Founders - #202 A Few Lessons From Warren Buffett

Episode Date: September 2, 2021

What I learned from reading A Few Lessons for Investors and Managers From Warren Buffett by Warren Buffett and Peter Bevelin.----Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes----Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.Speculation is most dangerous when it looks easiest.Now it is a funny thing about life; if you refuse to accept anything but the best you very often get it. —W. Somerset Maugham"Moats" —a metaphor for the superiorities they possess that make life difficult for their competitors. Business history is filled with "Roman Candles," companies whose moats proved illusory and were soon crossed.When a company is selling a product with commodity-like economic characteristics, being the low-cost producer is all-important.In a business selling a commodity-type product, it's impossible to be a lot smarter than your dumbest competitor.As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business."The truly big investment idea can usually be explained in a short paragraph.Our managers have produced extraordinary results by doing rather ordinary things—but doing them exceptionally well.If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength.On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as "widening the moat."We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence.Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity.It's difficult to teach a new dog old tricks.Investors should understand that for certain companies, and even for some industries, there simply is no good long-term strategy.Most of our directors have a major portion of their net worth invested in the company. We eat our own cooking.Our trust is in people rather than process. A “hire well, manage little" code suits both them and me.Just run your business as if: (1) You own 100% of it; (2) It is the only asset in the world that you and your family have or will ever have; and (3) You can't sell it for at least a century.We believe in Charlie's dictum-“Just tell me the bad news; the good news will take care of itself".We do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus we feel no need to proceed in an ordained direction but can instead simply decide what makes sense for our owners.We always mentally compare any move we are contemplating with dozens of other opportunities open to us. Our practice of making this comparison- acquisitions against passive investments –-is a discipline that managers focused simply on expansion seldom use.We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and no staff to investigate a multitude of ideas presented by promoters and intermediaries. Instead, we simply hope that something sensible comes along-and, when it does, we act.Loss of focus is what most worries Charlie and me.Charlie and I know that the right players will make almost any team manager look good. We subscribe to the philosophy of Ogilvy & Mather's founding genius, David Ogilvy: “If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants."Our experience has been that the manager of an already high-cost  operation frequently is uncommonly resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors.A compact organization lets all of us spend our time managing the business rather than managing each other.Thirty years ago Tom Murphy, then CEO of Cap Cities, drove this point home to me with a hypothetical tale about an employee who asked his boss for permission to hire an assistant. The employee assumed that adding $20,000 to the annual payroll would be inconsequential. But his boss told him the proposal should be evaluated as a $3 million decision, given that an additional person would probably cost at least that amount over his lifetime, factoring in raises, benefits and other expenses (more people, more toilet paper). And unless the company fell on very hard times, the employee added would be unlikely to be dismissed, however marginal his contribution to the business.In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.The most elusive of human goals- keeping things simple and remembering what you set out to do.Stay with simple propositions.Nothing sedates rationality like large doses of effortless money.Tomorrow is always uncertain.The less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.In allocating capital, activity does not correlate with achievement.The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster.Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a way to get very poor.The trick is to learn most lessons from the experiences of others.When a problem exists, whether in personnel or in business operations, the time to act is now.----Get access to the World’s Most Valuable Notebook for Founders by investing in a subscription to Founders Notes----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

Customer Review A Guide to Both Wisdom and Sherlock Holmes We Sherlock Holmes fans, readers, and secret imitators need a map. Here it is. Peter Bevelin is one of the wisest people on the planet. He went through the books and pulled out sections from Conan Doyle's stories that are relevant to us moderns. A guide to both wisdom and Sherlock Holmes. It makes you both wiser and eager to

reread Sherlock Holmes. That was a review from Amazon. And it's also the way I discovered the book that I'm going to talk to you about today, which is A Few Lessons for Investors and Managers from Warren Buffett. And it was written and put together by Peter Bevelin. And that review was written by Nassim Taleb. I've read a bunch of Taleb's books. I highly recommend them. They're some of my favorite books, Fooled by Randomness, Black Swan, Anti-Fragile, Skin in the Game, The Bed of Procrustes. And so I had the idea one day, I was like, well, what are the books that he likes to read? If I like reading his books, like what are the books that he likes to read? So I was going through and he writes a bunch of

reviews, good and bad, on Amazon of the books that he reads. And so the title of the book that Taleb was reviewing there is A Few Lessons from Sherlock Holmes. I was like, what is that? That stuck out. So I ended up clicking on the Amazon author page of Peter Bevelin. And then I realized, oh, wow, he wrote a few other books. He's got A Few Lessons from Sherlock Holmes. He's got the book I'm holding my hand, A Few Lessons for Investors and Managers. And then he has probably arguably his most famous book, which is Seeking Wisdom from Darwin to Munger. And so I started to click on the product description of his book, Seeking Wisdom. And I just want to pull out a little excerpt real quick from the product description.

So it says his quest for wisdom originated partly from making mistakes himself and observing those of others, but also from the philosophy of super investor and Berkshire Hathaway vice chairman, Charlie Munger. And then this is what made me just order all of Peter's books. A man whose simplicity and clarity of thought was unequal to anything Bevelin had seen. And that sentence describes, that's basically how I feel about Charlie Munger. I think he might be the wisest person I've ever come across. And so then I read Taleb's review of that book, Seeking Wisdom. He says a wonderful book on wisdom and decision making written by a wise decision maker. This is the kind of book you read first, then leave by your bedside and reread a bit every day. Let me pause right in front of in the middle of his review, because I was going to say the exact

same thing to you about the book that I hold in my hand it's like a series of essays you can read it's like less than 100 pages you could read it in a day if you want but i think the value is just keeping it out somewhere on a table uh your bedside wherever and just picking it up and maybe reading you know for five ten minutes and then thinking about you know what you read and then doing that consistently so let me go back to this wonderful book on wisdom and decision making written by minutes and then thinking about, you know, what you read and then doing that consistently. So let me go back to this wonderful book on wisdom and decision making written by a wise decision making decision maker. Rather, this is the kind of book you read first and leave by your bedside and reread a bit every day so you can slowly soak up the wisdom.

