In this installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, wish a very happy 90th birthday to Warren Buffett and share some of the greatest lessons learned from him over the years. Then, Frankel discusses why recent IPO Lemonade (NYSE:LMND) is at the top of his buy list right now, despite being a very young business in a competitive market, and Jason discusses why he's about ready to pull the trigger on Bill.com (NYSE:BILL).

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This video was recorded on Aug. 31, 2020.

Jason Moser: It's Monday, Aug. 31. I'm your host Jason Moser. On this week's Financials show, we're going to talk a little bit of Warren Buffett. Little Buffett, little Berkshire, the newly minted nonagenarian. Matt and I have a couple of stocks that we're actually going to pitch to you today, so not ones to watch, but a couple of stocks that we think, in the financial space, are good-looking opportunities today for investors taking the long-view, of course. And as you probably guessed, joining me this week, as always, it's Certified Financial Planner Matt Frankel. Matt, how's everything going?

Matt Frankel: Hey, it's another day in paradise down here in South Carolina. It's a beautiful sunny day and nothing I'd rather be doing than hanging out with you guys.

Moser: Well, I love it, love it, love it. And I'm enjoying what we're going to talk about today digging into the show. And what we're going to talk about, I think, is a lot of fun. I've always enjoyed following Warren Buffett. To see him turn 90 over the weekend I thought was really special. And, hey, listen, I'm excited we actually get to throw some stocks out there for listeners today to really ponder, you know, to consider adding to their portfolio. We're going to throw a couple of stock ideas your way.

But first, let's talk about the birthday boy here. Over the weekend, Warren Buffett turned 90 years old, you know, cheeseburgers and cherry cokes, [laughs] and man! the guy is just, he's just making it happen and looking better than ever. So, it was really nice to see that, Happy Birthday, Mr. Buffett! Certainly, I saw a lot of people on Twitter wishing you well. And you're, kind of, like our North Star here at The Motley Fool in a lot of ways.

And you know, along with the birthday news, there was some news of some new investments on the part of Berkshire Hathaway and Mr. Buffett. So, Matt, I wanted to talk with you about that first, because you know, Berkshire Hathaway, they essentially invested stakes valued at around $6 billion right now in five different Japanese companies. And he said something that I thought was really -- it may on the surface look like a little bit of an odd investment, but he said something in the interview regarding it that I think just encapsulates really what it's all about. He says, we're happy to be a part of the future of Japan. And that's really what investing is, you're participating in the future. And so clearly, he sees Japan with a bright future, an economy that is doing a lot of great stuff and a lot of advances and innovation there.

Five different companies, a lot of money. Talk to us a little bit about these companies and this investment, Matt.

Frankel: Yeah. So, these are essentially, they're known as trading companies. It's a Japanese-specific business model. Where these are essentially big conglomerates that invest in a bunch of different businesses, kind of, sounds like Berkshire Hathaway. So, not only did Buffett spread his money out between five different companies, but these are five different companies that spread their own investments out among a bunch of different operations. They have things like transportation, metals mining, infrastructure, a lot of them have energy operations, things like that. So, these are five trading companies. I think of this kind of in the same sense that I think of Buffett's bank investments or -- [laughs] and I know he doesn't own them anymore, but his airline investments. In the sense that he's not picking a winner. He sees a long-tailed opportunity here and he just kind of likes the whole space, in this case, Japan. He likes the Japanese economy and he's, kind of, investing in the whole thing, not just one part of it.

Moser: So, Matt, I don't want to interrupt, but I have to ask. It sounds like maybe Warren Buffett is taking the basket approach. Would you agree?

Frankel: He is, this is his, I guess, Japan basket, I guess you'd call it.

Moser: [laughs] I love it, I love it, I love it.

Frankel: The Buffett Japan basket, I guess we could call this. But a couple of significant things to mention here. As we mentioned, this is a little over $6 billion at the current market value. That's the biggest investment, I mean I know it's not a single company, but this is the biggest investment that Berkshire has announced in some time. I know that Dominion natural gas buy was $10 billion, but that included, like, $6 billion worth of debt, so it was only about $4 billion worth of cash that Buffett put up for that. We mentioned Bank of America recently, but Berkshire only invested about $2 billion in additional shares. So, this $6 billion investment is the biggest purchase Berkshire has made in some time.

