Tao of Charlie Munger: A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth With Commentary by David Clark

by David Clark

he is interested in a simple investment strategy that allows him to post superior results over the long term, the foundation of which is trying not to do anything stupid. To Charlie, being stupid means spending more for a business than you get in value.

A simple strategy in a field full of complexity and smart folks is an advantage. Conversely, if you’re one of the strong swimmers, be cautious of your complicated and complex ideas. You can get a lot out of simplicity as well.

Charlie believes that if you aren’t buying like crazy when you have the opportunity to buy a business that has a huge potential, it is a big mistake. The key here is to buy aggressively when we have the opportunity. The problem is that to do so, one is usually buying into a tanking stock market and for most people that is a very difficult thing to do. Why? Because they see other investors losing money and it frightens them, so they become timid. The opportunity is right in front of them, but they are too scared to invest.

Same thing with your own ideas. You get rejected a few times and suddenly you feel the idea isn’t worthwhile—that it’s a bad idea, despite your specific knowledge and experience to the contrary. You see something they don’t. Now, you need the courage to go all in on your opportunity.

the financial disasters of today are almost completely forgotten in a year or two.

“You have to be very patient, you have to wait until something comes along, which, at the price you’re paying, is easy. That’s contrary to human nature, just to sit there all day long doing nothing, waiting. It’s easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don’t feel active, you don’t feel useful, so you do something stupid.”

Charlie’s approach is contrary to human nature, but right there it should tell you that it is a winning investment strategy. For one of the most successful of all investment strategies is to be a contrarian investor—to go in the opposite direction—to buy when others are selling. And not being in a hurry is contrary to everyone who is in a hurry, which is just about everyone else in the world. Think of it this way: Charlie isn’t out looking for an investment, he is waiting for the right long-term investment—at the right price—to come to him. Yes, he keeps his eyes wide open to make sure he sees it when it arrives, which is why he reads a lot, to make sure he sees it when it shows up. But if it doesn’t show up, he just keeps on reading. Is that hard to do?

So my question to you is this: Are you one of the 99% of investors who are in a rush and end up overpaying for your investments? Or are you part of Charlie’s 1% club who have the patience to wait five years, if necessary, to find the right long-term investment selling at the right price?

“We have a history when things are really horrible of wading in when no one else will.” – As we have said repeatedly throughout this book, the only way that Charlie can do that is if he is sitting on a pile of cash in waiting to take advantage of some financial calamity. The reason that other investors don’t step in is that they don’t have the cash to buy anything with. Most investment funds are 100% invested in the market. Why are they 100% invested? Because cash offers a low return and having a lot of cash can severely hurt a fund’s performance.

Misjudgment of other investors…depending on what you’re optimizing for. Not an error if you’re going for short term high risk returns.

You should try to make money by selling people things that are good for the customer.”

“There isn’t a single formula. You need to know a lot about business and human nature and the numbers. . . . It is unreasonable to expect that there is a magic system that will do it for you.” – People are looking for a simple method they can learn from reading one book that will make them rich. It doesn’t happen that way—unless they get real lucky. One is actually better off reading a hundred business biographies than a hundred books on investing. Why? Because if we learn the history of a hundred different business models, we learn when the businesses had tough times and how they got through them; we also learn what made them great, or not so great.

“The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you.”

New technology can either damage an existing business or increase its profitability. The first question we should ask is: Will the new technology be a threat to the existing business model? Cars replaced buggies and horses. The telephone replaced the telegraph. Computers and printers replaced the typewriter. The next question is: Will the new technology enhance the business? Here the question gets a bit more complicated. Whether or not a company will benefit from a change in technology is dependent on the type of business it is. If you’re a commodity-type business, which sells a product or service that a number of other companies also supply, any technology breakthrough that will lower costs and improve margins will probably also be picked up by your competitors—which means you will lose any competitive edge the technology provides. But worse than that is when one of your competitors uses the cost savings the new technology provides to cut prices and increase its market share. As an example: New technology XY will deliver a 10% cost savings to our firm—which is a good thing. Our competitor also buys New Technology XY and achieves a 10% cost savings. Now both companies are ahead; both are saving 10%. But if our competitor wakes up one morning and decides to use that 10% cost savings to cut prices by 10% to add to his market share, we are going to have to also cut our prices by 10% or we are going to lose market share. So at the end of the day, in a commodity-type business w...