It is sort of Montaigne, but applied to business. That's if you ever read Taleb's books, he mentions Michel de Montaigne, probably pronounced that incorrectly several times. Somebody he admires. So it's sort of Montaigne, but applied to business with a great investigation of the psychological dimension of decision making. I like the book for many reasons. The main one is that it was written by a practitioner who knows what he wants, but not an academic. Enjoy it. Okay, so that leads us to this book. Eventually, I haven't read the other two books. This is the only one of Peter's books I've read so far. I will do podcasts on those books in the

future. I want to start off with, he tells us why. Well, first of all, I like that he starts his book with a quote and then ends it with a quote. Actually, you know what? Let me read. Let me read the first one because I think it's fantastic. This is how he begins the book. Now, now it's a funny thing about life. If you refuse to accept anything but the best, you very often get it. And then he ends the book with a quote by Confucius, and he says, in all things, success depends on previous preparation. And without such previous preparation, there is sure to be failure. OK, so let's go to where he's talking about. What's the point? Why am I writing this book? He says, some managers have asked me, you always talk about the wisdom of Warren Buffett. Couldn't you put together a memorandum with some of his key quotes that are useful for us managers? There are a lot of good books out there about Warren, but I wanted

to do it in a shorter, easy to read way. So I selected and arranged his words from the annual reports and the owner and the owner's manual and added some headlines of my own. And then he talks about all the people he needs to thank for him being able to put together this project. But I thought it was really interesting how he directly thinks Warren. He says, thank you, Warren. You have really enriched my life. Your yearly letter and your yearly letter and doses of timeless wisdom always bring sunshine to my day. You represent the very best of wisdom and human qualities. And then on the next page, he just has a quote from Warren Buffett that I've read before and I think is really good. I am a better investor because I'm a businessman and a better businessman because I'm an investor.

Okay, so let's get into the actual book. And this is what I think Peter did that is extremely smart. And I wish I did this because I read every single Warren Buffett shareholder letter. It's like over 50 years of his letters. It's by far the longest book I've ever done for the podcast. It's the longest podcast. I think it's like three hours long. I think it's founders number 88, if I'm not mistaken. I definitely have to take another crack at it. One, because there's very few people that have ever existed that have studied and thought more about business than Warren Buffett and his shareholder letters. He's dig through all my notes and highlights from something that's the size of a textbook. And I just went in chronological order. What I think the better idea is to, I would take all my, I would read them again, extract out all my notes and lessons, right? Remove all the financial stuff. Cause

you know, you don't need, it's obvious, like they put together the greatest investment record in the history of human civilization. So I don't you don't need to know it's like 20 percent this and 50 percent that. But really, I think the most valuable part is just taking out the lessons and rewrite and writing them and organizing them. And so what Peter did here is he organizes most of what he's quoting from is the shareholder letters. Right. And so what he did here is he organized it by topic. And then as he, he'll put in highlights at the end of like a paragraph, what year it came from. So right now, the section I'm in,

you know, he's got one paragraph that comes from 1996. Another one that comes from 2007. Another one that comes from 1983. Another one comes from 2007. And so organizing it by topic, I think actually makes it easier for what Warren's trying to teach us, like to sink into our brain. I think I was, once I read I read this, like, damn, that's a way better idea than

what I did. So I'll hopefully rectify that mistake in the future. Let's go into what he's talking about. So really, he's like, what is what a really great business is? The best definition of a moat that I've ever heard. Profit attracts competition. Steve Jobs on Disney doesn't want you to know how lucrative. I'm reading my notes that I'm leaving for myself, obviously, before I get into the highlights. And then I'd rather wrestle grizzlies. And so in this section, let me back up real quick. In this section, they're going to talk about what's what's like they're defining what's a really great business, what's a good business, and what's a gruesome business. So it starts out,

the best businesses are by far for owners, continue to be those that have high returns on capital, and that require a little incremental investment to grow. So they're going to start out with the really great business. And so what Peter does here is he adds highlights and like summaries in bold of what he thinks that like some are trying to like distill down what Warren's trying to teach us right so this is Peter's summary the really great business and he just lists some of these characteristics high returns a sustainable competitive advantage and obstacles that make it tough for new companies to enter so they're making a lot of money that the ability to make money is sustained over a long period of time and it's so tough to compete with them that very few people are able to create new companies to sell their position.

OK, so now we get to Warren. A truly great business must have an enduring moat that protects excellent returns on invested capital. And then Warren in his 2007 shareholder letter defines that for us, which is fantastic. So he says, moats, a metaphor for the superiorities that a business possesses that make life difficult for their competitors. So I thought of, it's a very famous character when you read Warren Buffett shareholder letters, or if you hear him speak, it's Rose Blumkin. She founded Nebraska Furniture Mart. It's funny because he winds up talking to her. She's like 70, 80 lady at that time and she started the company with 500 bucks right one of the greatest entrepreneurs to ever live i'm surprised there's not like a biography on her maybe there is i should actually go look but he he winds up handing her a check they do a deal it's like how much do you want

she said what is it 60 million 70 million i can't remember what it was so he shows up a couple days later hands her a check for an absurd amount of money she She barely looks at it, right? Folds the check, put it in the pocket. And then she says something to him like, Mr. Buffett or Warren, we're going to put our competitors through a meat grinder. And so he always references in his talks and writing, he's like, listen, I'd rather wrestle Grizzly. Like she's so good that you'd rather wrestle Grizzlies than compete with her. So that's what, that when he talks about moat, that's why I jotted down that note to myself. So he says the dynamics of capitalism guarantee

that competitors will repeatedly assault any business that is earning higher returns. And so this is why I think something that becomes very obvious when you study the history of entrepreneurship and you read these biographies, and the maxim I always use is bad boys move in silence the people that make money shut up about it they try they do and this is for the very reason the dynamics of capitalism guarantee and to the they shut up about it to the to the degree that they can if it's a private business obviously they'll shut up about it

we just saw this when i did that recent three-part series on jeff bezos i think it wasn't until the amazon unbound so it's part three of that three-part series the Jeff Bezos. I think it wasn't until the Amazon Unbound, so that's part three of that three-part series, the book that just came out by Brad Stone, where they finally had to reveal, in that book, they talk about they didn't want anybody to know how big AWS was. They would try to bury the revenue and profit. And eventually they had to pull it out. And they said, we didn't want our competitors to have this number. We didn't want them to know how lucrative that business was. So that made, when I'm reading this little paragraph, right, that reminded me of something I read a long time ago. I would say the best biography of Steve Jobs is becoming Steve Jobs, right? The one written by Isaacson is great too, but this one I really, really enjoyed. And I

think that's like founders number 18, somewhere, it back there you can find it in the in in the archive when he was in that book it tells a story of of the founding of pixar and just how difficult it was and he steve jobs intently studied disney for years and years and years he studied disney uh he had in his mind you know there was going to be an eventual i think he knew for a long period of time that eventually pixar like there was only one home, like it was going to be such a valuable property. And it goes in that book is in more detail about his strategy, which was genius. And the deal that Steve did with Bob winds up Steve winds up being the largest single shareholder in Disney is really quite amazing. But anyways, he said something in that book that I thought was very interesting. And he talks about how much money Disney was making in animation and that they're not going to tell you how lucrative it was.

