Founders - #295 I had dinner with Charlie Munger

Starting point is 00:00:00 I can't believe this happened. I still, I still cannot believe this happened. As it was happening, I couldn't believe it was happening. It reminded me of a scene in one of my favorite documentaries. This is a documentary you can watch on HBO. It's called The Defiant Ones. It's about the partnership between Jimmy Iovine and Dr. Dre. That is the description that it will say the documentary is about. What it's really about it will say the documentary is about. It's a documentary about entrepreneurship. It's a documentary about chasing and running down a dream. And one of my favorite scenes in that documentary is when Eminem is describing the very first time he met Dr. Dre. Eminem is completely unknown at this time. He's not assigned. He's not signed to any record label.

Starting point is 00:00:41 Dr. Dre is already a legend. And he says, I'm looking at Dre like, dude, I see you on TV all the time. You're one of my biggest influences ever in life. This is the greatest producer and I'm at his house. And I just rewatched that clip from documentary because that's exactly how I felt. I got to spend over three hours with Charlie. I got to see his library. I got to have dinner with him. It was probably an hour into it where it stopped feeling like an out-of-body experience. If you would have asked me before this, out of everybody living, who would you most want to have dinner with? Charlie was at the top of that list. I've said this before, and I really mean it. To me, Charlie is the wise grandfather I never had. One of my grandfathers died when I was too young to remember him. The other one is a psychopath and a monster and dumber than a bucket full of rocks. from listening to him talk never in a million years would I think because I sit in a room by

Starting point is 00:01:47 myself for half a decade reading biography after biography after biography every day for hours and then record what I learned and put it out into the world would I possibly there's no possible way I could think that leads me to being able to meet him and not only meet him, but I got to, I wrote him a letter in advance of meeting him and then being able to tell him in person, it's like, this is not hyperbolic, man. You changed my life. Your words and your ideas shaped my thinking. And this idea where people say, don't meet your heroes, you know, you're going to wind up being disappointed. I had the opposite experience with him. Not only was he unbelievably smart, but he was unfailingly polite. He was a gentleman with brains. And so I've thanked them privately, but it's important for me to thank them publicly as well.

Starting point is 00:02:35 Andrew Wilkinson and Chris Barling are the founders of Tiny. They're the ones that set up this dinner with Charlie Munger. And so this episode that you're about to hear is going to be a little different. What I did was the week leading up to The Dinner with Charlie, I reread the Tao of Charlie Munger. Then I had Dinner with Charlie. Then I came back and recorded a podcast on the book. But as I was recording, I added in commentary and other lessons and interesting stories that I learned at the dinner. I hope you enjoy it. And thank you for listening. In the Chronicles of American Financial History, Charlie Munger will be seen as an enigma wrapped in a paradox. He is both a mystery and a contradiction at the same time.

Starting point is 00:03:12 Warren Buffett said, Charlie's most important architectural feat was the design of today's Berkshire. The blueprint he gave me was simple. Forget what you know about buying fair businesses at wonderful prices, and instead buy wonderful businesses at fair prices. Consequently, Berkshire has been built to Charlie's blueprint. My role has been that of general contractor, with the CEOs of Ber business and investing geniuses of the 20th and 21st centuries? Therein lies the mystery. Charlie spent much of his youth reading, and that is where he discovered a larger world than the neighborhood of Dundee, where Warren Buffett's family also lived. The two boys attended the same grade school and high school, though they were seven years apart in age. In fact, one of Charlie's first jobs was working for Warren's grandfather

Starting point is 00:04:15 at the Buffett neighborhood grocery store. He learned about taking inventory, stocking shelves, pleasing customers, the importance of showing up on time for work, how to get along with others while accomplishing a joint task, and running the cash register, where money, the lifeblood of the business, flowed. Omaha in the 1930s had distinct ethnic immigrant neighborhoods. Many immigrants worked for the railroad and meatpacking plants whose operations were centered in Omaha. Charlie went to public school with the children of those immigrants and as a result developed an appreciation not only of their cultures but also of the commercial aptitude and the willingness to work unbelievably hard

Starting point is 00:04:57 to give their children a better life. That's actually something that Charlie's going to talk about later in the book as well where he talks about the difference between the work ethic of like up and coming countries, like people with immigrant mentality compared to people born in like rich countries. And when comparing the two different approaches to like their work ethic, he says something funny. He's like, the only people that are surprised when they lose to people like that are idiots. Back to this overview of Charlie's early life. After high school, 17 year old Charlie enrolled in the University of Michigan to study mathematics. He turned 19 a year after Pearl Harbor, dropped out of college, and joined the U.S. Army. The Army sent him to Caltech in Pasadena, California to study meteorology. There he fell in love with the sunny Southern California weather. While the teenage Warren Buffett was busy learning

Starting point is 00:05:39 about odds and probability at the horse racing track in Omaha, Charlie was learning this important investment skill while playing poker with his army buddies. And there's actually two maxims that I've heard him repeat that I've never forgotten that tie into this. He says, if you don't learn elementary probability, that you go through life like a one-legged man in an ass kicking contest. And another thing that he repeats is that you should remember that good ideas are rare. And when you find one, you have to bet heavily. So back to this, that's where he learned to fold his hand when the odds were against him and bet heavy when the odds were with him, a strategy he later adapted to investing. After the war, Charlie, who did not have an undergrad degree, applied to Harvard Law School. He was rejected. After a phone call from Harvard Law's retired dean, who was a Nebraskan and

Starting point is 00:06:23 family friend, he was admitted. He has never forgotten the importance of having friends in high places. After law school, Charlie moved back to Los Angeles, where he joined a prestigious corporate law firm. One of my favorite quotes that I've ever heard Peter Thiel say is he says most people systematically undervalue their time. As we're about to see, Charlie did not. I just wrote so smart next to this paragraph I'm about to read to you. Charlie thought a lot about business during their time. As we're about to see, Charlie did not. I just wrote so smart next to this paragraph I'm about to read to you. Charlie thought a lot about business during that time. He made a habit of asking people what was the best business they knew of. He longed to join the rich elite clientele his law firm served. He decided, this is the part about not undervaluing

Starting point is 00:06:59 your time. He decided that each day he would devote one hour of his time at the office to work on his own real estate projects, and by doing so, he completed five. He has said that the first million dollars he put together was the hardest money he ever earned. It was also during that period that he realized he would never become really rich practicing law. He would have to find something else. And we're going to see that he has perfect timing because he is about to find something else. And we're going to see that he has perfect timing because he is about to find something else. This is actually something that Charlie and I, a question I got to ask him, and Charlie and I talked about Ben Franklin, what Ben Franklin, Andrew Carnegie, and what we're going to see Warren Buffett and Charlie Munger had in common. I'll get there in one second. In the summer of 1959, while in Omaha to settle his father's estate, he met two old friends for

Starting point is 00:07:41 lunch. The two men had decided to bring along a friend of theirs who was running a partnership they had invested in and whom they thought Charlie would enjoy meeting, a young man by the name of Warren Buffett. The two began to talk about business and stocks. The conversation became so intense that Charlie and Warren barely noticed when their two friends got up to leave. That was the beginning of a long and very profitable relationship. Charlie asked if Warren thought it would be possible for Charlie to open an investment partnership like Warren's in California. This is way before Berkshire. There's two actually questions I asked Charlie about this or around this rather. Warren said he couldn't see any reason why not. And in 1962, Charlie finally started an investment partnership with an old poker buddy. He also started a new

Starting point is 00:08:24 law firm. Within three years, he stopped practicing law to focus on investing full time. Okay. And so I have so many notes and thoughts about this part of Charlie's life. And I'm so glad I got to talk to him about this. So one of the things that we were able to talk about all the way back on episode 251, I read this incredible biography of Ben Franklin and George Washington. It's called Franklin and Washington, the founding partnership. And so Charlie hadn't read that book, but he knew the story. He knew the relationship between Ben Franklin and Washington. And of course he did. I guess I should pause here to just point out something that was just incredible.

Starting point is 00:08:57 Absolutely incredible was the power of even at 99 years old, how powerful Charlie's mind and his recall. It was incredible. All I could think about was, imagine. Imagine trying to compete with this guy, with that mind, when he was 50 or 60. And it's not like he was working off any notes. Everything just came directly from his mind. So when we were talking about the fact that he was talking about one of the best things that Ben Franklin did, and you see it in that entire book, was Ben Franklin

Starting point is 00:09:29 was like 48 years old when he sought out and tried to build a relationship with George Washington. George Washington, I think, was like 20 or 21 years old at the time. And so Charlie said one of the best things that Ben Franklin ever did, and this is advice to you and I, right? One of the best things that Ben Franklin ever did was that he sought out other impressive people like Washington, but a ton of others, like A players only. He intentionally built relationships with these people. And while we're having this discussion, Charlie mentioned the fact that Andrew Carnegie did this as well. And I just went into great detail of how Andrew did that on episode 284 because one of the people, one of these A players that he sought out was Henry Clay Frick. And so after Charlie explained this to us, I asked him a follow-up question. I was like, well, is this something that you did in your life?

