In this episode of Industry Focus: Financials, Jason Moser shares some of his favorite passages from Warren Buffett's letters and some tips on investing. Later, Matt Frankel chats with Marcos Rosenberg, the head of U.S. deposits with Marcus by Goldman Sachs (GS +4.81%). He talks about the different products of the company and how they are differentiated in the market, future growth prospects, the consumer-centric approach, the company strategy, and more.
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This video was recorded on Feb. 24, 2020.
Jason Moser: It's Monday, February 24th, I'm your host Jason Moser, and it's just me here in the studio for the first half of today's Financials show. The second half of the hour, our own Matt Frankel has a good interview lined up for you, but before we get to that, I wanted to take just a few minutes and highlight five of my favorite passages from Warren Buffett's most recent shareholder letter.
If you listen to the show, then chances are better than not that you knew the most recent installment of the Berkshire Hathaway (BRK.A +0.48%) (BRK.B +0.43%) shareholder letter dropped on Saturday morning. I'll tell you, I've read a lot of them, and I think actually all of them that are listed on the site there, going back to 1977. And these letters are always a fun little read, but that's sort of the point, you know, sure they may be a little bit redundant, they're little repetitive, he's not really uncovering a lot of new and uncharted territory, but they're still fun to read nonetheless.
I do think that, like most things though, if we want to excel at something, if you don't practice then you don't get better, and investing is no different. It's just trying to figure out what and how to practice.
So some of you may know, I was a PGA club professional for several years before I found The Motley Fool and I taught a lot of golf. And most of what I taught boiled down to three fundamentals: grip, aim and setup. And that formed the clever acronym of GAS, and we got plenty of good fart jokes in the junior clinics with that one, as you can imagine. But really, it all boiled down to teaching this preswing stuff, these fundamentals, this idea that if you weren't doing this stuff correctly, then your chances of actually hitting the golf ball where you want it to go are pretty slim. So it's all about setting yourself up for success.
Investing is very much the same thing. I view reading these letters as a way of practicing the fundamentals, and it's not just Buffett's letters, I mean, you look at Tom Gayner with Markel or Jeff Bezos with Amazon, Jamie Dimon with JPMorgan, and there are more out there. But this is how we can work on our grip, aim, and setup. This is how we can work on our fundamentals as investors and remind ourselves of some of those obvious things, some of those things we maybe take for granted or forget. So without further ado, here are five of my favorite passages from this year's Berkshire Hathaway shareholder letter.
No. 1.
It's difficult to understand why retained earnings were unappreciated by investors before Smith's book was published. After all, it was no secret that mind-boggling wealth had earlier been amassed by such titans as Carnegie, Rockefeller and Ford, all of whom had retained a huge portion of their business earnings to fund growth and produce ever-greater profits. Throughout America, also, there had long been small-time capitalists who became rich following the same playbook. Nevertheless, when business ownership was sliced into small pieces, stocks, buyers in the pre-Smith years usually thought of their shares as a short-term gamble on market movements. Even at their best, stocks were considered speculations. Gentlemen preferred bonds. Though investors were slow to wise up, the math of retaining and reinvesting earnings is now well understood. Today, schoolchildren learn -- what Keynes termed "novel" -- combining savings with compound interest works wonders.
And that struck me: Just because we invest in these businesses and these businesses are also led by investors. How they allocate capital matters and it's one of those things that we look to these leadership teams, whether they're buying back shares or paying dividends or retaining those earnings and growing the business out, I thought that was just a really neat passage to remind us of that, and also the value in compound interest, we can never really forget that. And whether it's a savings account or whether it's these companies reinvesting their earnings and growing the business, compound interest can really work wonders, as Mr. Buffett said there.
Quote No. 2., passage No. 2.
In reviewing my uneven record, I've concluded that acquisitions are similar to marriage. They start, of course, with a joyful wedding but then reality tends to diverge from prenuptial expectations. Sometimes wonderfully the new union delivers bliss beyond either party's hopes, in other cases, disillusionment is swift. Applying those images to corporate acquisitions, I'd have to say it's usually the buyer who encounters unpleasant surprises. It's easy to get dreamy-eyed during corporate courtships.
