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March 15 - August 4, 2021
A significant portion of Berkshire’s long-term outperformance can be attributed to Buffett and Munger’s ability to execute on this brilliant insight.
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.
Graham emphasizes a large margin of safety.
On Intrinsic Business Value
it gives value to such intangible items as management talent and franchise value.
On Economic Forecasting
Buffett said he pays no attention to economic outlooks. His decisions are based simply on intrinsic business values.
Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
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.”
same thing that Buffett and Munger would do if there were no inflation. We’d buy great businesses with excellent management at a fair to bargain price and leave them alone.
While inflation is still undesirable, well-run businesses that employ relatively little capital, that throw off lots of cash and that have pricing flexibility will cope well with inflation.
rather than worry about economic projections, these brilliant investors focus on finding good businesses at bargain prices within our resilient economy.
Intrinsic Business Value
study what makes a good business good and what makes a bad business bad.
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 explained that financial disasters come about because stupid decisions in financial companies are not accompanied by immediate pain.
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.
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?
Intrinsic Business Value A central concept of Buffett’s philosophy is intrinsic business value, the value a knowledgeable buyer would pay for the business.
Business Castles 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.
Diversification: Twaddle Buffett and Munger took their annual poke at modern portfolio theory (MPT) by zeroing in on popular notions about diversification. Buffett noted that he likes to put a lot of money in things he feels strongly about. Diversification makes no sense for someone who knows what they are doing. “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.” Buffett claimed that three wonderful businesses is more than you need in this life and would
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Business Risk Owning a stock means owning a piece of a business. Accordingly, Buffett noted there are several key business risks. The first involves capital structure. A company with a ton of debt could be a candidate for foreclosure. The second relates to the nature of the business and its capital requirements. With commercial airlines, for example, tons of capital is required upfront, and competition is intense. A third risk occurs with commodity businesses. Unless you’re the low-cost producer, these are poor businesses to own. Overall, Berkshire seeks low-risk businesses with sustainable
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Market Risk
The key is to remember that the market exists to serve you, not instruct you. Volatility is a huge plus to real investors.
“the ovarian lottery.”
Filters
Opportunity Cost – Munger noted that for any corporate stock, a bond is an alternative. You must choose the best opportunity you can understand. He summed up, “Life is a whole series of opportunity costs.”
Quality People - Buffett said he looks for a manager who bats .400 and loves it. Munger noted there are many wonderful people and many awful people. Avoid the awful. Stick to those who take their promises seriously.
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.
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.
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)
Effective Rationality For several years, Munger, ever the philosopher, has been promoting the idea that we should all employ an interdisciplinary approach to solving human problems. By learning the primary models in each major discipline (such as compound interest and probability in math and break-points and back-up systems in engineering) and applying all of them, he asserts that people will make better decisions. In particular, the errors created from overusing any one model (“for the man with the hammer, every problem looks like a nail”) can be avoided. As an example, Munger discussed the
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Few investors understand one of the great secrets to Berkshire Hathaway’s wealth-compounding machine: float.
The value of float is powerful leverage.
Buffett qualified the notion of mistakes as those things within their circle of competence. Missing a big move in cocoa futures is not an error since that is something they know little about. An error is when it’s something they understand, but then they don’t act on it in a big way. Munger elegantly calls it “thumb-sucking.”
Buffett advised younger attendees to start saving early.
it’s much easier to save during your teen years when your parents are taking care of your financial obligations. He surmised that every dollar saved then is worth $20.
Invest in Yourself Buffett asserted that the very best investment you can make is in yourself.
Buffett asserted that the very best investment you can make is in yourself.
Buffett and Munger have repeated year after year that they seek to buy businesses with enduring competitive advantages.
A superior cost structure is often fundamental to a business’ sustainable advantage.
Greatest Asset: Self With graduation season upon us, Buffett offered some appropriate worldly wisdom. Imagine a genie comes to a 17 year old and offers to get him any car he wants. However, there is one catch – whatever car he chooses he must make it last a lifetime. Well, you can imagine that the young man would read the owner’s manual 10 times, would change the oil twice as often as suggested, etc. to help that car last 50 years. In the same way, Buffett continued, we each receive one body and one mind for a lifetime. You cannot repair them at age 60. You must maintain them.
One’s greatest asset is one’s self. Develop your mind and good health habits when you are young, and it will enhance your life. If not, you may have a wreck at age 70.
Buffett and Munger met in 1959, and they’ve been friends ever since. Buffett suggested it is helpful to list the qualities you would want in a friend and then seek to instill those qualities in yourself.
Keys to Investing 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.
He added that temperament is very important, especially a willingness to go away from the crowd.
He recommended realism in defining one’s circle of competence and discipline to stay within the circle. He added that it helps to insulate yourself from popular opinions. You’re better off sitting and thinking.(56)
Munger shared that it helps to have a passionate interest in knowing why things are happening.
Meanwhile, Munger continued, the rest of the world has gone on a crazy kick to use wild and elaborate models for gauging the cost of capital and other formulas for decision-making, resulting in “perfectly amazing mental malfunctions.”
