Michael Schaffer: How to Future-Proof Your Portfolio From AI, ChatGPT

This podcast is brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.

Hello and welcome to Barron's The Way Forward. I'm Greg Bartellis, and my guest today is Michael Schaefer, Senior Financial Advisor, Managing Director Investments at the Schaefer Wealth Management Group of Wells Fargo. Today we will discuss how advisors can grow and maintain wealth in a disruptive world. Michael, welcome to the program.

Thank you for having me.

Oh, my pleasure. We spoke recently and you said ChatGPT scares me to death. Let's start with that and then let's talk about the big picture, but I just wanted to quickly touch base on something very much of the moment.

Yeah, so I mean, ever since the '90s and creative destruction has been out there and technology and the speed of it has continued to disrupt many different businesses, other technologies and things of that nature. And when we started to look at ChatGPT in the last year, It's probably the most disruptive technology I've seen in a long time. And I think we really don't know what the ramifications of everything it's gonna be, but I do think it's gonna be very disruptive. It's going to change many people's lives in many different ways. Some of it good. I think it'll be a boom for healthcare, but I think for other businesses, it's gonna really have an effect. On the size of the business, and I think it's gonna have an effect on the job creation going forward. And many technologies in the past have been disruptive, but this one will be probably the most disruptive I've seen in basically the white-collar space. And I think what you're gonna continue to see as AI gets smarter and data gets more prevalent in it, that I think it's gonna be harder for businesses to be able to continue to grow and overcome the destruction that both ChatGPT or AI is giving to those businesses.

An interesting aspect is you have opinions all over the map, right? Some people are much, see ultimately this is more positive for business or negative, what have you. And there also is the vocational dimension, right? Of how this actually affects employment and then the investment implications of that. But one, really interesting factor that I'm curious what you think about is really not just necessarily getting from point A to point B, but the speed, the pace at which this creative destruction occurs, right? That's a big X factor because if there is a wholesale transformation of the economy, and let's say it unfurls over 8, 10 years, that's quite different than the same change occurring within 1 to 2 years. Speak to me about that, about anticipating and adjusting and the potential disruption, all of that.

I don't pretend to know how fast it's going to happen. I just know that it has— where we started seeing it and then where it is now has been really, really fast. I don't— you could say the government could get involved and put speed bumps to slow it down. I don't see how they would do that because the rest of the world's not going to do that. But I just think that it's gonna take a lot of the gray areas out of many different, you know, many different businesses that are out there that live off of gray areas like accounting or things of that nature. If the government's using ChatGPT, I can't imagine that accounting is, you know, they're gonna have to adopt it. And so, you know, it's gonna take a lot of the gray area out of, what our accountants do. And I think that it's gonna affect education. It's gonna affect other technology companies. It'll probably be a boom for anything in research. But there's still some things out there that we just don't know. I mean, somebody's still gonna have to decipher the research. Somebody's gonna have to look at the X-ray that this is analyzing and things of that nature. But if you think about it, it's probably gonna shrink a lot of businesses and it'll shrink the number of people that are involved in those businesses right now. And as an investor, when you're putting money to work for your future, when you have a runway that's just very cloudy and you're not sure how that's going to affect that business, it makes it a lot more challenging to to continue to stay with some of these businesses where you just don't know. And it's going to continue to change the investment landscape. Some of it good, it'll help with research. Some of it will be that when you look at how data's provided right now, I mean, it's kind of scary because I think it's going to be hard to decipher what's real and what's not.

Right. There are going to be certainly people use it for disinformation, et cetera. There's going to be a lot of potential for that. Tell me in terms of how investors should be looking at the world? Where are there relatively safer places to invest given all this?