Starting point is 00:10:08 Immediately, his answer was immediate. He goes, absolutely, and still do. So let's go back to where we are in the book right now. He starts this investment partnership, starts a new law firm. Three years in, he's like, okay, I'm going to stop practicing law. I'm going to focus on investing full-time. Charlie is 41 years old, 41 years old when he makes that decision. And so when I got to this part of the book, and I'm going to follow up with another question, I got to ask Charlie about this part of his life was this is the thought that came to my mind when I was reading this, right? We are in this stage of our lives right now.

Starting point is 00:10:39 The book about your life, the book about my life is being written right now. It's so important to think about the younger version of Charlie Munger, the book about my life, is being written right now. It's so important to think about the younger version of Charlie Munger, the younger version of Warren Buffett, because the decisions that that Charlie and that that Warren made at this point in their lives, literally the pages I'm looking at, the decisions they're doing on these pages will affect everything that happens after. The same applies to you and I. And I think reading biographies and thinking about the younger versions of not only Charlie and Warren, but everybody that you and I talk about in this podcast, like that is going to motivate you and I to make the most of what

Starting point is 00:11:15 we're doing right now, because we know the effect that it's going to have on multiple decades in the future. And so let's go into what 41 year old Charlie was doing. Charlie's investment partnership was different from Warren's in that he was willing to take on a lot of debt to do some of his trades. He was particularly fond of stock arbitrage. One arbitrage deal involved British Columbia Power, a company that was being taken over by the Canadian government. The takeover price was $22 a share. BCP was selling for $19 a share. Charlie brought all the shares of BCP he could get his hands on and ended up putting all of his partnership's money,

Starting point is 00:11:48 all of his own money, and all that he could borrow into BCP. The trade worked out. BCP was taken over at $22 a share, and Charlie made out like a bandit. And so that was obviously a risk that Charlie would take early in his career when he didn't have a lot of money that he wouldn't take now, right? In the mid-1960s, Charlie and Warren were busy scouring over the pink sheets. So that's like a pre-internet daily publication of the prices of stocks that were printed on pink paper. They're looking for deals, right? They're looking for a bargain price on a good

Starting point is 00:12:18 company. One of the companies they found was Blue Chip Stamps. So this is really important. The reason I'm pulling this out is because this is an important idea that they are going to use forever. Charlie at this point is in his mid forties. Warren is in his late thirties. So it says blue chip was a trading stamp company. Other businesses would buy trading stamps from blue chip to give them to their customers who would then redeem them for prices that blue chip was offering. This is going to be confusing to our modern day. David Clark, the author, does a great job. He's like, listen, just think of this as an early form of a rewards program. What made the company interesting to Charlie was that Blue Chip had a pool of money called Float. Again, this is an important idea that they're going to use forever.

Starting point is 00:12:58 They had a pool of money called Float. That was created by the lag time between the selling of the stamps and the customers redeeming them. What made Blue Chip's stock attractively priced was the fact that the U.S. government have filed an antitrust action against the company. That's why they're getting a deal. Charlie, as a lawyer, thought the lawsuit would be resolved in favor of Blue Chip, which it was. Charlie, through his partnership and Warren through Berkshire, eventually took control of the company and Charlie became its chairman. By the late 1970s, the float at Blue Chip had grown to approximately $100 million, money that Charlie and Warren could invest. Blue Chip's business model eventually became obsolete. Under Charlie's direction, Blue Chip used its surplus capital to purchase 100% of See's Candies and 80% of a finance company

Starting point is 00:13:42 called Wesco. Just as Warren, this is the important part, just as Warren had taken capital out of Berkshire's failing textile operation to buy a thriving insurance company, Charlie took the excess capital out of Blue Chip Stamp and invested it in profitable businesses. So that is one good idea that's going to lead to the discovery of another good idea, and they're going to combine these two ideas for decades and decades. In 1968, Charlie teamed up with Warren and Sandy Goatsman to form Diversified Retail Company.

Starting point is 00:14:14 DRC acquired a department store called Hochschild Kohn for $12 million. Hochschild Kohn was bought at a bargain price, but it had no competitive advantage and was constantly having to spend precious capital keeping up with the competition. This mistake is going to lead to the discovery of this great idea I just mentioned earlier. During that time, Charlie started seeing the advantages of investing in better businesses that didn't have big capital requirements and did have lots of free cash that could be reinvested in expanding operations or buying new businesses. So let's stop right there. Go back to the beginning of this introduction,

Starting point is 00:14:45 which I'm still reading from and I'm almost done with. Go back to the beginning introduction and what did Warren Buffett said? Charlie's most important architectural feat was the design of today's Berkshire. It's this idea, he says, the blueprint he gave me was simple. Forget what you know about buying fair businesses

Starting point is 00:14:58 at wonderful prices. That's the Garba, Ben Graham strategy, right? So forget about buying fair businesses at wonderful prices. Instead, buying fair businesses at wonderful prices. Instead, buy wonderful businesses at fair prices. In other words, go for great. Aim for quality. Those great businesses throw off a lot of cash.

Starting point is 00:15:15 We can then take that cash and reinvest it. And so I read this part before I had dinner with Charlie. Then I reread this entire section after, and I realized the biggest takeaway what like there was I mean Charlie's a genius like I just cannot believe that I got a chance to talk to him like I remember there's like I got to sit next to him at dinner and he like he looks at you in the eye like he'll turn his head and then look at you and I just I could not believe I had the thought multiple times and I'm not trying to embarrass myself but you know know, I truly love Charlie Munger. Like he is a hero of mine. He is the wise grandfather I never had. And so I had this idea. It's like, I cannot believe that I'm looking at like Charlie Munger

Starting point is 00:15:54 is looking at me and talking to me. That's how much I love and respect like the role that Charlie Munger has played in my life. And so there's a ton of great ideas that I got in a ton of notes. I took, uh, after I got back to my hotel after the dinner. But I think the thing that resonated with me the most is that Charlie has an almost complete indifference to problems. The way I would say is like troubles from time to time should be expected. This is an inescapable part of life. So why are you letting it bother you? And if you're listening to the lessons that he's trying to impart on others, you realize what he's saying is like, you can, the problems are

Starting point is 00:16:28 inescapable. You're going to have some level of problems, but you can reduce the amount of problems that you have in your life by aiming for quality, high quality business and high quality people produce less problems. So one of the notes I left myself after this is like, I don't ever want to forget this. It makes your life easier. you go for great. Great businesses are rare. Great people are rare. But you will have way less problems in your life if you're in a great business and you surround yourself by great people. And at this point in the book, you're seeing Warren and Charlie work themselves through this and realize, oh, this is the we need to course correct here. We need to we have a good strategy. Let's alter it a little bit and it's going to become a great

Starting point is 00:17:06 strategy. So it says when Charlie closed his fund in 1975, it had $10 million in assets and showed an average annual rate of return of almost 25% for the 14 years it was in operation. What is interesting is that in the final years of Charlie's fund, in the year, in the final years of the fund Charlie was running, a highly concentrated portfolio, the holding and blue chip stamp alone accounted for 61% of the fund's investments. And this is something that Charlie and Warren repeat over and over again. He has never been a fan of diversification as an investment strategy. There's a great quote that I have in my read-wise from something I read, either a biography or maybe Warren's shareholder letters in the past. What Warren said, diversification is for people who don't know what they are doing. Look at how the great fortunes were built.

Starting point is 00:17:53 And Warren's point there is obvious. Even if Sam Walton, Estee Lauder, Steve Jobs, Andrew Garney, even if they never made an investment outside their company, if they had 100% of their net worth in their companies, they'd still be fantastically rich. Back to this, in 1979, Charlie became Berkshire Hathaway's first vice chairman. In 1983, Blue Chip Stamp merged with Berkshire Hathaway and Charlie took over as chairman of Wesco. It was from those two positions that Charlie would help Warren make the investment and management decisions that would take Berkshire Hathaway from a net income of $148 million in 1984 to approximately $24 billion in 2016. That is when this book was published. And Warren wraps up the introduction for us in a perfect way. Warren, in summing up Charlie's impact on his investment

Starting point is 00:18:38 style over the last 57 years, said, Charlie shoved me in the direction of not just buying bargains as Ben Graham had taught me. This was the real impact that he had on me. It took a powerful force to move me on from Graham's limiting view. It was the power of Charlie's mind when I read that the first time made me think of one of my favorite quotes from Steve Jobs. Steve realized the exact same thing that Charlie and Warren realized. In everything I've done, this is what Steve said, in everything I've done, it really pays to go after the best people in the world.

