400 Pages of Warren Buffett and Charlie Munger In Their Own Words

1. 0:00 – 2:44

   Introducing Buffett and Munger Unscripted and Following Your Curiosity

   1. DSDavid Senra0:00

      So the book that I wanna talk to you about today is Buffett and Munger Unscripted: Three Decades of Investment and Business Insights from the Berkshire Hathaway Annual Shareholder Meetings. It was selected and arranged by Alex Morris, and Alex was kind enough to send me a copy before the book was released. He had a really smart idea. Since I think 1994, all of the Berkshire meetings, or Berkshire meetings, have been broadcast. They've been recorded and broadcast, so anybody can watch them. So he went through, like, 30 years, uh, watched every single meeting, took copious amounts of notes, and then what he created for you and I, really, the way I think about this, is a, it's a, it's a reference tool. So he separated it not by year, but by topic. So you can pick up this book, you know, scroll through the table of contents and say, "Oh, okay, I wanna learn about subject X." You go right to that page, and it'll show, you know, this year at this timestamp, this is what they said about that. So I read the book all the way through in chronological order and did what I always do, which is just abs- take a, a copious amount of notes and, uh, underlines and then, uh, add context, like when ... as I'm reading these notes and highlights, uh, how it relates to the other, you know, 379 episodes that you and I have gone over and the hundreds of History's Greatest Founders that you and I have studied. So I wanna start out with Charlie Munger talking about the importance of creating your own luck by following your curiosity and your intense interest. And so Charlie says, "Warren says he was lucky to find GEICO, but not every 21-year-old was gonna go down to Washington, D.C., start knocking on the doors of empty buildings to try to find something out that he was curious about. So we also made our own luck by being curious and seeking wisdom." Buffett adds to this, "If you enjoy what you're doing, you are likely to get a better result than if you go to work with your teach- teeth clenched every morning." My favorite, th- they, they say variations of the same ideas. Obviously, they repeat the importance of, you know, repetition is persuasive. But the, my favorite way that, that they ever said this is Munger said, "Intense interest in any subject is indispensable if you're going to excel in it." In fact, there's a great quote from this guy named Naval Ravikant that really echoes a lot of Buffett and Munger's ideas, what, what they're saying about here. And e- especially in, in the age of infinite leverage, uh, how important ... I think that idea only becomes more important. It's definitely something I'm betting my life and career on. But Naval said, "If you're not 100% into it, somebody else who is 100% into it will outperform you, and they won't just outperform you by a little bit. They'll outperform you by a lot, because now we're operating in the domain of ideas." Compound interest really applies, and leverage really applies, so I think it's really important. Again, if you enjoy what you're doing, you're gonna get a better result than if you go to work with your teeth clenched every morning. Uh,

2. 2:44 – 6:13

   Role Models, Envy, and Learning From Extreme Examples

   1. DSDavid Senra2:44

      there's another thing that's really important, and Munger talks about having the benefit, both him and Buffett had the benefit of role models that they could emulate inside of their family. Munger says, "I think we're helped because we came from families where there were some admirable people, and we tended to identify other admirable people outside of the family." So inside the family, and there's a maxim that Buffett will repeat, and he talks about the importance of picking the right heroes. So inside the family, think of Buffett's relationship, the fact that he, you know, he had ... he was very close with his father, called his father his hero. Munger was very close with his father, but he also talks about his grandfather, Judge Munger. And one of the things that I think had a, a really big impact on, on the way Charlie conducted his life was the fact that he observed, and they were told stories of, uh, later on in the family as well, that Judge Munger's sound judgment and then also financial strength really helped the Munger, the entire Munger clan survive the Great Depression. He was able to provide jobs. He was able to bail out, uh, some family members. And Munger talked about just how, like, uh, you get the sense of when he talks about his admiration for his, his grandfather that that's the role that he wanted to play inside of his own family as well. Another interesting idea, and what I w- obviously wanna do here is because this is essentially 400, almost 500 pages of Munger and Buffett in their own words. There's almost no other commentary or anything else. So I'm just gonna rip through ideas, 'cause it's very different from, you know, I've done, what, 10 episodes, something like that between, uh, all the biographies of Buffett and Munger. And so what I wanna do here is just rip through idea after idea after idea, because one of the, I think the, the really skills, the most admirable skills that Buffett and Munger both have is they ma- they, they're able to coin phrases that make their ideas, one, easy to understand, and two, memorable. And they do, they also do this by telling short little stories. So just gonna rip through, you know, maybe 100 different ideas that I found most interesting. And even though I've read almost every book that I f- I've found on Munger and Buffett so far, they use different ways to describe the same ideas, so th- that ... They were actually new to me in this book, where later on, Charlie, you know, they, they talk about the fact that you should study as much business history as possible, that you should be reading, you know, every biography you can get your hands on. Uh, Munger's read more biographies than I have. One of the reasons they, they mention this is because Munger states this in a different way, or at least a way that's new to me, where he says you need to, you should pick an extreme example and ask, "What the hell happened here?" So that's something that they repeat over and over again. There's an example of this. Warren says, "I owe a great deal to Charlie in terms of learning a lot about businesses. I've also spent a lifetime looking at businesses, seeing why some work and why some don't. As Yogi Berra said, 'You can see a lot just by observing.' That's pretty much what Charlie and I b- have been doing for a very long time." They talk about the fact that greed doesn't run the world, that envy does, and the one way to, one, you have to cure yourself of envy, and two, you should want to ha- you want, you should wanna deserve any success that comes your way. And again, this comes from something they learned from a family member. So Charlie Munger is telling us that you really should build yourself into a pos- a, a person that deserves what you get. And so Charlie says, "I had a great grandfather. When he died, the preacher gave the talk, and he said, 'None envied this man's success so fairly won and wisely used.' That is a very simple idea. We want to have people think of us as having won fairly and used wisely."

