Founders - #286 Warren Buffett and Charlie Munger

Starting point is 00:00:00 For the last five years, I've been writing a memo to myself. I have found this to be an excellent way to learn. The memo is in the form of a discussion between four characters. It's a story about a fictitious seeker and his visit to the Library of Wisdom where he meets another fictitious character, the librarian, along with Warren Buffett and Charlie Munger. What has been reinforced in writing this memo is the efficiency, simplicity, clarity, and common sense of judgment that are the hallmarks of Buffett and Munger. Both have a remarkable ability to eliminate folly, simplify things, boil down issues to their essence, get

Starting point is 00:00:36 right to the point, and focus on simple and timeless truths. They are the Einsteins of business and wisdom. If there's one goal of this book, it is to better understand how they think. That is from the very brief introduction of the book that we talked about today, which is all I want to know is where I'm going to die, so I'll never go there. Buffett and Munger, A Study in Simplicity and Uncommon Common Sense, and it was written by Peter Bevelin. So I wasn't expecting to read this book right away. It was actually recommended by my friend Eric Jorgensen. Eric Jorgensen is also the author of the book that I covered on episode 199, which is The Almanac of Naval Ravikant. But anytime Eric recommends a book, I immediately order it. This book came a few days later. I pick it up, crack

Starting point is 00:01:18 it open, trying to take a peek, see what the book was all about. I start reading it and I never stopped. And I think the reason it resonated with me immediately is because when you read the book, I feel it as if Warren Buffett and Charlie Munger are speaking directly to you. And I told you this before, but the reason I've read every single book I can find on Warren Buffett or Charlie Munger is because I really feel like they're the very wise grandfather figure that I never had. One of my grandfathers died when I was too young to remember him. And the other one was a psychopath and a monster and dumber than a bucket full of rocks. And so when I listen to Munger and Buffett speak or I read their writing, I really do view it as, hey, this is the wise grandfather figure that I never had. They have six decades more life

Starting point is 00:01:58 experience than I do. They've seen all kinds of different things, and they've learned from that experience, and then they push that knowledge and the information that they've acquired over their very long lives down to future generations. And so almost all my highlights are Munger and Buffett talking directly to you and I. It is very surprising that they start the book on the subject of mistakes. And so it starts off with Munger saying, mistakes are a fact of life. I'm not gnashing my teeth over them or suffering or enduring them. I regard it as perfectly normal to fail and to make bad decisions. Buffett comes in. Remember, this is going to be like a dialogue between them, I guess, just to tell you. So what's interesting about this book compared to the rest of the books that I've read on both Munger and Buffett is they quote heavily.

Starting point is 00:02:39 So he uses obviously any of the books written about Munger and Buffett, but also a lot of it is from the annual meetings that Buffett and Munger and Buffett, but also a lot of it is from the annual meetings that Buffett and Munger both put on. And so the author organized all this so we can read it in like a conversational format. So you have Munger that says that, Buffett says, everyone makes mistakes. I've made a lot and I'm going to make more. That's the nature of making a lot of decisions. Try to live your life totally free of mistakes is a life of inaction. Stupidity is inevitable. It happens to everyone. Wrong decisions are part of life. Being able to make them work out And so that's one main theme that they repeat over and over again is the fact that since mistakes are inevitable, you have to structure your life and your business to be able to survive the inevitable bad decisions that you're going to make.

Starting point is 00:03:22 And Buffett has a funny little memorable way to describe their approach to being able to survive mistakes. He says, the sign above the player's entrance to the field at Notre Dame reads, play like a champion today. I sometimes joke that the sign

Starting point is 00:03:36 at the field in Nebraska reads, remember your helmet. Charlie and I are remember your helmet kind of guys. We like to keep it simple. And then they go into the fact that avoiding problems is better than being forced to solve them. This is a really amazing way that Charlie Munger describes this idea. He says wisdom is prevention. Then Buffett says it wasn't raining when Noah built the ark.

Starting point is 00:03:58 And he didn't even look that smart for 39 days. But there are some things you have to think ahead on. And prevention is enormously important. And so if wisdom lies in prevention, how do you gain wisdom? And Munger says, if wisdom is what you want, you're going to get it by sitting on your ass. If you really want to be an outlier in terms of achievement, sit on your ass and read and do it all the time. And then Munger goes into the fact that because they spend so much time gaining wisdom and preparing, that allows them to actually make decisions really quickly when you have the few great opportunities in your life they're presented to you.

Starting point is 00:04:30 He says, we actually make decisions very rapidly. But that's because we've spent so much time preparing ourselves by quietly sitting and reading and thinking. Buffett chimes in. He says, unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world. Most men would rather die than think, and many do. And then Munger says, if you get into the mental habit of relating what you're reading to the basic underlying ideas being demonstrated, you gradually accumulate some wisdom. So then they're asked the question, but how do you guys have so much time to read? I always believed that you were very busy all the time and that you had meetings all the time.

Starting point is 00:05:07 Buffett says, at Berkshire, we don't have any meetings or committees, and I can think of no better way to become more intelligent than sit down and read. I hate meetings, frankly. I have created something that I enjoy. He's obviously talking about his company. I have created something that I enjoy. I happen to enjoy reading a lot, and I happen to enjoy thinking about things. Munger says we both hate.

Starting point is 00:05:27 This is something that I've really adopted. I think it's one of the best ideas that they have. And it's this idea that you have to schedule time to think and you cannot. Munger's going to say something funny where it's like most people, most business people schedule themselves like a dentist. He's like, well, if you do that every single minute of your day from the time you wake up to go to bed is accounted for. When the hell are you thinking? And I'll get into why Jeff Bezos picked up on this is such an important thing in one second. Munger says, we both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and

Starting point is 00:05:58 think. I've heard various stories over the years about this. But for example, like, let's say you wanted to meet with Warren Buffett, you wanted to schedule something and says, you know, hey, can you meet, you know, the third week of next month? He's just gonna say, no, if you wanna meet me Friday, call me Thursday and I'll tell you if I'm available. I interact with a lot of founders. It's completely different

Starting point is 00:06:15 than how most founders schedule their time. Maybe we should be learning from their experience. Munger says, we schedule time to think. Most people schedule themselves like a dentist. It's so easy to get so busy that you no longer have time to think and you pay a huge price a dentist. It's so easy to get so busy that you no longer have time to think. And you pay a huge price for that. And so when I got to this part, I thought of something that I read that Jeff Bezos said one time.

Starting point is 00:06:31 This is in the book Invent and Wander, the collected writings of Jeff Bezos. I covered it all the way back on episode 155. But Bezos said, I need eight hours of sleep. I think better. I have more energy. My mood is better. And think about it. As a senior executive, what do you really get paid to do? You get paid to make a small number of high quality decisions.

Starting point is 00:06:50 If I make like three good decisions a day, that is enough. And they should just be as high quality as I can make them. Warren Buffett says he's good if he makes three decisions a year. And I really believe that. And I think what Bezos would tell you, what Buffett would tell you, what Munger would tell you, he's like, how the hell do you expect to make high quality decisions if you're not spending any time deep in thought and you're focused? This leads directly into one of my favorite parts, something that they repeat over and over again, the dangers of multitasking. They say over and over again, what worries me and Charlie most is a lack of focus. Munger says this modern generation, which has gotten so good at doing two or three things at once, multitasking, all confidently predict will end up worse than people more like Warren Buffett with solitary reading time and less trying to do three things at once. I think people that are multitasking pay a huge price. I think Edwin Land, founder of Polaroid, somebody talked about over and over again on the podcast that Steve Jobs hero.

Starting point is 00:07:42 He would agree with exactly what they're saying. He talks about the powers of intense concentration hour after hour, who actually release things inside of people that they didn't even know existed. I send this video of Johnny Ive to a bunch of my founder friends. And in like three minutes, he talks about, hey, Steve Jobs was the most remarkably focused person I knew. And so this idea of the importance of focus appears over and over and over again. If you just pick up any of these biographies, you're going to see it just jump out at you. It's so obvious. I think people that multitask pay a huge price. I think when you multitask so much, you don't have time to think

Starting point is 00:08:11 about anything deeply. You're giving the world an advantage you shouldn't. Practically everybody is drifting into this mistake. This is amazing that what Munger says. I did not succeed in life by intelligence. I succeeded because I have a long attention span. And then Munger goes in. This is not rocket science. This is very obvious. And yet people don't do it. Johnny Ive in that video, the reason I sent it around so much is he talks about, listen, this seems really simple, but I'm shocked at how so few people do it. So I was whenever I hear stuff like that, where it's like, this is really important, high priority, repeated over and over again. And yet it goes completely against human nature. And, you know, it goes against human nature because most people don't do it.

