https://www.youtube.com/watch?v=VaE4pcf9PI8

1 00:00:00.000 --\> 00:01:00.000 what's going on everyone happy tuesday
hope you guys are pumped uh for today's podcast slash video uh i've been
looking forward to this one for a little bit and uh if i sound a little
bit stuffed up it's because i have two massive tubes that are like four
inches long in each of my nostrils uh but that was no reason to not give
you guys some sick stuff uh for business stuff and this is mostly just
for me too so uh anyways buckle up hope you enjoy so today what i want
to talk about is the perfect business and so believe it or not this is
actually something i talk a lot about um not as much publicly but what i
like if if we were to talk in person and talk talk shop about business i
i love talking about business models i love talking about uh just
monetization structures in general uh writing books specifically
modification structures uh so really excited about it but uh i just
recently finished uh berkshire hathaway university which is basically uh
uh the consolidated 30 years of shareholder uh the the war buffett a
trolley bugger the the you know the co-founders coach sheriffs etc of

2 00:01:00.000 --\> 00:02:00.000 of berkshire hathaway they do these
yearly shareholder events and these guys are both billionaires now
they're both in their high 90s which is crazy they've been investing for
50 plus years investing for 50 plus years and they've built a you know
kajillion dollar empire um i think as of today it's worth half a
trillion um which is just nuts their return on capital was 2 million
percent so when they started where they when they acquired berkshire
hathaway which was a publicly traded company at the time was a textile
company they uh the stock was nineteen dollars i believe actually no
they offered to buy war buff it out at eleven dollars and thirty cents
uh i love fifty anyways doesn't matter point is is that it was it was
between 11 and 20 right and at this point that same stock is worth 377
000 all right so that's a that's a 20 000 x return so if you so his odd
put thousand dollars in it's not worth 200 million all right that's how
crazy this is and over you know 30 years of shareholder things

3 00:02:00.000 --\> 00:03:00.000 there's many times where he gives
little nuggets of wisdom of what he's looking at uh when he's buying a
business or what he what he believes to be valuable businesses and uh i
was really it was cool for me because uh i have always had three main
things that i look for businesses and in reading his book or the book
that was about his shareholder readings i added two uh two to that list
and so i wanted to share those with you today all right and uh the
moniker that i have had for this is i'm gonna i'm gonna share with you
is unique expensive sticky air and i said there's five there's four
words here that's okay because i'm going to show the last one in a
second but unique expensive sticky air so what i'm looking for like in
my mind of what a perfect business is it's unique expensive sticky here
and i've explained each one of these so unique is something uh and i'll
even

4 00:03:00.000 --\> 00:04:00.000 tell you one of the things that he said
in his shareholder video that i found really just it was just so it was
so short and so like packed that i loved it um he said in response to
what is an ideal business in one of the one of the meetings he said uh
something that costs a penny sells for a buck it is habit-forming and it
was so succinct it's so great and reading some of the other stuff he's
got other other things but that one was three of the five in three
sentences right so they cost a penny sells for a dollar and it's habit
for me and i just like it it's just so great all right so let's let's
break this down so something that costs a penny so that would be like
air something that costs you almost nothing to make all right it's
expensive meaning you could sell it for a dollar so cost you a penny you
could sell it for a dollar and it's sticky it's habit for me people come
back and keep buying it again and again and again right which means very
long lifetime values all right that's that's what he's

5 00:04:00.000 --\> 00:05:00.000 looking at initially now the the unique
part is something that if you if you listen to some of his other stuff
is he likes to have big competitive boats all right so what's something
that's you know what's how can i find air for a petty sell it for a
dollar that people come back you want to keep breathing and no one else
can sell it so it's unique air right it's not here that anyone can sell
it's specific to the to it has a brand behind it that no one could copy
uh it has share of mind he talks about that a lot uh like geico everyone
here probably does like you could say 50 or more by switching to geico
you've heard that uh because he 10x their advertising budget as soon as
he bought the whole thing uh and just had them go on a massive rampage
so they could take over my chair and geico has grown proportionately and
so this is four of those features right unique expensive sticky air
something equal make for a petty sells for a dollar is habit forming
that no one else can replicate and um for me this is just so cool uh and
i'll