Let me just read that. I should just read this to you instead of rambling. So it says this is Steve talking. You can't go to the library and find a book titled The Business Model for Animation. Steve explained the reason you can't is because there's only been one company, Disney, that's ever done it well, and they're not interested in telling the world how lucrative it was. And to me, what Steve obviously picked up there is exactly very similar to what Warren's saying here. It's like, listen, if you're making a lot of money and people know about it, they're going to try, hey, I can do that too. The dynamics of capitalism guarantee that competitors will repeatedly assault any business that is earning high returns. Therefore, a formidable barrier, such as a company being the

low cost producer. So he's talking about the businesses that he's trying to make money on. And how do you essentially how do you overcome competition? So you have an advantage because you can be the low cost producer. So then your competitors can't compete with you. He uses Geico and Costco as an example of that. Are those possessing a powerful worldwide brand? And he used an example like Coca-Cola or American Express is essential for sustained success. Business history is filled with Roman candles, which are companies whose moats proved illusionary and whose moats were soon crossed. And so a way to analyze the company's moats, he's like, well, ask yourself, if you had a ton of money and a lot of skilled people, could you actually compete with them?

And I think he uses examples like if you gave somebody $20 billion to overcome Coca-Cola's market share, that's like impossible. So he says, one question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel to compete with it. So I'm going to skip over the good business part because I want to get to the gruesome. Before I get to the gruesome though, there's just a quote from his 1991 shareholder that I thought was fantastic. So he's talking about buying See's Candy. He says, in our See's purchase, Charlie and I had one important insight. We saw that the business had untapped pricing power.

So it just took one to know that myself, is you only need one important insight to make a fortune. Even if they, obviously, Berkshire is one of the best companies that have ever been created in human history. But even if you just own See's, you'd be unbelievably wealthy. They bought the business for $25 million. This is a quote from 2007 shareholder letter. Pre-tax earnings since the purchase of that $25 million Seas Candy over the few decades had been, and this is cash going back to Berkshire, had been $1.35 billion. Okay, so now let's go to the gruesome business. And this is really the type of business you don't want to be in, which I love studying.

Not only the great, but like the worst. Right. So the complete opposite end of the spectrum. Peter's note here is that requires a lot of capital at a low return business. Warren says the worst sort of business is one that grows rapidly, requires significant capital to engender that growth and then earns little or no money. Think airlines. Here's a durable competitive, or excuse me, here a durable competitive advantage has proven elusive ever since the days of the Wright brothers. And that's an example. He says in many industries, differentiation cannot be made meaningful. He's again, this is the type of business you don't want to be in. Hence the constant struggle of every vendor to establish and emphasize special qualities of product or service. So he talks about, you know, you can't really do that in airlines.

He's going to compare and contrast where you can and cannot do that. This works with candy bars. Here's an example of See's, right? Customers buy the brand name. They don't come in asking for a two-ounce candy bar. But it does not work with sugar. How often do you hear someone say, I'll have a cup of coffee with cream and C&H sugar, please? And so now he's going to say, well, what do you what do you do if you find yourself in a situation like that?

I think he would he would say get out of that business. But if you're in it and you're not leaving, the only way you can make money is if you were the low cost operator. So he says, when a company is selling a product with commodity-like economic characteristics, being the low cost producer is all important. And I would say probably the greatest historical example of that is John D. Rockefeller. This is exactly what he did. He was obsessed with eliminating waste. He was the lowest cost provider in the oil and the first for finding kerosene, if I remember correctly. But what happened is the way he would even, his costs were so low that he was able to make a profit at prices where his competitors would lose. So he'd go and try to buy his competitors, right? And he would show them their books.

Because at first they're like, no, no, I'm not gonna sell to you. And then he would explain, like, they would see his books. And they realized, oh, my God, this guy can make a profit at a price that would bleed me dry. And Rockefeller would also say crazy shit to his competitors. Like, I have ways of making money you know nothing about. It's kind of spooky. But anyways, seeing this many of his competitors, you know, they saw the writing on the wall. So they wind up selling to him and this helped him consolidate and so let's reread what buffett just said he didn't say this is one of the things that's important he's like this is the most important thing with a company that's selling a product with commodity-like economic characteristics

being the low cost per producer is all important and this goes on for many pages of but because he has experience in this warren winds up he talks about the original buying Berkshire Hathaway was a textile company. He winds up making more money when he bought Rose's furniture store. Right. He went to making more money in 19 months selling furniture than he did in 15 years selling textiles. So he has a lot of like personal experience like, hey, I made this mistake. Don't do this. Like, Just get out of these crappy businesses. And so this goes on for many, many pages, much longer than describing what a great or good business is. But I'm just going to pull out a couple quotes for you here. It says, this devastating outcome for shareholders, and he's talking about himself, indicates what can

happen when much brainpower and energy are applied to a faulty premise. So he's talking about the folly of investing and continuing to invest in textiles. And this is what makes Warren so great. He takes these complex issues and he puts them into these low anecdotes and stories and maxims that are just so easy to digest. The situation is suggestive of Samuel Johnson's horse. A horse that can count to 10 is a remarkable horse, not a remarkable mathematician. Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company, but not a remarkable business. We get an important truth here. In a business

selling a commodity type product, it is impossible to be a lot smarter than your dumbest competitor. So that's the way Warren describes it. And let me pull out another quote from John D. Rockefeller again, who built an empire in a commodity like business, right? And so let me actually, let me reread that section real quick. So it says, in a business selling a commodity type product, it's impossible to be a lot smarter than your dumbest competitor. OK, so he Warren is saying that in 1990. This is something that John D. Rockefeller said in the 1800s. Oftentimes the most difficult competition comes not from the strong, the intelligent, the conservative competitor, but from the man who is holding on by the eyelids and is ignorant of his costs. And anyways, he's got to keep running or bust.

So on the next page, he's like, this is what you should have done. As a wise friend told me a long ago, if you want to get a reputation as a good businessman, be sure to get into a good business. My conclusion from my own experiences and from much observation of other businesses is that a good managerial record measured by economic returns is far more a function of what business boat you get into than how effectively you row. I'm going to pause there. This is very fascinating idea. All the back and founders number 50, I read through all of Mark Andreessen's blog archive, right? And he has what at the time he was writing this, I think like 2007, he's like, you know, what is what's most responsible for a business's success? You know, Mark has this like encyclopedic

knowledge of business history, I would say, if you hear him talk, it's crazy. But so he's like, you know, it's the product, is it the team, is it the market? And he goes through and argues the other side of what other people would tell you, right? It's the product, it's the team. And he's like, no, no, I think it's the market. I think the market is the most important predictor of a business success. This is very similar to what Warren's saying. It's like, listen, it's more of a function of what business boat you get in and how effectively you row. Although intelligence and effort help considerably, of course, in any business, good or bad. The smartest person, the smartest, most capable person with the best product in a bad market like textiles. I mean, Warren just went on for page after page like this

is stupid. This is a mediocre business. I should have gotten out and then use my talents on something that actually is capable of producing profits. And so there's another category of businesses after the gruesome and they just call this other tough businesses. These are businesses you want to try to avoid. He talks about, hey, you know, you can succeed in retail, but it's tough, like your competitors are always copying you. Consumer tastes are fickle. They'll abandon you right away. And so he I like this idea that he calls a retail business and similar businesses like that. They are I have to be smart everyday businesses. He's like, you do not want a business where you have to be smart every day because we're humans are not smart every day. Right? It's so much harder. So avoid the main takeaway from this section, avoid the I have to

