In one sentence: Phil and Danielle ask whether the big 2019 IPOs (Uber, Lyft, Airbnb, Slack) are mature enough for a Rule #1 analysis, and Phil's answer is that a short track record puts an IPO in the small "risky biz" slice of the portfolio, and that a cash-burning company like Uber is a crapshoot.
Key ideas
- "Focus investing". Danielle finds Munger's own name for this style in Poor Charlie's Almanack: a small number of very good companies, not 200 cheap ones. Phil says Munger put Berkshire's fortune down to about 15 good decisions and very few bad ones, as long as the losses weren't big. [03:00–06:30]
- Rule #1 as the focus. Don't lose money on the mistakes and keep the upside on the winners. Buffett and Munger have both been down 50% mark to market. [05:00–07:00]
- Bars set too high. Phil says that in this market (expensive since 2015, Shiller P/E very high, Wilshire-to-GDP ratio high) almost nothing is a low bar. Phil cites a market drop of 10–15% and a ten-year expansion, the longest on record. [07:00–09:00]
- What an IPO is. A company sells newly issued shares to the public for cash, which dilutes existing owners. Dual-class shares let some founders keep control. [10:00–13:00]
- Why companies list. Historically for cash (AT&T and telephone lines). Phil says private capital is now plentiful, and that SEC rules and personal liability for executives make staying private more attractive. [13:00–19:30]
- "Only the crap goes public?" Phil worries that great companies avoid the public market. Danielle counters that a good company staying private doesn't make every listed one bad; but ask why a listing needs the money. Phil's Einhorn/Allied and Madoff stories are his examples that regulation doesn't catch much. [19:00–25:00]
- Who is selling to you? After the IPO, buyers purchase from employees and venture investors who know more than you. Phil says "people that know more … are getting out". Danielle's counter is that a mature company's data can be analysed like any other. [27:00–30:00]
- Track record rule. Phil wants ten years, including a recession, to see whether the company wins or loses when the tide goes out. He admits he bought Google with about four years of data, after studying it and using the product. [29:00–31:30]
- Two extremes. A company with five great years and heavy cash flow (Google) can be a small bet in the risky biz bucket, about 2.5–5% of the portfolio (a piece of the 10% bucket). Remember which five years: easy money flattered them. A cash-burning company that lists to fund itself (Uber) is "pure crapshoot". [31:00–36:00]
- Smart money to dumb money. Phil's view: late-stage venture investors need big returns, so when the price can't deliver them they sell to the public at lower required returns. Danielle disagrees that the public investor takes equal risk, since later stage is less risky than early. They leave it unresolved. [36:00–40:30]
How it maps to RuleOne
- The screen needs ten years of Big Five numbers, so recent IPOs won't screen. That is Phil's track record rule built in.
- /holdings/ is where the "risky biz" slice would show: small positions in less certain names, sized so a mistake doesn't matter.
- The stock pages link to SEC EDGAR, where an IPO's S-1 is the equivalent of the first 10-K.
Buffett, Munger and Graham links
- Munger's "focus investing" appears in Poor Charlie's Almanack, as Danielle reads it. Berkshire's 1993 Chairman's letter also discusses concentration ("a policy of … few holdings").
- Graham's The Intelligent Investor (ch. 6) warns against new issues for the defensive investor, because they are sold when markets are keen.
- Buffett's well-known advice on IPOs: be wary of the seller's motives. Check the exact source before quoting.
Words to know
- IPO: initial public offering, when a private company first sells shares to the public.
- Lockup: a period after an IPO when insiders can't sell.
- Dual-class shares: share classes with different voting power, used to keep founder control.
- Risky biz bucket: Phil's small slice of the portfolio for less certain bets.
Try this
Pick a company that went public in the last five years. On its stock page, check how many years of financials exist. Would it pass a ten-year test? If not, write down the position size you would limit it to.
Check yourself
- Why does Phil put most IPOs in the "risky biz" slice?
Answer
They lack a long track record, especially through a recession, so you can't be sure of the business. - Who often sells shares to you after an IPO?
Answer
Employees and early investors, who know more about the company than you do. - Why is Phil more tolerant of a Google-type IPO than an Uber-type one?
Answer
Google had strong cash flow and a clear moat, while Uber loses money and lists to fund itself.
Short quotes
"People that know more about this company than you do are getting out. And you're getting in." (Phil, ~28:30, auto-transcribed)