The Big Idea: What you want in a business is an economic castle with a very wide moat and an honest, talented knight to handle marauders. Be fearful when others are greedy and greedy when others are fearful. Think different from the crowd. Think long-term when others are thinking short-term. When the tide goes out, you will see who has been swimming naked.
Pouring over Berkshire’s reports, reading Buffett’s annual letter, and listening to Buffett and Munger at the annual meeting have all been central to our growth as value investors.
He could use this captive permanent capital to invest long-term by buying businesses, in part or in whole.
He loves the insurance business. With its float characteristics, it creates a powerful platform for compounding wealth.
In 1972, Berkshire bought See’s Candy.
He loves the power of brands and the virtues of companies that don’t require a lot of capital to grow.
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.
Buffett bought GEICO.
With billions in cash and fixed income securities, Berkshire is now a financial Fort Knox.
Berkshire continues to represent solid value, lower-than-average risk, and unparalleled quality. It is a superb company with better relative value than almost anything else in the U.S. stock market.
Berkshire has consistently outperformed the S&P 500 during negative years.
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.
These newsletters form a conversation with Warren Buffett and Charlie Munger spanning three decades.
great value investors, like Buffett and Munger, sleep like a baby — provided they follow simple timeless principles.
Numerous occasions arise where a business’ market price is distinctly out of line with its true business value.
Graham emphasizes a large margin of safety.
As long as politicians lack self-restraint, they will print a lot of money at some point.
Long–term bonds and other investments vulnerable to inflation should be avoided.
Buffett said he pays no attention to economic outlooks. His decisions are based simply on intrinsic business values.
There are thousands of wonderful small companies we can consider.
Outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community.
Be fearful when others are greedy and to be greedy only when others are fearful.
“Anything that can’t go on forever will end.”
Significant inflation is inevitable due to our government’s quick-fix attitude.
“The availability of a printing press as a short-term band aid is very tempting. Inflation is a narcotic.”
Know Your Limitations / Be Humble
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.
Keynes said, “I would rather be vaguely right than precisely wrong.”
On the Ideal Business Buffett: “Something that costs a penny, sells for a dollar and is habit forming.”
“Printing money is too easy. I’d do it myself if I could.”
“Everyone talks about the big money made in real estate, but they forget to talk about the big money lost in real estate.”
Foreign Currencies Munger : “ It’s hard enough to understand the culture you’ve been raised in, much less someone else’s.”
What can we do then to mitigate the effects of inflation?
We’d buy great businesses with excellent management at a fair to bargain price and leave them alone.
Well-run businesses that employ relatively little capital, that throw off lots of cash and that have pricing flexibility will cope well with inflation.
Encyclopedias will be little changed 20 years from now.
“The fact that you are being obsoleted does not mean you should go into the successor business.”
Buffett and Munger steadfastly refused to get into a long discussion of macroeconomics.
Brilliant investors focus on finding good businesses at bargain prices within our resilient economy.
Buffett sees the trade deficit as a far more serious problem than the federal budget deficit.
Heartily recommended biographies as a way to “make friends among the eminent dead.”
In sum, the trade deficit amounts to the gradual giving away of the farm. As these claim checks are cashed, America gives up more and more of its productive assets.
In sum, the LBO junk bond game will go to an extreme and will stop only when it cannot be done anymore. At that time, “there will be blood in the streets.”
Intrinsic Business Value is present value of the net cash flows from here to eternity.
Buffett noted that if he and Munger get a value of X to 3X for an asset, then they attempt to buy it at 1 / 2X.
Munger flies coach.
An established brand name product is so valuable.
Coca-Cola and Pepsi have over 70 % of the soft drink market, and their market share grows each year.
The history of Wall Street has forever been one of boom and bust.
“If investors only had to study the past, the richest people would be librarians.”
“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Two basic themes in value investing: 1) buy assets and 2) buy earnings power.
What he wants are “idiot-proof” businesses.
“Business schools are good at keeping their eyes half shut.”
His appraisal of Coca-Cola is unequivocal: “the most valuable franchise in the world.”
Buffett has classified Berkshire’s holdings in Capital Cities / ABC, Coca-Cola, GEICO and the Washington Post as “permanent.”
Good economic characteristics, able and trustworthy management.
Financial disasters come about because stupid decisions in financial companies are not accompanied by immediate pain.
The secular trend for media is not good.
Certain areas of the media industry are quickly turning from marvelous businesses into mediocre ones.
“Do what you enjoy the most. Work for people you admire. You can’t miss if you do that.”
The documented record of how people have behaved over many years has far more predictive power than a personal interview.
They don’t hire fresh MBA graduates. There is no record of on-the-job performance.
Guinness receives the vast majority of its profits from overseas.
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.
He pays so little attention to macroeconomic factors.
Relate compensation directly to the performance of the business.
Large sums being paid for mediocre performance.
Professors are so enamored by modern portfolio theory.
The distinction between the growth and value styles of investing is nonsense.
Studying airlines teaches you about competition in a high fixed-cost business with a fungible commodity.
Book value simply records what was put into the business. The key to calculating value is determining what will come out of the business.