Starting point is 00:08:47 I'm like, OK, that like like alarms go off in my mind. Like, OK, that is extremely important. That's something you need to master. Right. And so Munger goes into this. He goes, it's just this simple. We've have enough good sense when something was working well, we keep doing it. The fundamental algorithm of life. Repeat what works. Moving ahead, there's going to be three main ideas spread across a couple of pages. They're going to repeat these ideas a lot, which is very surprising. One is something that I think you know of well, but it's worth repeating. You should aim to be consistently not stupid. Then they talk a lot about do not let the thoughts of

Starting point is 00:09:21 others interfere with your own. And then something that I talk about that comes up a lot in conversations with other founders is it's so difficult to build a successful business. And then what happens and what Munger and Buffett are always talking about is like, first of all, it's very difficult to build a very successful business. And most likely your downfall, once you're able to achieve something that's extremely rare, is not that you're going to be taken over by a competitor or something like that. It's that you're going to mess it up. And they talk about that people, there's something in human nature where people are driven crazy by extreme success. And of course, they're able to describe all of these ideas in just a few sentences. The first thing here is

Starting point is 00:09:58 Munger saying, hey, the one thing that has surprised me all my life is how many people with high IQs do massively stupid things. Someone once said what most distinguishes the foolish and the intelligent is the foolish consistently commits the same stupidities, while the intelligent always find new ones. So that's really funny, obviously. Munger then continues. While an excess of self-regard is often counterproductive in its effects on cognition, it can cause some weird successes from overconfidence that happens to cause success. So what does that mean? That's kind of a weird language there.

Starting point is 00:10:31 This is he breaks it down into a maxim that I've heard Munger repeat several times. And he says, never underestimate the man who overestimates himself. Buffett chimes in. He says, I would say if Charlie and I have any advantage, it is because we're rational and we very seldom let extraneous factors interfere with our own thoughts. You're going to hear Buffett and Munger say variations of this idea over and over again. Let me go back to what Buffett's saying. He's like, hey, we try to be rational. We try to mute the outside world. We're not going to let the outside world interfere with our own thoughts. We do not let other people's opinion interfere with our own. And then Munger goes back into this thing. Don't mess it up. You need patience and discipline and an ability to take losses and

Starting point is 00:11:11 adversity without going crazy. You need an ability to not be driven crazy by extreme success. And then they go on for multiple, multiple pages about one of their favorite ideas. This is this idea of inversion. I've covered this idea a lot in the other Munger and Buffett episodes. I will list all of them in the show notes down below in case you want to check out, you know, I don't even know how many there are. There might be like eight or 10 or something like that. You can also go to founderspodcast.com and see like all the show notes in case it doesn't show up on your podcast player. But I'm going to try to avoid covering things I've covered in past podcasts because I just assume when I make the podcast that you're just like me, that you're a

Starting point is 00:11:46 maniac. And then when you find something that you're interested in, like I was interested in Charlie Munger, Warren Buffett, I'll read every single book and get my hands on. I would listen to every single podcast. So I will list them all. And obviously, if you're interested in learning more from Warren Buffett and Charlie Munger, just listen to them and listen to them again. And so they're going to talk about inversion throughout the entire book. Munger starts off. That is very much my approach to wisdom. I go around figuring out what doesn't work and then I avoid it.

Starting point is 00:12:10 Invert, always invert. I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. So that is in his personal, like his personal life, right? But he also talks about it's extremely useful in studying why other people fail in business.

Starting point is 00:12:24 To examine how businesses become big and strong, Charlie first studies how businesses decline and die. Buffett says, we have been a student of other people's folly and it has served us well. And then Buffett has a great line on how do you actually practice this? This is fantastic. It is an inversion process. You start out with failure and then engineer its removal. And this is one of my favorite ideas in the book. Another way to think about an idea I've already been previously exposed to. It's like, oh, you should figure out what you don't like to get to what you do like. And so Munger says, the mental process that has really worked for me my whole life, and I use it all the time, is turning everything into reverse.

Starting point is 00:13:02 I figure out what I don't like instead of figuring out what I like in order to get what I like. And so they go on giving examples of inversion over and over again and intersperse through all these examples of inversion. They say stuff like this. Hey, I think a lot, this is Buffett. I think a lot of people make things more complicated than they need to really think you should keep things simple in both business and investments. It's usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. And then they end this section of the book with why they're saying this. This is something you and I have talked about for years. Repetition is persuasive. They said some things may seem a little repetitious, but repetition is the mother of learning. And so if you pick up this book and read it, and I hope I can encourage you

Starting point is 00:13:41 to do so, you're going to be maybe surprised, but a large part of this book is actually on the human psychology and then observable human nature throughout history. And if you think about this, like, okay, why would some of the greatest founders and investors of all time and Munger and Buffett, why would they be so obsessed with that? Because business is people, right? Your business partners are people, your customers are people. And so they just have a lot of it is like avoiding, they talk about, you know, there's a lot of low quality traits in human beings and low quality people on this earth. You need to avoid them. Again, I think they give you a simple way to do this. And so Buffett talks about like, well, when you're picking people to do business with, he just has this thing. He's like, you know, if you need like a 50 page contract

Starting point is 00:14:23 to protect yourself from the person you're dealing with, you need to walk away from that deal immediately. He says, I like to deal with people where I feel a one page contract would do the job. And one apparent almost contradiction when you read, they talk about, hey, you know, we spent so much time studying history, reading biographies, learning from the experiences of others. And then they keep repeating that most people do not learn from other people. And Munger's got a great illustration at this point. He goes, you can tell that most people don't learn from the experience of other people because there's little originality in the disasters of mankind. We'll get there in one second. Buffett said, the trick is to learn most lessons from the experience of others. Munger says, the more hard lessons you can learn vicariously

Starting point is 00:15:01 rather than through your own hard experience, the better. You can see the results of not learning from other people's mistakes by simply looking around you. How little originality there is in the common disasters of mankind. He goes on to list some drunk driving deaths, incurable venereal diseases, conversion of bright college students into brainwashed zombies as members of destructive cults, business failures through, this is such a great line, business failures through repetition of obvious mistakes made by predecessors, and so on. I just love that idea. It's like you can tell people are not learning, or most people are incapable of learning from the experience of other people because there's no originality in the common disasters of mankind. They just repeat over and over again. I think you'll learn a lot from other people. In fact, I think you learn basically, if you can learn basically everything from other people,

Starting point is 00:15:47 you don't have to get too many new ideas on your own. You can just apply the best of what you see. And then a few pages later, they essentially give an enthusiastic endorsement of listening to Founders Podcast because they say, study effective individuals. Buffett says, look at effective individuals and try to figure out why they're effective. Munger says, I think history is very helpful. It enables you to keep things in perspective. So the history of civilization and the history of finance and investing, it is very useful. Buffett says, I like history. I like financial history.

Starting point is 00:16:18 It is useful to realize how extraordinary things can happen occasionally. This is a great, great line. Everything that needs to be said has already been said. But since no one was listening, everything must be said again. Now we got a couple different ideas all centered around this one main idea. Focus on the essence. The most important thing, the core. Always try to simplify things to their essence, the fundamental or most important aspect of something. The core is the way to think about it. Charlie's got the best 30-second mind in the world, Buffett said.