So, I mean, my team, we spend a lot of time on just looking at businesses that really can't be disrupted. And it might be a little bit boring and it's not as— the volatility's not there. So you don't have as many big moves and things of that nature. But if you just think about how families wealthy individuals have grown their net wealth, which is tax-adjusted net wealth. I mean, they really look for businesses with 5 criteria. And that is: 1, they have some kind of moat around them. 2, they have a high barrier of entry. 3, they have a durable competitive advantage. 4, management acts like a partner. And 5, we like them to pay dividends because if you're growing, especially if you're growing dividends, if you're growing the dividends, that means the business has to be run that before you allocate capital to other parts of the balance sheet, if a company's been paying dividends and raising it every year and its shareholders are expecting that, management will comply with that. And before they do an acquisition, before they do a stock buyback, they know that their investors are waiting for a dividend and a dividend raise. So it's really a long-term investment thesis that has really played out over time. It doesn't mean it works every year. It doesn't mean it performs every year. But if you're looking at your assets and not paying, not clicking capital gains all the time and trading in and out of one sector into another sector, I mean, these businesses will continue to deliver really good returns and returns that your purchasing power will stay with you. And most of us, we get caught up in the here and now. We get caught up in, what's going on in the world right now, the latest news and things like that. But if you can buy a business that continually raises prices, that can't be disrupted, that management acts appropriately, I mean, those businesses are really good long-term investments to hold onto for your family.

What you're saying sounds very similar to what Warren Buffett often says. I mean, that's a lot of the criteria of things that he talked about in terms of the wide moat, et cetera. You've mentioned that you've been to the Berkshire Hathaway shareholder conference for over 30 years running. Is that right? Mm-hmm.

We just got back.

Yeah. So is that 31 or 32? Where is that?

31.

31. That's really interesting. And there were apparently, I heard 40,000 attendees this year?

Roughly. Yeah. I don't know what the number is, but it's a big number.

Okay. So when you first started, do you recall approximately how many people were there?

I mean, I don't remember the number, but it was at the Creighton Center, which was a really small venue. And I would probably think there was probably 2,000 to 2,500. It was a shorter meeting. You didn't have all the fanfare that you do now. I mean, it's more of just a capitalist spectacle, I suppose. Warren and Charlie have grown their net worth and Berkshire's net wealth by continuing to hold really good assets for long periods of time.

What are some of your earliest memories of the earliest shareholder meetings for Berkshire that you intend— what are some of the things that stay with you that you recall?

I mean, I think that if I had to guess like what's changed, not really my thinking, but kind of made me think in a certain way, it's, I mean, just the power of a brand. And they talk about this and I don't remember if they talked about this back in the early '90s, but They talked about that if they wouldn't have bought See's Candy, they probably would have never bought Coca-Cola. They bought See's Candy and at that point in time, it really made them think about the power of a brand. The power of a brand, you have a moat. It's got a lot of these characteristics. You got a moat, you got a high barrier of entry, you can raise prices, it's got a durable competitive advantage. I know Warren and Charlie have spoken for a long time that if— If they wouldn't have bought See's Candy, they probably wouldn't have bought Coca-Cola. And Coca-Cola has been one of their biggest positions. Best positions, I should say.

[Speaker] Well, what's interesting too is I remember during the dot-com bubble and the NASDAQ was just going to insane heights, Buffett kind of sat on his hands. He said in so many words, I don't get it. It's not my core competency. I'm not gonna go there. And yet years later, it's so interesting. He bet big on Apple and just resoundingly in a massive way. I mean, Apple's easily his biggest equity holding. I think by a factor of 3 over Bank of America.

That's like 20%.

It's some, yeah, an enormous number, and that also has an incredible brand. He sees, correctly so I think, just the ubiquity of it, the loyalty to it. I mean, how people are literally attached to the devices, and all the people who not only have them, but they're gonna certainly buy a replacement. You know, it's just a matter of time, so they have incredible cash flow and whatnot. But I guess that also speaks to him having a certain flexibility but having still a structure, a framework, and he's not, he totally obviously got it. It made sense to him. Unlike some of that in the dot-com where a lot of that turned out to be right to avoid most of that, frankly.

Yeah. I mean, the interesting thing about it is though, is I mean, Berkshire's so big now that they can't, they have to be able to find, you know, big investments that they can put money in because for filings and things of that nature, it's very difficult for them to, buy into a small business where they can't buy the whole thing. They move the markets too much. I think Apple's a great investment for them. I think that they've done very well with it. But they don't have as much flexibility as people that don't have that size of having— I think they have $120 billion this year. I think they get a I think it's like a billion a month into Omaha every month on cash coming in from the businesses that they have. They're in a different situation than most investors because most investors can buy the businesses that are not the size of Apple. It just gives them more flexibility.

