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The principal problem with ideology is that you stop thinking when it comes to hard issues.
Almost all good businesses engage in “pain today, gain tomorrow” activities. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2001
understanding the power of compounding is not a natural state for the human race; however, it is a critical task. Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things. —CHARLIE MUNGER, POOR CHARLIE’S ALMANACK, 2005
What matters most: passion or competence that was born in? Berkshire is full of people who have a peculiar passion for their own business. I would argue passion is more important than brain power. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2003
People who are passionate tend to work harder and invest more in achieving their goals.
if you are playing a zero-sum game with people who are passionate and you are not, the odds that you will be a success drop substantially.
Some of the best passions in life grow on you in a nonlinear way after a slow start.
Nothing vicariously exposes you to more mistakes committed by others than reading.
“Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior are vital to long-term investment success.”6
Seth Karman put it this way in his book Margin of Safety: “Unsuccessful investors are dominated by emotion. Rather than responding coolly and rationally to market fluctuations, they respond emotionally with greed and fear.”7
“The way to wealth is as plain as the way to market. It depends chiefly on two words, industry and frugality: that is, waste neither time nor money, but make the best use of both. Without industry and frugality nothing will do, and with them, everything.”9
I suspect that some of the frugality that can be seen in Graham value investors springs from their understanding of opportunity cost and the power of compounding. They naturally compare the value of consumption today with the value of greater consumptions tomorrow, which causes them to be frugal.
Buffett pointed out that risk comes from not knowing what you’re doing.
people with a high IQ often relish the opportunity to solve hard valuation problems, thinking that they will be rewarded for having such ample mental skill with a higher return.
Hard problems are hard problems, pregnant with opportunities to make mistakes.
There are two kinds of businesses: The first earns 12 percent, and you can take it out at the end of the year. The second earns 12 percent, but all the excess cash must be reinvested—there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, “There’s all of my profit.” We hate that kind of business. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2003
Owner’s earnings can be defined as: Net income + Depreciation + Depletion + Amortization – Capital expenditure – Additional working capital.
The golden rule of investing: no asset (or strategy) is so good that you should invest irrespective of the price paid. —JAMES MONTIER, GMO LETTER, DECEMBER 2013
“The only way you win is by knowing what you’re good at and what you’re not good at, and sticking to what you’re good at.”3
When Charlie thinks about things, he starts by inverting. To understand how to be happy in life Charlie will study how to make life miserable; to examine how a business becomes big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. —LI LU, CHINA ENTREPRENEUR MAGAZINE, 2010
However, if you try to expand that circle of competence too far, it can have disastrous results.
Humans love stories because they cause them to suspend disbelief.
If you have not gone beyond simply using a product or service and have not taken a deep dive into the business of a company, you should not invest in that company.
Buffett talks about that fact that knowing where the perimeter of your circle of competence may be is far more important than the size of your circle.
Again, that is a very, very powerful idea. Every person is going to have a circle of competence. And it’s going to be very hard to advance that circle.
Competitive advantage is being not a churner.
His preference is in no small part driven by the ability of a long-term holder of an asset to gain certain tax and other advantages. By not incurring these tax costs, transaction costs, and other fees, the compounding benefits for the investor are substantially higher.
business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.
Munger believes the greater the quality of a company, the greater the strength of the wind at your back over the long term.
the best business to own is one that, over an extended period, can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite—that is, consistently employ ever-greater amounts of capital at very low rates of return. —WARREN BUFFETT, 1992 BERKSHIRE SHAREHOLDER LETTER, 1993
You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to compare those values with other values available in the stock market. —CHARLIE MUNGER, KIPLINGER, 2005 Judge the staying quality of the business in terms of its competitive advantage.
One competitor is enough to ruin a business running on small margins.
The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.
Why do some businesses create easy decisions for entrepreneurs and investors? A significant part of the answer lies in microeconomics: if there’s no significant barrier to entry that creates a sustainable competitive advantage, inevitable competition will cause the return on investment for that business to drop to opportunity cost
Whether a business has a durable moat is without question the most important attribute for an investor like Munger.
Proper allocation of capital is an investor’s number one job. —CHARLIE MUNGER, POOR CHARLIE’S ALMANACK, 2005
Charles T. Munger, Berkshire Hathaway’s vice-chairman, and I really have only two jobs. … One is to attract and keep outstanding managers to run our various operations. The other is capital allocation.
They believe that a new CEO may have risen from marketing, sales, law, or operations and have little actual capital allocation experience. They believe this can create big problems for a business because the CEO will often not know how to make critical decisions that will maximize shareholder return.
Rationality frequently wilts when the institutional imperative comes into play. For example: (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behavior of peer companies, whether they are expanding, acquiring, setting executive
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“a managerial wish list will not be filled at shareholder expense”
Many managerial [princes] remain serenely confident about the future potency of their kisses—even after their corporate backyards are knee-deep in unresponsive toads.
if you have to choose one, bet on the business momentum, not the brilliance of the manager.
Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat. —CHARLIE MUNGER, POOR CHARLIE’S ALMANACK, 2005
Munger and Buffett are not interested in investing in company “turnarounds,” because they seldom actually do turn around. Munger wants the moat of the company he is investing in to be strong enough to survive bad management.
betting on the quality of a business is better than betting on the quality of management.
I think it’s dangerous to rely on special talents—it’s better to own lots of monopolistic businesses with unregulated prices.
when good management is brought into a fundamentally bad business, it’s the reputation of the business that remains intact.
Intelligent people make decisions based on opportunity costs—in other words, it’s your alternatives that matter. That’s how we make all of our decisions.
We don’t know how to buy stocks by metrics. … We know that Burlington Northern will have a competitive advantage in years. … We don’t know what the heck Apple will have. … You really have to understand the company and its competitive positions. … That’s not disclosed by the math. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2013
Amazon has both supply-side and demand-side economies of scale, and they reinforce each other. The more people who provide comments on Amazon, the more valuable it becomes to other users due to demand-side economies. Amazon also has huge advantages with their warehouses and the supply chain on the supply side.