Starting point is 00:19:13 Let me read that part again. Warren, in summing up Charlie's impact on his investment style over the last 57 years, said, Charlie shoved me in the direction of not just buying bargains as Ben Graham had taught me. This was the real impact Ben Graham had taught me. This was the real impact that he had on me. It took a powerful force to move me on from Graham's limiting view. It was the power of Charlie's mind. And that was the end of the introduction of the book that I'm

Starting point is 00:19:38 going to talk to you about today and the one I've read for the second time now, The Tao, maybe actually maybe three or four times, The Tao of Charlie Munger, a compilation of quotes from Berkshire Hathaway's vice chairman on life, business and the pursuit of wealth. And it was put together by David Clark. And the reason I said I've probably read this three or four times because the very first time I read it was all the way back in 2019. It was episode 78 of Founders. But I have the hardcover, Kindle, and audible versions of this book. That's how important it is. I hope I can convince you, if you don't already own it, to order it by the time you finish listening to this podcast.

Starting point is 00:20:11 But I re-listened to the audible version over and over and over again. And I think having the hardcover, the physical copy of the book, and just leave it out on the table at your desk. Because the way it's set up is like you have these tiny chapters. There's like 100 or 150 different chapters. And they just start off with quotes from Charlie and then David Clark adding some like context to it. And so you can read the book all the way through, but you don't have to. You can just pick it up, you know, 5, 10, 15 minutes a day,

Starting point is 00:20:35 read some of Charlie's words, and he's going to give you something to think about. So I want to jump into one of his quotes right here. Charlie says, Life is like a poker game wherein you have to learn to quit sometimes when holding a much-loved hand. You must learn to handle mistakes and new facts that change the odds. And so this is some context provided by David Clark. Charlie experienced this with home mortgage lender Freddie Mac.

Starting point is 00:20:55 When Berkshire bought shares in Freddie Mac in the 1980s, it was a very well-run, conservatively managed, profitable enterprise that was involved in the mortgage business. As time went on, Freddie's management branched out into a new line of business in which they were using their quasi-governmental status to aggressively borrow short-term money and then lend it out long-term, the same financial equation that eventually put Lehman Brothers into bankruptcy. Seeing the dramatic increase in risk and the change in the attitude of Freddie Mac's management, Berkshire sold its much-loved investment at a profit in 1999. Nine years later, check out this out, by 2008, Freddie Mac was in receivership. The old management had been fired, and the stock was worth a tiny fraction of what it had been when Berkshire sold its shares. And then the next page is another quote by Charlie.

Starting point is 00:21:45 It says, my idea of shooting a fish in a barrel is draining the barrel first. And so what popped to my mind when I read that is something that's very common and all these history scholars and entrepreneurs have in common, you'll see over and over again if you read their biographies, is they're always trying to figure out how they can build an unfair advantage. I don't mean an illegal advantage, right? An unfair advantage. And the way to think about this is something that Jeff Bezos said one time. And he says, do you really want to plan for a future in which you might have to fight with somebody who

Starting point is 00:22:15 is just as good as you are? I wouldn't. And then Charlie goes into the importance of always advancing your thinking. They talked about, you know, for the first part of Warren's career, he stuck to Graham's playbook. And what they realized is that there was actually quantitative of always advancing your thinking. They talked about, you know, for the first part of Warren's career, he stuck to Graham's playbook. And what they realized is that there was actually quantitative measures in a wonderful business and a truly great business that would have horrified Graham.

Starting point is 00:22:35 And so he says, well, even if they've horrified Graham, we started thinking about better businesses. And then David gives us an example of Berkshire's decision to invest in Coca-Cola that would have never happened if they were just using Graham's playbook. It says, in Graham's investment philosophy, there was no such thing as owning a company for 20 years or longer and letting the underlying economics of the business grow the company and lift the stock price. Charlie and

Starting point is 00:22:58 Warren realized that some businesses have exceptional economics working in their favor that will cause their intrinsic value to increase over time. And so the numbers are going to be a little dated in the book because this book is, you know, seven years old or whatever the case is, but you'll get the point. Berkshire decides to put one point, let's call it $1.3 billion in Coke in 1988. Over the last 27 years of that investment alone has grown to over $17 billion, but that does not include all the dividends that I received in that time period in the year before the book was published. Coca-Cola paid Berkshire $528 million in dividends, a current annual dividend rate of 40%

Starting point is 00:23:37 on the initial investment of $1.299 billion, which I think is a great illustration on the importance of advancing your thinking. And so that concept of get in a good business and stay there, get in a great business and stay there is going to appear over and over again. Charlie says it in many different ways. One is better off buying a business with exceptional business economics working in its favor and holding it for many years than engaging in a lot of buying and selling. Charlie knows that time is a good friend to a business that has exceptional economics working in its favor, but for a mediocre business, time can be a curse. So this is something you hear me repeat over and over again, pops up in these stories, time carries most of the weight. And the reason that's so important to repeat over and over again, because it goes against human nature. It's so hard to

Starting point is 00:24:17 build a truly great business, and yet more likely than not, your truly great business is not going to be destroyed by competition, it's going to be destroyed by you. And so there's another line that Charlie repeats that I think is not in this book, but ties into exactly what he's talking about here. The problem isn't getting rich. It's staying sane. So it's not redundant that Charlie repeats this over and over again. It's really important. Repetition, first of all, is the mother of all learning, but repetition is also persuasive. And the most important person for us to persuade is ourselves. We're in a good business. If you're in a good business, just know that it's human nature to mess it up. Don't mess it up. Just stay there and let time do its work. Going back to another line that Charlie repeats over and over again, the worshiping at the altar

Starting point is 00:25:00 of diversification, I think is really crazy. This is the note I left myself and something I'm trying to apply in my life. One truly great business will make your unborn grandchildren wealthy. And then on the next page, there's one line from Charlie. And I'm like over here writing novels about it. So I'll tell you what popped up to my mind. Mimicking the herd invites regression to the mean. So that's what Charlie says. Mimicking the herd invites regression to the mean. So that's what Charlie says. Mimicking

Starting point is 00:25:25 the herd invites regression to the mean. Now we're getting to my novel and then I have other notes on this too. Charlie and Warren trust their own judgment implicitly. They don't care what other people are doing or thinking. Then I grabbed a quote from episode 286, which is titled, I think, Warren Buffett and Charlie Munger speaking directly to you. And there's a line in the book that I read for that episode. It 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. We do not let other people's opinions interfere. And this also made me think of something that happened when we were having dinner with Charlie. Andrew or Chris, I can't remember which one, from Tiny, asked Charlie a fantastic

Starting point is 00:26:08 question. And the question was, I'm going to paraphrase here. It's not like I was taking notes. I had prepared all these questions and ideas I wanted to talk to Charlie about, and I never looked at my phone one time. And so they asked, were you motivated? Part of your desire to be successful, like this drive to succeed? Did it have anything to do with like proving or like getting the the appreciation? Are they like what did you do it because of your relationship with your dad or your mom? Which is a good question, because this appears over and over again in the biographies that you and I talk about. This idea that came from Francis Ford Coppola's but was really in almost every single story. And it's the idea that you can always understand the son by the story of the father,

Starting point is 00:26:48 that the story of the father is embedded in the son. And so Charlie's answer to the question was fascinating. He says, no, I always had an inner clock. And so Charlie's point there was that he was doing it for him. He did it because he wanted to do these things. He was interested in them, not because X, even if, you know, you obviously love your parents, but those are external factors. Like everything came from internally. He has an inner clock. And so when I was taking notes, I had to paraphrase, like I was trying to think, okay, what are the things I want to never forget this, right? Like

Starting point is 00:27:16 Charlie, like it's a night that Charlie Munger probably won't remember and I'll never forget. And so I wanted to make sure and document like in writing, what are the things that jumped out at me? And so one of the notes I this is one of the notes I left myself. These are not the words that he used. He never used this word, but this is exactly like the impression he left on me. And so I wrote, Charlie has always had an inner clock. He just does what he wants to do and doesn't give a fuck about the ideas or thoughts of others. I think all of that ties back to what Charlie's saying here in the book. Mimicking the herd invites regression to the mean. Charlie Munger was not put on the earth to be average. He has no desire and has never had desire to mimic the herd. Go back to what Warren says. I would say if Charlie and I have any

Starting point is 00:28:00 advantage, it is because we're rational and we very seldom let extraneous factors interfere with our own thoughts. We do not let other people's opinions interfere. And so moving ahead in the book, we see this idea, same idea that we've already gone over, right? Presented a different way. And he talks about the, like, why are you worrying about prediction? I have never been able to predict accurately. I don't make money predicting accurately. We just tend to get into good businesses and stay there. Again, what I write on this page, what I wrote to myself on this page, time carries most of the weight. Stop overcomplicating things. Just get into a wonderful business and stay there. Another idea that Warren and Charlie repeat over and over again is the fact that financial crisis, the equal opportunity, we'll go over this later on because I've

Starting point is 00:28:43 jotted some notes down. He says this in another way. And I just tie in a bunch of the founders that you and I have studied, you know, advance. They use financial crisis because everybody else, again, it goes against human nature. Everybody else runs away. They run towards and they actually wind up growing their businesses by leaps and bounds, by investing and investing into their business when everybody else is running. If you like me live through the 1973 to 1974 financial crisis, or even the early 1990s, there was a waiting list to get out of the country club. That's when you know things are tough.