Yeah. Getting back to AI and disruptive technologies, you're a fan of railroad stocks. Is that right?

I mean, I like the features of railroad companies and those businesses because they're really an oligopoly inside a monopoly. And they have many attributes for what we talked about on those 5 attributes. They do have a regulatory side of it, which can be good and bad sometimes. But by and large over time, I mean, it's going to be hard to disrupt the railroad industry, even if we went to driverless semi-trucks. I mean, they're not going to have 100 cars behind them. And so the cheapest way to move product around the country is through railroads.

Now let's go back to the original topic of growing and maintaining wealth. Talk to me about the behavioral dimension of why so many people don't actually stick with it for the long term. And granted, some of it might be an emergency or insufficient planning, but tell me more about the behavioral component that technically is in their control or should be, or the advisor should be helping and how that— the importance of it?

In my opinion, part of being a good advisor is teaching. Our team spends a lot of time teaching and looking at data with clients so that they are wired in a way that they look at the world in this kind of way. And it might not be for everybody, but for a lot of people that look at it and get it, and you look at the data long-term, tax-deferred because we're not selling it. And our whole object is to hold these businesses in perpetuity. Doesn't mean we can, but that's our object, is that the compounding mechanism of not paying taxes all the time is just, it's a game changer and it's really a family changer. And when we really look at these businesses, we really look at them for transitioning the current investor's life and looking at the future generations and how do we grow net wealth and keep it in the family because it's going to be harder for a lot of younger people in this world to replicate what their parents did. And so by continually looking at this and as part of an estate plan and a financial plan, but just looking at it in a way that we can compound, I mean, families really, it really becomes a game changer. And every once in a while, we have to hold hands and get people from, or investors from doing things that are in the moment. But it's, you know, if you spend a lot of time on the front end with people and investors and families and spend a lot of time teaching them these timeless investment techniques, by and large, most of them adhere to it. And, you know, we've had crazy periods in the '90s. We've had crazy periods, you know, over the last couple years and things of that nature. But if you really look to it, these are timeless principles, investing principles. And if they're not timeless, then they're probably not a good investment principle. So the problem with a lot of the companies that are coming out, and ChatGPT is definitely gonna be one that we're gonna be hearing a lot about. I mean, there was a 60 Minutes piece not that long ago, and you're gonna continue to see more and more of this come out. It's, you know, people want to be a part of the new investment that's out there. And we've seen this before. And the unfortunate thing is with that is the exit's probably more important than the entrance. And so most investors get in them and they don't get out of them at the right time because, you know, there's, I think Buffett said this, it's like there's the three stages of technology companies and you have the innovators, you have the imitators, And then you have, he says, the idiots. And those three stages are very, very hard for investors because they get caught up in it. And then, you know, they don't want to miss out. So it's a fear of missing out. So they stay in it too long. And, you know, if you looked at some of these businesses that are defensible, like we talked about, you really don't have to do a lot. You just have to hold onto them and not get caught up in anything that's going to get your mind to think about things in a way that you're going to want to sell them because you don't want to really interrupt compounding. If you sell, you're going to interrupt compounding. Compounding over your lifetime, it is substantial when you hold on to really good assets and you're getting rising dividends and your purchasing power is going up with it. Those are game changers for families.

Yeah. I think the interesting aspect of compounding is it really deliver startling results, obviously, the deeper you are into the process. So a lot of people might not see big gains maybe for 5, 10 years and say, "Eh," but if they hang on 20, 25 years, then they might see some eye-popping numbers and go, "Aha," and be perhaps more incentivized to stick with it because they're being rewarded for their patience. I mean, so much of Warren Buffett's own wealth has been created something like in the past decade or what have you.

Yeah, Chris Davis had something today on that. He said that, and I don't remember what the quote exactly was, but most of Warren Buffett's net worth was created after he He was age 65.