be smart every day business. In contrast to this, meaning retail, in contrast to this have to be smart every day business, there is what I call the have to be smart once business. For example, if you were smart enough to buy a network TV station very early in the game, you could put a shiftless and backward nephew to run things and the business would still do well for decades. And then a few pages later, they're trying to identify what are the key factors for success or harm and how predictable are they? This is just going to pull out. I'm going to one of my favorite ideas that I learned from Charlie Munger, maybe his most powerful ideas. Find a simple idea and take it seriously. Right. And this is I was actually just right before I started recording, I was on the

phone with a friend because I was telling him about this. This book I was reading is like, what do you think? Like, what's the benefit of you keep reading books on Buffett and Munger and all these people? And the easiest way for me to summarize that quickly is like they do simple things extraordinarily well for a long period of time. And that is just hard for most humans to do. Warren has this great quote. It's like something like humans have a perverse, there's a perverse characteristic in human nature to make simple things complex. It's just so hard to keep things simple, do the simple things extraordinarily well and do that for a long period of time. This is like anathema to our nature, right? So he says, investors should remember that their scorecard is not,

and again, investors and entrepreneurs, anybody running a business too, investors should remember that their scorecard is not computed using Olympic diving methods. Degree of difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring the payoff is the same as if you had to correctly analyze an investment alternative characterized by many constantly shifting and complex variables and later on if i'm not mistaken i have a note or highlight in there where he compares like uh the the the likelihood of the probability of your success if you have one characteristic of your business you have to focus on as opposed to

getting 10 correctly. I'm pretty sure I cover that later on. And then finally, this summarizes this whole section, the truly big investment idea can usually be explained in a short paragraph. And so then we're going to sum up, Peter and Warren are going to sum up, it says, to sum up the great, good, and gruesome. Think of three types of savings accounts. The great one pays an extraordinary high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome both pays an inadequate rate of return, or interest rate, and requires you to keep adding money at those disappointing returns.

Business experience, direct and vicarious, produced my present strong preference for businesses that possess large amounts of enduring goodwill and that utilize a minimum of tangible assets. Next section note I left myself is kind of what I was just telling my friend. Do ordinary things extraordinary well and consistently over a long period of time and that creates miracles. Our managers have produced extraordinary results by doing rather ordinary things but doing them exceptionally well. Our managers protect their franchises,

they control their costs, they search for new products and markets that build on their existing And he wrote that in 1987. He expounds on that idea in 2005. If we are delighting customers, eliminating unnecessary costs, and improving our products and services, we gain strength. But if we treat customers with indifference and we tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible. Cumulatively, though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe this phenomenon as widening the moat. system basis over long term is so important. And doing that is essential if we are to have the kind of businesses we want a decade or two from now. We always, of course, hope to earn more money in the short term. But when short term and long term conflict, widening the moat must, he italicized that, must take precedent. You must do that. But when short term and long term conflict, widening the moat must take precedence. This reminds me of something I heard Peter Thiel say. He wrote in his book, too, in Zero to One, but I've heard him say,

it's like, listen, it's very counterintuitive. Almost all of a business's profits are 10 to 20 years into the future. So in Zero to One, he says, listen, the overwhelming importance of future profits is counterintuitive. Even in Silicon Valley, for a company to be valuable, it must grow and endure. But many entrepreneurs focus on short-term growth. They have an excuse. Growth is easy to measure, but durability isn't. And so he gives the example of like PayPal. He had done, he's like, listen, by the time the business has been, at this point that he's writing, excuse me, what he's writing about at this, he's writing about the time in

history when PayPal had only been around for 27 months, he found that 75% of the company's present value would come from profits that would be generated 10 years later. And so that was actually hard for me to like, get my head around for such a long time. It's like, what do you mean almost all business profits are 10 to 20 years in the future. But you see this when like people post it's like, oh, you know, the first year, uh, the company like Salesforce, they did like, I'm making these numbers up by the way. Uh, they did $5 million a year in their, uh, revenue the first year. Now they make $5 million, you know, every eight hours or something like that. And I've seen posts and calculations done like that, you know,

for Amazon, Apple, all that kind of stuff. So that's where you really try to wrap your head around. It's like what might seem like a big number today can be comparatively much smaller in the future for a business that has been widening a moat for 10, 15, 20 years. Now we're going to get into really the people part of the business. If you read Warren and Charlie, talk about, you know, Charlie says over and over again, like most people are rat poison.

He's very much like an elitist point of view. He's like, you got to stay away from the scumbags. And there's plenty of scumbags questioning business. So he says, we do not wish to join the managers who lack admirable qualities. We do not wish to join with them. No matter how attractive the prospects of their business, he summarizes this here. We've never succeeded in making a good deal with a bad person. And they talk about like, how do they like, what do they use to determine like the quality of a person?

What don't they use rather? Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity. So don't rely on resumes if you need to find undiscovered talent, which new companies have to do. Right. Because if the talent was discovered, you'd have a much wealthier company just overpay for that talent that you can't do. That's exactly what Nolan Bushnell did in the early days of Atari by hiring a 19-year-old Steve Jobs. More recently, a couple of podcasts ago, Jeremy Fry. That's what he did. He was able to hire a young, smart James Dyson. Listen to what they're asking for.

Brains, passion, and integrity. That's a description of James Dyson. Listen to what they're asking for. Brains, passion, and integrity. That's a description of James Dyson, right? One reason they're not big on resumes or what degree you have and really just focusing on passion, brains, and integrity. He says our experience with newly minted MBAs had not been that great. Their academic records always look terrific and the candidates always know just what to say, but too often they are short on personal commitment. I underlined that twice. I'll tell you why in a minute. Too often they are short on personal commitment to the company and general business savvy. It is difficult to teach a new dog old tricks. So short on personal commitment is the opposite of puts forth maximum effort. One of the things I'm most proud of about my

daughter when she gets her report card is the teachers for years. They have put this on, the puts forth maximum effort. I don't even care what the grade is that she gets, but the fact, and she gets straight A's because she's like really into school and really well behaved, basically the opposite I was when I was a child. But I'm just so proud when I read puts forth maximum effort. That is fantastic. Now, if somebody says that about you, that's a hell of a compliment, right? But that is so devastating. Like it's a devastating insult for somebody that has professional pride that if someone would say that you're short on personal commitment,

oh, it's gross. We do not remove superstars. Now, this is another note off myself. Warren, he just knows the power of maxims like he's fantastic about this we do not remove superstars from our lineups merely because they have attained a specific age superb managers are too scarce a resource to discard simply because a cake gets crowded with candles so now he gets into a little bit about corporate governance like who's on the board who's who you're hiring to run the company.

