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July 17 - July 23, 2020
As Buffett summed up, “If investors only had to study the past, the richest people would be librarians.”
Buffett noted that many investors illogically become euphoric when stock prices rise and are downcast when they fall. This makes no more sense than if you bought some hamburger one day, returned the next day to buy more but at a higher price, and then felt euphoric because you had bought some cheaper the day before. If you are going to be a lifelong buyer of food, you welcome falling prices and deplore price increases. So should it be with investments.
Buffett also noted that book value is seldom meaningful in analyzing the value of a business. Book value simply records what was put into the business. The key to calculating value is determining what will come out of the business.
Munger noted that many analysts look at huge bodies of past data looking for clues, which results in enormous misspent effort (generally proportional to the IQs of those doing it). True investing is really more like betting against a parimutuel system, trying to find a 2-to-1 shot that pays 3 to 1. Value investing is looking for a “mispriced gamble.”
The danger of relying on historical statistics or formulas is that you end up betting on a 14-year-old horse with a great record but is now ready for the glue factory.
“To think about what will happen versus when is a far more efficient way to behave.”
Buffett said to beware projections (“Don’t ask the barber if you need a haircut.”) and to keep things simple (“I’d rather multiply by three than by pi.”).
In another poke at human foibles, Munger claimed projections do more harm than good as they are prepared by people desiring a certain outcome. He quoted Mark Twain: “A mine is a hole in the ground owned by a liar.”
After you have enough for daily life, all that matters is your health and those you love. Likewise in work, what really matters is that you enjoy it and the people with which you work.
Buffett suggested it is helpful to list the qualities you would want in a friend and then seek to instill those qualities in yourself. He emphasized that it’s a matter of choice, not DNA. Anyone can develop good character and quality lifetime habits.
Buffett claimed that successful investing requires not extraordinary intellect but extraordinary discipline. Few have it. In fact, he mused, “What we learn from history is that people do not learn from history.”
Buffett concluded with the story of the woman who turned 103 and was asked, “What do you like about being 103?” She responded, “No peer pressure.”
Munger asserted that the history of what he doesn’t like in modern corporations comes from the directive by headquarters to have earnings go up continually and smoothly, a practice he refers to as “the blood brother of evil.” Buffett noted that the world just does not work that way, and it leads to a lot of bad things. CEOs with big egos making precise predictions are kidding investors, themselves or both. This, in turn, sets up a system that exerts psychological and financial pressure to do things that people don’t want to do.
Buffett opined that envy is the least fun of the seven deadly sins because it leaves you feeling awful.
As he’s pointed out in prior years, what really drives the compensation insanity is envy, not greed. Someone getting paid $2 million might be quite happy until they hear about someone else that got $2.1 million.
In an interesting point, Buffett again noted that you need something in your programming so that you don’t lose a lot of money. He claimed that his best ideas haven’t done better than others’ best ideas, but he’s lost less on his worst ideas.
We have often recommended to our friends and clients George Clason’s classic, The Richest Man in Babylon, so we were delighted to hear Charlie speak of it. He said that he read the book when he was young and that the book taught him to under-spend his income and invest the difference. Lo and behold, he did this, and it worked. He got the idea to add a mental compound interest as well. So he decided he would sell himself the best hour of the day to improving his own mind, and the world could buy the rest of his time. He said it may sound selfish, but it worked. He also noted that if you become
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Buffett noted that investing is really all about laying out cash now to get more back later. Buffett joked that in 600 B.C., Aesop, who was a very smart man, though he didn’t know it was 600 B.C., he couldn’t know everything – said, “A bird in the hand is worth two in the bush.” That’s really it.
Munger noted that a lot of spreadsheets and fancy math can lead to false precision and worse decisions. He allowed, “They teach the fancy math in business schools because…well, they gotta do something.”
Buffett added that this false precision only arises with very high IQs. You only need an IQ of 120 or so to be a good investor. In fact, he suggested, if you have a high IQ, keep your 120 and sell the rest. Higher math can lead you astray.
The best protection against inflation, according to Buffett, is your own earning power. If you constantly increase your earning power, you’ll be sure to get your share of the economic pie.
Buffett repeated his old mantra that successful investing requires the right temperament – to be greedy when others are fearful. If you get scared yourself, then you won’t make a lot of money in securities.
Buffett also shared some of his classic bits of wisdom about growing wealth. Spend less than what you make. Know and stay within your circle of competence. The only businesses that matter are the ones you put your money in. Keep learning over time. Don’t lose. Insist on a margin of safety.
Gold, for example. Buffett reprised his gold thought experiment, where if you took all the gold in the world, you could make a 67-foot cube weighing 175,000 metric tons. You could then get a ladder and sit on top of it, fondle it, polish it. But that cube isn’t going to do anything. You are simply betting someone will buy it higher.
Buffett joked that $100 billion of gold is produced annually, much of it taken out of the ground in South Africa to be shipped to the New York Fed, where it will be put back into the ground.
Buffett: “A full wallet is like a full bladder. One could get the urge very quickly to pee it away.”