“Successful investing requires this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.”

Conservative investing and steady saving without expecting miracles is the way to go.

It is difficult but not impossible to do better than the stock market average. But it takes a lot of reading to get there. For most people it is easier and safer if they just save their money, buy into an index fund anytime there is a bear market, and then just hold it forever.

“Everywhere there is a large commission, there is a high probability of a rip-off.” – Commission equals incentives. In Charlie’s world incentives drive motivation on both the conscious and subconscious levels.

“The wealth effect is the extent to which consumer spending is goosed upward due to increases in stock prices. Of course it exists, but to what extent? I made a speech a while back in which I said that the wealth effect is greater than economists believe. I still say this.” – If people believe that their house and investments are going up in value, they will be more willing to spend more, which is good for the economy. However, if they believe that their house and investments are going down in value, they will stop buying things, which is bad for the economy. This is the wealth effect.

“I think democracies are prone to inflation because politicians will naturally spend—they have the power to print money and will use money to get votes.”

“I think the hydrocarbon reserves in the United States are one of the most precious things we have, every bit as precious as the topsoil of Iowa. Just as I don’t want to export all the topsoil in Iowa to Iran or someplace, just because they are willing to give us some money, I love the hydrocarbon reserves we have in the ground. The fashion is to be independent and to use them up as fast as we can. I think that’s insanity as a national policy.”

“Koreans came up from nothing in the auto business. They worked 84 hours a week with no overtime for more than a decade. At the same time every Korean child came home from grade school, and worked with a tutor for four full hours in the afternoon and the evening, driven by these Tiger Moms. Are you surprised when you lose to people like that? Only if you’re a total idiot.”

“There’s a lot of leverage in those carry-trade games. Other people are more certain than I am that the aircraft can always be leased.”

“I don’t care if somebody makes a lot of money and holds it like a miser. Most people have a vast propensity to spend, helped by spouses and children.”

One of the greatest misconceptions in life is that the rich squirrel their gold away in some deep, dark vault, where it does no one any good. That may have been true two hundred years ago. However, in the modern age the rich keep their loot in banks and investment funds, which either loan it out to people and businesses in need or invest it in commercial enterprises. Banks and investment funds are distributors of capital in our communities.

The top 1% controls 39% of the world’s wealth, but what that really means is that 39% of the world’s wealth is tucked away in the world’s banks and investment funds, which are very busy investing this surplus wealth in the world’s economy. Which is a very good thing for the other 99% of the world.

“If I were running the world I would have low corporate taxes, and get at the yearning for equality some other way, like consumption taxes.” – In the free trade of the world today, corporations can move freely from one country to another. A high corporate tax rate in one country will drive a corporation out of that country into another that has a lower tax rate. And the corporations that migrate to lower-tax venues, when they get there, will put their surplus capital into local banks. Want to know how Singapore and Hong Kong became the two financial centers of Asia? Low corporate taxes attracted rich corporations to them and with the rich corporations came their surplus capital, which was tucked away in local banks such as the OCBC Bank in Singapore and the Bank of China in Hong Kong, where it has been used to help finance the economic miracles of Singapore and Hong Kong.

“The whole world is better when you don’t reduce engineering standards in finance. We skipped a total disaster by a hair’s breadth. . . . I’m a big fan of the people who took us through the crisis. I’m not a big fan of the people who caused the crisis. Some of them deserve to be in the lowest circle of hell.”