Essentially, like, who do you have around you? Who are the people you have around you? And, you know, he's nicer about it than other people have been. Isambard King of Brunel we saw could be ruthless. Steve Jobs could be ruthless. You know, Jeff Bezos is ruthless about this. But they just edit, edit, edit, constantly editing the actual people that they have around them. And Warren says it in a nicer way here, but he says, listen, this means that directors must get rid of a manager who is mediocre,

no matter how likable he is. He's talking about the directors he chooses. In selecting a new director, we were guided by our longstanding criteria, which are that board members have to be owner-oriented, business savvy, interested, and truly independent. And then he says the rarest of these qualities is business savvy. Many people, and that's a great thing about reading Warren's notes, shareholder letters, and why it's, I think, a valuable use of time, is because not only is he telling you the good ideas that he's come across, a lot of it is watching like really terrible behavior, which he says is like abundant in corporate America, and then doing the opposite, right? So he says, and this is a pretty crazy thing. The rarest of these qualities is

business savvy. These are people that have already made it onto boards, right? Many people who are smart, articulate, and admired have no real understanding of business. And so he talks about like when they're trying to select new people on the board, new people to the company it's like you guys are focused on the wrong thing over the years i've been queried many times about potential directors and have yet to hear anyone he italicized that word anyone ask does this person think like an intelligent owner and so one way to figure out like are you choosing the right personnel is he has this idea it's like what is this ask yourself what is the specialized activity that I'm in? And then obviously, the next note I left myself,

not obviously because I haven't said it yet, the next note I left myself was eat your own cooking. So let's start with this idea. Like, what is the specialized activity you're in? At Berkshire, we are in the specialized activity of running a business well. And therefore, we seek business judgment. So put that at the top of your list. He's talking about, you know, what education does this person

have? What age are they? Are they a man? Are they a woman? He's like, no, are they an intelligent owner or not? Do they have business judgment or not? What are you people talking about? Most of our directors have a major portion of their net worth invested in the company. And so this is what I mean when you study Warren and Charlie. They have a sophisticated, advanced understanding of human nature. And part of that, in my interpretation, is the fact that if you expose, whether it's me, you, any number of humans that live now, will live in the future, have lived in the past, to similar stimuli, we act in remarkably similar ways depending on that stimuli. So this idea, you need to have a lot of money in here because your decisions will be better if your family benefits from your decision or can be harmed by your decision. You have to eat your own cooking. We

want the behavior of our directors to be driven by their effects their decision will have on their family's net worth. Moving on to management now. Hire well, manage little is the maxim here. At Berkshire, managers can focus on running their businesses. They are not subjected to meetings at headquarters, nor financing worries, nor Wall Street harassment. Our trust is in people rather than process. A hire well, manage little code suits both them and me. And this might be my favorite thing in this entire book because it's simple and so powerful. It's a great way to think about how to run your business. So he says, just run. There's three things here. OK, just run your business as if one, you own 100 percent of it. Two, it is the only asset in the world that you and your family have or will ever have. And three, you can't sell it for at least a century.

Imagine if you had, if that was like the rubric in which you make business decisions through, right? Just run your business as if one, you own 100% of it. Two, it's the only asset in the world that you or your family have or will ever have. And three, you can't sell it for at least a century. And then on the bottom of this page, we get a dictum from Charlie Munger. At Berkshire, we believe in Charlie's dictum. Just tell me the bad news. The good news will take care of itself. Here's a quick one for you. When setting compensation, think, I get what I reward for. This is another note I left myself. Warren understands human nature, which I was just repeating.

Make sure incentives are tied to the same variables that determine value for owners and tied to the result of the area that the manager is responsible for and can impact. When we use incentives, they are always tied to the operating results for which a given CEO has authority. We issue no lottery tickets that carry payoffs unrelated to business performance. So he uses the business that he bought, Scott Felter, a bunch in as as an example in the book. And the guy running the business, Scott Felter, is this guy named Ralph Shea. So he says we compensate Ralph based on the results of his business rather than those of Berkshire. What could make more

sense since he's responsible for one operation but not the other? A cash bonus or a stock option tied to the fortunes of Berkshire would provide totally capricious rewards to Ralph. He could, for example, be hitting home runs at Scott Feltzer while Charlie and I rang up mistakes at Berkshire, thereby negating his efforts many times over. Conversely, why should option profits or bonuses be heaped upon Ralph if good things are occurring in other parts of Berkshire, but Scott Feltzer is lagging? And why are they doing this? Because they know if the compensation's out of whack, it's going to generate irrational decisions made by that person because they're optimizing for their own incentives over that of the business, right? So he says, arrangements that pay off in capricious ways unrelated to a manager's personal accomplishments

may well be welcomed by certain managers who, after all, refuses a free lottery ticket. But such arrangements are wasteful to the company and cause the manager to lose focus on what should be his real areas of concern. Additionally, irrational behavior at the parent company may well encourage imitative behavior at subsidiaries. And then he's saying the rewards that you're setting your compensation should be large. Why are you capping them? In setting compensation, we like to hold out the promise of large carrots, but make sure their delivery is tied directly to results in the area that a manager controls. We do not put a cap on bonuses. Okay, so now we go into more of like their unique operating philosophy. We keep it simple. We don't,

this is notes, note I left myself on this page. We keep it simple. We don't have strategic master plans. We like to steer the boat every day. Singleton, which I'll tell you more about in a minute. It's Henry Singleton, that is. And it's rare for people to consider opportunity costs, but you should. And our approach is haphazard. So let's see what all those notes mean. Our acquisition technique at Berkshire is simplicity itself.

We answer the phone. We do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus, we feel now, why wouldn't you do that? We feel no need to proceed in an ordained direction, which would be a course leading almost invariably to silly purchase prices, but can instead simply decide what makes sense for our owners. So let me pause there. Somebody I learned from by hearing Warren speak and Charlie is Henry Singleton. And so I wind up reading, I read two books, so you can find them in the archive. I'd start with Founders number 110, which is a book that's really hard to find.

It's called Distant Force. I'm pretty sure I paid over a hundred bucks for that book, if I remember correctly. Very hard to find, but worth every penny. And what I studied intently, Warren and Charlie's approach way before Singleton, right? I didn't even know who Singleton was, but they kept saying, it was like, listen, man, this is the, this guy put up the greatest record in American business history. Munger said something like his returns were utterly ridiculous. And what blew my mind. And I talked about on the two podcasts I did with Singleton, it's like, I'm starting to, I started reading these books. I'm like, oh my God,

like he's like the proto Warren Buffett. like a lot of the things that I thought were Warren Buffett's ideas Singleton had done, you know, a decade or two before. And so what they're talking about here that like they have the same approach, like we don't have this big master plan. So I'm going to read a quote from from Distant Force and founders number 110. And here it is. And this is Henry Singleton's response for not having a business plan. Once criticized for not having a business plan, Henry replied that he knew a lot of people running companies had very definitive plans they followed assiduously. But we're subject to a great number of outside influences on our businesses, and most of them can't be predicted. So my plan is to stay flexible. He told he told a reporter who was interviewing him. My only plan is to keep coming to work every day. I like to steer the boat each day rather than play. Excuse me, rather than plan way ahead into the future. And Singleton, if you haven't already read up on him, but his business career was wild. I think he starts his first business. Teledyne, it was his first business. Right.