Starting point is 00:29:13 If you live long enough, you'll see it. This goes back to the main thing I learned from speaking to him, is just this almost complete indifference to problems. Troubles will be, from time to time. They should be expected. They're inescapable. You cannot let them bother you. You can also not let them kill you. Like your business should have redundancy so you can survive them, right?

Starting point is 00:29:32 He's another way that Charlie says this. He says, listen, it's in the nature of stocks that they go down from time to time. And so he talks about keeping cash for this inevitability. Like, why don't you have cash? Why aren't you prepared for this? He knows that cyclical financial crises are just in the nature of capitalism random recessions and crashes are programmed into charlie's buying strategy he lets cat him and warren let cash pile up they wait for a recession and crash even if it means getting low rates of return on their cash holdings as they wait for the

Starting point is 00:30:00 inevitable when the crash hits they make their purchases. As Charlie has said many times, it was not brains that made him so rich, it was temperament. And this is an idea that they're still using in present day. At the end of 2022, Berkshire held $92 billion of treasury bills. And we brought this up at dinner, and he said something like, it was hilarious,

Starting point is 00:30:21 just how nonchalant he was about it. He goes, yeah, the world came around to us on that. And and so in this book they talk about the importance of patience over and over again and they have one line here i'm actually going to read the full quote this comes from uh episode 286 it's a tale of charlie munger it says i succeeded i succeeded because i have a long attention span that's still a fantastic quote but i like the what happens before it and it's just a reminder something i'm trying to obviously do with founders is he says, I think people that multitask pay a huge price. I only do this, right? I only focus on this. This is something I actually like, I got an idea from Charlie and the way I break it down in my own mind, it's only two words. Stop multitasking.

Starting point is 00:30:56 I have like a little Charlie Munger on my shoulder that like admonishes my behavior from time to time. I think people that multitask pay a huge price. When you multitask so much, you don't have time to think about anything deeply. You're giving the world an advantage you shouldn't do. Practically everybody is drifting into that mistake. I did not succeed in life by intelligence. I succeeded because I have a long attention span. And so that quote in this book is under the headline patience. Something that I heard Charlie say a long time ago that I've never forgotten. And I think reading biographies and obviously listening to podcasts like founders is going to play the role that Barron's magazine played in his life.

Starting point is 00:31:32 And so like another way to talk about the importance of patience is he tells a story. He's like, well, you know, I made four or five hundred million dollars from reading Barron's magazine for 50 years. And people are like, what? What are you talking about? And so his whole point is like, listen, I read Barron's magazine for 50 years. And people are like, what are you talking about? And so his whole point is like, listen, I read Barron's magazine for 50 years. I only found, the entire time,

Starting point is 00:31:50 I found one idea that I could act on, only one. I made $80 million on that idea, basically risk-free. Then I took that $80 million and I gave it to Li Lu and he turned it into four or $500 million. And so that is how I made four or $500 million from reading Barron's for 50 years. That is one of the greatest anecdotes you could ever hear about the importance of patience. And this is Charlie on the dangers of overconfidence. Smart people are not exempt

Starting point is 00:32:15 from professional disasters from overconfidence. Another way to think about that is he says this in a different way. The problem is not getting rich. It is staying sane. Then they go back into the importance of having patience and waiting for great opportunities. I love this sentence because, again, the reason we could shout these things from the rooftops, most humans are never going to do it just because it goes against human nature and they're incapable of going against our nature, right? And Charlie and Warren are capable of bucking the trend. One of the reasons Charlie and Warren have never worried about anyone mimicking their investment style because no other institution or individual

Starting point is 00:32:47 has the discipline or the patience to wait as long as they can. He then talks about the importance of making sure that you can endure problems. An isolated example that's very rare is much easier to endure than a perfect sea of misery that never ceases. And again, this all ties back to that main theme

Starting point is 00:33:02 where it's like the formula is simple but not easy.. Great businesses and great people getting great businesses, surround yourself with great people. That's going to take care of most of the avoid. What, one of the best things that Charlie said on episode 286, right? That it's crazy how much information he's able to convey to us in three words. And I think they, this all ties together. Wisdom is prevention. And how do you prevent from having to solve problems? You avoid them. Wisdom is prevention. And how do you prevent from having to solve problems? You avoid them. Wisdom is prevention. And how do you avoid problems? You get into great businesses and you surround yourself with great people. Charlie's talking about the difference between an excellent company, which might confront a major problem a few times in a span of 20 years

Starting point is 00:33:39 compared with a mediocre company, which might go from problem to problem year after year. And one way you know that you're around low quality people is because they are a perfect sea of misery that never ceases. They just have one problem after another. My wife has this beautiful way to describe this. She says in Spanish, but it loosely translates to that person can drown in a cup of water. On the next page, Charlie says something that I'm doing in my life, and it's something that jumped out at me, makes me think of something I learned from Ed Thorpe and Jeff Bezos. He says, move only when you have the advantage.

Starting point is 00:34:10 You have to understand the odds and have the discipline to bet only when the odds are in your favor. Something that popped up when I read this page as well is advice that I learned from Ed Thorpe on episode 222, which is only play games where you have an edge. And in his very last shareholder letter that Jeff wrote as the CEO of Amazon, he has another great three-line piece of advice. Differentiation is survival. To understand this piece of advice,

Starting point is 00:34:37 you need a little bit of Charlie history. In the late 1960s, both Charlie and Warren had their own hedge fund. As the bull market of late 1960s raged on, everything became overpriced and Warren could no longer find anything cheap enough to buy. So rather than alter his investment strategy, Warren shut down his hedge fund and returned the money to his partners, putting the vast majority of his own money into cash equivalents. Charlie kept on investing and enjoyed great returns until the stock market crash of 1973 and 1974,

Starting point is 00:35:01 when he lost nearly half of his partner's money. He called it the worst time of his life. Warren, who was sitting on a huge amount of cash because everything running up to the crash had been overpriced, suddenly found himself surrounded by dozens of wonderful companies selling at bargain prices. Another thing I learned from Charlie, aim for durability. In his eyes, durability is a first class trait. More about this now. Charlie and Warren's theory is that a company with a durable competitive advantage has business economics that will expand the underlying value of the business over time. And the more time passes, the more the company's value will expand. That's another way of saying time carries most of the weight.

Starting point is 00:35:39 We can apply that into actionable advice. Get in a great business and stay there. More advice from Charlie's, make sure you have an accurate representation of your business in your mind. I think one should recognize reality even when one doesn't like it. Indeed, especially when one doesn't like it. They talk, Munger and Buffett talk about the importance of stepping on problems early. Like the right time when you have a problem to act is right now. Munger has this great quote, wise people step on big and growing troubles early. Wise people step on big and growing troubles early. And then this is one of the most well-known of Charlie Munger's quotes. It's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.

Starting point is 00:36:22 There must be some wisdom in the folks that say it's the strong swimmers who drown. Charlie's interested in a simple strategy that allows him to post superior results over the long term, the foundation of which is trying not to do anything stupid. Another main theme that Charlie repeats over and over again is the ability to recognize it's not just good enough to recognize an opportunity when it's presented to you, you have to act on it. You do get an occasional opportunity to get into a wonderful business that's being run by a wonderful manager. And of course, that's hog heaven day. Charlie believes that if you aren't buying like crazy, when you have the opportunity to buy a business that has

Starting point is 00:36:55 huge potential, it is a big mistake. And then he has a hilarious story. His whole thing is like, listen, if you have an exceptional, exceptional business, we'll just keep on earning money over and over and over again forever. And so he has a fantastic way to tell the story. His whole thing is like, listen, if you have an exceptional business, we'll just keep on earning money over and over and over again forever. And so here's a fantastic way to tell the story. And he says, when I came out to California, there was this playboy and he spent all his time drinking heavily and chasing movie stars. His banker called him in and said that he was very nervous about his behavior. He told his banker, let me tell you something. My municipal bonds don't drink. I love that. And then Charlie says that learning from history is a form of leverage. The fact is so few people can do this

Starting point is 00:37:31 that and you see this because financials, the financial disasters of today are almost completely forgotten in a year or two. And so this goes back to the idea that Warren and Charlie just trust their own judgment. And so it says, if people weren't wrong so often, we wouldn't be so rich. And so I read that one sentence and without looking up any notes, I just wrote down, I go, okay, what are other people? What are a list of other entrepreneurs that you and I've studied that other people said that what these people were doing wouldn't work? Sam Walton, Steve Jobs, Jeff Bezos, Rockefeller, Edwin Land, Coco Chanel, Andrew Carnegie, Michael Jordan, Kobe Bryant, Larry Ellison, Ray Kroc, John Malone, Henry Ford, George Lucas, the Wright brothers. And if we went to every single episode or biography read so far for founders, the list would be a lot longer than that. This goes back to patience.