6 00:05:00.000 --\> 00:06:00.000 talk about a couple of the features of
this in a second um you know what i'll talk about it now so one thing
that you'll notice and this is for all the newer entrepreneurs or you
know really it any entrepreneur uh who's interested in this kind of
thing notice the gross margins he's talking about right a lot of people
quote feel bad for charging for things that don't cost that much which
is a terrible mindset to have you charge what the market will give you
right so if for example uh you you know you find this these widgets like
these pens and you know that that you get them from some place in china
that cost you a dollar if someone's willing to give you a hundred
dollars for it do you feel bad taking it you're like well if only they
do markets are built on information advantages information
inefficiencies meeting one person the seller knows more than the buyer
that's that's how these things work a lot right and so uh i i noticed
this because you

7 00:06:00.000 --\> 00:07:00.000 know you're listening to one of the
best investors of all time if not the best investor of all time and he
looks for like a hundred to one right costs a penny sells for a dollar a
hundred to one it costs one penny one percent cost of goods compared to
what it's being sold for so 99 gross margins that for me was actually
very very interesting uh is that he he doesn't go for like an 80 or a 90
he goes for 99 and for perspective the difference between selling
something uh for a dollar that cost you 10 cents versus selling
something for a dollar that costs you penny is not that uh you know it's
it's just nine percent more profitable to sell some you know sell it for
a dollar that costs a penny versus a dollar that costs a dime it's
actually ten times more profitable and here's here's why i better
explain this is that for one unit of cost the petty one could sell 10
times the amount for that one cost so does that make sense so if i were
to sell 10 pennies worth of buy cost it

8 00:07:00.000 --\> 00:08:00.000 means i make 10 whereas 10 pennies
worth of the other example of a dive is only one dollar and that's one
of the things that people don't understand about margins right the gross
margin of the product that you have like every increment when you go
from when you go from 90 to 95 gross margins in a business you double
the profitability of the business that's what's crazy right and so uh
that's why this is so important right now if you try for example look at
your prices right now and say uh i want to get to if you're at 90 and
you say i want to get to 95 percent gross margins now let's say it costs
you right uh let's say it costs you 10 right uh for your for your thing
right you sell for a hundred that's ninety percent gross margin so
ninety dollars is is margin for you ten dollars is cost you sell for a
hundred all right so if you wanted to get to 95 percent gross margins
what do you think you do would you add five dollars maybe 105 no that's
not bad to get to 95 gross

9 00:08:00.000 --\> 00:09:00.000 margins you'd have to sell the same 10
thing for 200 that's what people don't get about margins right and so
what i like what i would we would we would turn gyms around at what and
whatnot i would have guys who are at 66 margins that's usually where
most people are and that's horrible by the way and i would say we need
to get you to 80. and they would see 66 to 80. only 14 percent only 14
you just saw me double the price from 100 to 200 to get five right and
so that's that's how important these margins are and so to hear this man
say i want something that i could create for a penny sell for a dollar
that's habit for me get people keep buying over and over again for the
rest of their lives and that no one else can buy because it's unique
right that was pretty cool and so these are the four kind of components
of the business itself but the last thing that buffett talks about and
he talks about this a lot so i draw a little dotted line here is the
person who is running it all right and he has three characteristics that
i saw him repeat over and over again

10 00:09:00.000 --\> 00:10:00.000 uh for the management or the operators
all right and they have such a brilliant model of managing right because
berkshire only has like 19 employees or something like that something
stupid and they have a gazillion they did 88 billion in profits last
year think about that 88 billion the second most profit in the entire
world was like a 20-person company because they're so good at advocating
response just basically delegating out responsibility to the businesses
that they bought now he turns out a lot of deals but what he looks for
in operators and this is why i think this is cool is that what he looks
for in operators we can look for it ourselves we could create that
ourselves as entrepreneurs right we could think how can i embody these
characteristics all right and so the first of these characteristics is
he says i want somebody who's risk averse all right because he said many
times any things time zero is zero he's like you could have 30 years of
a great track record and make one bet that goes to zero and lose it all
and that is why he's so risk-averse and

11 00:10:00.000 --\> 00:11:00.000 i had a mentor who told me something
once that i that i just loved he said alex you should only have to get
rich once and for some reason that just like that that hit different you
should only have to get rich once and so uh and the smartest best of the
world feels that way too you should be risk averse he's like i give i
give up bigger opportunities all day long to to cover my downside all
right the richest people in the world i'm telling you this right now if
you don't have access to people who are worth a hundred million a
billion i do and i will tell you how they think all right it's all about
downside risk mitigation they will give up they will give up huge
returns to not risk losing money and the funny thing is that poor people
think the exact opposite they go for the lottery they've basically 100
guaranteed downside right one in 300 million of winning and they do it
all the time right and one of the things that uh buff says is like if
you if you uh if you bet poorly small you'll bet poorly big uh which i i
love that too right so