And I think this really does speak for itself. We talk all the time about these mergers and acquisitions, and in some cases, they look terrific. In other cases you kind of wonder what exactly is going on here. It doesn't always make sense. I'm just trying to figure out who the buyer was in my marriage, because I feel like I got the good end of that deal. So hopefully my wife has not encountered too many unpleasant surprises.
Passage No. 3.
Mistakes in assessing insurance risks can be huge and can take many years, even decades to surface and ripen. Think asbestos. A major catastrophe that will dwarf hurricanes Katrina and Michael will occur, perhaps tomorrow, perhaps many decades from now. The big one may come from a traditional sources, such as wind or earthquake, or it may be a total surprise involving, say, a cyberattack having disastrous consequences beyond anything insurers now contemplate. When such a mega-catastrophe strikes, Berkshire will get its share of the losses and they will be big, very big. Unlike many other insurers, however, handling the loss will not come close to straining our resources and we will be eager to add to our business the next day.
This kind of goes back to why Berkshire has always been such a steady investment. We know that they're in the business of writing good business and not chasing business. And in insurance, particularly, that matters a lot. It's important to remember to be prepared, it's important to remember that quality matters, it's important to remember you need to diversify. And I think in investing, it's always understanding it's a matter of when and not if. You know these losses will happen; it's just a matter of when, but regardless, Buffett feels like he's got the business in a place where they'll be prepared for it regardless. And I think Markel is another great example of an insurer that operates in that same vein. One of the reasons why we like that investment so much as well.
Passage No. 4.
Charlie and I do not view the $248 billion detailed above as a collection of stock market wagers -- dalliances to be terminated because of downgrades by "the Street," an earnings "miss," expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.
And that was in reference to their stock holdings there in the Berkshire Hathaway portfolio. Very Foolish, very much in line with the type of investing that we espouse here. We don't view these stocks as just stocks; they're businesses that we're owners of, and they're businesses that we plan to hold for many years, if not indefinitely. And there's always going to be something, and if you listen to everything, then it will probably keep you on the sidelines. But reality applies -- it really does apply today when you look at something like the coronavirus. I mean, coronavirus really is kind of the subject du jour, so I think it was a very fitting timing there. Before that, you know, hey, it was the China trade deal, and then so on and so on. So always, always worth remembering that these investments we're making are for the long haul.
Passage No. 5.
Forecasting interest rates has never been our game, and Charlie and I have no idea what rates we'll average over the next year or 10 or 30 years. Our, perhaps, jaundiced view is that the pundits who opine on these subjects, revealed by that very behavior, far more about themselves than they reveal about the future. What we can say is that if something close to current rate should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it's almost certain that equities will over time perform far better than long-term fixed-rate debt instruments.
You know, maybe that just means you want to stay invested. Again, we can sit here and kick around the ideas of where interest rates may go and what the economic picture may look like next year or five years from now. It's impossible to predict that. But if we can take a set of assumptions and look at how things might work out under that set of assumptions that can give you a better idea of what the future may hold. And then utilizing those Foolish investing principles, taking the long view, diversifying, etc., etc., I think that's a pretty telling quote there. I like the fact that they're not really into forecasting all that stuff.
Okay, thanks for indulging me there. I thought that was a fun read. I wanted to call out a few passages that just stuck with me there.
Before we get to Matt's interview, we just want to remind listeners that if you're looking for more stock ideas and recommendations, check out our Stock Advisor service. You'll get stock recommendations from David and Tom Gardner every month, Best Buys Now, and a whole lot more. Just go to if.fool.com. And we've got a special 50% discount for our listeners. Check it out at if.fool.com.
Okay, let's get to the interview. Marcos Rosenberg is the head of U.S. deposits with Marcus by Goldman Sachs. Recently, Matt Frankel spoke with Marcos about the company's strategy behind Marcus, the importance of reaching a younger audience, and a whole lot more. We hope you enjoy their conversation.
Matt Frankel: I'm joined now by Marcos Rosenberg, head of U.S. deposits at Marcus, a division of Goldman Sachs. Marcos, thank you so much for joining us today.
Marcos Rosenberg: It's a pleasure being here with you today, Matt.
