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Kindle Notes & Highlights
by
Tren Griffin
Started reading
September 16, 2019
We tend not to sell operating businesses. That is a lifestyle choice. We have bought well. We have a few which would be better if we sold them. But net we do better if we don’t do gin rummy management, churning our portfolio. We want a reputation as not being churners and flippers. Competitive advantage is being not a churner. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2008
Sixth Variable: Determining How Much to Bet When You Find a Mispriced Asset
Playing poker in the Army and as a young lawyer honed my business skills. … What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often. —CHARLIE MUNGER, DAMN RIGHT, 2000
Listen, 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. —SAM ZELL, NEW YORKER, 2007
Seventh Variable: Determining Whether the Quality of a Business Should Be Considered
Grahamites … realized that some company that was selling at two or three times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other. And once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses. —CHARLIE MUNGER, USC BUSINESS SCHOOL, 1994
Leaving the question of price aside, 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
Eighth Variable: Determining What Businesses to Own (in Whole or in Part)
We need to have a business with some characteristics that give us a durable competitive advantage. —CHARLIE MUNGER, BBC INTERVIEW, 2009
We buy barriers. Building them is tough. … Our great brands aren’t anything we’ve created. We’ve bought them. If you’re buying something at a huge discount to its replacement value and it’s hard to replace, you have a big advantage.
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. —CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 1997
Munger and Buffett are famous for delegating almost all authority and responsibility to Berkshire subsidiaries to run their own business, with the exception of capital allocation and the creation of compensation systems. In other words, while management of the businesses within Berkshire is extremely decentralized, the management of capital allocation and compensation systems is extremely centralized.
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. —WARREN BUFFETT, THE ESSAYS OF WARREN BUFFETT, 2011
A man says to a veterinarian: “Can you help me? Sometimes my horse walks just fine and sometimes he limps.” The vet replied: “Not a problem. When he’s walking fine, sell him.1
Remember that reputation and integrity are your most valuable assets—and can be lost in a heartbeat.
Buffett said at the most recent Berkshire meeting, “Ajit Jain has created tens of billions of dollars in value for this company out of nothing but brain and hard work.”
when good management is brought into a fundamentally bad business, it’s the reputation of the business that remains intact.
risk is the possibility of suffering a loss (not price volatility).
If there are significant risks inherent in the business itself, they put the decision in the too hard pile and move on to other potential opportunities.
when Jack Welch came into General Electric, he just said, “to hell with it. We’re either going to be number one or two in every field we’re in or we’re going to be out.” That was a very tough-minded thing to do, but I think it was a correct decision if you’re thinking about maximizing shareholder wealth.
Businesses that desire to benefit from economies of scope must avoid running as isolated units.
Michael Mauboussin wrote: “Brands do not confer advantages in and of themselves. Brands only increase value if they increase customer willingness to pay or reduce the cost to provide the good or service.”2 The creation of a great brand is a rare thing that requires considerable skill—and arguably a big dose of luck as well.
Morningstar added: “All of the firm’s operating companies are managed on a decentralized basis, eliminating the need for layers of management control and pushing responsibility down to the subsidiary level, where managers are empowered to make their own decisions.”3
Cash is the equivalent of financial Valium. It keeps you cool, calm and collected. —BRUCE BERKOWITZ, UNIVERSITY OF MIAMI INTERVIEW, 2012
Howard Marks pointed out the following rules for a value investor: “Rule No. 1: Most things will prove to be cyclical. Rule No. 2: Some of the greatest opportunities for gain and loss come when other people forget Rule No. 1.”8 Buffett has his own version of this which states: “Rule No. 1 is never lose money. Rule No. 2 is never forget rule number one.”9 Berkshire’s results must be compared with alternatives on a risk-adjusted basis.
Companies generating high economic returns will attract competitors willing to take a lesser, albeit still attractive, return which will drive down aggregate industry returns to the opportunity cost of capital. —MICHAEL MAUBOUSSIN, “MEASURING THE MOAT,” 2002
How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it. —CHARLIE MUNGER, POOR CHARLIE’S
The major success of capitalism is its ability to drench business owners in feedback and allocate talent efficiently. If you have an area with twenty restaurants, and suddenly eighteen are out of business, the remaining two are in good, capable hands. Business owners are constantly being reminded of benefits and punishments. That’s psychology explaining economics. —CHARLIE MUNGER, WESCO ANNUAL MEETING, 2011
Frequently, you’ll look at a business having fabulous results. And the question is, “How long can this continue?” Well, there’s only one way I know to answer that. And that’s to think about why the results are occurring now—and then to figure out what could cause those results to stop occurring. —CHARLIE MUNGER, DAMN RIGHT, 2000
People think the whole thing failed, but they forget that Kodak didn’t really go broke, because Eastman Chemical did survive as a prosperous company and they spun that off. —CHARLIE MUNGER, FORTUNE, 2012
the discussion above illustrates that there are some rules of thumb one can use to test the strength of a moat. At the top of the list is whether the business has pricing power. For example, if you must hold a prayer meeting before you try to raise prices, then you do not have much of a moat, if any, argues Buffett.
Munger and Buffett have said that there are also three different skills that relate to moats: creating a moat, identifying a moat that others have created, and identifying a startup that may acquire a moat before it is evident.
Identifying a moat others have created is something that people like Munger and Buffett can do. Munger admits that he and Buffett buy moats rather than build them, because building them is not something they do particularly well.
Venture capitalists harvest something called optionality, which is a different form of arbitrage than Graham’s value investing system. The skill needed to be successful as a venture capitalist is rare, as evidenced by the fact that the distribution of returns in venture capital is a power law. Moats that emerge from complex adaptive systems like an economy are hard to spot.
It is important to draw a clear and simple definitional distinction between value as a statistical factor (Fama/French) and value as an analytical style or goal (Ben Graham). The two methods are solving for different questions: Fama/French is solving for what creates a persistent disparity of return across large numbers of stocks, while Graham-style value investors are solving for where can one find low risk of permanent impairment of capital and a high probability of an attractive return.