Starting point is 00:38:14 And again, this idea of like breaking down what he's trying to say and just very simple, like rules for life. To me, it's like human nature is to be impatient and quit. Just do the opposite. You have to be very patient. You have to wait until something comes along, which at the price you're paying is easy. That's contrary to human nature, just to sit there all day long doing nothing and waiting. It's easy for us. We have lots of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing?

Starting point is 00:38:39 You don't feel active. You don't feel useful. So you do something stupid. And so they break down what is the likely human reaction. If you wake up one morning determined to invest your money, your chances of finding an investment that would meet Charlie's standards is almost zero. So you settle for something less when you could have gotten something more if you just waited. Charlie's approach is contrary to human nature. This is what I mentioned earlier, how that they run in when

Starting point is 00:39:07 everybody else is running away and that this is actually a great way to expand your business. We have a history when things are really horrible of wading in when no one else will. All these people used economic downturns to their advantage. This is when they expanded. Rockefeller, Carnegie, Henry Clay Frick, and Izzy Sharp. Izzy Sharp is the founder of Four Seasons. And so this came up a few times at dinner. He tells these wonderful stories with amazing recall of like all these different deals or businesses or ideas they came across as they built, you know, Berkshire over the last, what is that, 60 years, 50 years, something like that. And he just has like this tagline. This is like my, again, I wasn't taking notes. This is something I wrote

Starting point is 00:39:40 down after the fact. But really, he's just like like we made so much money because we had cash and we could move fast. Think about how crazy that is. That could be an advantage. Obviously, you're seeing these deals too, which is another advantage that you have to figure out how to build up in your own business. But once you are getting the deal flow and actually seeing the opportunities that are coming to you, the idea is like, we just made a lot of money because we had cash and we could move fast and then the book goes into something that obviously charlie and i share the fact that we're both biography nuts uh hope one day to catch him although now i know i've having seen his bookshelves i have to step my game way up he was on another thing it's like people say don't meet your heroes and i understand that advice but like i just came away like even more impressed by him.

Starting point is 00:40:26 Not only was he unbelievably intelligent, his mind is really powerful, he told amazing stories, super impressive at 99 years old, but he was just unbelievably polite. I asked, hey, Charlie, do you mind if I look at your bookshelf? He's like, go ahead, do whatever you want. I just could not believe how generous he was. So I saw the reason I bring this up is because, you know, I'm thinking I'm getting close to 300 biographies for the podcast. He has so many books I've never even heard of. Like, it was just amazing. In some cases, he's making his own books. He has transcriptions from very

Starting point is 00:40:57 valuable and rare interviews with some of history's greatest founders, and he put them in binders. That's what I mean. It's like, oh, I'm going to I need to set my game way up here. So there's going to be a bunch of books coming over the next, you know, few months to few years that I found on Charlie's bookshelf. And now I'm trying to like, they're very rare books. I have to like go and hunt them down. I was just unbelievably, again, I'm repeating myself, but I was just unbelievably impressed with just how much and how dedicated he was to reading and how he says like that, that made all the difference in his life. There isn't a single formula. You need to know a lot about business and human nature and the numbers. It is unreasonable to expect that there's a magic system that will

Starting point is 00:41:32 do it for you. People are looking for a simple method that they can learn from reading one book that will make them rich. It doesn't happen that way. One is actually better off reading a hundred business biographies than a hundred books on investing. Why? Because if we learn the history of a hundred different business models, we learn when the businesses had tough times and how they got through them. We also learn what made them great or not so great. And so on the next page, it goes back to this idea where it's like, hey, we made a lot of money because we had the cash and we can move fast, right? And essentially saying, hey, these opportunities, they present themselves, you got to make a decision right then. They're not going to like, oh, it's on the open market,

Starting point is 00:42:03 it's going to sit there for months. And so he says, you have to be ready to pounce when the opportunity presents itself, because in this world, opportunities just don't last very long. And so when I got to that section, it made me think of one of my favorite quotes. I got to redo this podcast because it's Marc Andreessen's blog archive, which I still think is fantastic. It's episode 50. I'm going to read two paragraphs from Mark and Jason's blog archive. This was written probably 15 years ago, and it ties into what Charlie's talking about here. This is what Mark said. The second rule of career planning. Instead of planning your career, focus on pursuing opportunities. Opportunities that present themselves to you are the consequence of being in the right place at the right time. They tend to

Starting point is 00:42:42 present themselves when you're not expecting it, and often when you're engaged in other activities that would seem to preclude you from pursuing them. And they come and go quickly. If you don't jump all over an opportunity, somebody else generally will and it will vanish. I am continually amazed at the number of people who are presented with an opportunity and pass. There's your basic dividing line

Starting point is 00:43:00 between the people who shoot up in their careers like a rocket ship and those who don't right there. I am also continually amazed at the number of people who coast through life and don't go out and see and don't go and seek out opportunities even when they know in their gut that is what they'd really like to do. Do not be one of those people. Life is way too short. And so now we got to the part that I mentioned earlier, where he was talking about the fact that people that are coming from poorer countries or that have immigrant mentality, they just work so unbelievably hard, much harder than people who grew up using like wealth and comfort. And you should not be surprised if a person's working and putting in, you know,

Starting point is 00:43:40 two or five or 10 times the effort that you lose to this person. This is this spawned a bunch of thoughts for me as well. And so he's talking about the rise of Korea in the business world. And he says, Koreans came up from nothing in the auto business. So let me pause right there. Chung Ju Young, the most, I've read, you know, 300 biographies so far for the podcast. Episode 117, that is the single most inspiring autobiography that I have read so far. It's called Born of This Land, My Life Story, I think. Chun Ju Young was the founder of Hyundai. He grew up so poor, he had to eat tree bark in the winter to survive as a kid, and he winds up dying as the richest man in Korea. Koreans came up from nothing in the auto business. They worked 84 hours a week for more than a decade. At the same time, every Korean child came home from grade

Starting point is 00:44:23 school and worked with a tutor for four hours in the afternoon. Are you surprised when you lose to people like that? Only if you're a total idiot. And so when I read this part, not only did I think of Chung Ju Young, but I thought of my friend Sam Hinckley was on the Invest Like the Best podcast. And the title is Find Your People. I think it's Find Your People. I will find the actual link and put in the show notes for you. And Sam is an authority on the writing of Robert Caro. I think Caro's multiple part series on Lyndon B. Johnson

Starting point is 00:44:53 is Sam's favorite book. But he says something on the podcast. I took these notes years ago or maybe like a year ago. And I thought it was fascinating. It relates exactly what Charlie's saying here.

Starting point is 00:45:03 And so Sam is talking about like, you know, Carl is famous for writing his series on Lyndon Johnson and is famous for writing The Power Broker on Robert Moses. I read The Power Broker. I'm working my way through the Lyndon Johnson series right now. But Sam says something that's fascinating. He says, Carl profiled two men whose seeds were not high in the tournament of life. They were born without many advantages.

Starting point is 00:45:22 And to get all the way to the top, you probably had to sacrifice everything to the effort. The meta lesson is, if you are not willing to pay that price, you should presume that someone else will. If you want something like the presidency, and then my note here is ours, or being a billionaire, if you want something like the presidency, you should presume there is someone out there who will devote all their time, money, relationships, sense of ethics, everything in sacrifice of that one goal. Of course, that person would win that race. And to me, that sounds a lot like the same lesson that Charlie's trying to impart on you and I here. Are you surprised when you lose to some people like that? Only if you are a total idiot.

Starting point is 00:46:05 Another person Charlie brings up that he admired a lot was Sam Walton. And so this quote from Charlie made me think of a quote that I read in Sam's fantastic autobiography, which I covered for the second time on episode 234. I'll probably read that book. I would imagine I read that book five or ten times throughout my life. I just had lunch with somebody that was in town to have dinner with Peter Thiel, and he said something that was fascinating that Peter had mentioned at dinner. He just randomly said, oh yeah, I was reading this book for the seventh time and he noticed something. And I was like, oh, okay. I thought reading them two times was

Starting point is 00:46:39 enough, maybe three times enough. And again, you're constantly supposed to see people that just take things farther than you otherwise would. Charlie says, we just keep our heads down and handle the head wins and tailwinds as best we can and take the result after a period of years. Sam in his fantastic autobiography said, when he was asked, how did Walmart do it? He says, friend, we just got after it and we stayed after it. And then we're almost to the end of the book and we come to one of my, this is one of my favorite Charlie Munger ideas of all time. In business, we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables, like the discount warehouses of Costco. Costco is obsessed with keeping operating costs to a minimum. So now David Clark is giving us

Starting point is 00:47:21 some commentary on like how extreme they are. And he's going to tie into something I asked, something I got to ask Charlie about Jim Senegal because he knows Jim Senegal. He loves Jim Senegal. It was just hilarious. And I love Jim Senegal too. And I was, well, I'll get there in a minute. So it says Costco is obsessed with keeping operating costs to a minimum. It does not provide shopping bags, saving Costco two to five cents each on plastic bags and 10 to 25 cents each on paper ones. This might not seem significant, but consider this. There's approximately 150 million customer checkouts every year at Costco. That's crazy. So let's say that each checkout, if they provided bags, it costs them 30 cents. If you multiply that 30 cents by the total checkouts, that's $45 million a year. By simply

Starting point is 00:48:00 getting rid of paper bags at checkout, Costco arguably saves itself $45 million a year. And saying Costco's not alone in this kind of thinking, Geico did something that seemed outrageous. Early on, it got rid of its insurance agent and its commission by selling directly to the consumer, thereby reducing which allows its stores to sell us a sofa cheaper than the competition and still keep its margins high. This paragraph is so important. I have a giant exclamation point next to this in the book. The one thing that all of Berkshire's businesses have in common is that they are managed by people who are willing to go to great lengths to keep costs low. That goes for Berkshire's home office as well. It doesn't have a public relations department or an investor services department. And for many years, the annual report was printed on the cheapest paper possible and had no expensive color photos. Note, in recent years, the paper quality has improved.