Exactly. Exactly. So curious about something now, the prescription, if you will, of just being patient, letting compounding do its thing. It's very simple conceptually. However, given the ubiquity of media that we're all on our phones, we're in a media-drenched environment. Is it harder for people to tune out the noise and stick with this? Are you getting more resistance or pushback? Like, oh, I just saw this on TV or that their emotions are getting put in, like speak to that dynamic.

Yeah. We're not getting it like we did in the '90s. '80s. In the '90s, we got a lot of it. But we've spent so much time on the front end educating and just showing data. So we want people to see data. We want our investors to see data and that way they can look at it. And it's not just us consulting, it's really them just looking at the data. But you do, it's hard. It's hard not to, get caught up in the here and now. And it's hard, I suppose, when you go to a cocktail party and somebody talks about how they made all this money in say Bitcoin, and you don't own Bitcoin and you just kind of feel like you're left out. And so, I mean, you know, it's, we can't say that we don't see any of that. But I mean, what we always talk about is, you know, in the short term, stock market's a voting machine. In the long term, it's a weighing machine. And it's a, big weighing machine when you buy companies that have assets that can raise prices.

Yeah. You mentioned sharing the data with clients. Is there any method of delivery that tends to be more effective, be it videos or charts, paper or news articles? What do you find tends to resonate? Yeah.

We subscribe to Bloomberg. Bloomberg is really just a data source. We just spend a lot of time looking at We could look at, since we're talking about railroads, there's periods where railroads, there's 5-year periods where railroads didn't do anything and things like that. So we'll look at those 5 years and talk to people and say, "How do you feel when you see this?" And I mean, 5 years is a long time. I mean, '08, '09 was a long time. But if you looked at these businesses and you went to sleep in '08, January of '08, and you woke up in 2010, by and large, your income would have gone up substantially and you would have never known you had price fluctuation because these businesses rebounded. I think that when we spend a lot of time, and maybe it's just so obvious, you would think everybody's doing it, but I think that with the phone and the media on TV and things of that nature, there's not 24 hours of news every day, business news. Every day. And so they keep saying the same thing over and over. And so people get it in their head and then all of a sudden it just becomes real. What we try to do is just look at data and not get emotionally caught up, not get caught up in the here and now, and just look at what the runway looks like for those businesses.

And before we wrap up, can you share with the listeners an actionable idea?

Yeah, I mean, I think when I look at my I view my clients as my partners. I think it's very important that when you build your team around your wealth management business, that you get like-minded people. Not people that are going to agree with you at everything, because we don't want that. We always want to try and poke a hole in our thinking. When everybody buys in, it just makes everybody's life easier. I think that it's important that we deliver to these families really good timeless advice that is gonna help them and help them in the future. And it's so easy to get caught up in the here and now. And so our goal is, we look at our clients as our partners and we wanna be able to give them the ability to continue to compound. It doesn't mean it outperforms every year. It does not mean that. But what it does mean is that by owning these, not paying taxes, continuing to compound, we're not going to wake up and we're going to have news where it is so disruptive to that business like we've seen in some of the educational companies that are out there. ChatGPT is starting to pick up steam. Those companies are starting to take hits. ChatGPT is not going to change the railroad business. It's not going to change the bourbon business. It's just easier to look at those businesses and really hold them for long-term and just don't get caught up. We'll have people to say, "Look, just walk me through one more time why we're doing what we're doing," and we're happy to do it. That's really what we do. The other thing is we want this to be generational. We want their children, even some of their grandchildren to look at this investment and to look at these as not just pieces of paper, but just really good wealth creators and really good businesses. And so, the stock market's open, it could be having a good day, a bad day. And Ben Graham always said, Mr. Market, the market goes up, the market goes down. But people that are running railroads, people that are selling bourbon, people that have brands, they're looking at expanding in different markets of the world. And they're looking at the world in a different way than just what the short term is of what the stock market does.

Excellent. Well, thank you for that perspective and, uh, for joining the program. I appreciate it.

Thank you for having me.

Thank you. My guest has been Michael Shafer. For more advisor-specific podcasts, please check out barons.com/podcast. For The Way Forward, I'm Greg Bartalus.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.