He starts it at forty four, if I remember correctly. And if you had invested a dollar, I think his career lasted maybe 15 years, something like that. I forgot the exact, maybe 20 years. But anyways, for every dollar you put in, you would have got back nearly $200, I think maybe $180. So his returns were quite ridiculous. So let's go back to what Warren is saying here. This is the summary from Peter. What is the best use of my cash? So he's asking back to what Warren is saying here. This is the summary from Peter. What is the best use of my cash?

So he's asking these questions, right? Think about this before you invest in anything, whether your time, money, whatever. Do I want to invest my cash into this business at the price today? Or is there something else I would rather do with my cash? Now, this is Warren talking, writing here. In doing this, we always mentally compare any move we are contemplating with dozens of other opportunities open to us. Our practice of making this comparison is a discipline that managers focus simply on expansion, seldom use. So he's describing his haphazard approach to acquisitions. We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and no staff

to investigate a multitude of ideas presented by promoters and intermediaries. Instead, we simply hope that something sensible comes along. And when it does, we act. So those words are written by Warren Buffett. I could see Henry Singleton writing those exact words as well. Another thing, let's see, the note I left myself for this page is focus. And then it's a misconception that a movement in any direction is progression and then a funny story. So let's see what this is about. Leaders, business or otherwise, seldom are deficient in animal spirits and often relish increased activity and challenge,

even if that increased activity and challenge isn't actually beneficial for what you're trying to do. In many of these acquisitions, managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded the pursuers to the consequences of the catch. Pascal's observation seems apt. It has struck me that all of men's misfortunes spring from a single cause that they are unable to sit quietly in a room. And then about a decade after he wrote those words, he expounds on this idea. A serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse. Loss of focus is what worries Charlie and me the most. And this is a funny story and a great example of that.

I can't resist repeating a tale told me last year by a corporate executive. The business he grew up in was a fine one with a longtime record of leadership in its industry. Its main product, however, was distressingly glamourless. So several decades ago, the company hired a management consultant who naturally advised diversification into the then current FAD. Before long, the company acquired a number of businesses, each after the consulting firm had gone through a long and expensive acquisition study. And the outcome? Said the executive sadly. When we started, we were getting 100% of our earnings from the original business. After 10 years, we were getting 150% from our original business. So this is how to think about acquisitions or what I learned from 50 years of experience.

And so he's saying before you buy something, especially if you're giving your company stock, understand the true value of what you're giving up. I've been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high price investment bankers. The bankers give the board a detailed assessment of the value of the company being purchased with emphasis on why it is worth far more than its market price. In more than 50 years of board memberships, however, never have I heard the investment bankers or the management discuss the true value of what is being given. He's saying all they're focused on is like what they're trying to buy. But what is the value of what you're giving away? Managers and directors might sharpen their

thinking by asking themselves if they would sell 100% of their business on the same basis they are being asked to sell a part of it that's a really interesting idea right and if it isn't smart to sell all on such a basis they should ask themselves why it's smart to sell a portion okay so now this section remember they're all i think it's like 15 what is this yeah 15 different essays this is on management issues and the note of myself is this part is so good just read it all okay charlie and i know that the right players will make almost any team manager look good we subscribe to the philosophy of ogilvy and mather's founding genius david ogilvy if each of us high there's a quote from ogilvy obviously if each of us hires people who

are smaller than we are we shall become a company of dwarfs but if each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants. Protect the reputation. The priority is that all of us continue to zealously guard Berkshire's reputation. We can't be perfect, but we can try to be. And as I've said in these memos for more than 25 years, we can afford to lose money, even a lot of money. But we cannot afford to lose reputation, even a shred of reputation. And then he gets into the management and its effect on cost efficiency. At some companies, corporate expenses run 10% or more of operating earnings. This tithing, that's such a great description of it. The tithing that operations thus make to headquarters not only hurts earnings,

but more importantly, it slashes capital values. Charlie and I, and this is why he's bringing this up, Charlie and I have observed no correlation between high corporate costs and good corporate performance. In fact, we see the simpler, low-cost operation as more likely to operate effectively than its bureaucratic brethren. Our experience has been that managers of an already high-cost operation is uncommonly resourceful in finding new ways to add to overhead, while the manager of a tightly run operation usually continues to find additional methods to curtail costs, even when his costs are already well below that of his competitors.

So a tiger doesn't change his stripes, I think is the maxim there, right? Size seems to make many organizations slow thinking, resistant to change, and smug. In Winston Churchill's words, we shape our buildings and afterwards our buildings shape us. That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy and imperial corporate palaces induce imperious behavior. And so he's saying just get rid of like you're going to make mistakes either way, but you'd rather have a mistake of a bad decision than moving too slowly. So he said we would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly or not at all because of a stifling bureaucracy.

A compact organization lets all of us spend our time managing the business rather than managing each other and then this this uh something he learned from tom murphy which is the ceo of cap cities this is really smart i don't know if i've ever like i i this i don't know if i've ever heard anybody else think like this so he's talking about like don't be careful don't overstaff when times are good when your business is doing well, you're like, oh, we have plenty of money we're going to hire. Because thinking about not just the decision at that time. So let me just read this section to you. 30 years ago, Tom Murphy, who was then CEO of Cap Cities, drove this point home to me with a hypothetical tale about an employee who asked his boss for permission to hire an assistant.

The employee assumed that adding $20,000 to the annual payroll would be inconsequential, but his boss told him the proposal should be evaluated as a $3 million decision, given that the additional person would probably cost at least that amount over his lifetime, factoring in raises, benefits, and other expenses. And unless the company fell on very hard times, the employee added would be unlikely to be dismissed, however marginal his contribution to the business. And so the next section is good. Whether it's good or bad times, you should be cost efficient and do what makes sense. Don't let the temporary either increase in business or decrease in

business have you make an irrational decision. Charlie and I do not believe in flexible operating budgets, as in non-direct expenses can be X if revenues are Y. Our expenses should be 5% of revenue. Should we really cut our news, the news reporters at the Buffalo News, or the quality of the product and services that sees candies simply because profits are down during a given year or quarter? Or conversely, should we add a staff economist or corporate strategist, an institutional advertising campaign or something else that does Berkshire no good simply because the money currently is rolling in?

