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March 15 - August 4, 2021
Munger advocated developing a temperament of owning securities without fretting. If you focus on the price, you are really saying that you believe the market knows more than you do. If you think of the value of the business instead of the price, you will sleep better. If the market were to shut down for five years, Acme Brick would still be turning out bricks, and Dairy Queen would still be selling Dilly Bars.
Successful Living Buffett claimed that you are successful if the people you hope love you, do love you. He and Munger agreed that making money is no replacement for friendship and happiness.
He noted that junk bonds in the fall of 2002 collapsed to where they had
St. Petersburg Paradox
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.”
“To measure opportunity cost, take your best available opportunity versus all other options.” Concentrate in your best one or two ideas.
The key is to follow logic rather than emotion. Focus on what is important and knowable rather than on public opinion.
He concluded that if you buy convulsion and remember that the market is there to serve
“History doesn’t repeat itself, but it rhymes. We’ll have something that rhymes.”
Buffett asserted that to a large extent, gambling is a tax on ignorance. You put it in, and it ends up taxing many that are least able to pay while relieving taxes on those who don’t gamble.
Buffett emphasized that the ability to generate cash and reinvest is critical. He noted that it is the ability to generate cash that gives Berkshire its value. In addition, it is important to understand the competitive position and dynamics of the business and look into the future.
Finally, Buffett stressed the importance of staying within one’s circle of competence. Buffett said a large part of his success has come from knowing how to recognize and step over one-foot bars and to recognize and avoid the seven-foot bars.
Become a Learning Machine Munger has often extolled Buffett’s relentless thirst for learning, calling him a “learning machine.” Buffett agreed that he is big on reading everything in sight and recommended good investors should read everything they can. In his case, he said that by the age of 10, he’d read every book in the Omaha public library on investing, some twice! Fill your mind with competing ideas, and see what makes sense to you.
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.
If Buffett were teaching business school, he would make it shockingly simple. “Teach (1) How to Value a Business, and (2) How to Think about Market Fluctuations – that the market is there to serve you, not influence you.” That would be it.
Munger rued that elite schools teach that the secret of investment management is diversification. They have it backasswards he asserted. Non-diversification is the key.
Buffett opined that “a chief risk officer is an employee that makes you feel good while you do dumb things.”
Seriously, he noted the importance of a good mental attitude, to love what you do and to do it with other people who love what they do. He said he feels blessed in so many ways, especially with great partners and great managers. It would be crazy to focus on the minuses.
also noted that he was lucky to find his passion so early in life. He recalled reading his dad’s books on investing as a boy and how that turned him on.
He also noted that getting the right spouse is essential.
When he speaks to students, he suggests they adopt the mindset of someone who is picking one car for the rest of their lives. How would they treat it? They would read the manual carefully, change the oil twice as often and clean up the rust spots. Well, each of us gets one mind and one body for life. How will you treat yours?
Look not what at the numbers are but what the numbers mean.
Systemic Risk With regard to systemic risk, Buffett noted that his first rule is to play tomorrow. That means not going broke no matter what happens. So keep plenty in reserves, and go low on debt.(130) If that is handled, then you can invest.
Avoiding Mistakes Buffett suggested that investors stay away from businesses they don’t understand well. You want to be able to have a decent idea of what the business will look like in 5-10 years – then wait for a crazy price.
Avoid new issues – the insiders are selling their company, so it’s ridiculous to think that an IPO will be the cheapest thing to buy in a world of thousands of stocks. The IPO sellers pick the time to sell. So don’t waste five seconds on it.
Buffett noted their constant study of others’ disasters has helped them enormously. Read the stories of financial follies.
He suggested that people will do very well owning good businesses if they don’t pay too much for them.
Energy Management On the subject of their work habits, Munger offered a fascinating insight. By accident, he and Buffett have ideal habits for what they do. For example, they didn’t know when they started out about modern psychological evidence that you shouldn’t make important decisions when you’re tired and that difficult decisions are tiring. He joked that they didn’t know important decision-making was helped by consuming lots of caffeine and sugar.(143) Munger offered up that because they both live on auto–pilot, they don’t waste energy on the ordinary things that come up every day. He
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Filters Asked for five or six criteria for choosing an investment, Munger asserted that Berkshire does not have a one-size-fits-all system. Each industry is different. Also, they keep learning.
A key one is whether they have a good idea of how the business is going to do over the next five or 10 years. That filter eliminates many businesses from consideration.
Another filter is people. Buffett wants people to run the business the same way after selling to Berkshire as they ran it before selling to Berkshire.
Happiness Buffett’s formula for happiness is simple: “Do what I like with people I like.” He noted that he learned early in life that his favorite employer was himself. It avoids aggravation.
Basic Advice
Buffett reminded folks that to buy a stock is to buy part ownership of a business. Don’t get hung up on daily price quotes. Instead, think about business performance and what you would pay for the business, just as you would a farm.
Get the Details Asked how he does it, Buffett shared that he and Charlie read a lot. What matters most to him are micro factors, as opposed to the macro factors that so often get all the attention. He loves to know all the details of a business.
Final Quote
Munger: “I think if you see the world accurately, it’s bound to be humorous because it’s so ridiculous.”
Intrinsic Business Value Buffett noted that intrinsic business value can only be calculated in retrospect: cash generated between now and judgment day discounted back to the present at an appropriate interest rate.