Starting point is 00:16:48 If I call him and describe a problem to him, any kind of situation, he gets to the essence of it immediately. When we make decisions, we focus on the most important thing. Something they preach over and over again is get into a good business and allow the miracle of compound interest to do most of the work for you. I talk about this over and over again with you, that time carries most of the weight. Buffett says, compound interest is a little like rolling a snowball down a hill. You start with a small snowball, and if it rolls long enough, you'll have a real snowball at the end. It's better if you're not in too much of a hurry and keep doing sound things. The reason I wanted to read you that paragraph is really for this next two sentences. Berkshire was a small business at one time. It just takes time. It is

Starting point is 00:17:31 the nature of compound interest. You cannot build it in one day or one week. Going back to this idea that once you're in a good business, stay in a good business, let time do the work. Charlie Munger talks about this as staying on the wave. So he says, when new businesses come in, there are huge advantages for the early birds. And when you're an early bird, there's a model that I call surfing. When a surfer gets up and catches the wave and just stays there, he can go for a long, long time. But if he gets off the wave, he becomes mired in the shallows. People get long runs when they're right on the edge of the wave. And so he uses example like Microsoft or Intel stay on the way. And then they give some ideas on both that are effective for sales and effective for managing other people within your organization. Mary Kay once said, it's so simple,

Starting point is 00:18:18 yet it makes such a difference. Pretend that every single person you meet has a sign around his or her neck that says, make me feel important. All human beings work better if they get reinforcement. If there are constant rewards for doing well, you will be driven to do more of the same. And then they have a theme that they repeat over and over again with different little stories. And a lot of it actually is related to like Buffett loves baseball stories. But it's just this idea that there's just most of the world is by definition has to be mediocre in that if you can actually do the work necessary to turn yourself into a formidable individual and then work with just the best, first of all, work with the best

Starting point is 00:18:53 possible people and work in the best possible industries and businesses that will do most of the work for you. And to be able to do that, you have to be kind of ruthless with cutting people that aren't up to your standards out of like you don you don't want to do work. You can't work with, you know, C players or even B players. So Buffett says the real issue is mediocrity. There are too many 240 hitters. So he loves this baseball analogy. If you were a fantastic hitter, you'd be a 400 hitter. That's something he's going to repeat over and over again. But in this case, you have somebody that may even think they're a 400 hitter, but are actually a 240 hitter. So that's what he's talking about. The real issue here is mediocrity. There are too many 240 hitters in business. Businesses often settle for a notch or two above mediocrity. There are strong human instincts at work.

Starting point is 00:19:33 And then they also give advice where it's like, listen, you think you might be able to turn around a business or turn around a person. You're just better off getting into a better opportunity. This is something where I always say it's like actions express priority. It's one of my favorite maxims. People do what they actually want to do. And you can tell what people want to do is just like, how do you spend your time? What are your, it doesn't matter what you tell me. Hey, this is important to me. It's like, just, I can look at what you do. And this is great advice from Buffett. People just do what they want to do. And you're just better off just not trying to change their behavior because only they can do that. So he

Starting point is 00:20:04 says in almost 60 years of investing, we found it practically useless to give advice to anyone. And this is even in situations where you figure, hey, they should have a lot of influence and control here. And he says, listen, Charlie and I have been on boards of companies in which we were among the largest shareholders. And even then, we had very little luck changing their behavior. So we think that if you buy a stock in a company, you better not count on being able to change the course of action. And then they go back into the importance of understanding human behavior. And then they touch a little bit on why so many founders and investors have it like they love history. They

Starting point is 00:20:37 like studying history. They find it very useful for their careers. Buffett says you really should understand human behavior if you're going to run a business. Munger says, once you have the ideas, of course, you must continuously practice. Amen. Something you and I talk about over and over again. Once you have the ideas, of course, you must continuously practice their use. If you don't practice, you can't perform well. A wise man engaged in learning some important skill will not stop until he is really fluent in it. So more on this idea of it's really important if you're going to run a business to understand human nature. Again, this is all these ideas. These are not on the same page. So this is

Starting point is 00:21:08 how you know it's important to them because what's important to people, they will repeat. And so this is really, it's a story about imitation is the note that I left myself when I read this. But no, what Charlie's about to tell us, he's telling us a story about human nature. That's very fascinating. And if you think about their bird's eye view that they've had in the finance industry, which has been full of panics and bubbles and booms and busts, right? This is just absolutely fantastic. So Charlie Munger says, one of my favorite stories is about the little boy in Texas. The teacher asked the class, if there are nine sheep in the pen and one jumps out, how many are left?

Starting point is 00:21:42 And everybody got the answer right, except this little boy who said, none of them are left. And the teacher said, you don't understand arithmetic. And he said, no, teacher, you don't understand sheep. And Buffett adds on to the story by saying, it always amazes me how high IQ people mindlessly imitate. And then Buffett describes this phenomenon by this idea he calls the three eyes and so he says you get what I call the natural progression the three eyes the innovators the imitators and the idiots so skipping ahead let's go back to this idea that they repeat over and over again spend a lot of time thinking reading formulating your own thoughts and mute the world and so Buffett says we do not read other people's

Starting point is 00:22:25 opinions we want to think we want to get the facts and then think this was such a like a mind-blowing uh realization because you never know like when you're reading something when it just is going to suddenly click or like kind of um interact with maybe an idea that was previous in your mind or you didn't weren't necessarily like completely understood how important it was when i was reading buffett shareholder letters, and then obviously this is like years ago. So this is probably like in 2019 maybe. And listening to Charlie Munger speak, they kept bringing up this guy named Henry Singleton. And I was like, what the heck is going on here? You know, in my opinion, Buffett and Munger have studied, the people living and maybe people have ever lived,

Starting point is 00:23:01 they've probably studied more different businesses and more company founders and managers and CEOs than almost anybody else, right? They've been at it since Buffett's case since he was a little kid and he's been doing all this for a hundred years, right? And yet they kept bringing up Henry Singleton, Henry Singleton. They're like, hey, this guy was, Charlie Munger says Henry Singleton was the smartest person he ever met. Munger said that his returns in business were utterly ridiculous. Buffett said it's literally a crime that business

Starting point is 00:23:25 schools don't study this guy. And the reason it's hard to study him is you actually have to, like there's not a lot written about him. I've done two episodes on him, but episode 110, there's this book called Dissent Force, which is written by Singleton's like right-hand guy. And it's really the history of the company Teledyne that they built together. But what was so remarkable and just made, I don't know why, it just clicked when I started reading about Singleton is like how he spent his time. But the point of all this is like, there's a description in that book that really resonated with me that you have to do the work necessary to be able to trust your own judgment or none of this is going to work. And so I'm

Starting point is 00:23:54 going to read a quote from Disenforced. It's episode 110. I'm about to reread this and collect all the other information. In fact, a bunch of listeners actually sent me really valuable information about Singleton, like old press articles and stuff they found in public libraries and stuff. But I want to read this because I really think this is exactly what Buffett is saying here. Let me reread Buffett before I get there, right? He's like, listen, we don't read other people's opinions. We want to think. We want to get the facts and then think. In many ways, Singleton was Buffett before Buffett, right? So it says, quite often, Henry simply talked about his philosophy of running a corporation and the various financial strategies that he came up with

Starting point is 00:24:29 as he sat in his office each day, often working in his Apple II computer. He was a brilliant strategist, and he came up with many creative ideas, ideas that were sometimes contrary to the currently accepted methods of managing a large corporation that prevailed in those days. One of the things that blew my mind was the fact that Henry Singleton was friends with Claude Shannon, the inventor of information theory, a universal genius, one of the rare universal geniuses that the world has seen, right? And Claude Shannon. And Claude Shannon was actually on the board of Teledyne and an advisor. So when Henry would go out and when he was building his conglomerate, trying to buy through acquisitions, he would actually have to be able to tap. Imagine be able to like call up Claude Shannon, be like, what do you think about this new technology?

Starting point is 00:25:13 It's just crazy to me. Anyways, this is what Shannon said. Check this out. He all, Shannon is talking about Singleton, observing Singleton, how he works. He says he always tries to work out the best moves. And maybe he doesn't like to talk too much because when you're playing a game, you don't tell anyone else what your strategy is. Where did the strategy come from? The same place that Buffett now in this book that I'm holding in my hand is saying came from him sitting there in his room thinking. Singleton was obviously extremely well read just like Buffett as well. Let me go back to Buffett. I'm going to repeat this for the third time. We do not read other people's opinions. We want to think.