12 00:11:00.000 --\> 00:12:00.000 anyways number one matchmaker is
risk-averse so we think about ourselves how can i be more risk-averse
how can i make sure that i can't lose right it's much more important to
not lose than it is to win and what's interesting is that if you don't
lose long enough you kind of win by default which is kind of interesting
which brings me to the second point which is log-term thinking so the
reason that they like family-owned business specifically is that
families think about generations they think about passing it down
between you know father and son parents and kids right and they like
those businesses because they don't cut quarters they think about
quality they think about long-term investment long-term competitive
strategy they're not thinking about quarterly earnings and you know
basically short-term gratification which is what most of the stock
market companies are forced to do because they have to pay her to to to
stock stockholders right and so if you can't i've talked about this some
of my other podcasts shifting from ceo to investor but one of the most
beneficial things that i have done for

13 00:12:00.000 --\> 00:13:00.000 my mental health and for the success
of my business is thinking in a long-term type horizon and i can't tell
you that i'll tell you that of the people that i encounter the longer
their time horizon that they talk in the wealthier more successful they
are invariably so when i talk to somebody and all they're thinking about
is this week the next two weeks payroll and what they're gonna make this
month and last month i already know that they don't make a ton right and
it's because that's all they think in right and then and then they get
from there you get to slightly higher level entrepreneurs they're
thinking in quarters okay this quarter this one we can't focus anything
this chord is all we got this is what we can do right and that's fine
because the smaller you are the less stable you are it's more volatile
right but over time as you expand those horizons right you'll be able to
make better better decisions because you'll start thinking well if i did
this for five straight years would it be reasonable that i would win
probably right uh if i do this consistently for five years do i think
that i will it would be unreasonable that i won't be able to be far past
by my my goal probably right but most people still

14 00:13:00.000 --\> 00:14:00.000 think of these tiny chunks of time and
could never get ahead and they spend month after month after month for
30 years trying to become millionaires rather than just set a goal of
like well let me just see if i could increase my my income by 20 000 in
the next year right and then next year after that i'll try and increase
it by another 20 000 and they do that by you know and in five years you
have a top one percent income uh but only 99 of people don't think that
way which is why only one percent do so anyways number one for the
management is that they're risk averse they will take they will take the
loss they will not take the opportunity to avoid the loss number two
they think of long term horizons right and number three they have
unimpeachable character which i just really like that is a word
unimpeachable character and if he uh if you listen to or talk about uh
about about about losing buddy he said if you lose money that will be
forgiven

15 00:14:00.000 --\> 00:15:00.000 he said but if you lose me a shred of
reputation i will be ruthless and he's he's so uh so big on this and i
think that's you know these these these kind of three things come
together people who have unimpeachable character are not trying to get
rich quick right they're trying to build something of value they're
trying to build something that's enduring something that's long term and
uh they're honest and so what happens though is that when you have an
impeachable character it's actually intangible that has compounding
returns and i'll explain what would be that but he talks about it for
his own business he's like the fact that our check's always clear that
we we do what we say we're going to do uh allow us to get access to more
deals because more people want to work with us right and we do we close
deals faster and so the thing is is that your reputation over time
becomes a competitive advantage and that's what a what's a unique that's
a sustainable and compounding competitive advantage because someone
who's stuck with their word for 10 years compared to somebody stuck with
their word for 30 years whose

16 00:15:00.000 --\> 00:16:00.000 word is worth more the 30-year guy
someone she's stuck with you know who's done everything and but unique
character for 30 years compared to guys done it for 60 years who has the
stronger word the 60-year guy it's something that if you can develop it
literally compounds with time uh and it's and it's in his opinion
priceless and i think he's a very good valuer of things and so anyways
the perfect business model i'll give you a quick recap it's unique
expensive sticky year that's managed by somebody who's risk averse
long-term thinking and has unimpeachable character all right so
something that you could create for a penny sell for a buck that's
habit-forming that no one else can do and you do it in such a way that
you don't take short-term risks you think long-term in terms of how
you're going to invest in the business and the legacy and building
something of value and not not obsessed with short-term volatility but
for a long-term earning and finally that you do it in such a way that
people will think everything that this man has done has been fairly
earned and wisely used

17 00:16:00.000 --\> 00:17:00.000 and so with that i will leave you with
the perfect business i hope you enjoyed this hope you found this
valuable this is one of my favorite things to talk about and uh keep
being awesome and if you're in the arena keep getting up i promise uh
you will get better over time lots of love i'll catch you guys soon bye
