Just because that’s how things are done doesn’t mean it will work for you or your customers. Warren Buffet’s customer-first investment strategy caused him to rethink the entire investment business model.

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Dave Young:
Stephen, I was excited, being a former Nebraskan, that we’re going to talk about the guy that most of us in Nebraska call Uncle Warren, today, the Oracle of Omaha, Warren Buffett.

Stephen Semple:
The Oracle of Omaha. That’s right. I keep forgetting that you’ve got a background from a place like Nebraska. You seem far more sophisticated than that.

Dave Young:
I don’t know if Warren knows that we call him that. I’m pretty sure he doesn’t answer to it.

Stephen Semple:
I think he’d be okay with it, though.

Dave Young:
I think he would.

Stephen Semple:
Now we’re going to talk about Warren Buffett, but this is not an investment podcast. This is a podcast about building businesses and about building empires. And there’s no question Warren Buffett has built an empire. When you look at the top 10 wealthiest people in the world, 9 of them are all people from the technology space. He’s the only one that’s not in the technology space. So when you’re on that list, you’ve definitely built an empire. And what most people want to talk about is here’s how we invested money. That’s not what we’re going to talk about today because there’s a hidden gem in there, and that’s the business model that he created. And that’s what I want to talk about.

Dave Young:
All right, I can’t wait to hear it.

Stephen Semple:
Yeah, so young Warren, when he was 11, he started investing. He had saved up his money, and this was one of his first investment lessons. We need to understand these lessons to understand the business model. So young Warren goes to his sister, Doris, and he convinces Doris to invest with him. Now together, they bought three shares of Cities Services Preferred. They bought three shares at $38 a share. And this is a stock that he had heard his dad, Howard, talk about. Now Howard was a stockbroker, so he knew a thing or two hearing his dad talking. This was back in 1941. And so they buy these shares at $38 a share, and guess what happens.

Dave Young:
They lost it all.

Stephen Semple:
Well, they didn’t lose it all. The stock was down near $27, so it was originally 38 bucks down to $27. And he felt terrible, especially since he had convinced his sister to do this. But then good news happens, the stock recovers to $40, and they sell; good times are had by all.

Dave Young:
Yeah.

Stephen Semple:
But then guess what happens? It continues up and up, and shortly later, it reaches $200 a share, a 700% increase.

Dave Young:
Wow, and they got out at 40.

Stephen Semple:
They got out at 40. And they got out at 40 because of emotions. And here’s where he learned one of his first big lessons, you cannot control an investor’s emotions, and emotions will kill you. The reason why they got out was because of the emotions he was feeling about his sister and her money. Plus, it’s better to hold long-term than to sell quickly. How many times have we heard Warren Buffett talking about that?

Dave Young:
Sure.

Stephen Semple:
And this is where he first learned about this. Now, his dad eventually became a congressman. And he was a four-term congressman from the state of Nebraska, and they moved to Washington. And when Buffett was growing up as a kid in high school in Washington, he started all sorts of businesses. And he always did it with a partner. And he reached a certain point where he was making more money than his teachers, you know Warren. And he decided this is what he wanted to do in business. And he actually applied to Harvard University, and he was refused. Harvard said, “We don’t want your type here. You’re not good enough for us.”

Stephen Semple:
Now the funny thing is, when you hear Warren Buffett being interviewed about this, he actually thinks it was a real positive. So he went to the Columbia School of Business. Because he had heard about a guy, Benjamin Graham, and he wanted to study under Benjamin Graham. Now anybody from the investment industry would know Benjamin Graham because Benjamin Graham was basically the father of value investing. He was the guy who invented that idea. And Warren Buffett will say it was the best thing that ever happened was being able to go and learn under Benjamin Graham. Because really, what he learned from Graham was how to find these really cheap stocks and make money off of them. And he started doing it that way, and in fact, he went and he worked for Benjamin and all this other stuff.

And later, he met Charlie Munger, who added his flair to the value investing style. Because Charlie has a completely different flair than Warren Buffett. They really benefited from this. And look, we could go on for hours and hours and hours and hours about this investment style and how they invested, but as I said, this is not an investment podcast.

Dave Young:
We’re looking at-

Stephen Semple:
This is about business models.

Dave Young:
Okay.

Stephen Semple:
Yeah. And here’s the problem with the playbook of the investment industry. For the most part, in the investment industry, and it was completely true in Warren’s day when he started off, they’re paid to make transactions. You’re paid to buy. You’re paid to sell. Now, if you’re better to hold long-term, you can’t make a living doing it that way.