“We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.” – Once Charlie gets his hands on an excellent business at a fair price, he knows that the smart thing to do is to hold on to it and let the company’s accumulated earnings pile up. This will increase its underlying intrinsic value and over time will cause the stock price to go up.

“When you mix raisins with turds, you still have turds.” – Here Charlie is talking about companies buying other companies. If a great company buys a turd of a company, it ends up with a mixture and the turd of a company drags down the results of the great company.

“In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables—like the discount warehouses of Costco.”

The one thing that all of Berkshire’s businesses have in common is that they are managed by people who are willing to go to great lengths to keep costs low. That goes for Berkshire’s home office as well—it doesn’t have a public relations or investor services department, and for many years the annual report was printed on the cheapest paper possible and had no expensive color photos.

“A great business at a fair price is superior to a fair business at a great price.”

Growth rate, earnings, share to earnings ratio, and variations in these numbers over time. If I had to pick the most important for companies that are good (positive earnings, positive growth rate, positive cash flow), then I’d pick minimizing variation in earnings year over year. Can’t get compounding without consistency. Then, choose growth rate because the power of compounding is worth the price.

“There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year. The second earns 12%, 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.” – Early in Charlie’s career as an investor he got involved in a high-tech business that was manufacturing sophisticated measuring devices for science. The company had good sales, but every dollar it earned had to go right back into the business. Luckily for Charlie, he sold the company right before the technology changed and rendered the company’s product obsolete. He had the same experience with Berkshire’s textile business: in good times it made money, even created a small surplus, but as time went on the textile business became so competitive that every dollar the company made had to be spent trying to keep the business afloat. Charlie had the exact opposite experience with See’s Candies—the pots that hold the chocolate were fifty years old and still didn’t need replacing, and the product was the same year after year. The business required very little in capital expenditures, so it was possible to take money out of it every year to invest in other businesses.

Interesting…different from the ownership mentality. Difference is in what you’re using those profits for—capital depreciation costs or re-investment in future opportunities. Minimize the former (lower costs) and use profits to improve business or reward shareholders.

“Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.”

brand-name products own a piece of consumers’ minds and don’t have any direct competition. When Charlie and Warren first discovered such companies, they called them “consumer monopolies.” See’s Candies is one of those consumer monopolies. See’s has made candy on the same machinery year after year, which has meant low capital expenditures, and because its product brand owns a piece of consumers’ minds, it can slowly raise prices without hurting demand. That equates to higher margins on sales, which means that See’s makes more money on each piece of candy it sells. That means See’s can keep its pricing in pace with inflation; it also means that the return on Berkshire’s original investment keeps growing year after year.

“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.”

No amount of good decision process can turn a bad business into a great one. The upside can’t get much better, so all your energy goes into minimizing the downside, and you’re one black swan away from the brink of death.

“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.” – In the fifty years that Charlie has owned Berkshire Hathaway stock he has seen its stock price fall by 50% three separate times. If he had sold his shares during any one of those declines his net worth would be a fraction of what it is today. Charlie believes that it is the nature of long-term stock holding to occasionally experience a steep decline in a share price, which in Berkshire’s case it has always fully recovered from.

“Averaged out, betting on the quality of a business is better than betting on the quality of management . . . 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.”

But as a general rule, bet on the quality of the business, not on the quality of the management—unless, of course, you’ve got a Mrs. B. in your hand. If that is the case, go all in.

INCENTIVES – “From all business, my favorite case on incentives is Federal Express. The heart and soul of their system—which creates the integrity of the product—is having all their airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time. They tried everything—moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift—and when it’s all done, they can go home. Well, their problems cleared up overnight.”