So that Trader Joe's, when I just did that biography a few weeks ago, Joe Colombobo colombo i don't know how to pronounce his name but uh trader joe i'll just call him he didn't think this made any sense either he's like his competitors in the in the grocery and retail business they would do uh like advertising budgets based on you know do spend 10 of your revenue on advertising he's like why and so he does like this content he took a lot of ogilvy's ideas and ogilvy on advertising and he did content marketing and mailing lists for that thing called the fearless flyer. And he wound up drastically expanding his business and actually spending less on advertising. He's booming, nor the cutting of essential people or activities because profitability is shrinking. That kind of yo-yo approach is neither businesslike nor humane. Our goal is to do what makes sense for Berkshire House customers and employees at all times, and never to add the unneeded. Okay, so now they have the entire section on risk, how to reduce risk. Says Charlie and I

detest even small risks unless we feel we are being adequately compensated for doing so. Charlie and I believe, so he's saying you can't delegate risk control. Charlie and I believe that a CEO must not delegate risk control. It is simply too important. If the CEO is incapable of handling that job, he should look for other employment. And so one way to minimize risk is just keep things simple. If in both business and investments, it is usually far more profitable to to simply stick with the easy and obvious than it is to resolve the difficult. The most elusive of human goals, keeping things simple and remembering what you set out to do. That's so great. I got to repeat it again. The most elusive of human goals,

keeping things simple and remembering what you set out to do. This is about mastering the fundamentals. Ben Graham taught me 45 years ago that in investing, it is not necessary to do extraordinary things to get extraordinary results. In later life, I've been surprised to find that this statement holds true in business management as well. What a manager must do is handle the basics well and not get diverted. So this idea of mastering the fundamentals is something you see not just in business. It's all masters of their craft do this. The example I always use because it's the greatest illustration of this is one of the last interviews that kobe bryant did before he died he's relaying a conversation that him and michael jordan had because his daughter who unfortunately perished with him it was you know really into

playing basketball and he was looking at you know eventually texting michael he's like listen i'm having a hard time his kobe suspicion was that like you should just focus on mastering the fundamentals. Right. He's like, why are you teaching your 12 year old like all this complicated, fancy stuff in basketball? Right. So Kobe took the opposite approach. He's like, I just teach my kids the basics and then we do it over and over again. That sounds exactly like Warren and Charlie's approach to business. Right. I just keep teaching my kids the basics and do it over and over again. So he's bouncing this idea of Michael Jordan, this conversation. He conversation he's like dude it's like they're just doing they're having these 12 year old kids do way too much like i'm having a hard time remembering what i was doing at basketball when i was 12 what were you doing and michael's like dude i was playing baseball

and kobe tells i'm pretty sure it's it's uhod interviewing him. He says, think about that. Let that sink in. Greatest basketball player to ever live. Hadn't even picked up the ball yet. What is the chance your 12-year-old needs all this fancy shit? And so we get to the point where he breaks down. Like, if you can just have a business with one variable you have to focus on, your chance of success is a lot higher.

So he says, if only one variable is key to a decision and that variable has a 90% chance of going your way, the chance for a successful outcome is obviously 90%. But if 10 independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. Now we get to something that Charlie Munger says. I think maybe one of his most important ideas. Just stop trying to be brilliant. It's next to impossible. Just avoid doing dumb things over a long period of time.

And you'll come out way better than most people, right? Peter says it is better to just try to avoid the really dumb things what can really hurt you than try to be very smart and Warren says you can produce outstanding long term results primarily by avoiding dumb decisions rather than by making brilliant ones Charlie and I have not learned how to solve difficult business problems

what we have learned to do is avoid them we adopted a strategy that required our being smart and not too smart at that only a few times a year. And that's really what I would take away from his writing and Charlie's writing too, is like, it's impossibly smart every day. So don't set yourself a position where you have to be smart every day. You just can't. It doesn't matter how smart you are. So it says we adopted a strategy. We just need to be smart a few times a year. Indeed, we will now settle for

one good idea a year. And then he just has a maxim here. I think that applies to not only like personal life investments, but also business. A fat wallet is the enemy of superior investment results. And that's not that's that's that's not all that different. It's very similar to a few weeks ago, maybe the Rothschilds. I think it had to be the Rothschild podcast I was doing where the Game of Thrones, like that scene from Game of Thrones made me think of that. So Warren saying here, fat wallet is the enemy of superior investment results. That was like who made your family rich? Was it the fancy lads in

silk no it was the hard bastard so the hard bastard usually coming up with not with not any money that's part of what's driving them right uh there's an investor named josh wolf uh who has a great maxim on this he says uh chips on shoulders puts chips in pockets. And this is what Warren says. Intelligent investing is not complex, though that is far from saying that is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note the word selected.

You don't have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important. Knowing its boundaries, however, is vital. And so that idea, note the word selected, you don't have to be an expert on every company or even many. And in a lot of cases, the greatest fortunes the world has ever seen they had to know one business there's a quote in um the the second buffett biography i read the one by um by uh lowenstein uh the one i did most recently maybe like i don't know two months ago but it says what john d rockefeller andrew carnegie

sam walton and bill gates have in common is that each owes his fortune to a single product or innovation and then another maximum two more maxims here from from buffett uh big opportunities is that each owes his fortune to a single product or innovation. And then another maxim, two more maxims here from Buffett. Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble. And then his point he's about to make here is you've got to be really careful when things look easy. This actually reminded me of something Bob Noyce, founder of Intel, said. Speculation is most dangerous when it looks easiest.

So Bob said he would give advice to young entrepreneurs. He's like, listen, if you see a business or he says if you when you look at another guy's business and it looks easy, you don't know enough about it. That's a paraphrase. He said it a lot better. But this is this next section is on avoiding on avoiding deceiving yourself. Nothing sedates rationality like large doses of effortless money. And so this whole section, this is I don't think I'm being clear here. This is all about risk. It's about speculation and leverage and when things look too easy. So he's just going through. I'm just pulling out some some highlights here.