A corporation’s return on equity approximates its equity coupon.
Post-retirement medical benefits amount to a huge liability for corporate America that has been accruing for 20 years but is only now beginning to be reported on balance sheets.
There is a bias toward inflating the numbers in U.S. accounting.
Buffett continues to like world markets.
Guinness itself already earns money in many different currencies.
Berkshire seeks to keep things simple, “so the chairman can sit and read annual reports all day.”
Long-term government bond rate (plus a point or two if interest rates are low) is the appropriate discount rate for most assets.
They would have no edge if they tried to evaluate every horse. They have an edge only if they pick their spots.
Generics have been doing well, but not all brands are alike.
Gillette has a much larger moat around its business castle.
Coke has a worldwide infrastructure that is very impressive.
“The failure rate of all great civilizations is 100%.”
When asked for great investment books to read, Buffett cited The Intelligent Investor.
The real key to investment success is to have the right mindset.
Stay within your circle of competence.
Few humans have an edge if they try to follow 40 companies or more (such as yours truly). Eight or 10 in a lifetime, or even one, will get you your return.
“You don’t find out who’s been swimming naked until the tide goes out.”
Parsimonious Munger reputedly flies coach. The back of the plane invariably arrives at the same time as the front
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?
Identify and keep good managers. Keep it fun and interesting, compensate them fairly based on performance and to leave them alone.
Munger added that they are agnostic on macroeconomic factors. Instead, they spend all their time on individual businesses.
Buffett’s preference is to buy the entire company.
Buffett and Munger took their annual shot at debunking modern portfolio theory.
He would prefer a steeply progressive tax on consumption rather than on income.
It is judgment that has utility in measuring price and value. What is needed is not quick information, but good information.
You cannot let the market think for you.
Beware projections. “Don’t ask the barber if you need a haircut.”
‘Listen to your customers’ as a business principle does not require a 300-page book.
Munger claimed projections do more harm than good.
“Something with a lousy past record and a bright future, that’s an opportunity we’re going to miss.
Buffett noted that newspapers still have exceptionally good economics.
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.
Even with U.S. national debt at 60 % of GDP (versus 125 % of GDP at the end of World War II), Buffett does not think the national debt is a big worry.
Buffett explained the purpose of the “B” issuance was to head off the creation of unit trusts by brokerage firms.
Buffett spoke highly of Gates’ managerial talent and business focus. But, ever principled, Buffett said technology is just not something they want to bet on.
GEICO is an outstanding company with a low-cost distribution method and has widened its competitive moat by its focus on lowering costs.
Corporate stock buybacks add to shareholder value only if the purchases are made at prices below intrinsic business value.
One of Buffett’s tricks is that he keeps learning.
Buffett claimed that in 40 years, he has never gotten an idea from a Wall Street report.
Diversification makes no sense for someone who knows what they are doing.
Diversification is a protection against ignorance,
“Much of what is taught in corporate finance classes is twaddle.”
Soft drinks, candy, shaving, chewing gum — there’s not a whole lot of technology going into the art of the chew.
They love focused management.
Businesses should become more efficient, not less so.
He could not name one business ruined by downsizing, he could think of many ruined by bloat.
Buffett has long chastised the way stock options are handed out in boardrooms.
Munger said he preferred the old-fashioned way – have executives buy stock in the market.
Buffett referred to Coca-Cola and Gillette as “The Inevitables” due to their massive market dominance.
Buffett claimed there will never be another major soft drink company. Coke’s infrastructure is incredible.
The restaurant business is much tougher than the razor business. With food, people will switch with competitive pricing. Meanwhile, Gillette sees few customers changing their shaving habits to save a few dollars.
At 15% a year, stock returns are growing far faster than the economy itself. Sooner or later, something has to happen.
A company with a ton of debt could be a candidate for foreclosure.
With commodity businesses, unless you’re the low-cost producer, these are poor businesses to own.
Berkshire seeks low-risk businesses with sustainable competitive advantages and strong capital structures.
Volatility is a huge plus to real investors.
Berkshire has seldom invested in technology,
Aristotle’s observation that systems work better when perceived as fair.
Buffett said he looks for a manager who bats .400 and loves it.
Stick to those who take their promises seriously.
Go with businesses that are understandable with a sustainable edge.
Munger remarked that the accounting of options is weak, corrupt and contemptible.
Buffett said the real sin is mediocre management. That is what costs the shareholders money. It is almost impossible to overpay for good management.
Find people with brains, energy and integrity, and you can own the world.
Munger noted that Buffett is the most rational person he has ever known.
Buffett’s ability to learn has been essential to the success of Berkshire.
Buy only understandable, predictable businesses.
See’s Candy taught them the virtues of a franchise-type business.
It is essential to learn from both the mistakes of others as well as your own.
Patton: “It’s an honor to die for your country. Make sure the other guys get the honor.”
Yogi Berra: “You can observe a lot just by looking.”
His focus has always been to find great businesses – with great management and great economics at a reasonable price.
With 4% – 5% GDP growth and 1% inflation, it is unlikely that corporate profits will grow faster than 5% – 6%. Otherwise, profits will eventually be greater than the GDP!
