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January 5 - June 9, 2020
Insurance companies collect premiums, of which a significant portion goes into reserves to pay future claims. This reserve (the “float”) earns money for Berkshire, leveraging the company’s return on capital. If you can operate in a way where that float is generated at a low cost and you can grow it over time, you have built a wealth-compounding machine.
Selling chocolate doesn’t require a lot of innovation. It won’t become obsolete. If you have a good brand, customers will keep coming back every Valentine’s Day for more.
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.
When Corey started in internal audit, computers could be purchased online without paying sales tax. But, at Berkshire, if anything like that was purchased, it had to be reported to corporate, so they could file the use tax returns. Buffett wanted to make sure that Nebraska got their sales tax. He was adamant about making sure that Berkshire paid—not more taxes than it had to, but the taxes that it was responsible for.
Berkshire Hathaway now represents half a trillion dollars of assets. It makes direct purchases and deals of its own design. Berkshire sometimes buys whole companies. Buffett and Munger play the game at a scale that most investors cannot match. So instead of copying, understand why they made the decisions they did. Then apply those insights to your own decisions and your own position.
Buffett suggests that the best investment you can make is in yourself.
Basically, Graham breaks the art of investing down into two simple variables – price and value. Value is what a business is worth. Price is what you have to pay to get it.
I should also note that Graham emphasizes a large margin of safety. The strategy is not to buy a dollar of value for 97 cents. Rather, the gap should be dramatic so as to absorb the effects of miscalculation and worse-than-average luck. As Buffett puts it, “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it.” Over time, diversified portfolios of such stocks have provided superior returns with below-average risk.
True to Graham’s principles, Buffett said he pays no attention to economic outlooks. His decisions are based simply on intrinsic business values.
he will try to find businesses that can keep pace with inflation.
Michaelis explained that there have been two basic themes in value investing: 1) buy assets and 2) buy earnings power.
In looking for investments and for business managers, Buffett recommends a cream-skimming approach. He suggests adopting the mindset of a basketball coach who, in a crowd of people, will immediately begin talking to the seven-footers. You only need one good player to make a difference.
Munger also claimed that much can be discerned from “the paper record.” The documented record of how people have behaved over many years has far more predictive power than a personal interview. Buffett added that this is why they don’t hire fresh MBA graduates. There is no record of on-the-job performance.
“We’re predicting how people will swim against the current. We’re not predicting the current itself.”
People is company . Current is market.
The idea is to find investments that give you money, not take it.
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.
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.
See’s Candy vs. generic chocolate? Buffett said he just hopes that few men, come Valentine’s Day, will say “Here, honey, I took the low bid.”
Brand value
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. As long as you stay within your circle of competence (and know where the perimeter is), you will do fine.
Buffett gave two criteria for evaluating the performance of management: 1) How well do they run the business? and 2) How well do they treat the owners?
“It is crazy to give up something you know for something you do not.”
“To think about what will happen versus when is a far more efficient way to behave.”
Asked about the boom in information technology, Buffett replied that his primary information source is the same as it was 40 years ago: annual reports.
He emphasized that it is judgment that has utility in measuring price and value. What is needed is not quick information, but good information.
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.”).
“Something with a lousy past record and a bright future… that’s an opportunity we’re going to miss.”
Buffett added that a 15-year graph of newspaper advertising rates versus newsprint prices would show ad rates have done far better.
Munger said that mistake is made frequently by those who gamble, continuing to gamble when the right thing would be to walk away.
Buffett emphatically summed up his case for reason over emotion: “A stock does not know you own it, the price you paid, who recommended it, the prices someone else paid . . . the stock does not give a damn.”
Munger said the ideal business has a wide and long-lasting moat around a terrific castle with an honest lord. The moat represents a barrier to competition and could be low production costs, a trademark, or an advantage of scale or technology.
Buffett noted it is important to differentiate between a business where you have to be smart once versus one where you have to stay smart. For example, in retail, you are under assault at all times versus a newspaper, where you just need to be first.
Accounting is the language of business,
On a general note, Buffett said, when accounting appears confusing, avoid the company. The confusion may well be intentional and reveal the character of the management.
“Most men would rather die than think. Many have.”
“It’s an honor to die for your country. Make sure the other guys get the honor.”
The keys to analyzing Coca-Cola’s economic progress are l) unit cases sold (more is better), and 2) number of shares outstanding (the fewer the better).
Insurance companies collect premiums, of which a significant portion go into reserves to pay future claims. This reserve (“float”) earns money for Berkshire, leveraging the company’s return on capital.
He recommended learning about local businesses – which ones are good and why, which ones went out of business, etc. As you go, you’ll build a database in your mind that is going to pay off over time.