“AIG is a lot like GE. It is a fabulously successful insurance operator, and with success it morphed into a massive carry business—borrowing a lot of money at one price and investing it at another price. AIG was a big operator that was a lot like GE Credit. We never owned either because even the best and wisest people make us nervous in great big credit operations with swollen balance sheets. It just makes me nervous, that many people borrowing so many billions.” – Well, it turned out that Charlie was right, the carry trade nearly bankrupted both AIG and GE in 2007–09. And in 2015 GE began the process of selling off its financial division. Borrowing short term at cheap rates and lending it out long term at higher rates is an easy way to make tons of money as long as one can keep rolling over the short-term loans at cheap rates. But if short-term interest rates climb above what the money was borrowed at or the bankers decide not to roll over the short-term loans, the whole thing collapses like a house of cards.

“As you can tell in Berkshire’s operations, we are much more conservative. We borrow less, on more favorable terms. We’re happier with less leverage. You could argue that we’ve been wrong, and that it’s cost us a fortune, but that doesn’t bother us. Missing out on some opportunity never bothers us. What’s wrong with someone getting a little richer than you? It’s crazy to worry about this.” – Charlie has learned that leverage and envy are a lethal combination. Leverage is just another name for debt. The attraction of using leverage (debt) is that it allows one to leverage equity capital to make even more money. However, using leverage not only increases your gain when things go your way; it also increases your losses if things don’t.

Fatal combination…envy and leverage, all in the name of getting more than the others…betting everything you have and need to get what you don’t have and don’t need.

Charlie and Warren have always avoided using large amounts of leverage/debt with Berkshire. They have also tried to avoid investing in companies that have high debt-to-equity ratios. The net result is that Berkshire has been able to profit off the financial debt-laden folly of others while not partaking in it itself.

“At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.”

“No war plan outlasts the first encounter with the enemy.”

Prussian field marshal Count Helmuth von Moltke, who wrote, “The material and moral consequences of every major battle are so far-reaching that they usually bring about a completely altered situation, a new basis for the adoption of new measures. One cannot be at all sure that any operational plan will survive the first encounter with the main body of the enemy. Only a layman could suppose that the development of a campaign represents the strict application of a prior concept that has been worked out in every detail and followed through to the very end.”

That isn’t to say that one shouldn’t have plans to solve specific problems; one should, but one should follow Charlie’s advice and make plans that take i...

It is far better to keep things simple and improvise as we go along. Whenever I think of “master plans,” I remember Nebraska Furniture Mart’s founder, Mrs. B., who, in response to a question about having a business plan, replied in her thick Russian accent, “Yeah, sell cheap and tell the truth.” She was a business genius.

“How is [Berkshire] organized? I don’t think in [the] history of the world has anything Berkshire’s size [been] organized in so decentralized a fashion.” – The one thing that Charlie and Warren did that is unique in the world of corporate conglomerates was to dismiss the idea of synergy. What happens, happens, but the heads of each of Berkshire’s subsidiaries are free to do business with whomever they want, whenever they want, even if it is a competitor of one of Berkshire’s other subsidiaries. Unlike most corporate conglomerates, Berkshire does not have a quota system imposed by headquarters requiring the subsidiaries to meet HQ’s numbers. At Berkshire the CEO running the subsidiary calls the shots and sets the projections. Berkshire’s culture is also unique in that it will let businesses run out, which means that instead of selling a subsidiary with declining revenue and future prospects, it will keep on running the business until it’s time to shut the doors, as we did with Berkshire’s textile operations. There is no discarding a wholly owned Berkshire subsidiary company because it is doing poorly, as CEO Jack Welch used to do at General Electric. This strategy of decentralization almost to the point of abdication frees Berkshire’s subsidiary managers—the people with the best knowledge—to adapt their businesses to the economic environment as they see fit, without being meddled with by a less knowledgeable home office. It also allows Charlie and Warren to avoid the financ...

Sometimes really smart people can do really stupid things.

Charlie and Warren learned with the purchase of Nebraska Furniture Mart that if the dominant player is large enough and well enough entrenched with its customer base, the cost of entry into its market is much too high for potential competitors. Size and market domination can create their own kind of durable competitive advantage, which is what Iscar has in spades.

A type of moat in what looks like a commodity market.

“In a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.”