Buffett reiterated the importance of staying within one’s circle of competence.
Buffett believes GEICO’s direct model should grow more and more powerful.
Buffett sees that the Internet will have a huge impact on retailing.
Buffett believes Berkshire’s furniture stores, for one, will be little affected by the Internet.
Brand names will be important. Buffett doubts that people will go to brand “X” over the Internet.
It is tricky attempting to predict what changes in technology will do.
The greater the moat, the greater the certainty and the amount of future cash flows.
Peter Lynch has said, “Find a business any idiot could run because eventually one will.”
Buffett added that there is a big difference between identifying a growth industry and minting money.
Buffett contended that the average college student has the same standard of living as he does. Same food. No important difference in clothes, cars, TVs.
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.
“If share of mind exists, the market will follow.”
American Express, which has maintained a very special position in people’s minds about financial integrity and worldwide acceptance.
“You are mixing a good concept, such as the Internet, with irrational excess. But if you mix raisins with turds, they are still turds.”
The single biggest outcome of the Internet has been little understood: buyers are the winners.
If someone else is getting rich, so what? Someone else will always be doing better.
Buffett suggests that expectations of a 6% annual return in stocks over the next 17 years would be rational.
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.
Buffett concluded that stocks are a perfectly decent way to make 6% or 7% a year over the next 15 to 20 years. But anybody that expects to make 15% per year is living in a dream world.
Back in the 1970s, when the prospects for stocks were better, pension funds were using assumptions in the 6% range. Now, when prospects are way poorer, most pension funds have built-in assumptions of 9% or better.
Buffett said it will be interesting to watch how quickly assumptions change as pension shortfalls mount in the years to come.
Buffett explained that there will always be a battle between brands and retailers. The retailer would like his name to be a brand. And to the extent that people trust Costco or Wal-Mart as much as they trust the brands, then the value of the brand moves over to the retailer.
He went on to say that the muscle power of Sam’s Club and Costco has gotten very extreme.
Munger asserted, “It’s stupid the way we extrapolate the past. Not just stupid, massively stupid.”
It’s a mistake for any company to predict 15% growth.
Buffett advised younger attendees to start saving early.
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.
Understand a company’s costs and why it’s got a sustainable edge against its competitors.
Since airline travel is pretty much a commodity business, costs are the key factors.
Buffett anticipated that Berkshire might buy 40 companies, roughly two a year, over the next 20 years.
Buffett noted there is nothing wrong with earning 6% to 7% on your money.
We each receive one body and one mind for a lifetime. You cannot repair them at age 60. You must maintain them.
Crooks – normally, they tell you things too good to be true. They have a smell about them.
Enormously successful companies as Wal-Mart, GE and Microsoft never mention EBIDTA.
Depreciation not only reflects a real cost, but the worst kind of cost.
Berkshire vastly prefers businesses where you get the cash up front (like insurance).
Taxes are a real cost.
Buffett and Munger shared their disgust with the flagrant abuse of stock options in corporate America.
Enron is one of the most disgusting examples of a business culture gone wrong.
Dollar-cost-averaging into a broad-based index is a reasonable approach.
The Nikkei Index returns over the past 13 years have been negative.
It’s crazy for Americans to assume that what happened to Argentina and Japan won’t happen to us.
Buffett has frequently used his “waiting for the fat pitch” baseball analogy to describe Berkshire’s asset allocation approach.
At least two-thirds of acquisitions are duds.
Temperament is very important, especially a willingness to go away from the crowd.
Know why things are happening.
Buffett warned investors that management that refuses to expense options or has fanciful pension assumptions will likely take the low road on other matters as well. He cautioned, “There’s seldom one cockroach in the kitchen.”
“Everywhere you see ‘EBITDA’ in some analyst’s report, simply insert the words ‘bullshit earnings.’”
Inflation is the enemy of the investor.
Returns of 6% to 7% for equity investors seem a reasonable expectation and not bad in a low-inflation world.
The fail rate of all great civilizations is 100%.
One of the keys to a successful society is the perception of fairness.
One of the most remarkable qualities of his friend, Warren, is that he continues to get better with age and continues to keep learning.
Wall Street Journal and Fortune as favorite sources and included the usual corporate filings.
One thing Buffett said he never reads are analysts’ reports.
Success resided in waiting for the fat pitch.
Making money is no replacement for friendship and happiness.
They knew people with buildings named after them but had no one who loved them. That’s no way to live.
For inflation strategies, Buffett suggested, as a first line of defense, that one increase his / her earning power.
As a second strategy, Buffett recommended owning businesses that can price through inflation and have low capital expenditures to maintain the business.
The worst sorts of businesses to own in an inflationary environment are ones that require lots of capital to stay in the game and provide no real return.
It is virtually ironclad that most people will get only a small return after inflation and taxes.
Avoid having “a lot of silly needs in life.”
Managers can make a lot of money at Berkshire, but the bonuses are always related to performance.
For a good compensation agreement, he advised, you must understand the keys to the business and keep it simple.
A 50-year retrospective shows only a very few companies were able to grow at even 10% or better over that period.
