Why It Matters: Investing like Warren Buffett, is it for everyone?
To listen to the MoneyFM Radio Show, click here.
Introduction
Money FM 89.3 is the best of the breakfast huddle. Why it matters on money FM 89.3.
Host - MoneyFM
Money FM 89.3. Good morning. It's the breakfast huddle with Elliott Danka and Ryan Huang. It's time now for why it matters. I'm sure you've heard the name Warren Buffett, the man behind Berkshire Hathaway managing an equity portfolio with more than 300 billion.
At the end of the second quarter of this year, 2022, now Buffett's legendary value investor, whose stock picks mostly stable cash-flowing businesses have averaged an annual return of more than 20% for around 5 decades. Now, when you look at the soaring inflation picture, the rising interest rates prompting an exodus from growth towards value in 2022.
The investing prowess of Buffett has come under increased spotlight in the media.
And of course, there's a special interest around his recent moves at the marketplace. Some of the top stocks in the investment portfolio, Berkshire Hathaway, include Apple Inc, Bank of America Corporation and American Express Company as well. Between March and June 2022.
The value of the equity portfolio decreased by around 63 billion, but in this time as well, Buffett made new purchases in no stocks sold out of two reduced holdings in four and made additional purchases in nine stocks.
Today we're going to dive deeper into understanding Warren Buffett's investment approach. Can it work for everyone? And helping me out this morning is Christopher Ballard, who is the managing director at Check Capital Management. Good morning, Christopher.
Chris Ballard
Good morning.
Host - MoneyFM
Good afternoon for you. Because you're calling us from the United States, which part of the US are you in right now?
Chris Ballard
In California, Southern California, to be specific, yeah.
Host - MoneyFM
Ohh lovely.
How's the weather there?
Chris Ballard
The weather is perfect actually, it's a little hot. We've had a heat wave, but it's doing pretty well with in the summer, but it's still the water is still warm.
People still heading to the beach every day for sure.
Host - MoneyFM
Very nice. This is great for my imagination. This time in the morning, love California. But of course, we're going to talk about Check Capital Management, you guys, investment manager for individuals looking to protect and grow assets. Tell us a little bit more about the company, the history, and the business model.
Chris Ballard
Sure, yeah. So, we've been around for 35 years and we were founded by Steven Check, which is why we're called Check Capital Management. He's actually an electrical engineer by trade, used to work at Hughes Aircraft in the late 80s, always had a passion for investing, and found his own investment business in 1987 when he was 26 years old.
So it's about 36 years ago at this point in time.
And he ended up coming across the likes of great investors like Peter Lynch, Benjamin Graham and Warren Buffett, and really found himself attracted mostly to Warren Buffett's style of investing in general. And that's kind of where we've been the entire time of investing. So, what we do is we typically invest in roughly 15 to 20 individual stocks at any given point in time.
But we also invest individual's wealth and so we like to be diversified and we have a two-bucket approach to diversification that includes individual issue bonds as well in cash and now on top of all that. So in essence, we have individual equities and individual bonds.
But sometimes we'll also use option contracts to either write covered calls to make those equities more conservative.
Or we'll leverage the option and use debit spread and get more aggressive. Well, that's basically it. And then we also have a different sort of fee structure where most of our competitors have a standard asset-based fee model, which we do also offer.
But we also have a profit-based fee model which is tied to our performance where we end up making money when clients are making money and they're more closely tied to our performance over time.
Host - MoneyFM
Yeah, I was going to bring that up next. The performance-based fee structure. So the pressure is on everyone to get the decisions right then.
Chris Ballard
Absolutely, yes.
Host - MoneyFM
Why did CCM decide to go with this unique offering?
Chris Ballard
With the fee structure you're talking about?
So you know, Warren Buffett actually himself had within our business managing other people's money. And he had an offering that was performance-based. It was more in favor of his clients than even ours are.
But he ended up really being the champion of that, where he wouldn't even get paid until he is making clients, at least what, let's say treasuries were making and then he would get 25% of anything above that level. So let's say a 25% / 6% rate of return would go to Warren Buffett. Well, we don't, we have a 0% floor, but we have a 10% profit-based fee model.
But that's where it kind of comes from. A really well aligned with that line of thinking, we think it's the fair and right thing to do for our clients.
And it keeps our incentives on the right side of things and then but as long as you're keeping in our opinion anyway this long-term and investor mindset, you're going to be well aligned. We don't think this actually works very well for folks who are just trying to trade all day, every day. We think you're going to get bit and hurt in the short run using a performance-based fee model.
So anyway it's just really we think it's the right thing to offer and again we do offer both style of fees to our clients.
Host - MoneyFM
Christopher, you mentioned Warren Buffett, and I know a lot of people look at this guy, Oracle of Omaha is his nickname and they try to learn from him.
Could you explain his investment strategy? Help us understand it.
Chris Ballard
No, it's sort of evolution that happened over time, you know, he thought off as a youngster as well and traded probably like any other young investor does or new investor does and he became more aligned with what is the traditional style of value investing. When he went to Columbia University and learned from Benjamin Graham, who was teaching there.
And Buffett was probably like best student ever and eventually went to work at Benjamin Graham's office with him and learned even more from that.
Kind of fun from that, which is back then value investing is about trying to get ahold of investments that were very undervalued. And then what's relatively available at that point in time and then to sell them when they get the overvalue. So then that's just buying and selling, but maybe on a slower scale than day trading or something like that. But over time it has evolved.
He came across Charlie Munger, of course, our favorite best friend and partner of 55 years at Berkshire, that is. Even though he's known him longer. And Munger had more of a perspective of trying to find great businesses and just hitching your wagon to those businesses and never letting go.
Your favorite investment time frame is forever, even though that isn't always the case. Not all businesses are created equal, and sometimes the investment thesis changes over time.