So, why is this significant? I think it's significant, really, for two reasons. One, it shows that Buffett is really committed to putting some of Berkshire's giant mountain of cash to work. I mean, Berkshire had over $140 billion on its balance sheet at the end of the second quarter. We mentioned the Dominion assets, the Bank of America stock that he bought, those were all things that happened in the third quarter. And this purchase happened, if you read the press release, over a 12-month period. These aren't U.S. stocks, so they didn't show up on the company's 13F filing. But Berkshire made these purchases over the course of a year, so that also shows that -- remember how everyone was getting frustrated in the March and April period when Berkshire literally bought nothing according to its 13F? So, maybe Berkshire wasn't being as conservative as you thought; they were quietly buying up these Japanese companies.

And like you said, this was pretty consistently over the course of a year. So, in the early days of the pandemic, Berkshire was putting money to work, just not in obvious visible ways to us. So, this is definitely a significant thing. It's not a giant investment by Berkshire standards. About $6 billion is a little over 1% of Berkshire's market cap. So, even if these are wildly successful, they're not going to be that much needle moving acquisitions, not like the Apple investment or anything like that. But it's significant that Buffett really seems committed to finding ways and thinking outside of his usual box in putting this money to work.

Moser: Yeah, I'm glad you made that point regarding -- you know, our conversations all throughout the year, kind of, you know, why wasn't he putting money to work? And well, it turns out he was, just in a little bit of a different way. And it definitely sounds like he is open to growing those investments as well. I think I saw where he said he was happy to take it to ownership stakes in any of those companies up to 9% or maybe 9.9%, and maybe that's where the cutoff is, so that he doesn't have to necessarily report. But I think any which way you cut it, yeah, it's a bet on the future of Japan, it's a bet on the global economy. It is a basket approach, I think is just probably the easiest way to put it, because he wasn't really placing his investment in one name. I mean, he spread that across five different companies. And so, I think that's a pretty sensible way to go about it, especially a country where -- I mean, anytime you're outside of your home stadium, so to speak, it's a little bit more difficult, the degree of difficulty goes up. And so, I think spreading that risk around makes sense.

Matt, I wanted to talk for just a minute about Warren's birthday, because one of the things that came up over the weekend or I saw this on Twitter, I thought it was really cool. One of our colleagues here at the Fool, Anand Chokkavelu, he's been with the company for, well, longer than I have. He's been here ever since I've been here, so he's been here for longer than I have, which, you know, is to plus-10 years at least. But he is a Buffett guy, I've learned a lot from reading Anand's writing through the years. And one of the things he did, I think it's really cool, he said on Twitter, he said, Aug. 30 is Warren Buffett's 90th birthday. Each year I celebrate the Babe Ruth of investing's birthday by adding another reason we love our hero. And then he went on to rattle off 90 tweets of just really great gems, things that he and we have learned from Warren Buffett along the way.

And you know, we wanted to pick out things that we have learned from him, the lessons that we use in our investing philosophy. And I'll just say, I think it was the 35th point that Anand made here, but it really resonated with me, because it was a quote, and it's on keeping it simple, stupid! And the quote is, "The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective." And that's one of those things that resonates with me, because I say oftentimes, and maybe I got it from this, but investing is as easy or as difficult as you want to make it. So, I try to keep it simple, I try to keep it easy [laughs] and not difficult. So, that's one of those Buffett-isms that sticks with me even today. I was wondering if there are a couple of lessons, one or two lessons there that you wanted to highlight this week in honor of Mr. Buffett's birthday?

Frankel: Yeah, the one you just said sounds similar to one that I really love, that's: You don't need to do extraordinary things to get extraordinary results. But it's really tough to just pick one or two. I wrote something about my 100 favorite Buffett quotes.

Moser: And we will tweet that out on The Motley Fool Industry Focus feed too for the listeners, along with Anand's 90 gems there; we'll retweet that on the feed as well.