While intelligence is helpful, Buffett and Munger asserted that having the proper temperament was far more critical.
One must read a lot to be wise.
Most get confused by the mass of information.
Successful investing requires not extraordinary intellect but extraordinary discipline.
“What we learn from history is that people do not learn from history.”
God made the world so only math can understand it.
Buffett asserted that his underlying premise is that business will do well in America.
With low probability events, he asserted that people underestimate them if they haven’t occurred for a while and overestimate them if they occurred recently.
Conduct yourself so that if there is a financial crunch, you’ll get through.
They don’t believe in a lot of leverage at Berkshire. Throughout history, it is leverage that wipes people out.
Buffett summed up with regard to financial calamities: (1) don’t let it wipe you out, and (2) be prepared to take advantage. Berkshire is so positioned.
The key has been having incentives in place to get the right employee behavior. And for that, you must think the business through.
Buffett noted that most people underestimate how important good habits are.
Munger added that it is critical to “avoid dumb stuff” like going to the race track, risking AIDS, experimenting with cocaine or getting into debt.
Poor Charlie’s Almanack
Buffett noted that he loves companies with untapped pricing power.
The U.S. is trading away $ 2 billion per day of her assets as we consume roughly 6% more than we produce. In time, our children will be paying “tribute” to foreign investors for our current over-consumption.
Buffett observed that if you take a centuries-long view, you will see that extraordinary things have happened.
Buffett added, “It’s Armageddon around here every day.”
Buffett shared that his number one concern was nuclear terrorism.
He also mentioned a website, LastBestChance.org.
After the NCB problem, Buffett sees education as the nation’s largest problem.
He believes that a good school system is like virginity: it can be preserved but not restored.
Buffett observed that mortgage terms have gotten easier and easier as housing prices have gotten higher and higher.
CEOs with big egos making precise predictions are kidding investors, themselves or both.
Too many compensation systems incentivize the wrong things.
Many corporate managers are told to submit budgets and quarterly estimates. This leads to a short-term focus.
At Berkshire, managers do not submit budgets.
General Motors could be said to be owned by its retirees, with $90 billion in retirement benefit obligations compared to just $14 billion of equity for shareholders.
Buffett noted the best way to find great managers is to look at the record.
Munger noted that Berkshire does no asset allocation. They merely go where the opportunities are regardless of categories,
He stated his belief that a rich country should take care of the young and the old, so Social Security should not be taken below its current level.
He figured a logical way to handle future spending needs would be a consumption tax.
Munger declared that Social Security is one of the best things government has ever done.
Buffett thought to earn 6% to 7% in stocks over the long run would be a reasonable expectation.
Buffett stated that he is an enormous bull on the U.S. economy long term.
Buffett was especially taken by ISCAR CEO Eiton Wertheimer and his family-style culture, which was reflected in the fact that ISCAR was not put up for auction.
Buffett has been very patient sitting on the Berkshire cash horde through a period of very low short-term interest rates.
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.
Munger emphasized that Berkshire does not train executives, it finds them.
Buffett asserted the real question for boards of directors to consider is, “To what extent do the managers think like owners?”
The key is knowing the edge of one’s circle of competence.
Buffett noted that, as a general rule, he ignores what is hot.
“How can you gain a significant competitive advantage?” With commodities, if you get too many producers, you’ll have poor returns.
Buffett informed the crowd that he sold his much-heralded silver position some time ago for a modest profit.
Costing around $45 per square foot, manufactured homes offer good value.
Munger sees the same sins that collapsed the manufactured housing industry five years ago resurfacing in the stick-built industry.
Buffett noted that loose lending has run amuck.
So media economics will continue to deteriorate as competition increases. For newspapers, TV and cable, the future will be less attractive than the past.
He called it a very high probability that the U.S. currency will weaken over the years given our current policies.
Buffett predicted currency markets will be a catalyst for some future decline.
The CPI understates inflation.
Buffett noted that often the best opportunities come in the midst of some convulsion. The key is to buy when others are paralyzed.
The key is to follow logic rather than emotion. Focus on what is important and knowable rather than on public opinion.
“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.
Munger noted that the chance of going 60 years with no nuclear events was close to zero.
Berkshire has the lowest turnover of any major company, and that is attributable to the owner attitude of Berkshire’s shareholders.
Buffett noted that he and Charlie have seen guys go broke or close to it because 99 of 100 of their decisions were good, but the 100th did them in.
“History doesn’t repeat itself, but it rhymes. We’ll have something that rhymes.”
Buffett believes the dollar will likely decline against most major currencies over time unless current policies change in a major way.
He concluded that it is easy to get anchored in your own currency.
Buffett concluded that it will be at least a couple of years before real estate recovers.
It’s an enormously difficult thing to run a big company, so the greater sin is having the wrong person.
Buffett’s view is that the most important job of the board is to pick the right CEO.
The second most important job is to prevent the CEO from overreaching, which often happens in acquisitions.
Buffett noted that earnings at The Buffalo News are down 40% from the peak.
Similarly, the shift to the digital world has decimated World Book Encyclopedia, where unit sales have dropped from 300,000 to 22,000.