Starting point is 00:25:47 We want to get the facts and then think. Now, we're many pages deep in the book, and they go back to this theme. Default to know, keep an open calendar so you can actually think. The difference between successful people and very successful people is that very successful people say no to almost everything. That was Buffett. Munger says, both Warren and I have amazingly open calendar and we're very reluctant to put new commitments in there. I like flexibility and it has worked for me.

Starting point is 00:26:10 And so Buffett takes this so seriously that, you know, at the point they're talking about this, I think he owned like 80 different businesses. And so he would actually, every few years, he would write the managers of his business a letter. And it's all about the fact that Buffett ruthlessly guards his time. This is what the letter says. Please turn down. This is Buffett writing, right? This is to all of the CEOs and the managers of all the subsidiaries in Berkshire. Please turn down all the proposals for me to speak, make contributions, etc. Sometimes these

Starting point is 00:26:44 requests for you to act as an intermediary will be accompanied by, Oh, it can't hurt to ask. It will be easier for both of us if you just say no. And he means no right away. As an added favor, don't suggest that they instead write or call me. Multiply 80 or so businesses by the periodic. Oh, I think he'll be interested in this one. And you can understand why it's better to just say no firmly and immediately. And then they touch on a main

Starting point is 00:27:09 theme in the history of entrepreneurship, the importance of frugality, guarding the resources that you have, not spending foolishly, no matter how much money you have. Charlie and I have always been big fans of living within your income. And if you do that, you'll have a whole lot more income later on. Munger says, if you want to get rich, you've got to underspend your income. You've got to intelligently invest the money that you haven't spent. The money will work for you for a longer period of time. You have to save. And so I actually found, I'm going to reread his biography. And I got another book on him too. I actually found this guy because Buffett, it's another entrepreneur that Buffett and Munger talk about from history. It's this guy named James J. Hill. And I covered him all the way back in episode

Starting point is 00:27:49 number 96. And he's one of the, maybe the greatest railroad builder in history. And there's something that he talks about and he would repeat in his work. You know, this is 1800s, probably, let's see, mid to late 1800s when he says this. And he said, if you want to know whether you are destined to be a success or failure in life, you can easily find out. The test is simple and it's infallible. Are you able to save money? If not, drop out. You will lose. You may think not, but you will lose as sure as you live. The seed of success is not in you. So then they spend some time talking about the dangers of debt, that debt is an easy way, a common way for really rich people to go broke. Munger says, smart men go broke in three ways, liquor, ladies,

Starting point is 00:28:32 and leverage. Buffett says, whenever a bright and rich person goes broke, it's usually because of leverage. Any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeros, even when it's employed by very smart people. One of the things you will find, this is still Buffett talking, one of the things you will find, which is interesting, and people don't think of enough, with most businesses and with most individuals, life tends to snap you at your weakest link. You can have somebody whose aggregate performance is terrific, but if they have a weakness, maybe it's with alcohol, maybe it's a

Starting point is 00:29:11 susceptibility to taking a little easy money. It's the weak link that snaps you. And frequently in the financial markets, the weak link is borrowed money. And so the other side of the coin of this idea is like, hey, they tell you over and over again, you got to be real careful with debt, be real careful with leverage. They will preach the fact that you should try, your business should have mountains and mountains of cash. Cash is a lot like oxygen. You don't notice it 99% of the time, but when it's absent, it's the only thing that you notice. We have maximum financial flexibility to face both hazards and opportunities. Buffett says, we our cash largely in U.S. Treasury bills and avoid other short term securities yielding a few more basis points.

Starting point is 00:29:52 Somebody sent me and this is not my world, so I don't know. But somebody said that they right now they have 100 billion in cash earning 4 percent risk free. We agree with investment writer Ray DeVos observation. More money has been lost reaching for yield than at the point of a gun. And why do they say that? Because cash insures your survival, something you and I talk about over and over again. You have to stay in the game long enough to get lucky. Buffett says it pays to conduct your affairs so that no matter how foolish other people get, you're still around to play the game the next day.

Starting point is 00:30:21 Munger says, I am not a victim. I am a survivor. And then they start giving advice on just interpersonal relationships. You're going to like people, you're going to deal with bad people throughout your life. That's inevitable. But how you can't control what they do other than you can avoid them, obviously, but you can control your reactions. And so then Buffett in the middle of this, he talks about, hey, this is some of the best advice I ever got in my life. And so he says, 40 years ago, Tom Murphy, who was the former CEO of Cap Cities and ABC, gave me one of the best pieces of advice I've ever received.

Starting point is 00:30:49 He said, Warren, you can always tell someone to go to hell tomorrow. You haven't missed the opportunity. Just forget about it for a day. If you feel the same way tomorrow, then you could tell them, but don't spout off in a moment of anger. And then this is one of the most important

Starting point is 00:31:04 fundamental insights into human nature that I've learned personally from Charlie Munger. And then this is one of the most important fundamental insights into human nature that I've learned personally from Charlie Munger. And he's like, listen, everybody thinks that the world is driven by greed, but it's the world is not driven by greed. It's driven by envy. And your life will be a lot better if you can just eliminate envy from your life. And so Charlie says, I've heard Warren say half of it. And I guess he learned this from Warren. I've learned I've heard Warren say half a dozen times, it's not greed that drives the world, but envy. Buffett says, our experience is that envy is what really drives people. You can give someone a $2 million bonus and they're happy until they see the next guy got $2.1 million

Starting point is 00:31:37 and then they're miserable. And Munger illustrates why this is so ridiculous. If you're comfortably rich and someone else is getting richer faster than you, so what? Someone will always be getting richer faster than you. This is not a tragedy. Someone else is always going to be doing better at any human activity you can name. Then we go back to this idea, something that I believe with my whole heart, that time is the best filter. Buffett says Gianni Anginelli maybe is the former chairman of the car company Fiat. So says Gianni once told me, one time told me, when you get older, you'll have the reputation that you deserve. You can fool some people some of the time, but not forever. I believe the same is true for companies. And now when I read that, that's probably like what the third or fourth

Starting point is 00:32:22 time. I think the fourth time I've read that particular highlight, something else just jumped at me. Where he says, hey, you know, with time, you can't fool people. You can fool people some of the time, but not forever. Over time, you're going to have the personal reputation that you deserve, and your company will have the reputation you deserve. Buffett says something in this book that's fantastic, where he describes what an actual brand is. And he says a brand is a promise. So I'm not sure why, but when I reread that section just now, that's the idea that jumped, that popped in my mind. And so then Charlie adds

Starting point is 00:32:50 to this, the best way to get a reputation for yourself and your business is to actually work backwards. He is going to quote Sol Price. So Sol Price, Buffett and Munger are both fans of Sol Price. I did an episode on him. It's episode 107. I would make the argument that Sol Price is the most influential retailer to ever live. Sam Walton, Trader Joe, Jim Senegal, Bernie Marcus from Home Depot, Jeff Bezos, they all used ideas in their business, variations of Sol Price's ideas in their business. And so we have Munger talking about like, okay, well, you should decide what kind of business that you do not want, right? So he says, Sol Price used to say success in business came from deciding which business you could intelligently do without. He had a list of businesses that he did not want. He didn't want

Starting point is 00:33:33 business from people who wrote bad checks. He didn't want business of people who clogged up his parking lot without buying very much. He carefully invented a system. He's the one that came up with the idea. Everybody knows Costco. That Costco idea is Sol Price's idea. It was just actually brought to life by Jim Sinigal, which is Sol Price's mentee. Jim, when he was real young, actually worked for Sol Price. He greatly admired him. In fact, the autobiography, excuse me, the biography of Sol Price that I read for episode 107, Jim Sinigal wrote the forward or the introduction of that book. And he says, like when people would interview him,

Starting point is 00:34:06 it was like, oh, you knew Sol for 50 years before he died. You must've learned a lot from him. He's like, no, no, I didn't learn a lot. I learned everything, everything from him. So that's what Charlie's talking about. He's like, well, he just designed a business. You know, how many businesses do you have to pay a membership for you to shop at?