Frankel: We will. And I can share three of my favorite Buffett lessons that I've learned and put into practice myself. No. 1, Buffett loves to buy companies that are in temporary trouble. This was the origin of his American Express stake, just to name one. This is where he got the Bank of America stake originally during the financial crisis; you know, a company in temporary trouble. I'm sorry, a great company in temporary trouble. You know, a lot of companies that have temporary trouble can go bankrupt. He wants great companies in temporary trouble.

So, to apply this to my own investment philosophy, this is where my own Bank of America investment came from. This is why I bought companies like Empire State Realty Trust. I mean, the Empire State Building is a fantastic asset. The company has got a rock-solid balance sheet, but it's got temporary trouble right now. You know, New York offices are not exactly thriving at the moment. Ryman Hospitality Properties is one we've talked about; great company, temporary trouble. Conferences in group events aren't a thing right now. So, buying great companies in temporary trouble is one of my favorite Buffett lessons.

Another one: A climate of fear is a long-term investor's best friend. I've put more money to work in the market in March through May of this year than I have probably in the previous three years combined. And it's because, it was a big -- I mean, March especially, is probably the worst climate of fear that's happened in my lifetime, including the financial crisis. So, it's just been a climate of fear, which as a long-term investor -- as a short-term investor, my portfolio has gone like this; the people listening can't really see this, but it's been kind of a roller-coaster ride since March. I remember the day my portfolio peaked in value, all-time high, the last day I was at Fool HQ, which was in late-February at some point. I think the last time you saw me live with Jason was the best day, my peak net worth, since then, it was like a roller coaster. First, you have the giant drop. And then, it kind of goes like this for a while, and like this. So, as a short-term investor, it's been kind of a hectic time. And if I was obsessing about the short-term swings in my portfolio, I would never get any sleep right now. But as a long-term investor, I know that I've bought some excellent companies at low prices; and that's kind of a Buffett mentality.

You know, you just turn off the news. I haven't turned on CNBC in three months. I love CNBC, it's a great news channel, but I haven't turned them on in three months just because I don't want to pay attention to the short-term swings and I don't want somebody yelling at me about the short-term swings, the way they do on there, you know, trying to make them seem even worse than they are.

So, ignoring the headlines, focusing on excellent companies at great values. And finally, looking for a margin of safety when you invest. That's something Buffett talks about -- the way he says it is, if you were driving a truck that weighs 9,900 pounds and a bridge said capacity 10,000 pounds, would you drive across it?

Moser: I'd be thinking twice about that one for sure.

Frankel: Right. And what he says, you probably drive down the road a little bit and find another bridge that says capacity 15,000 pounds. That's a margin of safety. So, that's what we look for in stocks. I mentioned Empire State Realty, that's a great one with a margin of safety, because it's a terrible business to be in right now, office space in New York City that's pretty much shut down. But the company has about $1 billion in liquidity, they have excellent credit, they have very little debt compared to their peers. That's a margin of safety, having that much cash in the bank that you could be flexible, do whatever you want with. So, those are my top three. I know I've rambled on a little bit, but I do love Buffett lessons and I could talk about all 100 if you really want me to.

Moser: Yeah, we could go through and listen. There's an entire series of shows here, and maybe we'll [laughs] talk to Anand about that, because there's a lot to dig into there with the stuff that he tweeted out, it was really great. So, look for that on the Industry Focus feed.

Matt, let's jump into the ideas we wanted to get into today, because these ideas, you know, they employ our investing philosophies, lessons we've learned. And certainly, Warren Buffett and Charlie Munger, they've been a part of that all along the way, but we wanted to throw a couple of ideas in the finance space to listeners today. These are ideas that we think really look like good investable ideas, worthy of consideration for investors today. And so, I'm going to let you start, and Matt, let's take about five minutes each and let's just, kind of, make our case. You know, this is, we're not putting me versus you. I mean, maybe we'll throw a poll out there on Twitter to see who likes it. But just, you know, go in, give us five minutes and talk about the stock that you're pitching today and why you like it.

Frankel: Sure. I'm actually going to go do something rare for me and pitch a recent IPO. Normally, I'd advise staying away from those. And it is Lemonade. LMND is the ticker symbol. If you're not familiar, they are an insurance tech company. Insurance is a massive market. You know, over 10% of U.S. GDP is insurance. It's a $5 trillion annual market.