Buffett asserted that to a large extent, gambling is a tax on ignorance.
Buffett favors great businesses, which he defines as those having a high return on capital for a long period of time, where he thinks management will treat shareholders right.
He added that he has no system for estimating the correct value of all businesses.
Buffett has taught in past years that it is important to know the one or two key factors in each business you own.
Finally, Buffett stressed the importance of staying within one’s circle of competence.
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.
Fill your mind with competing ideas, and see what makes sense to you.
In an interesting point, Buffett again noted that you need something in your programming so that you don’t lose a lot of money.
Buffett begs to differ, asserting volatility does not measure risk. Beta is nice and mathematical, but it’s wrong.
Buffett believes that real risk comes from the nature of certain kinds of businesses, by the simple economics of the business and from not knowing what you’re doing.
We have often recommended to our friends and clients George Clason’s classic, The Richest Man in Babylon,
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.
Buffett suggested reading his old standby, The Intelligent Investor.
Just as the priesthood of Biblical scholars would not have much to do if the masses simply followed the 10 Commandments, so do business school professors need something to teach and impress the students.
Buffett asks whether the manager loves the money or loves the business. If they love the business, they’ll be a good fit for Berkshire.
He suggests the “newspaper” standard: behave as if your actions will be on the front page of the local newspaper. Berkshire has no budgets or earning goals, which eliminates some of the perverse pressures that infect most other large companies.
Buffett warned years ago that the U.S. dollar was at risk with our ever-expanding trade deficit.
As a result, Buffett is happy to earn profits in currencies other than the U.S. dollar. That can happen through stock ownership (Coca-Cola earns 80 % of its profits overseas) or through the direct purchase of foreign companies.
Buffett noted how China is now unleashing its potential in a more open society. The talent was always there. It was just suppressed for so long.
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.
The danger, according to Buffett, isn’t that we will run out of oil, as is sometimes heralded by the press, but that daily production will level out and then slowly decline over time.
Munger noted that it is stupid to use our limited supply of hydrocarbons as fast as we are.
Munger believed that we need to use the sun – there is no other alternative.
Buffett noted that this simplicity is a big advantage. Mars came to Berkshire because they knew no lawyers were needed. The folks at Mars knew that at Berkshire, a deal’s a deal, and the check will clear.
Buffett observed that big food companies are good businesses. They earn good returns on tangible assets. Good brands like See’s, Coke, Mars, Wrigley’s are tough to compete with.
Buffett noted that the size of a bank means little to him. What really counts is the culture. He wants a bank CEO who has risk controls in his DNA.
Buffett noted that one of the greatest risks to civilization continues to be nuclear proliferation.
Munger believes CEOs taking compensation have a moral duty not to take the last dollar. Like Supreme Court justices, they should choose to be underpaid.
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 also noted that getting the right spouse is essential.
Recommended that many could benefit by forcing themselves to learn public speaking at an early age.
Buffett suggested the best investment one can make is in oneself.
Buffett admitted that the focus has been on the mind at Berkshire. He and Charlie didn’t bother to work too hard on the body.
He strongly recommended Robert Cialdini’s book, Influence, for the task. He also recommended Cialdini’s newest book, Yes,
Buffett reflected that he devoured books from an early age. He spends much of his day reading books, annual reports and newspapers.
Buffett and Munger were both complimentary of the government’s actions in the midst of crisis and are optimistic for the recovery of the banking system.
Wells Fargo has a fabulous business model. With Wachovia, it picked up the fourth largest deposit base in America.
Munger noted that a lot of spreadsheets and fancy math can lead to false precision and worse decisions.
In fact, he suggested, if you have a high IQ, keep your 120 and sell the rest. Higher math can lead you astray.
In valuing businesses, it is important to understand the language of accounting, to stay within your circle of competence, and to focus on what is meaningful and sustainable.
He went on to say that there is one big no brainer that would hugely improve U.S. industry and commerce, and that is to build a nationwide electricity grid.
Buffett noted that the Berkshire culture and business model are very difficult to copy.
They run the business without teams of lawyers and bankers. Management is decentralized and incentives are rational. The culture is constantly reinforced as the managers see that it works.
Our reputation is that we buy to keep, and people can trust us on that.
Buffett guaranteed that the dollar will buy less over time,
All major nations are electing to run major deficits in the face of the economic crisis.
The best protection against inflation, according to Buffett, is your own earning power.
The next best thing is to own wonderful businesses, especially those that have low capital requirements.
As for retail, Buffett sees a big change in consumer behavior going for the low-priced products, and he suspects it will last quite a long time.
Munger was very excited about Berkshire’s attempt to acquire 10% of BYD, a Chinese manufacturer.
Now, the company aims to take on the auto world from a standing start by building electric cars.
Lithium batteries are needed in every utility function.
For all its flaws, the capitalist system works, unleashing human potential.
He noted that mankind is getting close to solving the technical problem of our time – solar power. Cheap, clean, storable power will change the world.
He emphasized that there is no possibility of U.S. default – because it prints its own currency and can simply print more money.