Starting point is 00:34:21 Like, that's extremely rare, but why is he, or unusual? Why is he doing that? Because he's designing, he's getting to the business he wants by avoiding the things he does not want. And that membership fee, that barrier to entry eliminates a lot of things that Charlie's talking about here. He didn't want business of people who clogged up his parking lot without buying very much. He carefully invented a system where he kept those people out and succeeded by deciding what he would be better off without and avoiding it. This is a very good way to think, and it is not common. And so then Buffett goes into something that he repeats over and over again.

Starting point is 00:34:55 In fact, one of the best gifts I've ever gotten is for Father's Day, my wife got me this mug and it says like the wisdom of Warren Buffett. And all it is is Warren's face with a bunch of quotes that he said. And all I do is like fill up this cup multiple times a day with espresso and then read. Right. And one of my favorite things is because it's like these ideas are in a book and they're in the podcast. And yet this like physical item brings that out and it's like serves as like a reminder every day. And on one of the things that he says on this, this coffee mug is the best thing I did was to choose the right heroes. This is something that him and Munger repeat over and over again. I'm going to read this section real quick and then tell you something Munger also says. I think it's very important to have

Starting point is 00:35:37 the right heroes. Choose your heroes carefully and then figure out what it is about them that you admire. Then you figure out how to do the same thing. It is not impossible. And then I've actually seen clips from Warren saying this at the shareholder meeting. And then Charlie adds, you also should not relegate your selection of heroes to the living. That the eminent dead, obviously a main theme of this podcast, right? The eminent dead provide some of the best models around. And then they have some more advice for our career, for our work, that you really should try to maneuver yourself. Get yourself in a position where you can do work that you have an intense interest in. If you listen to my three part series about Paul Graham's essays, episode 275, 76, and 277, this is a main theme of his

Starting point is 00:36:22 writing as well. The big thing you want to do is you want to enjoy every day. So you want to have a job that you love and you want to work with people that you like, admire, and trust. Munger says, in my whole life, I have never been good at something I wasn't very interested in. It just doesn't work. There is no substitute for strong interest. They also talk about a very common mistake that smart people make, that successful people make, is because they were successful in one domain, that knowledge actually transfers to other domains. The best example of this is, I always say, Henry Ford's one of the entrepreneurs I most admire professionally, not personally. And I really like his philosophy of company building. But you see this illustration if you read about Henry Ford.

Starting point is 00:37:04 He was a master at building the Ford Motor Company. But then he thought like he could control like the morals of his like his employees. He thought he could like he could figure out a way to stop World War One from happening. He had all these things where he failed spectacularly at where he thought, OK, well, I have some kind of knowledge I derived from my business and it's applicable to this domain. And it definitely wasn't. Buffett says for us to think that because we made a lot of money, we're going to be better at giving advice on every subject, well, that just doesn't make sense. That's crazy. I'm very suspect of the person who is very good at one business who

Starting point is 00:37:35 starts thinking they should tell the world how to behave on everything. They start repeating this idea, you really should try to be seeking out and working with and associating only with first class people. Munger says our basic rule has always been that we do not deal with assholes. I have turned down business deals that were otherwise decent deals because I didn't like the people that I'd have to work with. You have to you want to avoid other people who are total rat poison. And there are a lot of them you want to associate with first class people. Then they go back into the most important asset. One of the most important assets in running a business is passion. That is very interesting. Let's say that you want to, they're asked a hypothetical question by a fictitious

Starting point is 00:38:15 character in this book. So that question says, let's say I want to hire somebody. What is important to think about? Buffett says, you look for the logical things, passion, an interest in running the business, honestly, or honesty, passion, an interest in running the business, honestly, or honesty, excuse me. Do they love the business or do they love the money? This is the first filter. Do they love the business or do they love the money? This is the first filter. I mean, real passion. If temperament is the most important personal asset in managing money in business, it's passion. It's also why Jeff Bezos says that missionaries make the best products. Missionaries, not mercenaries. He says mercenaries are in it

Starting point is 00:38:49 just for the money. Missionaries actually care about what the business is doing. What service is that business giving to the world? You want to try to hire people that are complete in alignment with you and look at it like you do, like it's a mission. They also spend a lot of time talking about company culture, the fact that you have to be very intentional how you build the culture at your business that once the culture is in place, it is nearly impossible. You're better off just starting a different company than trying to change the culture.

Starting point is 00:39:14 So it says, we try to provide an environment for them, meaning the managers and the CEOs of their businesses, which is exactly like we'd want if we were running a business. We would like to run our own business in our own way. So they're like, hey, we try not to mess with them, right? We're only working with A players. A players don't like to be micromanaged. And if I had to micromanage them, why did I buy the business to begin with? That doesn't make any sense. We will never allow Berkshire to become

Starting point is 00:39:36 some monolith that is overrun with committees, budget presentations, and multiple layers of management. Instead, we plan to operate as a collection of separately managed, medium-sized and large businesses, most of whose decision-making occurs at the operating level. All of the businesses that we own are run autonomously to an extraordinary degree. In most cases, the managers of important businesses we have owned for many years

Starting point is 00:39:59 have not been to Omaha or even met each other. We adapt to their methods rather than vice versa. So then Buffett talks about like his own strategy. Like what does Buffett think, like what is his competitive advantage, right? He is trying to be a, like not trying to be, he does this. He's a buyer of businesses. I would argue that Buffett's shareholder letters is the greatest single example of content marketing that the world has ever seen. I talk about this more on episode 227, which is the essays of Warren Buffett, where it talks about like he publishes a letter that he shows like he was interested in buying this person's business. He actually publishes the letter that he sent the person, the owner of the business.

Starting point is 00:40:40 I feel it's like a masterclass in product differentiation. And so he touches on how he thinks about this and how he positions himself. And so he says, our long avowed goal is to be the buyer of choice for businesses, particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises, avoid leveraging up acquired businesses, grant unusual autonomy to our managers, and hold the purchase companies through thick and thin. Our record matches our rhetoric. Most buyers competing against us follow

Starting point is 00:41:12 a different path. For them, acquisitions are merchandise. We have a decided advantage when we encounter sellers who truly care about the future of their businesses. If you truly care about your business and the future of it, it's not a merchandise to you. It's not just a big, you know, a big exit. It's like, you actually care. Like if you are going to sell your business, like you care what happens, what happens after you leave the business.

Starting point is 00:41:34 And so Buffett's like, well, if you're one of those people, of course, but Berkshire would be, if you look at our track record, Berkshire would be your first choice. So he says the reverse is apt to be true. Also, when an owner auctions off his business, exhibiting a total lack of interest in what follows, you will frequently find that it has been dressed up for sale. And therefore, what Buffett's saying, it's not a high quality, like, if somebody truly cares, most likely they

Starting point is 00:41:59 truly they built a like a wonderful business. Somebody's just in it to start scale and sell, they probably don't give a shit. And so therefore, the long-term prospects of a business like that are very suspect and Buffett's not interested in buying those kinds of businesses. There is a great line in the Anthony Bourdain biography that I read for episode 219 that jumps out when I read this next sentence. It says, life isn't a green room for something else. Go for it. Buffett says, we're here on the earth only one time. So you ought to be doing something that you enjoy as you go along and you can be enthusiastic about.