Lemonade is an insurance tech company. Their basic idea is to use artificial intelligence and other modern technologies to make the insurance business quicker, easier and more affordable than it ever has been before. It kind of reminds me of, you remember when GEICO first got really popular because of their "15 minutes could save you 15% or more," remember that line. So it's kind of something like that, except now you can get a quote in a few seconds thanks to the technology. So, the insurance business, the general idea is that it generates money that can then be invested in something else while you're waiting to pay out claims, and Lemonade does it a little bit differently. First of all, for right now, they offer homeowners, renters and pet insurance. Those sound kind of like three random things for an insurance company to offer. They're planning to add things like health insurance and life insurance eventually, but right now they're just kind of ramping up.

So, the way they plan to do this is, one, their business model is a little misunderstood, because they say that everything that's not paid out in claims, they donate to charity. Which sounds like a very noble cause but a terrible profit model. So, [laughs] what they do, they take an upfront fee, a portion of the premium right off the bat that is their money to cover their costs, invest if they want to, things like that, it's 25%. So, 25% of the premium goes to paying their expenses and can be invested, it's the ...

Moser: It's, sort of, their version of a float, I guess, yeah?

Frankel: Sure. And the other 75%, they use to purchase reinsurance policies. That, kind of, instead of making a variable payout for claims -- you know, as claims come in, they pay them out, and so and so on. The reinsurance allows them to, kind of, make a flat cost of paying out claims. They buy these reinsurance policies; they have a predictable cost of claims. That 25% is predictable money that's in their pocket. Not in their pocket, I mean, that's what they can use to run their business. So, over time this can be profitable.

I love the charitable aspect of the operation. I love that. One Buffett lesson that really applies to this, not only is insurance Buffett's favorite industry, Berkshire Hathaway, at its core is an insurance company. But Buffett has taught us to look for durable competitive advantages. The use of artificial intelligence, you know, technologies that other insurance companies don't use and getting a, kind of, first-mover advantage in that way, gives them the durable competitive advantage of having a favorable cost structure. It's cheaper to generate a policy through artificial intelligence than through a live agent. You know, the same idea with banks. It's cheaper to process a deposit through a mobile app than it is to have a teller assist you. So, they use the same kind of idea here. And that's a durable advantage; especially since they're really the first ones to really develop these insurance technologies. They're the first tech-focused insurance company; you know, GEICO has a mobile app, but that's not the focus of their business, using tech.

So, that's a durable competitive advantage. I think this business has a ton of room to grow over time, the gross so far has been very impressive. Most of their customers, 70% of their customers, are under 35. So, they're bringing in people who are new to the insurance world. 90% said they didn't switch from another insurance company, so that means they're getting a lot of first-timers. So, renters' insurance and homeowners' insurance especially, they're targeting first-time homebuyers, for example. These are people who are young and could be Lemonade customers for the next 50 years. So, it's a long-tailed customer base, cost advantages. They're doing a great job of, kind of, bringing newer people who don't -- maybe people who don't have renters' insurance right now, bringing them into the insurance economy, which could eventually be upgraded to homeowners' insurance once these people buy homes.

So, there's a lot of room to grow this business. I really like Lemonade's model. Like, any IPO I would advise, kind of, taking a small nibble at first, I wouldn't advise putting, you know, 10% of your portfolio [laughs] into the stock right now. But it's a recent IPO, there's a lot of execution risk; we won't sugarcoat it. Whenever you're trying to be a pioneer in a space and really disrupt the $5 trillion industry, there's a ton of execution risk. So, I would advise taking a small nibble at first, but this is a stock that's on my watchlist. And obviously now that I've mentioned it right now, I can't buy it in the next few days, but it's one that I plan to at least take a small nibble in my portfolio in the near future.

Moser: Yeah, I like that. I like that charitable aspect to it. And I think, you mentioned the younger demographic, I think that resonates a lot with the younger demographic. And I also think this is probably a business that does pretty well with, sort of, word-of-mouth advertising. I mean, I would imagine that a lot of people just talk with their friends and family about this company. And maybe, you know, given the branding and what they're doing, and that aspect of the business, the word-of-mouth, hopefully that's something that can -- you know, they don't have to spend so much, really, to create that awareness and acquire those customers. But, yeah, that's -- we talked about Lemonade on the show before, I really like that one. That's great.