Exit your position or partnership with those companies, so it's morphed over time. But overall it's about business ownership and having a business owner's mindset to investing rather than a trader's and a gambler's mindset to invest.
Host - MoneyFM
And you know, with that and expanding on that your thoughts on his strategies, especially during a volatile period, a transformative period in that sense that we've gone through what we're seeing in the markets right now. I mean, he is still buying, what are your thoughts on it?
Chris Ballard
It's great. We love that he's buying. We would agree with him that there are a lot of deals out there. There are many businesses that are quite undervalued right now and you can always point to many negative things going on around the world. And there are there, you can be scared about all kinds of things if you want to focus on those. But if you're looking long term and you're looking even at a business like Berkshire Hathaway itself it's trading for a steep discount to where it should be in our opinion.
Right now, as of Friday's close, it's trading for like 1.25 times book value.
And at that price, he's buying back his own stocks, talking about buying stocks. You're talking about probably the shares he's buying in an open market.
But he's also buying back shares of Berkshire Hathaway. And at this level, over the past few years, he's been doing just.
That so yeah, we think that Berkshire should be valued quite a bit higher than it is right now, and buying the shares at this point in time regardless of what might happen in the next three to six months is the right thing to do if you have the cash available.
Host - MoneyFM
Christopher, let's talk about the two-bucket approach. Firstly, could you help us understand it how straightforward does it look?
Chris Ballard
Yeah, it is pretty straightforward. So you know most asset managers are looking to, you know, diversify you with the pie chart. So they want you in all asset classes whether it's large-cap, small-cap, international, and then make sure you have exposure to all the different sectors and maybe overweighting and underweighting those sectors and asset classes with tactical allocation or something like that.
And then and then using bonds as well, where they'll sometimes, you know look at their client and say well, what is your risk tolerance on a scale of one to 10 and what's your age and then therefore here's where you should fall under this big pie chart.
But instead for us what we think it should tie directly to an individual's circumstance. So we basically think that if somebody doesn't need money out of their portfolio to live off of net of, let's say pensions, Social Security here in America, and any other real estate income they might have coming to them.
Whatever they need out of the portfolio to live off, we think you should have five years' worth of that or so set aside in cash and bond.
And the rest of it can be committed and, in our opinion, that commitment can be in the individual equities with the business ownership mindset rather than you know big pie chart and exposure to everything, and what we look to do is you know at least once a year, we'll look to rebalance that and make sure we always have five years worth of safe assets.
But in a time like this when stocks are down you don't have to sell out of the stocks that are down because now we still have 4 1/2 years worth of whatever you're looking to live off of set aside in something safe.
Your committed money has 4 1/2 years still to get back to an all-time high and then once we get near that we will look to replenish that safe bucket of money all the way back to being five years full yet again.
Host - MoneyFM
That's kind of usually why I trusted an expert to do that sort of thing for me. I mean it, Christopher, how do I decide whether this is a good fit for me or not?
Chris Ballard
Yeah, the question would end up being about once we would take the conversation from here about the style of investments that we're getting into. We talked about, you know, let's say the Berkshire Hathaway’s of the world. And if you're more inclined to give them something that's newer and more IPO oriented or you're a trader, you get a fit for whether or not you know, we might make sense for you.
But so part of it is the alignment of an investment philosophy and approach that you feel akin to. And then outside of that, you end up kind of unpacking more about your personal situation so that we could describe to you in more detail about how the two-bucket approach would work for you versus maybe somebody else.
So it's more a matter of a conversation that takes place over time and also whether or not again it just sort of makes sense for you and with what we're saying because some clients are attracted to you know mutual funds and ETF's and they feel like that's the right thing to do.
Where roughly 90% of our competitors that's what they're talking about is having a manager or managers that is mutual funds or separate account management.
Well, we're talking about a classical way of investing and for a lot of clients out there, they really are drawn towards this classical individual equity style of investing. That's us, that's who we are.
Host - MoneyFM
OK. Christopher, just as a wrap up, I want to talk about your outlook on upcoming investment trends, especially in the near future. And on that note, where does this cryptocurrency factor into this?
Chris Ballard
The cryptocurrency is that what the last part of that was?
Host - MoneyFM
Yeah, yeah.
Chris Ballard
Yeah, for us it doesn't factor in at all. Well, we're not interested in it. You know, it doesn't. It very well could play a role in the long run. We don't know what that's going to look like and what crypto is going to be the right crypto to be in. We'd rather avoid the thing altogether, so it doesn't play a role for us at all.
We wouldn’t hedge just for the sake of it, even just to go along with the crowd and feel like we’re being left out.
As far as trends in the future, we like kind of staying tried and true and to what works.
And you know, getting ahold of these businesses when they are working and when that, you know, the potential for success is very high as the years go on rather than try to find the next best thing.
But we also want to keep an eye on all things that are developing throughout the world and internally you could talk about something like Amazon at even 15 years ago, it seemed like something that their business model is one that wasn't going to work, but they were the first one through the wall.
They made it work, and so it's wise to keep an eye on, OK, where are they going to chip into the type of businesses that we're interested in and what other new models similar to Amazon are coming out and keeping an eye on those and maybe being interested in those at some point in time.
Host - MoneyFM
Well, thank you so much for sharing that with us, Christopher Ballard who is the Managing Director at Check Capital Management on the line with me. Christopher, thank you for your time. Again, take care. Have a great day!
Chris Ballard
Thank you so much. You too.
Outro
Before acting on the information on Money FM, please consider if it's suitable for your own investment objectives, financial situation and risk tolerance.
To listen to more great interviews, download our podcasts at Money FM, 89.3 SG, or download the SPH radio app available on Google Play or the App Store.