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As Charlie once said, “There is no better teacher than history in determining the future. There are answers worth billions of dollars in a $30 history book.”
From 1733 to 1758, Ben Franklin dispensed useful and timeless advice through Poor Richard’s Almanack. Among the virtues extolled were thrift, duty, hard work, and simplicity.
Look first for someone both smarter and wiser than you are. After locating him (or her), ask him not to flaunt his superiority so that you may enjoy acclaim for the many accomplishments that sprang from his thoughts and advice. Seek a partner who will never second-guess you nor sulk when you make expensive mistakes. Look also for a generous soul who will put up his own money and work for peanuts. Finally, join with someone who will constantly add to the fun as you travel a long road together.
The quotes, talks, and speeches presented here are rooted in the old-fashioned Midwestern values for which Charlie has become known: lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one’s own beliefs, and many more. But his advice comes not in the form of stentorian admonishments; instead, Charlie uses humor, inversions (following the directive of the great algebraist [Carl] Jacobi to “invert, always invert”), and paradox to provide sage counsel about life’s
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Charlie once said, “I wanted to get rich so I could be independent, like Lord John Maynard Keynes.” Independence is the end that wealth serves for Charlie, not the other way around.
Charlie’s redundancy in expressions and examples is purposeful; for the kind of deep “fluency” he advocates, he knows that repetition is the heart of instruction.
However, he never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.
To this day, Charlie continues to influence the firm’s attorneys, reminding them, “You don’t need to take the last dollar” and “Choose clients as you would friends.”
Much of Franklin’s success was due to the essential nature of the man—most especially his appetite for hard work, but also his insatiable curiosity and patient demeanor. Above all, he possessed a quick and willing mind that enabled him to easily master each new field of endeavor he chose to undertake.
As John Muir observed about the interconnectedness of nature, “When we try to pick out anything by itself, we find it hitched to everything else in the universe.”
Charlie counts preparation, patience, discipline, and objectivity among his most fundamental guiding principles. He will not deviate from these principles, regardless of group dynamics, emotional itches, or popular wisdom that “this time around it’s different.” When faithfully adhered to, these traits result in one of the best-known Munger characteristics: not buying or selling very often.
he faithfully honors Albert Einstein’s admonition: “A scientific theory should be as simple as possible, but no simpler.”
“Quickly eliminate the big universe of what not to do; follow up with a fluent, multidisciplinary attack on what remains; then act decisively when, and only when, the right circumstances appear.”
proper calculation of intrinsic valuation, not the end. The list of additional factors he examines is seemingly endless and includes such things as the current and prospective regulatory climate; the state of labor, supplier, and customer relations; the potential impact of changes in technology; competitive strengths and vulnerabilities; pricing power; scalability; environmental issues; and, notably, the presence of hidden exposures.
“a great business at a fair price is superior to a fair business at a great price.”
as Charlie says, “Hard work is an essential element in tracking down and perfecting a strategy, or in executing it.”
For Charlie and Warren, the hard work is continuous, whether it results in current investing activity or not—and usually it does not. This habit of committing far more time to learning and thinking than to doing is no accident. It is the blend of discipline and patience exhibited by true masters of a craft: an uncompromising commitment to “properly playing the hand.”
While poor outcomes are excusable in the Munger–Buffett world—given the fact that some outcomes are outside of their control—sloppy preparation and decision-making are never excusable because they are controllable.
Guns, Germs, and Steel, The Selfish Gene, Ice Age, and Darwin’s Blind Spot all have a certain theme: a focus on the issue of competitive destruction and an examination of why some entities are nevertheless able to adapt, survive, and even dominate over time.
Risk All investment evaluations should begin by measuring risk, especially reputational. Incorporate an appropriate margin of safety. Avoid dealing with people of questionable character. Insist upon proper compensation for risk assumed. Always beware of inflation and interest rate exposures. Avoid big mistakes; shun permanent capital loss. Independence “Only in fairy tales are emperors told they are naked.” Objectivity and rationality require independence of thought. Remember that just because other people agree or disagree with you doesn’t make you right or wrong—the only thing that matters
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We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.
What Carson said was that he couldn’t tell the graduating class how to be happy, but he could tell them from personal experience how to guarantee misery. Carson’s prescription for sure misery included: Ingesting chemicals in an effort to alter mood or perception Envy Resentment
While susceptibility varies, addiction can happen to any of us through a subtle process where the bonds of degradation are too light to be felt until they are too strong to be broken. And yet, I have yet to meet anyone, in over six decades of life, whose life was worsened by fear and avoidance of such a deceptive pathway to destruction.
Many educational institutions—although not nearly enough—have realized this. At Harvard Business School, the great quantitative thing that bonds the first year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems. And the students love it. They’re amazed to find that high school algebra works in life.
His rule for all the Braun Company’s communications was called the five Ws: You had to tell who was going to do what, where, when, and why. And if you wrote a letter or directive in the Braun Company telling somebody to do something and you didn’t tell him why, you could get fired. In fact, you would get fired if you did it twice.
“The mind of man at one and the same time is both the glory and the shame of the universe.” And that’s exactly right. It has this enormous power. However, it also has these standard misfunctions that often cause it to reach wrong conclusions. It also makes man extraordinarily subject to manipulation by others.
I’ve gotten so that I now use a kind of two track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain, at a subconscious level, is automatically doing these things—which, by and large, are useful but which often misfunction?
microeconomics. Here I find it quite useful to think of a free-market economy—or a partly free-market economy—as sort of the equivalent of an ecosystem.