Another one we've talked about on the show before, and I'm going with this week is Bill.com, ticker is BILL; very easy to remember. But if you remember, Bill.com, this was founded in 2006 by Rene Lacerte. And their mission is to make it simple to connect and do business; that's a pretty wide-reaching mission, of course. But what they do is they provide cloud-based software that digitizes and automates back office financial operations, primarily for small- to medium-size businesses, those SMBs that we talk about.

It is a relative newcomer to the public markets as well. They just IPO'd in December 2019, and shares have done really well since that initial pricing of $22. Digging into the business, for me, it starts to become clear why, I think -- again, they're trying to help these small- to medium-size businesses essentially make paper-based manual transactions obsolete. You know, a lot of these businesses still rely on writing checks and keeping paper letters and whatnot, but Bill.com is really trying to bring all of these small- to medium-size businesses into the 21st century and making it cost effective.

According to the SMB Technology Adoption Index, in 2016, more than 90% of small- to medium-size businesses surveyed still relied on paper checks to make and accept business-to-business payments. So, you can see big opportunities there to eliminate maybe not cash, but checks, right. We talk about the War on Cash; this is very similar, in that, they're trying to eliminate that paper trail. It's a SaaS business, the customers pay a monthly subscription for services. They also benefit from transactions conducted on the platform and revenue generated on interest earned from customer funds held in trust. It's a small part of the business today, but they continue to grow and could become more meaningful.

And they do all this with artificial intelligence and AI-driven platforms. That's really one of their competitive advantages is, really trying to use technology to make this as efficient a business as possible. And we talk about efficiency, I mean they are doing something here. At the end of this most recent quarter they reported last week, more than 98,000 customers, which was up 28% from a year ago. They processed $25.4 billion in total payment volume, which was up, I think, 26% from a year ago. And then at the end of the fourth quarter, they held over 2.5 million network members; that was up 39% from the 1.8 million members at the end of the last fiscal year. They processed 5.6 million payments for the quarter, Matt; 5.6 million. And so, you've got this big network of providers and participants, members and ultimately what this can do is create a very compelling network effect over time, assuming that they continue to grow that customer base.

And certainly, I think you're seeing that businesses more and more would like to move away from paper and checks and whatnot. And so Bill.com, it's not the only one out there really doing what it's trying to do, still a very young company. Like I said, relatively new to the public markets. But Rene Lacerte, the CEO, the Founder, he's got a strong history in this space and he seems like [laughs] he knows what he's doing. It is unprofitable. I think probably the biggest risk today is the valuation. It is trading at around 48X sales, so clearly -- I mean, in a market where a lot of these businesses are trading this way, Bill.com is no exception.

So, like you said with Lemonade, I think it's one where I would advise nibbling, I would advise buying this in thirds maybe. And say, OK, if you know how much money you would want to invest in this business, split that total amount up into three different tranches and just invest one tranche at a time. Maybe get some skin in the game to start following it. If you find another more opportunistic entry point down the road, add that second or third tranche. But like you, Matt, this is a business that I actually want to bring into my own personal portfolio. So, my intention is that once our time is up here and we can actually make these transactions, I personally am going to put a little money to work in Bill.com as well, because I just have seen what they're doing, and while it's a very competitive space, it's also a very big market. And Mr. Lacerte seems like a really compelling founder-leader.

So, there you go, Bill.com and Lemonade. And the ticker for Lemonade, again, Matt, was... ?

Frankel: LMND. And since this is the Buffett episode, I'm going to go one step further and ask you a question, then I'll answer it about Lemonade.

Moser: OK.

Frankel: Do you think Warren Buffett should or will buy Bill.com stock, not the company?

Moser: Stock, not the company. OK. Well, I don't know that he will, I think he should. And I think that just based on the investments in PagSeguro and StoneCo, for example -- and maybe it's not even Buffett particularly, but the team that he's assembled there, I think they see the merits of the space, I think they see the merits of the fintech space and what it's doing. I think that it has a lot of qualities that Mr. Buffett and company appreciate. So, it would not surprise me if they did buy it, but it may be a little bit too small of a company even for him. I mean, like I said, the valuation is pretty crazy and I don't know [laughs] there's that margin of safety that he feels so good about today.