Frankel: So your name is Marcos from Marcus. Is that a coincidence?
Rosenberg: It's just a pure coincidence. My name is spelled with an "o," Marcos, and the Marcus by Goldman Sachs is spelled with "u." And we have a lot of fun during meetings, you know, just around that. Marcus by Goldman Sachs. Marcus was the first name of Mr. Goldman, and it's just pure coincidence. Same name, different spelling.
Frankel: [laughs] Thank you for clearing that up. So your savings platform has grown pretty impressively since you introduced it. I know a lot of it was due to an acquisition, but a lot of it's just been organic growth. So tell us a bit about the growth so far and how you've been so successful with everything.
Rosenberg: The acquisition gave us a place to start. The growth has come directly from the work that has been done post-acquisition. We are incredibly customer-centric. We listen to more than 100,000 people to tell us about their experiences with money. And we've designed our products to truly be on the customer side. So our priority and what we've been working and spending our energy on is to simplify the customer journey, to remove friction points and overall to improve the digital experience. And that's what, we believe, has been propelling our growth alongside the brand.
Goldman Sachs is a very strong brand and the bridge of utilizing markets by Goldman Sachs has proven to be very, very effective. And consumers are taking action and they're resonating very well with the brand and with the offering. We feel very, very satisfied.
Frankel: So could you just kind of clarify some of the pain points you've addressed? I know customer service is a big one, like, what makes your customer service different than the competition.
Rosenberg: Well, I think there are a number of things that the consumers need to be thinking about when they decide who they want to engage in a relationship, because at the end of the day, money is something very personal, and seeking a financial institution is a very personal decision as well.
So there are four key things that I believe your audience, your listeners, are already thinking about maybe unconsciously, right. One is experience. Getting with an institution and interacting with an institution that has experience. So for example, with Marcus by Goldman Sachs, Goldman Sachs has been around 150 years, so there's deep, deep financial expertise there. An institution that's safe and that's trusted. As you know, we offer savings accounts and CDs, are FDIC insured. And we also pay a lot of attention around security, we use multifactor authentication, SSL encryption, firewalls, and other safeguards.
Value would be the third thing that I believe is very important for consumers to be thinking about. In our case, we offer a free app that gives customers an easy way to transfer funds, to manage accounts, to track transfers. There's also a "resource" section on our website, and on the app as well, that has a lot of information about every day financial questions and every day financial challenges and which is part of the value that we bring to the table.
And last but not the least is accessibility. In our case, we're here seven days a week to take a call, so you can talk to a human directly, because sometimes it's necessary either as a confirmation or to clarify a doubt or a question. And we're 24/7 through our digital offering, be it on the web or through the app. So all those things are very, very important.
And around value, since we're talking about savings and CDs specifically, rates are important. And we offer four times the national average.
Frankel: Excellent. So you just mentioned interest rates. Since last time we had Marcus on the podcast, interest rates have fallen considerably, and there've been numerous Federal Reserve rate cuts, and that's kind of trickled down to your platform as well. Have you noticed that affect demand for your product at all?
Rosenberg: Well, we offer a variety of savings options to help customers make the most out of their money regardless of which part of the interest rate cycle we're at. We offer fixed rate options in the form of certificates of deposits and variable rate products, as you know, in the form of savings accounts.
And as I mentioned earlier, we offer four times the national average for online savings accounts, and we have every intention to continue to offer highly competitive rates, regardless of where the interest rate environment, broadly speaking, is at.
Frankel: Okay. Fair enough. So interest rates are, obviously, a big differentiator. Your brand name, you mentioned, is a big differentiator and there's a bunch of things you've done to address consumer pain points, but there's also a lot of competition in your industry. I know in the past few years alone, a lot of institutions have popped up with online savings accounts. So do you view this as kind of a market that's getting crowded, or is there room for everybody to grow?
Rosenberg: We believe that competition is good. It provides more options to consumers. And consumers should explore their options to make sure that they're saving with a partner who truly has their best interest in mind and that offers products that would match those needs.