So this is an example. Every generation has had to get his own head chopped off in its own way. Throughout history, there have always been bubbles and busts. And so his point that he made on the previous page, actually, no, I should read to you. Let me go find it real quick. So he's talking about that there's always uncertainty. You've got to be really careful when you have these overconfident prognosticators like they're just full of crap right uh comment commentators today often talk about a great uncertainty but think back for example to december 6 1941 october 18th 1987 so before the day before poor harbor the day before uh the huge crash in the 80s and september 10th 2011

or excuse me 2001 day before sept before September 11th, obviously. No matter how serene today may be, tomorrow is always uncertain. So let me go back to this other page. Every generation has to get their own head chopped off in its own way throughout history. There have always been bubbles and busts, yet they take us by surprise every time. I read a book like probably 15 years ago about this called The Eight Centuries of Folly. And it's all about bubbles and busts in human history. I thought it was interesting. The less the prudence with which others conduct their affairs. So he's saying this happens over and over again. So what do you do? How do you reduce risk here? And this is a very good, simple sentence, right? The less the prudence with which others conduct their affairs,

the greater the prudence with which we should their affairs, the greater the prudence with which we should conduct our own affairs. So I take that to mean that when everybody else around you is getting sloppy, tighten up. Then he's going to talk about leverage, the importance of surviving and keeping control so you don't have to rely on other people. Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a very good way to get very poor. Once having profited from its wonders, very few people retreat to more conservative practices. Leverage often produces a zero, even for smart people. Over the years, a number of very smart people have learned the hard way that a long string, this is so good, this is like classic Warren here. Very smart people have learned the hard way that a long string this is so good this is like classic warren here uh very smart people have

learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero that is not an equation whose effects i would like to experience personally and his whole point is like if leverage is going to wipe you out of the game you can't win the game if you can't survive and actually finish the game the fundamental principle of auto racing is to finish is that to finish first you must first finish that dictum is equally applicable to business another great way to think about this the roads of business are riddled with potholes a plan that requires dodging them all is a plan for disaster. So this is why he's talking about why they value liquidity so much.

We will never become dependent on the kindness of strangers. Having loads of liquidity lets us sleep well. And why? Because it's the nature of his business. If you want to shoot rare, fast-moving elephants, you have to carry a loaded gun. Or excuse me, you should always carry a loaded gun. And he's writing these words all the way back in 1980. The most attractive opportunities may present themselves at a time when credit is extremely expensive or even unavailable. At such a time, we want to have plenty of financial firepower. During the episodes of financial chaos, now he's writing this in 2010. During the episodes of financial chaos that occasionally erupt in our economy, we will

be equipped both financially and emotionally to play offense while others scramble for survival. So this is, I wrote, just jotted down this note on this paragraph. This is kind of a gangster statement from Warren about what he's about to say here. So let me start that over and you'll see what I mean by that. During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival that's what allowed us to invest 15.6 billion dollars in 25 days of panic following the Lehman Brothers bankruptcy in 2008 and so I went back I was like whoa it's not just saying like you guys are panicking you're going broke and you're panicking meanwhile

I'm sitting on a vast fortress of fortune right right? So I went back and looked, and the numbers I'm about to give you are a couple of years out of date, but just in one of those investments was 5 billion of that money into Bank of America. And so the numbers I have are seven years later. So that's 2017. Sorry, nine years later, he made, so he invested 5 billion into Bank of America.

He winds up making $21 billion, so a profit of $16 billion since the investment was made, plus the investment now pays Berkshire more than $400 million per year in dividends when he exercised the warrants in 2017. So again, go back to what he just said. We're equipped to both financially and emotionally to play offense while others scramble for survival. We invested $15.6 billion in 25 days of panic. And so he did that. So he's writing about, he did it in 2008.

He's writing about it in 2010. Let's go back to what he said in 1987. If you want to shoot rare, fast-moving elephants, which is what he did for Bank of America and all the other investments he made then, you should always carry a loaded gun, which he did. 1980. 30. He waited 30. What is that? 28, rather. Not 30. 28 years to put this idea into practice. I mean, he obviously put it in practice before then, but on such a large scale. The most attractive opportunities may present themselves at a time when credit is extremely expensive or even unavailable. At such a time, we want to have plenty of financial firepower. He wrote that in 1980.

That's wild. See, this is what I meant about why Peter did such a smart move by taking all this, like arranging it instead of by year, he arranged it by topic. Because now all this is on one page for me to reference. And you see the idea formulate and then the application many decades later. That's really cool. We're still in the section on risk. I have a ton of highlights in this section, apparently. So this is really on just the dangers that we constantly want to copy everything that's going on around us. So a way to think about this is just ask yourself a question. Are you just copying the behavior around you? The tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. He calls this the managerial trap of the

institutional imperative. So he's defining it as the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. And so he's got a maxim for us. What the wise do in the beginning, fools do in the end. He hits this over and over again, year after year, the behavior of peer companies will be mindlessly imitated. And so one way to get around it is he asking like, why am I doing what I'm doing? Ask why is his like counter to this i would rather be wrong in a group than and he's describing the behavior that he sees this ridiculous behavior i would rather be wrong in a group than right by myself we are willing to look foolish as long as we don't feel we acted foolish and the final section is just about it's really really short

it's like three pages it's about this you're going to make mistakes so what are you going to do mistakes are going to be made what do you are you going to do you have to do post-mortems on your dumb decisions agonizing over errors is a mistake but acknowledging and analyzing them can be useful that practice is rare in corporate boardrooms. There, Charlie and I have almost never witnessed a candid postmortem of a failed decision. Triumphs will be trumpeted, but dumb decisions either get no follow-up or are rationalized. So this part reminded me of, again, another one of this interview that Kobe did before he died. And he talks about, like, you know, win or lose, your response should be the same. And when you lose, you have a lot of valuable

information if you go back and actually analyze it. Right. So he was talking to he was like a big promoter of women's basketball. And so he's talking to one of the best women's basketball players in the country, Katie Lou Samuelson. Her team had lost in the finals and he was having a conversation with her. He's like, have you watched the game? And she's like, no, no, no, no, no. It's way too painful. He's like, no, you have to. And so this is a quote that he said. He says, you have to do the hard stuff and watch that game and study that game to not make those mistakes over and over again, just because you weren't brave enough to face it. You have to deal with it, face it, and then learn from it.

And he says, I invited her to my office and we watched the game together and went through there's a mismatch this is what you should have done and like you just learn a ton doing that and so again kobe's applying that to basketball warren's saying saying for the decisions you're making in your career you've got to go back and actually figure it out so you don't do that mistake in the future. Learn from them. Learn from your mistakes, but it's better to try to learn from other mistakes. The trick is to learn most lessons from the experience of others. And then just two more things. Attack growing problems early. When a problem exists, whether in personnel or in business operations, the time to act is now. And then he closes with that quote from Confucius.

In all things, success depends on previous preparation, and without such previous preparation, there is sure to be failure. I think the example of him talking about having a lot of liquidity and having the proper emotional temperament to be calm while others are panicked is a perfect description of what Confucius said many, many centuries ago. Success depends on previous preparation. He had that gigantic opportunity in 2008 based on stuff he did decades before. And without such previous preparation, there is sure to be failure.

And so that's where I'll leave it. No brainer to buy the book. I paid $19 for this thing. Are you kidding me? And you can keep it out and just pick it up and read one essay that probably takes five, 10 minutes at a time and then put it back down. I think it's a fantastic little reference. And I really like what Peter did and the way he organized multiple decades of shareholder letters into a book that's less than 100 pages. Just absolutely fantastic. So if you buy the book and you want to support the podcast at the same time, you can buy the book using the link that's in the show notes in your podcast player. That is

200, where am I at? 202? 202 books down, 1,000 to go. I'll talk to you again soon.