Starting point is 00:42:31 Then we have two great quotes. The first one is from Buffett. When a problem exists, whether it's in personnel or in business operations, the time to act is now, Munger says, wise people step on big and growing troubles early. There's several times in the book that Munger talks about his ability to make decisions very rapidly. We heard Buffett say earlier that Munger has the best 30 second mind that he's ever

Starting point is 00:42:53 encountered. And so in his points, like they have an idea of the businesses that they're interested in, they're in their mind, the characteristics of the stuff they're interested in. So even like he'll get a phone call and within like 15 seconds, like, nope. And he'll just like hang up the phone. He's like, there's no point. I know I don't want this business. There's no point us. Like we have limited time on this earth. Like I'm not going to waste, sit here and just be polite for 15 minutes just to give you a no that I can give you a no in 30 seconds. And so Munger says, spend no time arguing with people whose idea you know to be stupid. I think a main theme that comes up again and again, these life stories that you and I go over is the fact that future opportunities are unpredictable

Starting point is 00:43:27 to you. Like you just have to trust in something, obviously do as good a job as you can with whatever's in front of you. But like there's going to, if you keep going along and you keep getting better, that's going to unlock opportunities you can't possibly predict. And there's a, I feel like there's a current running through the thinking of Buffett and Munger that talks about this. It's like, listen, we running through the thinking of Buffett and Munger that talks about this. It's like, listen, we're not really big into master plans. We know we want to own wonderful businesses. We know we want to own pieces of wonderful business in public markets. But essentially, instead of going deep in this inflexible master plan, we're just going to keep

Starting point is 00:43:58 reacting to the game that's on the field. And so it says, Munger says, I have a deep distrust in master planning. There has never been a master plan. Anyone who wanted to do a master plan, we fired because it takes on a life of its own and doesn't cover the new reality. Buffett says, 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. Charlie and I don't sit around and talk about the future of industries. We have no reports or staff. We just review what comes in and look for companies

Starting point is 00:44:29 with a durable competitive advantage at an attractive price. And so think about that. That is a rather simple plan. We're just going to review what comes in. We constantly get people offering to sell or like we have inbound requests to buy their businesses.

Starting point is 00:44:43 We'll just review it. Is this a company with a durable competitive advantage and attractive price? If it is, okay, we'll buy it. And if it isn't, we'll just sit on our ass and we'll read and we'll think and we'll pile up money. It's really hard to lose if that's the two different modes that you have in your business, right? This goes back into the futility that people just, the futility of trying to change other people's minds. Better to just select different people to work with, that, you know, people just do what they want to do. And Buffett says, I'd say that the history that Charlie and I have of persuading decent, intelligent people who we thought were doing unintelligent things to change their course of action has been poor.

Starting point is 00:45:20 When people want to do something, they want to do something. We don't try to change people. It doesn't work well. We accept people the way they are. And then Charlie passes on a bit of wisdom that he thought was very valuable in running a business. It's from this guy named Carl Braun, who was an engineer and an entrepreneur. And it says, few practices are wiser than not only thinking through reasons before giving orders, so orders to people in your company, but also communicating these reasons to the recipient of that order.

Starting point is 00:45:46 No one knew this better than Carl Braun, who designed oil refineries with spectacular skill and integrity. He had a very simple rule. You had to tell who was to do what, where, when, and why. If you wrote a communication leaving off your explanation of why the addressee

Starting point is 00:46:01 was to do what was ordered, Braun was likely to fire you. Because Braun well knew that ideas got through best when reasons for the ideas were meticulously laid out. People have to know why is what Charlie's telling us. Or even simpler way to think about that is always tell the other person why. Charlie just told us that you should spend no time arguing with people whose idea you know to be stupid.

Starting point is 00:46:24 There's another great line in this regard. You do not have to attend every argument that you're invited to. So then they talk about Charlie's orangutan theory, which I absolutely love. The first time I was introduced to this theory is actually, I read the autobiography of Catherine Graham. It was obviously episode 152. And she talked about that in her case, the way Warren Buffett was helping her learn how to run her business and that she thought that Warren was her version of the orangutan. And so Munger's orangutan theory is this,

Starting point is 00:46:54 if a smart person goes into a room with an orangutan and explains whatever his or her idea is, the orangutan just sits there eating his banana. And at the end of the conversation, the person explaining comes out smarter. There's something about smart people explaining ideas to an orangutan that makes their decision making better. And it's this idea that you're just speaking. This is actually forces you to organize your thought. It clarifies your thinking. It's very helpful. Remember at the beginning of the book, they said repetition is the mother of learning.

Starting point is 00:47:24 Charlie Munger goes back to this idea that it's so hard to get rich, and yet most likely when you get rich, you're going to mess it up. Just don't mess it up. The problem is not getting rich, Munger says. It is staying sane. For whatever reason, extreme success tends to warp people's minds. They cannot handle it. And then I absolutely love this section because it talks about like, you know, we talk about this like history doesn't repeat human nature does, that there's ideas in history books that are worth, you know, billions of dollars. I'm about to read you something, right? That sounds like Warren Buffett said it today. We just went from this zero interest rate environment,

Starting point is 00:48:02 rates are going up, valuations are, you know, being in flux. And yet what I'm about to read you, he said in 1994, I just had a weird experience where, you know, I share a lot of like highlights and stuff from books I read on Twitter and on LinkedIn. I tweeted this out and Elon Musk responded back to it, basically agreeing with what Buffett said again in 1994 from this book. But it's just as accurate as today.

Starting point is 00:48:28 Buffett says the value of every business, the value of a farm, an apartment, or any other economic asset is 100% sensitive to interest rates. That's because all you're doing when you're investing is transferring money to someone now in exchange for a stream of money, which you expect to come back in the future. And the higher the interest rates are, the less that present value will be. Interest rates are to asset prices, sort of like gravity is to an apple. When interest rates are low, there is little gravitational pull on asset prices. This is a crazy sentence, right? And I wish I didn't understand this.

Starting point is 00:49:03 You know, maybe I wasn't like something that was relatively important to like my business, right? But it's just amazing where I just wish I understood. I wish I understood this before now, because if you understood this in 1994 and you knew that this entire time, you could have profited heavily off of this transition back and forth between high interest rates to low interest rates and now from low interest rates to highest higher interest rates. So that's like there's like ideas really will put money in your wallet. It's just a way to think about it. So I'm going to repeat the second paragraph because I interrupted it, but this is very fascinating. And I'll tell you the punchline at the very end. Interest rates are to asset prices, sort of like gravity is to Apple. When interest rates are low,

Starting point is 00:49:38 there is little gravitational pull on asset prices. This is the punchline. Interest rates power everything in the economic universe. Another thing they repeat is the importance, always go for quality. Wonderful businesses are so rare. So if you get into a wonderful business, do not leave it. It is just a rare thing to happen. If you are in a wonderful business for a long time, even if you pay a little bit too much going in, getting into the business, you will get a wonderful result if you stay in that business for a long time. Buffett talks about earlier in his career, he did not really understood the power of brands. It's like this weird abstraction, right? It came from his purchase of See's Candy many, many years ago. He's like, oh, brands are extremely valuable. They're extremely

Starting point is 00:50:17 powerful and valuable. And so this leads to other investments, profitable investments in the future. And so he says, additionally, through watching See's Candy in action, I gained a business education about the value of powerful brands that opened my eyes to many other profitable investments. And this is an example of why I think Buffett's one of the world's greatest communicators that has ever lived, because he can communicate things that are relatively complex, make them simple, uses humor, talks to us in stories. But this was really interesting. I don't think I've heard this before anywhere in any of the book, too. And he talks about, like, there is sometimes, like, you can be inexact.

Starting point is 00:50:54 And there's just times when further analysis is actually a waste of time. And it sounds crazy because of the giant numbers that he is throwing out here in this investment. But he'll tell the story and I think it'll make sense to you at the end. With something like PetroChina, my reaction is similar to seeing somebody who weighs somewhere between 300 and 350 pounds. I might not know how much they weigh, but I know that they're fat. And that's all I'm looking for. Knowing if an opportunity is financially fat and whether PetroChina weighed $95 billion or $105 billion. She's talking about the true valuation of it. If it's 95 or 105, right? It did not make much difference. Why didn't it make much difference? Because at the time it was selling for

Starting point is 00:51:37 $35 billion. Any further refining of analysis would have been a waste of time. In that case, he's saying, just jump on it. You know, it's a good opportunity. It doesn't matter. You're paying $35 billion, whether it's worth $95 or $105. It doesn't matter. It is a financially fat opportunity. So we were very inexact. You'd be amazed at how inexact we are. Using precise numbers is, in fact, foolish. Working with a range of possibilities is the better approach. Now, this, this is one of my favorite. This is where it just clicked for me, right? We're in the middle. You can't see this because you can't see the book that I'm holding. We're in the middle of the book where at this part, they're all talking about like the like the irrational behavior that occurs in bull markets. And that just happens over

Starting point is 00:52:23 and over again. Right. And I'll pull out a couple quotes because I think that's very interesting. I think you and I can learn from that. And yet what sticks out the most to me, clicked, is I'm going to read this first. And I have no idea why I finally had a deeper understanding of this. So Buffett says, Charlie and I do not expect to win you over to our way of thinking. We've observed enough human behavior to know the futility of that. But we do want you to be aware of our personal calculus. And I was like, oh my God. Sometimes I read, and you probably do this too, where like, you know, that's two sentences, you know, three

Starting point is 00:52:56 lines in a book. And yet you just sit there and you stare at it and like you read it again. And you like really think about what the hell he's talking about. And I was like, OK, that is actually really interesting. Charlie and I don't expect to win you over to our way of thinking. We've observed enough human behavior to know the futility of that. But we do want you to be aware of our personal calculus. What I wrote to myself in this click to me. Learning is not memorizing information. Learning is changing your behavior.