By way of an example, we have online savings calculators where consumers can see how their savings accounts will stack up against other banks. But I think, Matt, the most important thing is, we are building, at Marcus, the digital bank of the future. So we obsess over what's best for customers, and that's how we believe we're going to continue to attract more customers. And the market is very big. So we zoom out for a moment, and you take a look at the size of this market.
Just on the consumer side alone, for deposits, it's $4 trillion. And I understand that that's a four with way too many zeros, right. But about north of half of that is still with brick-and-mortar banks. And what that means is that for the majority of those dollars, which belong to the majority of our U.S. consumers, their earning rates on savings that start with a zero, as opposed to being able to earn a savings rate with an online bank -- ours specifically, at Marcus. We offer 1.7%. So there is enough room here to grow, obviously. And the biggest enemy here is inertia, is not that there's more entrants or less entrants or more banks or fewer banks, it's the inertia, because clearly over half of the dollars nationwide are sitting in very, very low-interest-rate accounts and information, education and taking action is incredibly important.
Frankel: So $2 trillion is a pretty big addressable market. I definitely say there's a nice slice of the pie for everybody, and hopefully Marcus should be successful getting more than most, I would think.
So kind of just switching gears to kind of the broader picture. Goldman Sachs, in general, has been moving to a more consumer-focused banking model, not just being, you know, the bank of Wall Street anymore, which is kind of where Marcus was born.
So your CEO, David Solomon, sounds very optimistic about the potential for Goldman's consumer banking side. Could you see Marcus eventually being a big player in consumer banking in the sense that a Bank of America, Wells Fargo, kind of mentioned along with those names?
Rosenberg: We are building a leading digital consumer bank. We're addressing the savings, spending and borrowing needs of millions of consumers. And very importantly, we are starting from a clean slate. So we don't have a dated or aged infrastructure. We don't have operating models that would need to be changed. We're not shackled by an expensive branch network. So all those things mean that we can move very quickly, that we can satisfy customer needs very effectively, and that we can be highly competitive.
So if you go back just a few years, we started with a no-fee, fixed-rate, unsecured personal loan, we moved into deposits, and we started offering high-yield online savings accounts, certificates of deposit in various terms. We've been launching new products and services, like a no-penalty CD -- which, in an environment where interest rates are decreasing, is a great option because consumers can lock in the rate of today and have full access to their money if they need to without paying any penalty. That's seven days after the initial deposit. And throughout the life of the CD, the money can be accessed.
We also offer our CD maturity center, where our customers can actually change the renewal terms of their CD throughout the term of the CD.
Just to give you a couple of examples. We have an app that was recently launched, and, as you mentioned, we're going to be launching checking. So I think all of these things will propel our growth and will enable us to develop deeper and even more meaningful relationships with customers. So we're very excited about the future and we're only in the early innings right now.
Frankel: Well, as a fan of Marcus, I'm excited to see where it goes from here. Just one last question. We like to -- this is not a financial note -- but we like to end all of our podcasts on interviews on this note. A lot of our listeners are avid readers, so do you have a book that you would recommend to our readers that they could learn more about one of your favorite topics?
Rosenberg: Yes. Well, I have a number of different things. I have more than one favorite topic, but something that's very germane to the conversation that we had, and specifically about saving, I'm always very fascinated about how we, as human beings, go about making decisions, and how many times decisions are made emotionally and not necessarily rationally.
And I've been reading a lot about that topic over the years and studying that topic over the years, because it's related to the business that I'm in. There's a book by Richard Thaler, it's called Misbehaving. I found it very, very, very interesting. It's about the making of behavioral economics map. And I'm not sure if your listeners or you're familiar with the topic, which is really the fusion of economics and psychology. And the book has many fascinating examples about how human beings act and make everyday choices. And that has a lot of bearing, a lot of importance into how we make financial choices specifically. So it's a very, very entertaining book that I would recommend.
Frankel: All right. Well, thank you very much for that, Marcos Rosenberg. Thank you so much for joining us on our Industry Focus podcast, and we hope to talk to you again soon.
Rosenberg: Thanks for having me, Matt. Thank you.
Moser: Okay. That's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at [email protected]. Reach out and let us know how you're doing.
As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.
Thanks to Austin Morgan for all his work behind the glass this week. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.