Munger added that unfunded promises are miles bigger than the reported problem. It can work out as long as the economy grows. If growth stops, you have a very difficult problem.
We will have higher inflation in our future.
Buffett noted that the culture at Berkshire now is strongly self-reinforcing.
He added that it’s really tough to change an existing culture.
Buffett emphasized how important it is to form good financial habits early in life.
McDonald’s has been a great educator for the American workforce. It teaches folks to show up on time, do their work efficiently.
BYD will work out well as it solves significant world problems with its batteries and electric cars.
Stocks would be better than bonds or cash over the long run.
Munger was less sanguine, saying that equities were the best of a bad lot of opportunities and that he sees a long period of dull returns ahead.
Today, oil is not so essential.
Munger asserted that solar power is coming because it is so obviously needed.
Buffett repeated his old mantra that successful investing requires the right temperament – to be greedy when others are fearful.
Buffett suggested that most people would invest better with no daily stock quotations. Buy a good business, and hold it for a long, long time.
Buffett shared that there’s nothing like following your passion. That’s the common factor with all of Berkshire’s excellent managers – they love what they do.
Spend less than what you make. Know and stay within your circle of competence.
Keep learning over time. Don’t lose. Insist on a margin of safety.
Munger reminisced that the only business course he ever took was accounting.
The main problems of civilization are technical and solvable, all with energy, with huge benefits for civilization.
Maintain low expectations – that is the key to happiness.
Do what works and keep doing it. That’s the fundamental algorithm of life – REPEAT WHAT WORKS.
By separating the chairman and the CEO positions, Berkshire can more easily correct mistakes with CEOs that don’t work out. Fire one, hire another if need be.
Since 1776, America has been the most extraordinary economic story in the world.
Buffett predicted that in the next 100 years, we will have 15 to 20 lousy years and that we’ll be so far ahead.
“Europe had the Black Death where one – third of the population died. The world will go on.”
Buffett declared the best inflation hedge is a company with a wonderful product that requires little capital to grow.
Category 1 – Investments denominated in a currency.
Any currency investment is a bet on how government will behave.
Category 2 – Investments that don’t produce anything but you hope to sell at a higher price.
Gold, for example.
Category 3 – Investments in assets that produce something.
Munger added that gold is a peculiar investment in that it only works if everything goes to hell.
Buffett concluded that he will bet on good businesses to outperform gold.
Buffett shared his usual advice that the average investor would do fine to simply buy shares of an index fund over time.
The next 50 years will not be as good as the last 50 years for skilled investors.
He added that lowering expectations was how he got married – “My wife lowered her expectations.”
Munger added that one advantage of buying into cyclical industries is that many people don’t like them because the earnings are so unpredictable.
Munger felt it was a huge mistake not to learn more from the subprime mortgage debacle.
Finance attracts the same sort of people who are attracted to snake charming.
Those institutions that put society at risk and fail should leave the CEO and spouse dead broke.
Costco (the $ 80 billion membership warehouse club retailer) is the best in the world in its industry.
It’s a meritocracy that takes it as its extreme ethical duty to pass along savings to its customers,
Costco has the right ethics, diligence and management to continue its winning ways
Basically, at Berkshire, cash is always in Treasuries.
St. Augustine, “Everyone wants fiscal virtue but not quite yet.”
Buffett asserted that American banks are in far better position than European banks.
Munger noted that we have a full federal union, so we can print money. He’s comfortable with the U.S. system.
Greenspan was wrong with his laissez-faire policies. It is the duty of government to step on bad behavior.
Buffett noted that surprises like this are why Berkshire’s overriding principle is to reserve conservatively.
Buffett insists that Berkshire keep at least $20 billion in cash.
Buffett’s key to motivating Berkshire’s managers is giving them room to paint their own paintings.
He likes painting his own canvas and getting applause for doing well. So he seeks managers who are wired in the same way, giving them the paintbrushes and compensating them well for good performance.
Berkshire managers don’t have to talk to shareholders, lawyers, reporters, etc., so they can focus on their businesses.
Regarding compensation consultants, he suggested prostitution would be a step up for them.
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.
In the next 20 years, Berkshire will be significantly overvalued and undervalued at different points.
He asserted that we would have been better off to keep oil and gas, the hydrocarbons that are the single most precious resource of the U.S., in the ground over the last 50 years.
“Energy independence is stupid. We want to conserve it and use the other fellow’s resources.”
Buffett and Munger took their annual shot at modern portfolio theory and the business schools that teach it.
Keep plenty in reserves, and go low on debt.
Railroads are an extremely efficient and environmentally friendly way to move goods.
It takes the railroad one gallon of diesel fuel to move one ton 500 miles. Trucks cost three times more. Railroads move 42% of all intercity traffic now, offering very powerful economics compared to the cost, congestion and emissions of moving by roads.
While the economics are not as good as they once were, newspapers still have a role to play.
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.
Use filters so that you don’t waste time on unproductive ideas. Avoid big losses.
Buffett noted their constant study of others’ disasters has helped them enormously.
Buffett took note of how Richard Branson’s Virgin Cola came and went, joking that a brand is a promise, but he’s not sure what the promise was with Branson’s product.