Starting point is 00:48:59 And the annual report now sports one color photo, which may be a sign that management is starting to slip. And so there's few people in the world that love Costco more than Charlie Munger. I got to ask him, I was like, hey, I love Jim Senegal. You know, the only thing I've ever found him in writing is the fact that he wrote the introduction to Sol Price's biography, which was like his hero and his mentor. And I was like, what's going on? Like, why can't I, I forgot the exact way I said it. It's like, why does like, I asked him like why Jim kept a low profile that it's just so hard to find speeches or writings of Jim. And Charlie's simple answer was that's because he was busy working. I thought there was a lesson there. And then Charlie brings up the fact that this is harder to understand, especially for

Starting point is 00:49:39 people in business, like just how magical that's the only way to describe it. Like a great brand is nothing short of magic. If you think about it, the quote unquote richest person in the world right now, Bernard O'Naught, has built his fortune on the power, the magic of brands. And so they didn't understand, Warren and Charlie didn't understand the magic of brands until they bought See's Candies. It says, when we bought See's Candies, we didn't know the power of a good brand. Over time, we just discovered that we could raise prices by 10% a year and no one cared. Learning that changed Berkshire. It was really important. And this is why it's so important and valuable. Some brand names own a piece of

Starting point is 00:50:13 consumers' minds and they do not have any direct competition. When Charlie and Warren first discovered such companies, they called them consumer monopolies. And I thought this was interesting. One way Charlie found great businesses is by buying a bunch of bad businesses first. Charlie and Warren have both owned a few bad businesses in their day. Department store, a windmill manufacturer, a textile factory, and an airline. Why are those businesses bad? Because they are involved in intensely competitive industries. Think about what Jeff Bezos told us, differentiation is survival.

Starting point is 00:50:43 Because they're involved in intensely competitive industries that beat each other up over price, which brings their profit margins down, kills their cash flow, and diminishes their chances of long-term survivability. Now we know that the secret is always to go with the better business that has a durable, competitive advantage. He mentioned this earlier that is in the nature of stocks to go up and down. If you're not willing to rack with equanimity to market price decline at 50% two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared with the people who do have the temperament, who can be more philosophical about these market fluctuations. I would condense that down even further into an aphorism that you and I could take

Starting point is 00:51:22 with us in the future. Tough times don't last, but tough people do. Average out betting on the quality of a business is better than betting on the quality of the management. But very rarely you find a manager who is so good that you're wise to follow him into what looks like a mediocre business. And so they use this example of Rose Blumkin, Mrs. B, who's my favorite character in all of Warren's shareholder letters. I wish there was, I can't find a biography on her. If you find a biography on Mrs. B, please let me know. Mrs. B started the Nebraska Furniture Mart in Omaha in 1937. She grew it into the most successful furniture store in the United States. Berkshire bought 90% of the company from her when she was 89 years old, and she stayed on managing it with her sons. Five years later,

Starting point is 00:52:05 she gets into a fight with her sons. She leaves in a huff and starts a new store across the street. What harm can a 94-year-old woman do to a multi-billion dollar conglomerate? In no time at all, she had taken so much of Nebraska Furniture Mart's business that Berkshire was forced to spend millions of dollars buying her out a second time. But this time around, they had her sign a non-complete clause, a very wise thing to do, given that she went on to work seven days a week, open to close, so she passed away at the age of 104. But as a general rule, bet on the quality of the business, not on the quality of the management, unless you've got a Mrs. B. In that case, go all in. Mrs. B is going to make another appearance under the section of master plans, which is hilarious.

Starting point is 00:52:48 At Berkshire, there's never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn't cover new reality. We want people taking into account new information. That's a great way to describe it. I think they described it even better in episode 286. They said, we are individual opportunity driven. Our acquisition technique at Berkshire is simplicity itself.

Starting point is 00:53:09 We answer the phone. Individual opportunity driven. And so at the end of this section, it goes back to Mrs. B. We'd rather keep things simple and improvise as we go along. Whenever I think of master plans, I remember Nebraska Furniture Mart's founder,

Starting point is 00:53:22 Mrs. B, who in response to a question about having a business plan replied, yes, sell cheap and tell the truth. So this is a quote you don't hear all the time. It's this idea, ties together these two ideas, the importance of continuing advancing your thinking and then know when to stretch for great opportunities. And so there's this company called Iscar. It's actually the first time they bought a wholly owned company outside the United States. And so Charlie was this company called Iscar. It's actually the first time they bought a wholly owned company outside the United States. And so Charlie was going to describe it now. He

Starting point is 00:53:49 says, we didn't know when we were young which things to stretch for. But by the time we reached Iscar, which we never would have bought when we were young, we knew to stretch for the right people. So stretch for the right people. And so this is a description of what they did. Iscar is an Israel-based worldwide maker of precision carbide metal cutting tools used in industry. It is the dominant player in its field. So Berkshire bought 80% of the company in 2006 for $4 billion. It then purchased the final 20% in 2013 for $2 billion, which shows that it was a better business in 2013 than it was in 2006. Benjamin Graham would have never bought it because it wasn't selling below book value.

Starting point is 00:54:28 Charlie and Warren learned with the purchase of Nebraska Furniture Mart that if the dominant player is large enough and well enough entrenched with its customer base, the cost of entry into its market is much too high for potential competitors. Size and market domination can create, this is the punchline, size and market domination can create their own kind of durable competitive advantage, which is what Iskar had in spades. So something Charlie brought up at dinner as well as the people he greatly admired. We were talking a lot about Benjamin Franklin. He says there was unlikely to ever be another life as remarkable as Ben Franklin's. And another person that he greatly admires, and I saw a bunch of books about, was Lee Kuan Yew. I'm going to

Starting point is 00:55:05 actually do a podcast on Lee's book, which is called From Third World to First Singapore Story, because it says in this book that that book is well worth reading. It actually says Charlie became so enamored of Lee that he commissioned a bronze bust of him to keep the one he owns of Benjamin Franklin Company. So I thought that was interesting. This is what Charlie said about Lee and Singapore. In a democracy, everyone takes turns. But if you really want a lot of wisdom, it's better to concentrate decisions and process in one person. So to repeat that, if you really want a lot of wisdom, it's better to concentrate decisions and process in one person. It is no accident that Singapore has had a much, much better record given where it started than the United States. Their power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.

Starting point is 00:55:53 And so the reason I wanted to include that in the discussion you and I are having today is because when I read that, I didn't think about Lee Kuan Yew and I didn't think about Warren Buffett. I actually thought about Steve Jobs. And it's something that I read in, I read the biography of Johnny Ive, which was fantastic for episode 178. And this idea that founders have absolute control, right? It's better to concentrate decisions and process in one person. And there's a story in that book when Steve comes back to Apple

Starting point is 00:56:19 where he's getting a lot of pushback by some of the people over there. And Jobs just refused to take no for an answer. And because he had absolute control and absolute authority, he could do so. So there's a paragraph in the book of, it's called Johnny Ive, the genius behind Apple's greatest products. And it says, this is what Steve Jobs talking, when we took it, this idea, when we took this idea to the engineers, they came up with 38 reasons they couldn't do it, Jobs recalled. And I said, no, no, we're doing this. And they said, well, why? And I said,

Starting point is 00:56:45 because I'm the CEO and I think it can be done. And they grudgingly did it. And then they get into the importance of the trait that you and I share, this idea of lifelong learning and self-improvement lasts as long as the breath lasts. Because why? Because it's so valuable. There's a compounding effect to knowledge. In Charlie's own life, when he was practicing law, he implemented a self-education regime of one hour a day to learn such things as real estate development, stock investing. It was slow going at first, but after a great number of years and thousands of books read, he started to see how different areas of knowledge interplay with each other and how knowledge, like money, can compound, making one more and more aware

Starting point is 00:57:21 of the world in which he or she lives. I'm usually pretty suspect of formulas, but I actually think this three-part formula is actually really good. These are Charlie Munger's three rules for a career. Number one, don't sell anything you wouldn't buy yourself. Number two, don't work for anyone you don't respect and admire. And three, work only with people you enjoy. And so when I was rereading my highlights last night,

Starting point is 00:57:45 because I knew I was going to sit down and talk to you about this today, when I got to this part again about making mistakes, this is what I wrote at the top of the page This was my main takeaway from my dinner with charlie his complete indifference to problems And this is what he says. There's no way you can live an adequate life without many mistakes In fact one trick in life is to get so you can handle mistakes And so one of my favorite quotes on this actually came from the founder of IKEA. I read his autobiography all the way back on, this is like years ago, it was episode 104. And he has this great line I've never forgotten,

Starting point is 00:58:12 you know, many years since. He says, only those who are asleep make no mistakes. Making mistakes is the privilege of the active. The fear of making mistakes is the root of bureaucracy and the enemy of development. It is always the mediocre people who are negative, who spend their time proving that they were not wrong. The strong person is always positive and moves forward. And so when Charlie says, listen, you're going to go through life, you're going to make mistakes, right?

