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September 2 - September 13, 2024
He loves the insurance business. With its float characteristics, it creates a powerful platform for compounding wealth.
As Munger once put it, “Basically, we’re a hedgehog that knows one big thing. If you generate float at 3% per annum and buy businesses that earn 13% per annum with the proceeds of that float, we have figured out that’s a pretty good position to be in.” Few investors understand that float is one of the secrets to Berkshire’s success.
Those two pieces—the insurance company as a platform and high-quality brands as cash generators—built the base for the wealth-compounding machine that is Berkshire Hathaway.
So instead of copying, understand why they made the decisions they did. Then apply those insights to your own decisions and your own position.
Noting that the Japanese stock market has gone to wild extremes, Buffett wryly quoted Herb Stein: “Anything that can’t go on forever will end.”
Berkshire Hathaway’s insurance companies are seeing a sharp drop off in premium volume. Earnings will look good for a year or two (“the bar closes, but you get to finish your drink”), but business is becoming intrinsically less profitable in a very discernible trend.
“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
Buffett: “Do what you enjoy the most. Work for people you admire. You can’t miss if you do that.”
Investing is not that complicated, he explained. Other than learning accounting, which is the language of business, the real key to investment success is to have the right mindset with a temperament compatible with those principles.
OMAHA, Neb. and STAMFORD, Conn.--(BUSINESS WIRE)--June 19, 1998--Berkshire Hathaway Inc. and General Re Corporation announced today that they have reached a definitive agreement to merge.
He asserted that the notion that an investor or investment manager should be “required” to beat everyone else is nonsense. The real key is to know what you really want to avoid and give those things a wide berth (such as a bad marriage, an early death, and so on). Do this and life will go much better, he advised.(45)
The Rosetta Stone of investing is to remember that a stock is part ownership in a business. That principle provides the foundation for rational investing.
Accounting Asked if he recommended any books on accounting, Buffett advocated getting all the accounting you can if you are in business. Read lots of annual reports. Learn accounting by reading good business articles, especially those on accounting scandals. Try to know how the numbers are put together. Then, if you cannot understand it, it is probably because management doesn’t want you to understand it. Management always obfuscates the facts for a reason.
As a second strategy, Buffett recommended owning businesses that can price through inflation and have low capital expenditures to maintain the business.
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.”
Buffett concluded that you can learn a lot about the durability of the economics of a business by observing price behavior.
So it is envy, not greed, that is the dominant sin among investment bankers. Buffett opined that envy is the least fun of the seven deadly sins because it leaves you feeling awful.
He said CEO Eitan Wertheimer’s character and talent jumped off the page.
Buffett asserted the real question for boards of directors to consider is, “To what extent do the managers think like owners?”
One fascinating side note, Buffett observed, “Any calls you get on Sunday, you’re going to make money.” Those rare calls are the best since they are inevitably from seriously distressed sellers.
He chose Charlie Munger, Sandy Gottesman and Bill Ruane. Charlie wasn’t interested in more partners. Sandy took separate accounts and has done very well for his clients. Bill Ruane set up a separate mutual fund (the Sequoia Fund), which has also done very well.
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.
The Intelligent Investor by Benjamin Graham (especially chapters 8 and 20), which changed his life.
He strongly recommended Robert Cialdini’s book, Influence, for the task. He also recommended Cialdini’s newest book, Yes, noting that Cialdini is the rare social psychologist who can connect the world of theory and daily life.
The next best thing is to own wonderful businesses, especially those that have low capital requirements. For example, Coca-Cola requires little capital to grow and is sure to get its percentage of income, however it is measured, whatever the currency.
This is why Berkshire bought the 15% notes of Harley Davidson rather than the stock. He had no question the company would stay in business, quipping, “You have to like a business where the customers tattoo your name on their chests!”
“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
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 added that being an investor has made him a better businessman and that being a businessman has made him a better investor.(125)
As he has in years past, Buffett asserted that The Intelligent Investor chapters 8 (Mr. Market) and 20 (Margin of Safety) give you all you need to know. Build into your system that stocks get mispriced.
Later, Munger went even further by suggesting that if you disagree with someone, you should understand their side better than they do before you open your mouth.
In sum, you can skip the fees and get the performance of American industry by owning an S&P 500 Index fund.
(80) I believe it was Nuclear Terrorism by Graham Allison.