Starting point is 00:53:24 There is no point for you and I to spend all this time reading, listening to educational podcasts, if it doesn't change what we do. And if it doesn't change what we do, we didn't actually learn it. He's telling you, we've seen enough human behavior. You're not going to actually do anything with this information that we're giving very few people. He's obviously some people were. And so that's what they talk about. Like most people, they don't say all people, but they're saying most people cannot learn from the experiences of other people. They're saying the exact same thing here that we've seen enough human behavior. We could tell you not to do this. A lot of people are going to do it. The smart ones, the ones that are able to learn from other

Starting point is 00:53:57 people's behavior are going to have a massive advantage because they know that learning is not memorizing information. Learning is changing your behavior. That's like, I love that. Whatever clicked right there is super important for me and hopefully for you as well. It's not memorizing information. Did the book that I read, the podcast I listen to, did it change my behavior? Did it actually have an effect in the real world? Oh, okay. So then they go into like this irrational behavior that you see in bull markets. The sheep story that he told earlier is like a good indication of that. And he's got funny ways. Buffett's got a funny way of reminding you about this. Like when you should feel that you're in danger.

Starting point is 00:54:35 Because it says like the problem is it looks so easy. So that's what attracts you to it. And so he says, but remember the late Barton Briggs observation. A bull market is like sex. It feels best just before it ends. And so Munger says, how do you take advantage of that? If you stay rational yourself, the stupidity of the world helps you.

Starting point is 00:54:54 Wall Street never changes. The pockets change. The suckers change. The stock change. But Wall Street never changes because human nature never changes. Then it goes back to this idea of they don't have a master plan. They are opportunity driven. That's a great way.

Starting point is 00:55:10 That's like a great use of language by them really gets this idea into our brains. We don't have a master theory of capital allocation. We are simply of asset allocation. We simply we're simply opportunity driven, individual opportunity driven. Our acquisition technique at Berkshire is simplicity itself. We answer the phone. Something I love about doing the podcast is getting to read these stories. This idea where multiple people that we cover have figured out the idea of having the value

Starting point is 00:55:36 of having a personal motto, right? So Stan Lee, the founder of Marvel, had like, I can't even pronounce it, but it means like ever upward. Shackleton says, by endurance we conquer. One of my favorites is actually Teddy Roosevelt. And he says, get action. It was actually a personal motto of his father that he adopted for his own life. Very similar to what Munger's saying here. Do not be too timid. Go at life with a little courage. So in the past few episodes, and really, I mean, this is a main theme throughout Founders,

Starting point is 00:56:10 but it has been especially pronounced in, actually, it's episode 283 of Andrew Carnegie and 284 of Andrew Carnegie and Henry Clay Frick. And now that I'm looking at all the episodes, actually 282 of Jeff Bezos talks about this quite a bit in his show Holder Letters 2. And there's two twin themes that run throughout the history of entrepreneurship that I think are most pronounced in the books. And I observe less frequently in like modern day, meaning they're obviously very valuable because they're very hard for people to do. And that's this idea of extreme focus and extreme frugality. I love what Buffett does here. And so he's talking about the fact that if you really think about it, like two different founders, two different business managers. One is unbelievably gifted at cost-conscious, frugal culture. They're watching their costs over and over again. And one

Starting point is 00:56:49 is not. Like they're not, even if they're in the same industry, they're completely different businesses. This is really interesting use of language here. She says, one of the best moats in many respects is to be a low-cost producer. Being a low-cost producer of something that's essential to people is going to be a very good business. It is like comparing a copper producer whose costs are $2.50 a pound with a copper producer whose costs are a dollar a pound. This next sentence is crazy to, would be crazy to most people. I don't think it's gonna be crazy to you and I. Those are two different kinds of businesses. But we're like, no, wait, they're both producing copper. And Buffett's point is like, no, this advantage means it's just a completely other business. Why? One is going to go broke at $1.50 a pound, and the other one is going to still be doing fine. This idea that

Starting point is 00:57:34 they're completely different businesses. Regardless, same product, same industry, doesn't matter. They're completely different just the way they're managed. So let's go back to something that's above this. Why does the business have an edge against its competitors? You're asking yourself questions, right? Ask, why can't company A do what company B does? What stops some competitor from entering the market? And so Buffett's answer to this hypothetical question is the best way to understand this, meaning why does that company have an edge, whether it's a company that you're running yourself or a company you want to invest in? Why do they have an edge? The best way to understand this, meaning why does that company have an edge, whether it's a company you're running yourself or a company you want to invest in? Why do they have an edge? The best way to understand this is to study businesses that have achieved it. The question then is, how does

Starting point is 00:58:11 a company get its edge? And the way companies, he talks about building out the moat, and it's this idea of focus and frugality, leads into his copper story. The moat is not the product. In this case, the moat is not the product. The moat is not the industry. The moat is the management of the business in regards to its costs. This is a very old idea. This is something Buffett is saying in 2009. And yet it's something that Andrew Carnegie knew in 1865. And then this is what I mentioned earlier, my favorite definition of a brand I think I've ever read. A brand is a promise.

Starting point is 00:58:43 That is a quote from Warren Buffett. Then he goes into the important part. Buffett's going to talk a lot about here. It's just like, you know, business can be fundamentally simple. You should be really obsessing over your customers. This is, you know, one of my favorite maxims in the history of entrepreneurship comes from Jeff Bezos. He says, obsess over customers. I don't have any tattoos, but if I did, I almost feel like it'd be beneficial if I tattooed this on my forearm. Just obsess over customers. There's just so much hard-earned knowledge. In those three words, Buffett is going to agree with Bezos here, and he says, in the end, nobody that's ever taken good care of the customer has ever lost. Like Sam Walton once said, there's only one boss, the customer,

Starting point is 00:59:20 and he or she can fire everybody in the company from the chairman down on down simply by spending his or her money elsewhere. And a few pages later, look how this actually ties together, right? These two quotes I'm reading, the ones I just read in this one are, you know, separated by maybe 20 pages or something. This is crazy. Warren Buffett said this about Amazon in 2012. And he says, Amazon could affect a lot of businesses who don't think they will be affected. For Amazon, it is very hard to find unhappy customers. A business that has millions and millions of happy customers can introduce them to new items. It will be a powerhouse and could affect a lot of businesses.

Starting point is 01:00:01 And this is where you really get excited, right? When you think about this, okay, Warren identified that, sees, oh, this is very unusual. It says that in 2012. That is after, because Jeff is writing, you know, in the late nineties, I think 97 is his first, is his first shareholder letter. It's 15 years separating from the first shareholder letter. You know, he'd been practicing that in the few years that he'd been running Amazon before that. But this idea is like, that is the end result of what Bezos set out from day one. He's like, no, we're going to obsess over customers. We're going to build the world's most customer-centric company.