Buffett also declared that no one will ever build another railroad.
Munger noted that all it takes is one competitor to ruin a business.
With $48,000 in per capita GDP, America is a rich nation. However, far too much compensation has gone to the top executives over the last 20 years. The tax code has encouraged this trend.
Meanwhile, medical costs equal 17% of GDP, a seven-point disadvantage to the rest of the world. Medical costs are the tapeworm of American industry.
Munger opined that it is time for a value-added tax.
Well-run companies with winning business models are taking market share from the less well-run. Those companies with scale can more easily deal with the increasing regulation and complexity of modern society. We love the little guy, but the way to bet has been on the big. GEICO is getting big fast.
Low-cost providers usually win in commodity-type businesses.
“Well, obviously, we’re not going to copy the oddball things every competitor does when we’ve got an operation that’s working so well.”
Berkshire’s advantage is that they don’t have such pressures – “we just don’t give a damn.” Munger added that the Bible says things like, “You can’t covet your neighbor’s ass,” for a reason. Borrowing from past comments, he finished with, “Even worse, envy is the one sin that’s no fun.”
“Anything Wall Street can sell they will. You can count on that.” Munger added, “They’ll throw in a lot of big words, too.”
Buffett stressed that he and Charlie don’t pay any attention to macro forecasts.
Buffett acknowledged that as Berkshire gets bigger, it gets harder to move the needle, and returns, although satisfactory, will not be as good as in the past.
Berkshire’s success will also depend on opportunities provided by turbulent markets.
Buffett added that if you buy a great business for what appears to be a high price, it’s seldom a mistake.
Buffett declared that he thinks the dollar will be the world’s reserve currency for some decades to come.
Munger continued, “Well, if you stop to think about it, every great civilization of the past has passed the baton.”
Munger indicated that he is worried about inflation and that the next century will be harder.
Buffett continued, “Interest rates power everything in the economic universe.”
“Berkshire is the 800 number when there is a panic in the markets.”
Buffett pointed out that when the investment tide goes out, you will see who has been swimming naked.
Stay sane when others are crazy.
Treat subsidiaries as they would want to be treated.
You shouldn’t make important decisions when you’re tired.
They don’t waste energy on the ordinary things that come up every day.
Buffett asserted that health care costs are the biggest threat to American competitiveness.
He thinks the key to life is that the old virtues still work, like plugging along and staying rational.
Bill Gross recently made comments that his generation of investors owed a lot of their success to the timing of their birth.
Buffett said he envies the baby being born today in the United States. That’s the luckiest individual ever.
Munger confidently predicted that there will be more solar generation in deserts than on rooftops.
Overall, he thinks that U.S. banks are much stronger than they’ve been in 25 years.
He added that our banking system is far stronger than Europe’s.
He noted we will always have bubbles because it is the nature of capitalism to go to excess. That’s what humans do.
The important thing will be to preserve the culture and that picking the right CEO will be the key to that.
The wrong sort of person would be rejected like “foreign tissue.”
Munger continued, suggesting that if 50 years ago, someone would have said that Buffett would manage a huge firm like Berkshire from Omaha, Nebraska, with a tiny office staff, people would have said it could never work. But it has.
He clearly believes equities are the superior choice to bonds and cash at this time.
Buffett loves banks.
The Big Four get plenty of press: Wells Fargo, Coca-Cola, American Express and IBM.
Buffett has modeled a rational, intelligent and sometimes inspired approach to capital allocation.
Berkshire has been on a buying spree of capital-heavy businesses, highlighted by his “Powerhouse Five”: MidAmerican Energy, Burlington Northern Santa Fe, ISCAR, Lubrizol and Marmon Group.
Being able to think and invest very long term and not worry about current earnings or Wall Street analysts can be a major competitive advantage.
Buffett said he prefers to keep the balance sheet super strong.
Berkshire has famously not paid dividends.
The lack of skill that many CEOs have at capital allocation is no small matter.
Intelligent capital allocation is the essence of sound wealth-building.
He quoted the Russian worker who said, “Everyone has a job, and it all works out. They pretend to pay us, and we pretend to work.”
“Efficiency is required over time in capitalism.”
Interestingly, Buffett does not see any scale advantages to owning auto dealers. Most dealerships work on local considerations.
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.
Buffett wants people to run the business the same way after selling to Berkshire as they ran it before selling to Berkshire.
Munger sees IBM as “a very admirable enterprise bought at a reasonable price.”
Buffett asserted that Berkshire’s culture runs deep.
Culture comes from the top according to Buffett. The leader must be consistent, communicate well, and reward proper behavior and punish misbehavior.
Buffett countered that Coca-Cola has a very wide moat.
He predicted that 20 years from now more Coke will be consumed than today.
Buffett reiterated that a strong brand is really powerful, though you do have to build them and promote them.
Buffett noted that he would have never predicted five years of zero interest rates.
Fortunately for shareholders, macro predictions are not essential to the Berkshire process.
Renewable energy costs are becoming more competitive.
Buffett noted that all of his and his families’ net worth is in BRK.