How about you -- what do you think with Lemonade?

Frankel: Yeah, I mean, I think he should. And there are a couple of reasons. One, because insurance, you know, is Buffett's favorite business, and they're kind of the future of insurance. And Buffett has a history of taking nibbles on some up-and-comers in his favorite spaces. Think of StoneCo. You know, Buffett loves payment processing. He's owned American Express for a long time. He has positions in Visa and MasterCard, and then StoneCo is the Brazilian kind of equivalent. And he took a nice nibble in that. I could see him doing a similar thing with a company like Lemonade, because you know, they're the higher-tech players. He kind of missed the boat on a lot of the big tech crazes, like Amazon and Google, things like that, and he has expressed regret over it. So, I think, you know, he can redeem himself a little bit by getting in on the ground floor of an up-and-coming insurance tech play like Lemonade. They're a reinsurance customer. Buffett has a lot of reinsurance businesses. There could be a lot of synergies there. It's a play that would make sense, I think, as a nibble.

Moser: Yeah, I think you're right. Given his penchant for insurance. And I bet you, he loves what that company stands for, we've talked about it, he'd appreciate that, I think. So, well, hey, folks, listen, there are two companies that Matt and I really like, we wanted to go one step further than just ones to watch this week and really talk about companies that we feel strongly about, and strongly enough to put our own money to work. And so, I'm excited to see how these work out. I love that Lemonade pitch. Matt, I think that's a cool-looking company. I've just really been impressed with what I've learned about Bill.com and I'm going to have a lot of fun following these; I know you will too.

Frankel: For sure.

Moser: Well, that's going to do it for us this week, folks. And, Matt, before I leave, I just want to wish you guys well. Have a safe trip. Given that you're in South Carolina, are you flying down to Florida or you guys going to drive?

Frankel: No. And for those -- we talked about this before the recording started, I think, but for those who are just listening on the podcast, we're going to Disney World for the weekend. We are driving. It's about a six-hour drive from where I live. We have to make reservations, it's a little bit of a different system than we're used to, but we were able to -- we were worried, because of Labor Day, you know. You take Labor Day and Disney, and I can just start getting claustrophobic with all the crowds.

Moser: [laughs] Not the place you want to be.

Frankel: Right. But they're limiting capacity to, like, 20%. So, I mean, even -- you know, how busy could it get? [laughs]

Moser: That sounds like a dream, man. I think that ought to be a lot of fun.

Frankel: Yeah. And we were able to reserve all three parks we wanted on the days we wanted. And I keep looking at the Disney app and all the lines are, like, five or 10 minutes for all the rides [laughs] we want to do, so ...

Moser: Man, that ought to be a lot of fun.

Frankel: Yeah, it just seems like a nice, like a once-in-a-lifetime opportunity to -- if you're not that worried about the -- and we're going to be taking precautions, and my wife, you know, she buys sanitizer by the gallon for things like this. So, we're going to be taking precautions. You know, I'm not saying, don't worry about the virus. But from everything I hear, Disney is doing a great job at keeping everything clean and following protocols and things like that. And I haven't read any -- they've been open for almost two months now, I haven't read anything about someone -- like a case being traced back to Disney World.

Moser: [laughs] I'd imagine that they're probably setting the standard for keeping a park clean and safe, so. Well, we'll talk about it when you get back. And as a reminder, folks, with next week being Labor Day weekend, on next Monday we will be off as the office will be closed, so no Industry Focus next Monday. We will join back with you on the following Monday. We'll talk about Matt's trip and get his report on the state of travel and entertainment in the Southeast of the United States of America.

But remember, you can always reach out to us on Twitter @MFIndustryFocus, you can drop us an email at IndustryFocus@Fool.com. Let us know if you're traveling anywhere, tell us how that's going, we'd love to hear it. You know, any compelling stuff out there? Hey, we'll bring it over to the show too.

But as always, people on the program may have interests 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, as always, to Tim Sparks for putting the show together. For Matt Frankel, I'm Jason Moser, thanks for listening and we will see you not next week, but the week after. Happy Labor Day, folks!