Dave Young:
As a broker, because you’re talking about the broker model, the stockbroker.

Stephen Semple:
Right, stockbroker model. You cannot make a living with a buy-hold strategy. You just simply can’t. The other thing is you can’t control the emotions of the investor. Because the investor can call you and say, “Buy this, sell this,” all this other stuff. So Warren Buffett looked at this and said, “This model is busted. I believe in long-term investing, and I can’t make a living doing it that way. And also, it’s the investor’s emotions that are going to kill them. How can I control those emotions?”

Dave Young:
Okay, so can I guess?

Stephen Semple:
Sure.

Dave Young:
This is where Berkshire Hathaway came from.

Stephen Semple:
This is where the idea came from in Berkshire … But there are a couple of things that he did. He started a company that would invest in other companies. So the whole idea was not the broker model. You’re going to invest in this company, and this company is going to invest in other companies. And so, as we grow the value of this business, my wealth is increasing, and your wealth is increasing. So, therefore, we’re away from the transaction model.

Dave Young:
And my shareholders don’t get to let their emotions come into play. They can sell my stock or not, right?

Stephen Semple:
Right. Yeah, and in fact, when he first started this idea, he had three rules. So rule number one is that you have no say in what it’s invested in, none. The second thing is that you have to put your money in for a year, and you’re only allowed to take it out once a year.

Dave Young:
Okay.

Stephen Semple:
So that was how he fought the short-term, you’re in for a year. And once a year, you can decide whether or not you want your money out. That’s it. So that helped control the emotions. Now he’s changed the business model from a money standpoint, and he’s changed the business model from an emotion standpoint. And he had a third rule, and I loved his third rule. Because they would always get together for these investment rules, and they would have lunch with the investors. And so for the investors lunch is Dutch, everybody paid for their own lunch.

Dave Young:
Okay. Those were his three rules. The third one, I just like.

Stephen Semple:
It’s really interesting because we struggle with the same thing, marketing is long-term, which is the reason why we ask our customers for a year-long commitment. So they’ve got to be in for a year before they can choose to move on or not. So it’s a very similar thing, and we talk a lot about reducing the committee so that there’s not a lot of emotions from other people coming in affecting your marketing. So it’s really interesting; what Warren Buffett did is a lot of things we’re doing as well. But do you want to hear one of the most incredible questions I have ever heard a consultant ask?

Dave Young:
Can’t wait.

Stephen Semple:
It was, “Will you do whatever I say? And if not, why not?” But again, it’s that speaking to the emotion and really figuring out is the person really committed to your style of doing things?

Dave Young:
Yeah. What do you think of that question?

Stephen Semple:
I like it, and I have started to use it because, to me, it’s not about answering yes. To me, it’s about, “If not, why not?” Because often what will happen, the reason they give is something we can address.

Dave Young:
Right. So it’s better to know the reason they’re not doing it than just to wake up one morning, and they’ve decided not to do it.

Stephen Semple:
Correct. Because often they’ll send something, and you go, “Okay, great. Well, we can negotiate on that and figure out how to make that work.” We’ve shared it a number of times, and I think we should put this ad on the website. Remember the Old Spice, the first P&G Old Spice commercial-

Dave Young:
“I’m on a horse,” yeah.

Stephen Semple:
The line everybody remembers, the throwaway line. Well, that ad was hugely successful. Old Spice was a dying brand; sales were down, and it was only being used by old guys. And P&G wanted to revitalize it. And it’s interesting. There’s a whole story of the connection to that person to the guy at P&G who was responsible for that has attended Wizard Academy courses and things along that line. So there’s an interesting connection there. But when they hired the agency, the agency said to them, “We’ll take this on. No problem, but you cannot change a word. You either do this in its entirety or not at all.” And in fact, there wasn’t even a choice. It was, “You are going to run the ad that we give you.”

Dave Young:
Yeah, I love that. I love that about what they did. And there was pushback against the “I’m on a horse” line, too. It was like, “Do we really need that?”

Stephen Semple:
And the reason for doing that, frankly, is to control the customer’s emotions. In terms of saying, “What we know ahead of time is you’re going to feel uncomfortable with these things, and you just got to go with it. So you need to give us a long-term commitment, and we need to figure out ways of controlling your emotions.” And that’s similar to the business model that we use in our advertising agency, right, Dave?

Dave Young:
Yeah, it’s good stuff. I think this is a great lesson.

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