Starting point is 01:00:40 15, 20 years later, and you're seeing Buffett's like, oh, this dude's going to be a problem. And he's going to be a problem for other businesses because he's got millions of happy and satisfied customers. And how do you get millions of happy and satisfied customers? You build the world's most customer centric company and you obsess over customers. This is, how could that not excite you? I love when I see these ideas, they just stick together. And what makes me, or they fit together rather. And what makes me even more excited is like you have another genius. You've got two geniuses there. You've got another genius realizing, oh, what this other genius is doing is genius. All we have to do, I'm not a genius. All I have to do, all you have to do is just copy them. Like, hey, that's a good idea. Thank you very much. I'm going to apply it to my business. This is now rocket science. And it gets even better because on the next page, Munger gives us a tactic. So, oh, you like that

Starting point is 01:01:21 idea? Here's how you actually implement it. One of the directors of the Daily Journal said very simply, we should make a list of everything that irritates our customers and then we should eliminate those defects one by one competitor, which competitor and why? You will find out who the bet, asking this question, you will find out who the best guy in the industry is. He continues, ask the management of each company, which competitor they would be willing to, this is the other side of that, right? It's like, okay, if you could knock out of the game, only one of your competitors, who that is. The other side is what if you had to bet all of your net worth and you could like, you invested all your net worth in one of your competitors? Who is that? Ask the management of each company which competitor they would be willing to put their net worth in for the next 10 years. Then ask which of their competitors they would short. This will provide important

Starting point is 01:02:13 insights into the industry, into your industry, that even those who work their whole life in the industry would not realize. Two pieces of advice, one from Munger, one from Buffett. This is something you and I talk about all the time. If you go to sleep on a win, you wake up with a loss. Charlie Munger says, successful places tend to get bloated. He's talking about successful companies. Successful companies tend to get bloated, fat, complacent. It's the nature of human life. Most companies, when they get rich, get sloppy.

Starting point is 01:02:39 Warren Buffett, this is one way to avoid that. Widen your moat, build an enduring competitive advantage, delight your customers and relentlessly fight costs. And Munger and Buffett both know this because they have this crazy historical base of knowledge and history of business. Munger says, it is the nature of things that most big businesses eventually fall into mediocrity or worse. Look at the history of big companies in the world and the record is not good. Almost all great records eventually dwindle. I think that's the natural consequence of competitive life. And then Munger talks about one of the fiercest competitors that the business landscape has ever

Starting point is 01:03:15 seen. Somebody you and I have talked about over and over again. The latest episode I did on him, which will not be the last, is episode 234, Sam Walton. I've never heard this before. It's absolutely fantastic. It is Charlie Munger's Northern Pike model. And his point is, if you're running up against somebody like this, you should just get out of the business. He says, one of the models in my head is the Northern Pike model. You have a lake full of trout, but if you throw in a few Northern Pike, pretty soon there aren't many trout left, but there are a lot of Northern Pike. Walmart in its early days was the Northern Pike. It figured out how the customer could be better served and just galloped through the world like Genghis Khan. So there's a few ideas here. This

Starting point is 01:03:57 is on passion, intense interest, and working only with winners. This is another, this is one of my favorite of his. This is probably my favorite of Buffett's baseball stories when it regards to business. First, Munger says, I cannot put passion into someone. They either have it or they don't. There's nothing you can do about it. And Buffett goes in the importance of working with winners. My managerial model is Eddie Bennett. So he's talking about this is I'm just going to copy Eddie Bennett, who was a bat boy,

Starting point is 01:04:22 his idea for how I run Berkshire. This metaphor is fantastic. My managerial model is Eddie Bennett, who was a bat boy, his idea for how I run Berkshire. This metaphor is fantastic. My managerial model is Eddie Bennett, who was a bat boy. In 1919, Eddie began his work with the Chicago White Sox, who that year went to the World Series. The next year, he switched to the Brooklyn Dodgers, and they won their league title. However, our heroes, meaning Eddie, smelled trouble. He changed boroughs and joined the New York Yankees in 1921, and they promptly won their first title in history. Now, Eddie settled in, shrewdly seeing what was coming. In the next seven years, the Yankees won five American League titles.

Starting point is 01:04:58 What does this have to do with management? It is simple. To be a winner, work with winners. In 1927, Eddie received $700 for his share of the World Series winnings. This sum, which Eddie earned by working only four days because New York swept the series, was roughly equal to the full year pay then earned by Bat boys who worked with ordinary associates. So just what he made from working four days in the World Series is what a person with his same job would make all year because they were working with ordinary players, right? Eddie understood that how he lugged bats was unimportant. What counted instead was hooking up with the cream of those on the playing field. I've learned this from Eddie. At Berkshire, I regularly hand bats to many of the heaviest hitters in American business. And then just one more thing from Buffett on passion. He says passion adds to your productivity. Munger says the secret to being successful in any field is getting very interested in it.

Starting point is 01:06:01 I could never excel in anything which I didn't have an intense interest. Now, these next two pages are so good. It's essentially saying, unusual records are a result of high levels of talent in low competition environments. Buffett says, I don't want to play a game where the other guy has an advantage. Somebody asked, how do you beat Bobby Fisher?

Starting point is 01:06:22 The answer was, you play him in any game except chess. He continues, one of the best motes in many respects is sometimes just having more talent. And then once you have the talent, he says, you want to work where there is little competition. One of the secrets of life is weak competition. The unusual records have been achieved by those who have worked relatively neglected fields in which the competition was light. Munger now jumps in. Competence is a relative concept. I realized what I needed to get ahead was to compete against idiots. And luckily for me, there was a large supply of idiots. And then I love how much Charlie Munger talks about the importance of practice

Starting point is 01:07:02 in this book. This is something obviously that really stuck in my mind from reading the biography of Michael Jordan on episode 212. So Munger says, obviously, if you want to get good at something, which is competitive, you have to think about it and you have to practice a lot. You have to keep learning because the world keeps changing and your competitors keep learning. You have to go to bed wiser than when you got up. As you try to master what you're trying to do, people who do that almost never fail utterly. Very few have ever failed with that approach, meaning just trying to be a little wiser every day, right?

Starting point is 01:07:32 Very few have ever failed with that approach. You may rise slowly, but you're sure to rise. And so then they go back to this and they go on this for quite a while. The idea is like, we're not listening to the opinions and the predictions of other people. That is just absolutely useless. Forming macro opinions or listening to the macro or market predictions of others is a waste of time. It is dangerous because it may blur your vision to the facts that are truly important. I pay no attention to economic forecasting. I worry about being in a good business with good people. That is all I focus on. This is Buffett speaking

Starting point is 01:08:02 about this entire time. In the 54 years that we have worked together, we have never forgone an attractive purchase because of the macro or political environment or the views of other people. Then Munger says, people have all, he's talking about like the futility of trying to predict the future and forecasting. People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It just happens over and over and over again. And this is an absolutely fantastic line, still about forecasters.

Starting point is 01:08:39 And it says, this is Buffett, market forecasters will fill your ear, but they will never fill your wallet. And then Munger goes into the important role that continuous education, seeking of knowledge that him and Buffett have dedicated their lives to, why that was so influential with the record that Berkshire was able to achieve. What people mean when they say a man has common sense is uncommon sense. We don't have any new tricks. We just know the old tricks better. Berkshire loves education and it loves people who like to learn. I think the one thing that we did that worked best of all, we were always dissatisfied with what we already knew. We wanted to know more. If Warren and I had stayed frozen in time, Berkshire would have been a terrible place. It's only that we kept learning that made it work, and I don't think that'll ever stop. Had Warren

Starting point is 01:09:32 not been learning all this time, our record would be a mere shadow of what it is, and he's actually improved since he passed the age at which most other people retire. Most people don't even try this. It takes practice. And that is where I'll leave it for the full story. Highly, highly recommend buying the book. The great thing about this book is you don't have to read it all at once. You don't even really have to read it in order. That's the way I did. But I think it's just a great thing to keep out. You pick up, maybe read five, 10 minutes, maybe read a few pages. To me, it's really a tool, a way to download the thinking of Buffett and Munger into your brain consistently. So if you buy this book using the link that's in the show notes on your podcast player,

Starting point is 01:10:14 you'll be supporting the podcast at the same time. Another great way to support the podcast is to sign up to the Founders Premium Feed. The Founders Premium Feed contains AMA Ask Me Anything episodes. Subscribers to that feed get to ask me questions directly, which I then answer those questions on AMA episodes on the Founders Premium feed. If that sounds interesting to you, that link is down below in the show notes and of course available at founderspodcast.com. That is 286 books down, 1,000 to go, and I'll talk to you again soon.

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Founders - #286 Warren Buffett and Charlie Munger

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