Starting point is 00:58:38 The fact is that you have to get to a point where you can handle them. I would also say something he mentioned a few times is the importance of learning from mistakes. And so he brought up a few times throughout the night, some mistakes that he had made and then what he learned from them. And it reminded me of this. He has a, there's a short chapter in this book called admitting stupidity. And this is the quote from Charlie that I feel that he definitely applied to his own life. He says, I like people admitting that they were complete, stupid horses asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn. And so before sitting down and rereading this book for like the second or third time or whatever it was, I had listened to the entire audio book. And I heard

Starting point is 00:59:18 once I heard this part in the audio book, I had the thought I was like, oh, that's definitely going in the podcast. I love this. This is another one of his ideas that I'm trying to use in my own work. He says, extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world. And this is the commentary by David Clark. Specialization is the key to survival in any species, and that is the key to success in any business. Specialization protects us from competition. Why? Because specialization presents a barrier of entry to the competition, and the more difficult it is to become specialized, the greater the barrier. If all

Starting point is 00:59:55 we do is what everyone else does, we will spend our lives competing head-to-head with everyone else. But if we specialize in something and excel at it, the specialization will set us apart from the rest of the crowd. Do we take our Porsche to the local car mechanic who works on everyone's car? Of course not. We take it to the shop that specializes in Porsches. It charges us twice the normal hourly rate and gets away with it because it is a Porsche specialist. It is specialists who make the big bucks. And then this next one is titled Secret of Success, which usually I'm very skeptical when I hear things like this, but I really do believe it does most of the heavy lifting.

Starting point is 01:00:31 If we believe, and I think what Charlie said is accurate, but if we believe what he said is accurate is that, listen, problems are inevitable. But if you surround yourself with great people and get into great businesses, it eliminates, wisdom is prevention. It's going to eliminate most of the problems that you have, that you're going to have in life that are under your control, right? So I think that's a hugely important idea. And I would combine it with this. And I think this is the same principle. And he says, I have never succeeded very much in anything in which I was not very interested. If you can't somehow find yourself very interested in something, I don't think you'll succeed very much, even if you're fairly smart. There's another way that I've heard him explain this exact same idea. And that he says an intense interest in any subject is indispensable if you want to excel.

Starting point is 01:01:13 And this is the commentary by David Clark. Charlie often says that the key to being a great business manager is to have a passion for the business. For people who have that, they are artists whose passion for their work drives and defines their lives. Here, Charlie's pointing out that this theory applies to anything that we do in life. To be successful in something, we need to be passionately interested in it. And that passion, more than raw intelligence, tends to determine whether or not we will succeed at what we do. As Steve Jobs said, work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. And I want to summarize that again by repeating this.

Starting point is 01:01:53 An intense interest in any subject is indispensable if you want to excel at it. A few pages later, he goes right back at it. This time it's from the opposite angle that most people are rat poison. You should avoid them. The other side of that is obviously go for great, right? Go for great, I think is the maximum that's going to come out of this podcast that I'll remember the most. Oh, it's just so useful dealing with people you can trust and getting all the others the hell out of your life. Wise people want to avoid other people who are just total rat poison, and there are a lot of them. Wise people want to avoid other people who are just total rat poison. And there are a lot of them. Wise people want to avoid other people who

Starting point is 01:02:25 are just total rat poison. And there are a lot of them. When I read this, this quote from Charlie, it made me think of something that I read in in Warren Buffett's shareholder letters. And it's really this application of the idea they only want to work with other great people. And what warns I'm going to read this this paragraph from his shareholder letters real quick. And really what he's talking about is just most businesses are poorly run to average run. And so he says, our major contribution to the operations of our subsidiaries is applause, but it is not the indiscriminate applause of a Pollyanna. This is Warren writing, by the way. Rather, it is informed applause based upon the two long careers that we have spent intensively observing business performance

Starting point is 01:03:05 and managerial behavior. Charlie and I have seen so much of the ordinary in business that we can truly appreciate a virtuoso performance. Another piece of advice from Charlie, there is no cookie cutter solutions. Think about his answer when he was asked, hey, if you ever had to teach like a class, a business class or a finance class, what would you do?

Starting point is 01:03:24 And he's like, I would take a 100 studies of company history and just talk about what they did correctly and what they did incorrectly. Earlier in the book, he said, hey, you're better off reading hundreds of biographies than just reading, you know, 100 business books. And this is why. It's like when you're doing that, you're just watching game tape. different than a young Kobe Bryant watching videotape of Michael Jordan and Magic Johnson and just constantly being exposed to a million different game scenarios and then using that knowledge in his own work when he's presented with another complex scenario. And it says, beware of cookie cutter solutions. One solution fits all is not the way to go. The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You cannot run all these places with a cookie cutter solution. And then Charlie

Starting point is 01:04:05 talks about the importance of being a learning machine. And you see this, what's amazing to me is, you know, I've read every single book that I can find on Charlie Munger. Hopefully I've covered them all. Charlie at 41 or 45 would get his ass kicked by the 65 year old Charlie, the 70 year old Charlie. He applied this in his own life. Like he took his own advice. Warren is one of the best learning machines on this earth. Warren's investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is. And this commentary by David Clark is one of my favorite sections in this entire book.

Starting point is 01:04:42 There is another point that I've noticed with men and women who truly excel at their craft or profession. They keep on learning and improving themselves long, long after most people would have retired. It's like sharks. They have to swim to live. Learning is just something those people have to do. And a large part of the way that Warren and Charlie learned, not only through the experience, they spent a ton of time reading and then talking to smart people. This is actually another idea that I, that I stole from Charlie and I'm using, I don't know if I told you this, like, hopefully this podcast is, you're like learning something and being entertained by this because I still feel like, like I'm on the high that this happened. The reason I bring that up is because I can't remember if I told you that I got a chance to write a letter to Charlie

Starting point is 01:05:19 before I met up with him. And it was really short, just explaining like the, the influence. I had a chance to tell one of my heroes, like, this is not hyperbolic. Your ideas changed my life. Your thinking has shaped mine. And so I won't read the whole thing, but I do want to read a section. And this is just a handful of these ideas. So I wrote him letters, like I'm using a collection of your ideas as a blueprint for building my business. And I just listed off some of them. And, you know, this is just part, a few of them. Become friends with the eminent dead. Aim for durability. Take a simple idea and take it seriously. Find what you're best at and keep pounding away at it forever. Stop multitasking. Self-improvement lasts as long as the breath does. So that second to last one right there,

Starting point is 01:06:00 to stop multitasking, this is what he says. Look at this generation with all of its electronic devices and multitasking. I will confidently predict less success than Warren, who just focused on reading. And then this is the extension of that idea of reading personal biographies allows one to experience multiple lives and successes and failures. Reading business biographies allows one to experience the vicissitudes of a business and learn how problems are solved. Both Charlie and Warren are copious readers of personal and business biographies. And that last line is an understatement. I thought I've read a lot of biographies.

Starting point is 01:06:30 Charlie and Warren make me look like an absolute amateur. Sam Zell, I don't think I've told you this yet. I'm working on a podcast about it, but I got to also have a two-hour lunch sitting directly across from Sam Zell. Same thing. This guy knew more about business history than I did. Every obscure figure, every obscure book, every obscure company I tried to bring up, he knew the founder,

Starting point is 01:06:48 he knew the company history, he knew the outcome. It was remarkable. And again, just meeting Sam, talking to him, talking to Charlie, it's like, okay, I get done with this. And I'm like, I'm clearly, clearly on the right path. And then Charlie shares a lesson that he learned from his dad when his dad was still alive. I asked my father why he did. His dad was an attorney for a bunch of businessmen in Omaha. I asked my father why he did so much work for a big blowhard, an overreaching jerk, rather than for his best friend, Grant McFadden. He said, that man you call a blowhard is a walking bonanza of legal troubles.