One ratio that Buffett is known to track is the total market cap to GDP.
Another number that Buffett has mentioned is the ratio of corporate profits to GDP.
Berkshire has done it with no corporate budgets, no quarterly earnings projections — focusing instead on adding sustainable and growing earnings power.
This is a departure from the early years at Berkshire when they owned cheap stocks and easy-to-operate companies. Now, they’ve learned to find great managers, which creates an opening to own more complex businesses.
He noted that he learned early in life that his favorite employer was himself.
Amazon’s created a big advantage with its intense focus on developing millions of satisfied customers.
Adaptation to the Internet by the American public has been amazing.
Buffett likes peanut brittle and flavored drinks. People should be free to choose to do what they like.
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.
Berkshire will continue to have a large appetite for renewable energy development.
The great danger is when there are discontinuities that cause the system to stop such as World War I, September 11, 2001.
Buffett noted that a major cyber, nuclear, or biological attack is a near certainty that will happen at some point.
Buffett reminded folks that to buy a stock is to buy part ownership of a business.
Munger added, while it’s difficult, to look for people you can trust in dealing with investments.
Buffett assured that American business will be fine over time. Don’t be envious. Follow your own course.
Buffett noted that monopoly and bureaucracy were widespread in higher education in America.
For too many schools, the purpose of the endowment is to make a bigger endowment.
In sum, you can skip the fees and get the performance of American industry by owning an S&P 500 Index fund.
Buffett noted that Berkshire selects board members with (1) business savvy, (2) shareholder orientation, and (3) special interest in Berkshire.
All Berkshire board members have bought stock in the open market. There are no stock options.
Buybacks above intrinsic value destroy value.
Cyber, nuclear, biochemical, and chemical attacks – it’s just a matter of time because a percentage of the population comprises psychotics, megalomaniacs, and religious fanatics.
He loves to know all the details of a business.
He noted that Warren’s gift is that he thinks ahead of the crowd. He thinks in such a clear way.
Buffett quoted Yogi Berra:“ You can see a lot just by observing. ”
Munger concurred, noting that the essence of it all is the quality of the business and the human quality of the management. Neither can be assured by “due diligence.”
Buffett suggested that all kinds of companies have people not doing much.
He concluded that a lean staff is always better.
Munger noted the importance of proper incentives. You get what you reward for.
GEICO uses just two variables that apply to its 20,000 employees’ laddered bonus program: (1) growth in policies in force and (2) profitability of seasoned business.
Focus on intrinsic value growth, not reported earnings.
Each business will have a couple of unique factors that are essential in evaluating its progress. Often, those unique factors are not immediately reflected in the reported earnings.
Another lesson is how Berkshire’s laser focus on long-term intrinsic value growth and comfort with lumpy earnings puts it at a major advantage compared to its publicly traded peers.
Under pressure from analysts, shareholders, and other constituencies, public companies are often driven to forgo the long-term, rational decision in favor of short-term gratification.
Buffett noted that driverless cars were a threat to both GEICO and the railroads.
These five companies (Alphabet, Amazon, Apple, Facebook, Microsoft) require no equity capital to run them.
It’s a very different world.
Munger observed that what Amazon has done was very difficult and not at all obvious. Missing Google was worse.
Munger concluded that Jeff Bezos is a different species.
He praised Bogle for his lifelong championing of the idea of index funds.
Munger joked that a hedge fund manager was asked, “Why do you charge 2 and 20?” The manager replied, “Because I couldn’t get 3 and 30.”
Berkshire leans heavily on principles of behavior rather than loads of rules. He claimed that a culture that self-selects is better than a 1,000-page manual.
“Lose money for the firm and I will be understanding. Lose one shred of reputation for the firm and I will be ruthless.”
Although every situation is unique, in general, he loves a competitive advantage that can last for decades, talented and eager managers who fit the Berkshire culture, and of course, a good price.
He noted that life properly lived is learning, learning, learning all the time.
He summed up that what you want is an economic castle with a very wide moat and an honest, talented knight to handle marauders.
Buffett affirmed that Berkshire is built to last.
Berkshire’s culture is significantly more shareholder – oriented than that of the companies in the S&P 500.
Munger noted that, if things went to hell in a handbasket, Berkshire would do much better. While he doesn’t wish adversity on anyone, Berkshire benefits from times of chaos.
Farming, steel, retail — all these areas have always been getting more productive. America is a story of constantly finding better ways to do things.
While it wasn’t fun, it was pro-social for textile production to move where it could be more efficiently done.
With artificial intelligence, Buffett observed that more change will be coming. Almost certainly it will cause less employment in certain areas while being good for society overall.
He wrapped up the topic by opining that change will continue, but it won’t happen that quickly — so people don’t need to worry so much.
Buffett predicted that in the next 10 years, Berkshire will have significantly more money invested in utility systems
Buffett labeled medical costs the tapeworm of American economic competitiveness. The rest of the world spends 5% – 10% of GDP on healthcare, mostly with socialized medicine.
However, vested interests are hard to change. We are in love with our lifesaving technologies. The system is crazy, and the costs are wild.