“I don’t think any other twosome in business was better at continuous learning than we were. And if we hadn’t been continuous learners, the record wouldn’t have been as good. And we were so extreme about it that we both spent the better part of our days reading, so we could learn more, which is not a common pattern in business.” (Charlie Munger)
Someone once asked Charlie Munger what Warren Buffett's secret was. "I would say half of all the time he spends is sitting on his ass and reading. He has a lot of time to think."
Warren Buffett, a voracious reader, will be the first to tell you that reading is the most valuable source of knowledge. The Berkshire Hathaway CEO reads up to 500 pages per day. Buffett: "My job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action. And Charlie—his children call him a book with legs...I just sit in my office and read all day. I read everything: Annual reports, 10-Ks, 10-Qs, biographies, histories, five newspapers a day. Reading is key. Reading has made me rich over time."
“Buffett's huge network of knowledgeable and influential friends also has been a help along the way. Buffett has been an original thinker, but it cannot have hurt to discuss prospects for a television station with Tom Murphy, chat about a common investment with Laurence Tisch, or talk with Jack Byrne about insurance." Of Permanent Value, The Story of Warren Buffett
"There are answers worth billions of dollars in a $30 history book" (Charlie Munger)
“Sometimes in life you see something different and it changes you. When I was young I read a single paragraph in a chapter of 'The Intelligent Investor' and a light bulb went off.” There are 'Rosetta Stones' in life: insights that if discovered completely change one's understanding.
11.1) Avoid rigid plans (though not rigid filters)
Acknowledge what you don't know (for example, what the market is going to do in the short term): "Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children"
“Strategic plans cause more dumb decisions than anything else in America...At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.” (Charlie Munger)
“Flexibility has always been a crucial facet of Warren Buffett's capital allocation acumen. The first business Berkshire owned, obviously, was the textile business and [they] famously ran it off and eventually closed it in 1985. Several of the businesses they bought — Blue Chip Stamps, Diversified Retailing — wound up essentially being zeroes. They pivoted away from those. It's been this capital allocation at Berkshire that has allowed it to be so successful." (Investor Chris Bloomstran)
Continually add savings into a very low cost S&P 500 index fund. Keep a small portion of savings in cash or cash-like equivalents. Avoiding all the “helper” fees and taxes of active money management while compounding ownership of a broad swath of US stocks is likely the best move for most people.
12.1) What to Invest In? Low cost S&P 500 Index Funds
”Consistently buy a very, very, very low-cost S&P 500 index fund. Keep buying it through thick and thin, and especially through thin. Hold it for 50 years.”
Explanation from writer Morgan Housel on the value of buying a broad set of stocks via an index fund: “The S&P 500 rose 22% in 2017. But a quarter of that return came from 5 companies – Amazon, Apple, Facebook, Boeing, and Microsoft. Apple alone was responsible for more of the index’s total returns than the bottom 321 companies combined. The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain…Forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered. Effectively all of the index’s overall returns came from 7% of components.” Takeaway: you don’t want to miss out on the small number of stocks that drive most of the returns (and those annual S&P 500 returns will make you wealthy if you consistently invest over a long enough period of time), and individual stock selection is very risk.
12.2) What not to invest much in (general, depends on context and not investment advice)
Cash: "A terrible long-term asset, one that is certain to depreciate in value…When people say ‘cash is king’, that’s crazy. Cash is a bad investment, it’s sure to go down in value over time.” “Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses.” (Note Buffett views cash as a strong strategic reserve and ‘oxygen’ that is necessary in reasonable doses, but not a suitable long term investment).
Individual stock selection: For the vast majority of investors, Charlie Munger strongly advocated for index funds due to their simplicity, low cost, diversification, and historical ability to deliver good returns over time. He believed that active stock picking is extremely difficult and only potentially suitable for a small minority of investors with exceptional abilities and a deep understanding of businesses. Munger once claimed that “95% of people have no chance of beating the S&P 500 Index”
Bonds: “If you had to choose between buying long-term bonds or equities, I would choose equities in a minute. I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier — far riskier — than short-term U.S. bonds. As an investor's investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates." See the image for a clear view of the outperformance of stocks over bonds over long time horizons (across regions and time periods). Buffett’s recommendation: “90% in a very low cost index fund, 10% in short term government bonds.” The 10% in short term government bonds ensures liquidity (your ability to buy or sell with relative ease) while reducing your overall risk in market downturns.
Gold: “Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce - gold's price as I write this - its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B? I’m confident that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.” (Buffett, 2011 shareholder letter)
Buffett has long been critical of most money managers, noting that most can’t consistently beat the S&P 500. Money Managers ('Helpers') are in the great majority of cases simply going to reduce your investment earnings, not increase them. This quick story from Buffett's 2005 letter makes the point clear, and when you compound the lost earnings from fees, commissions, taxes, and underperformance against the S&P 500 over time, the effects are enormous. See image for how much just 1% per year lost to investment advisors can cut your earnings at retirement (by 1/3!).
----
"The most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves. Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.
To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.
But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.
After a while, most of the family members realize that they are not doing so well at this new “beat-my-brother” game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers. The family’s disappointment grows. Each of its members is now employing professionals. Yet overall, the group’s finances have taken a turn for the worse. The solution?
More help, of course. It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.
The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”
The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with self-confidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives. The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.
And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).
A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men'. If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: 'For investors as a whole, returns decrease as motion increases'."
"The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard...You always want to consider your inner scorecard - how you feel about your own performance and success. You should worry more about how well you perform rather than how well the rest of the world perceives your performance.”
13.2) Do what you love with people you love doing it with
"The ultimate luxury is doing something every day that you love doing with people that you love doing it with...I think I stay healthy partly by being happy. It really helps if your stomach isn't grinding all the time [because] you're doing things you don't want to do or you're working with people [you don't like]."
An investor on what he learned over lunch with Buffett: “It was around dessert when I realized that this guy was not trying to be the best investor of his generation. This guy was trying to live his happiest life.”
13.3) Miscellaneous - my two favorites (and if you made it this far, thanks for reading!)
"I can do anything in the world I want to do but what I want to do is run Berkshire Hathaway. Now why do I want to run it that way? I get to paint my own painting. I go down there every day and I feel like Michelangelo working on the Sistine Chapel or something. Nobody else may think it's a great painting, but I get to paint my own painting. I get to do my own thing. It's a form of creativity. It's exactly like somebody feels that's a professional golfer, or like somebody feels that's a painter. They're not doing it for the money, primarily. They're doing it because they like doing something well and that happens to be down the route of their talents. I love painting my own painting. I come down to the office, I get on my back, and I start painting. And I think I’m in the Sistine Chapel."
“Ask yourself who you'd want to spend the last day of your life with and then meet with them as often as you can."
