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May 6, 2017 - January 12, 2018
The main reason is this: Unless you find yourself in the enviable position that Berkshire operates in, you would do well not to copy its moves.
On Intrinsic Business Value This concept is the centerpiece of Buffett’s approach. Buffett defines it as “what a company would bring if sold to a knowledgeable buyer.”
occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Munger denied being humble (of course) but noted that the key to his and Buffett’s success has been that “we’ve had a very low opinion of our abilities.” He said that he’d rather be with a guy with an IQ of 130 who thinks it is 128 than a guy with an IQ of 190 who thinks it is 240. The latter will get you into a lot of trouble.
Again, knowing your limitations and the limitations of your information seems to be the key. Or as Keynes said, “I would rather be vaguely right than precisely wrong.”
the key to investment success is to buy wonderful businesses.
Michaelis explained that there have been two basic themes in value investing: 1) buy assets
The first approach focuses on buying a company well below its liquidating value. Ben Graham was an asset bargain hunter, which was probably the appropriate approach coming out of the depression as he did.
investing the “cigar butt approach.” Unless you are a liquidator, you may end up waiting a long time for that “puff” of profit.
Michaelis prefers the earnings power approach. If a company earns very high returns year after year, he explained, then, ultimately, those will be the shareholders’ returns as well.
what he wants are “idiot-proof” businesses. He pointed to Coca-Cola and the Washington Post as examples and described them as “first liens against the passage of time.”(24)
Munger explained that the business schools are merely heeding Ben Franklin’s advice: “Keep your eyes wide open before marriage and half shut thereafter.”
great ben franklin quote
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.
When the same question was directed at Munger, he told the story of the World War II Air Force captain who was bored stiff in Panama. As the general reviewed the officers, he asked the captain what he did. The frustrated captain answered, “I don’t do one damn thing.” The general asked the same of his lieutenant. The lieutenant replied, “Well, sir, I help the captain.”
Munger pointed out that liquor can be a status symbol and that Guinness’ products enjoy the rare and remarkable quality that the higher the price, the higher the perceived value. Buffett added that some people equate price with value in investment banking services and business schools. So it is with scotch.(29)
another pattern to look for..any indian business that matches this pattern?
Buffett noted that this illustrates why he pays so little attention to macroeconomic factors. Owning the right business is the key. Coca-Cola went public in 1919 at $40 per share. In 1920, the stock plunged to 19 ½ as sugar prices changed. After seven decades of wars, depression, etc. that initial $40 share would now be worth $1.8 million (About 16% compounded annually). It is far more fruitful to decide whether a product can sustain itself than make economic predictions.(30)
“We’re predicting how people will swim against the current. We’re not predicting the current itself.”
Munger added that $13,000 is a perfectly reasonable amount to pay for a partnership interest in a fine business.
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.
Munger
Buffett noted that the industry still has its head in the sand regarding worst-case scenarios. Too many insurers make the mistake of underwriting based on experience rather than exposure.
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?
Business performance should be compared to that of the competition, include review of capital allocation decisions and take into account the hand management was dealt.
Munger observed that the concept of treating the other fellow as if the roles were reversed was a sound one. Buffett’s other job is to allocate capital. “Aside from that, we play bridge.”
Buffett noted you do not have to make it back the way you lost it. 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
“To buy number one on your list equally with number 37 strikes us as madness. Diversification is a protection against ignorance, a confession that you do not know the businesses you own.”
Opportunity Cost –
Quality People -
Good Businesses – Go with those that are understandable with a sustainable edge. The pond you choose is far more important than how well you swim.
Munger took aim at performance chasers, noting that investors need only to have a sensible way to keep wealth growing (especially if they are already rich). If someone else is getting rich, so what? Someone else will always be doing better. 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)
Buffett claimed that successful investing is not complicated. 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.
Buffett summed up with regard to financial calamities: (1) don’t let it wipe you out, and (2) be prepared to take advantage.
Buffett added that “it is not a great business when you have a prayer session before raising prices a penny.” Buffett
“To measure opportunity cost, take your best available opportunity versus all other options.” Concentrate in your best one or two ideas.
Focus on what is important and knowable rather than on public opinion.
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.