Starting point is 01:07:17 Whereas Grant McFadden, who fixes problems promptly and is nice, hardly generates any legal work at all. And again, that ties into a main theme of this book. Same with businesses. The great ones don't have endless problems. There's a great line that's in the inside cover of this book, and it says, Munger is a deeply perceptive observer of human nature. This next quote from him made me think of that. Something I also wrote down to myself after I had dinner with him. I said, Charlie looks at nearly everything through the lens of history. You aren't changing human nature. Things will just keep repeating forever. And so he says,

Starting point is 01:07:54 all human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you're Warren Buffett, you will respond. Learn from this and find out how to prosper by reinforcing the people who are close to you. Next quote from Charlie. I just wrote simply, this is excellent. You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add and that your best course is to

Starting point is 01:08:32 trust some expert. We are lucky if we get to live to old age. And so he has advice for that. The best armor for old age is a well-spent life preceding it. I wrote down on this page after I reread the highlights last night, another takeaway from my dinner with Charlie, he did this. The best armor of old age is a well-spent life preceding it. And so this is some of his best advice because I think it applies specifically to people like you and I. These like very driven, trying to do something in the world, willing to push yourself, wanting to build a successful business, a successful life. And it's amazing how many wealthy people I know have not heeded this advice yet. And their lives are worse off

Starting point is 01:09:15 at this. He says, I've heard Warren say a half a dozen times, it's not greed that drives the world, but envy. You have to cure yourself of this. Curing yourself of this is key, key for a well-lived life. Charlie is known for saying that self-pity has no utility. Envy doesn't either. Envy has no utility. And then Charlie talks about his favorite habit. That's the habit of reading. I got to see this firsthand. Again, this is advice that Charlie gives. It's advice that Warren gives. It's something I experienced directly when I had lunch with Sam Zell. In my whole life, I have known no wise people who didn't read all the time. None. Zero. You'd be amazed at how much Warren reads and how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking

Starting point is 01:10:00 out. Charlie's always been a voracious reader. As a child, he lived in the downtown Omaha Public Library where, exploring the stacks, he met the towering intellectuals of both the past and present in books. By the age of eight, both Thomas Jefferson and Benjamin Franklin had permanent places on the bookshelf above his bed. It is reading that helped put him ahead of the pack. In fact, this is my oversight that I have not done. I have a biography of Thomas Jefferson. I just haven't read it yet. And I haven't done it from the podcast. Forgot that Thomas Jefferson was one of Charlie Munger's heroes and who he looked up to and influenced his thinking.

Starting point is 01:10:34 So that alone is why I need to do it. And as I'd imagine, Charlie Munger would recommend as well. Next thing, this is definitely really important advice and something you see that Charlie does in his own life. Life is always going to hurt some people in some ways and help others. There should be more willingness to take the blows of life as they fall. That's what manhood is, taking life as it falls, not whining all the time and trying to fix it by whining. As the great American cowboy actor John Wayne once said,

Starting point is 01:11:02 Son, I don't care much for quitters. And then this is Charlie repeating the compounding effect of knowledge. I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up. And boy, does that help, particularly when you have a long run ahead of you. Then he repeats, stop multitasking. I think people who multitask pay a huge price. It was in one of the books, I can't remember if it was on the Bill Gates biography that I just recently did or one of the Warren Buffett biographies, but I read this story where a young Bill Gates and then a slightly older, but still younger version of Warren Buffett,

Starting point is 01:11:42 because I think he's like a decade and a half older than Bill, maybe two decades, something like that, maybe even three. But Warren and Bill Gates are at some kind of dinner or meeting, and Bill Gates' dad is there. And he was asking the group, they were like in a small group, like, okay, what was the one trait, or what was most responsible for your success? And Warren Buffett and Bill Gates both answered the same way. They said focus. And I think if you listen to episode

Starting point is 01:12:10 290 or if you read the book that the episode is about hard drive Bill Gates in the making of the Microsoft empire, you'd realize that he had complete focus on it. In fact, I heard Bill speak later in like some kind of documentary where he said he knew something had changed because when he started having to deal with the antitrust suit that Microsoft was going through for the first time since the founding of Microsoft, he was actively looking for a distraction. So let's go back to this idea that Charlie mentioned, the fact that this is what Ben Franklin did. This is what Andrew Carnegie did. This is what him and Warren Buffett did. You've got to try to build this seamless web of trust with the people that are around you. The highest form that civilization can reach is a seamless web of

Starting point is 01:12:47 deserved trust. Not much procedure, just totally reliable people correctly trusting one another. In your own life, what you want is a seamless web of deserved trust. And if your proposed marriage contract has 47 pages, I suggest you not enter. The corporate culture at Berkshire is that if you can't trust someone, you really shouldn't be doing business with him or her. So Charlie was just telling us that envy has no utility. This is when he talks about the self-pity has no utility at all. Either I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well. Every missed chance in life was an opportunity to learn something and that your

Starting point is 01:13:23 duty was not to be submerged in self-pity, but to utilize the terrible blow in a constructive fashion. That is a very good idea. And I love the fact that, you know, he says that studying from history is a form of leverage. Like hopefully you and I have multiple decades left in our career and think about all the lessons that we're able to observe from other people and learn from other people's experience that we can apply in the same fashion. Charlie did that, but he also had to learn from his own experience. So this is an example of this is the fact that he didn't cry about these mistakes. He learned the lesson and then applied the lesson that he learned to his profit later on in life. If he had never experienced troubles with a business in a very competitive industries like

Starting point is 01:14:01 textiles, shoes, retail, and airlines, he would have never gained the insight into the wonders of owning a business that had a consumer monopoly such as Coca-Cola or See's Candies. He would have never seen how a low-cost producer such as Geico can have a competitive advantage over its much bigger competitors. If he had never experienced the pain of the market crash of 1973 and 1974, he would have never had the foresight to stockpile the cash he used to buy Wells Fargo stock in 2008 and 2009. So there's a lesson I learned from reading two of Arnold Schwarzenegger's autobiographies. It's episode 193. That's the autobiography Arnold wrote when he was like 70. And episode 141, which is the episode that he wrote when he was like 30. And he kind of at the very end, the book ends of him calling a shot saying, hey, the same

Starting point is 01:14:48 lessons that I used to become a world champion of bodybuilding, I'm just going to use to become an actor and build a business empire. So it's kind of interesting that he called the shot there. But one thing he said, he's like, it's very dangerous when you start doubting yourself that you're going to get. Don't worry, the external world is going to try to get you to doubt yourself as much as possible. But it's dangerous when you actually believe you start doubting yourself. This ties into what this story that Charlie's about to tell you and I it's like, it's very dangerous if you start lying to

Starting point is 01:15:16 yourself. And this is a great little story to remember how dangerous that is and how to avoid it. Dean Kendall once told me a story. When I was a little boy, I was put in charge of a little retail operation that included candy. My father saw me take a piece of candy and eat it. And I told him, don't worry, I intend to replace it. Now listen to this fantastic advice that this father gave his son. My father said, remember he's like, oh, don't worry, I'll eat it, I'll replace it later. My father said, that sort of thinking will ruin your mind. It will be much better for you if you take all you want and call yourself a thief every time you do it. He's trying to tell his son, don't lie to yourself. And then this is the second to last piece of advice from Charlie Munger to you and I.

Starting point is 01:15:59 If you have enough sense to become a mental adult yourself, you can run rings around people smarter than you. Just pick up the key ideas from all the disciplines, not just a few, and you're immensely wiser than they are. And finally, he says, over the long term, the eclipse rate of great civilizations being overtaken is 100%, so you know how it's going to end. When we brought up the subject of death, he said he wasn't afraid of it,

Starting point is 01:16:25 and he made a joke saying he just planned to lay there like everyone else does. And that is where I'll leave it. For the full story, highly recommend. I really think it's crazy if you don't buy this book. To me, it's just a manual for life, for business. Keep it around, keep it out, constantly pick it up. If you don't buy the physical copy, at least buy the audible and just listen to it over and over again. And if you buy the book and you use the link that's in the show notes in your podcast player or available at founderspodcast.com,

Starting point is 01:16:50 you'll be supporting the podcast at the same time. If you haven't yet signed up for Founders Premium, that link is also down below and available at founderspodcast.com. That is so you can listen to the AMA, the Ask Me Anything episodes that I've been making. I might actually do a Charlie Munger only AMA episode soon as well. I had that idea earlier today. That's available down below in

Starting point is 01:17:11 the show notes on your podcast player and available at founderspodcast.com. And if you want to join my free email newsletter where I email the top 10 highlights for the books that I read, that link is also below. That is 295 books down. And if I want to catch up with Charlie Munger, 10,000 to go. And I'll talk to you again soon.

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Founders - #295 I had dinner with Charlie Munger

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