What we have now is Motocross, which is read by a bunch of nuts who like to participate in tournaments where they turn somersaults on their motorcycles. But they care about it. For them, it’s the principal purpose of life. A magazine called Motocross is a total necessity to those people. And its profit margins would make you salivate. Just think of how narrowcast that kind of publishing is. So occasionally, scaling down and intensifying gives you the big advantage. Bigger is not always better.
I have in my files an early National Cash Register company report in which Patterson described his methods and objectives. And a well-educated orangutan could see that buying into a partnership with Patterson in those early days, given his notions about the cash register business, was a total 100 percent cinch. And, of course, that’s exactly what an investor should be looking for. In a long life, you can expect to profit heavily from at least a few of those opportunities if you develop the wisdom and will to seize them. At any rate, surfing is a very powerful model.
So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
The model I like—to sort of simplify the notion of what goes on in a market for common stocks—is the pari mutuel system22 at the racetrack. If you stop to think about it, a pari mutuel system is a market. Everybody goes there and bets, and the odds change based on what’s bet. That’s what happens in the stock market. Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position, etc., etc., is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the damn odds, the bad horse pays 100 to
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It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
the best part of it all was his concept of Mr. Market. Instead of thinking the market was efficient, Graham treated it as a manic depressive who comes by every day. And some days Mr. Market says, “I’ll sell you some of my interest for way less than you think it’s worth.” And other days, he comes by and says, “I’ll buy your interest at a price that’s way higher than you think it’s worth.” And you get the option of deciding whether you want to buy more, sell part of what you already have, or do nothing at all.
And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You’re much more likely to do well if you start out to do something feasible instead of something that isn’t feasible. Isn’t that perfectly obvious? How many of you have 56 brilliant insights in which you have equal confidence? Raise your hands, please. How many of you have two or three insights that you have some confidence in? I rest my case.
However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But very rarely, you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business.
There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass: You’re paying less to brokers. You’re listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2, or 3 percentage points per annum compounded. And you think that most of you are going to get that much advantage by hiring investment counselors and paying them 1 percent to run around, incurring a lot of taxes on your behalf? Lots of luck.
Within the growth stock model, there’s a sub position: There are actually businesses that you will find a few times in a lifetime where any manager could raise the return enormously just by raising prices, and yet they haven’t done it. So they have huge untapped pricing power that they’re not using. That is the ultimate no brainer.
How do you and Warren evaluate an acquisition candidate? We’re light on financial yardsticks. We apply lots of subjective criteria: Can we trust management? Can it harm our reputation? What can go wrong? Do we understand the business? Does it require capital infusions to keep it going? What is the expected cash flow? We don’t expect linear growth; cyclicality is fine with us as long as the price is appropriate.
What should a young person look for in a career? I have three basic rules—meeting all three is nearly impossible, but you should try anyway: Don’t sell anything you wouldn’t buy yourself. Don’t work for anyone you don’t respect and admire. Work only with people you enjoy.
What overall life advice do you have for young people? Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step-by-step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day, and at the end of the day—if you live long enough—like most people, you will get out of life what you deserve. Life and its various passages can be hard, brutally hard. The three things I have found helpful in coping with its challenges are: Have low expectations.
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you should be very wary of heavy ideology. You can have heavy ideology in favor of accuracy, diligence, and objectivity. But a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn’t, and it’s kind of a holy construct where you know you’re right, makes you a bit nuts.
If something is very important but can’t be perfectly and precisely demonstrated because of ethical constraints, you can’t just treat it like it doesn’t exist. You have to do the best you can with it, with such evidence as is available.
What makes investment hard, as I said at USC, is that it’s easy to see that some companies have better businesses than others. But the price of the stock goes up so high that all of a sudden, the question of which stock is the best to buy gets quite difficult. We’ve never eliminated the difficulty of that problem. And 98 percent of the time, our attitude toward the market is that we’re agnostics. We don’t know. Is GM valued properly vis-à-vis Ford? We don’t know. We’re always looking for something where we think we have an insight that gives us a big statistical advantage. Sometimes it comes
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As for gambling with simple mechanical house odds against me, why in the world would I ever want to do that, particularly given how I detest the manipulative culture of legalized gambling? I don’t like legalized gambling.
On the other hand, I do like the manly art of wagering, so to speak. And I like light social gambling among friends. But I do not like the professional gambling milieu.
common stocks generally have generated returns of 10 to 11 percent after inflation for many years and that those returns can’t continue for a very long period. And they can’t. It’s simply impossible. The wealth of the world will compound at no such rate. Whatever experience Stanford has had in its portfolio for the last 15 years, its future experience is virtually certain to be worse. It may still be okay. But it’s been a hog-heaven period for investors over the last 15 years. Bonanza effects of such scale can’t last forever.
You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add and that your best course is to trust some expert. In effect, you’ve got to know what you know and what you don’t know. What could possibly be more useful in life than that?
He taught me the right lesson. The lesson? As you go through life, sell your services once in a while to an unreasonable blowhard if that’s what you must do to feed your family. But run your own life like Grant McFayden.
To the extent you become a person who thinks correctly, you can add great value. To the extent you’ve learned it so well that you have enough confidence to intervene where it takes a little courage, you can add great value. And to the extent that you can prevent or stop some asininity that would otherwise destroy your firm, your client, or something that you care about, you can add great value.