3. 6:13 – 10:38

   Spotting Opportunities in Parallel Industries and the Value of Focus

   1. DSDavid Senra6:13

      And then here's another idea that I absolutely love, that if you're actually paying attention- All right? You can spot opportunities in parallel industries. And so they were talking about, we- I cannot believe how we absolutely missed Google. And why would they, like, why would they even say that? Because they were using Google's ads at Geico, and it was the, the most effective ads that they could possibly find, and then they realized, hey, these ads cost Google almost nothing. So this is what Munger says: "I feel like a horse's ass for not identifying Google better and Warren ads. We had some insights because we were using Google ads at Geico, and we were seeing the results produced. We were paying $10 a click for something that had a marginal cost to Google of exactly zero, and we saw that the ads were working for us. We could see at Geico how well Google advertising worked, and we just sat there sucking our thumbs." So when I, when I thought of that, I didn't think of Warren or Charlie or, or, or Geico or Google. I remember, so th- there's this guy named Jay Gould who I became ob- slightly obsessed with, uh, because I'm always fascinated by, you know, people that reach the top of their profession, who they admire. And so Rockefeller was asked one time, like, "Who's the greatest businessman you know?" And he said without hesitation, "Jay Gould". Cornelius Vanderbilt, when he was the richest man in America, he was in his 70s, he said that Jay Gould, who was in his 30s at the time, was the smartest man in America. So I read a bunch of biographies of Jay Gould, and Jay was, Jay was making a ton of money in the railroad in- industry at the time. And by paying attention to what was happening in the railroad or next to the railroads, he actually spotted a massive opportunity, and that was in the telegraph industry. So I wanna read from this transcript of this, uh, this episode on Jay Gould I did. Uh, so it says, "Jay was keenly interested in the telegraph business. Now, telegraphs went hand in hand with railroading because telegraph companies strung their lines alongside the railroad tracks," the railroad tracks that he owned. And so he started looking into this monopoly, the telegraph monopoly of the day, which was Western Union, and, and Jay could not believe how much money they made. Western Union was a money machine. Jay coveted it. He said, "I'd rather be the president of Western Union than the president of the United States." So I actually love that idea, that you can spot an opportunity in these, uh, industries that are running parallel to the one that you're already operating in. This is a great line, uh, from Warren Buffett, but could definitely be something that Charlie Munger says over and over again. He says, "The world is overwhelmingly short-term focused." So my friend Ho Nam, who's the founder of Altos Ventures, he made me aware of this tweet that he wrote, and I thought it was really interesting. He was reading this book, and in the book there's this quote by this guy named Andy Taylor. So Andy Taylor's actually one that took over Enterprise Rent-A-Car, and he grew it from 78 million in revenue to 24 billion in revenue. And he was asked like, "What allowed you to do that?" And he replied with one word: focus. He continues, "I'm not the smartest person in the room, but I have the ability to focus at a level that most people can't, and I can focus for very long periods of time." He worked on that business for 38 years. He continues, "I never tired of that focus. I never tired of buying cars. I never tired of renting cars. I never tired of service. I don't get bored. Most CEOs don't have the attention span to dedicate four decades of their life to doing the same thing over and over and over again, and doing it really, really well." And so obviously going back to the Buffett quote, "The world is overwhelmingly short-term focused." Well, if you want an edge, you just do the opposite of what the world does. Now, I, I'm gonna repeat this over and over again, 'cause I just, it's probably my favorite, it is my favorite line in the book. You know, you pick an extreme example and ask, what the hell happened here? So they're constantly, because, you know, Munger and Buffett both have this encyclopedic knowledge of business history in their heads, they're constantly referencing ideas they have, and they explain the idea to you and I through stories, and usually it's through the stories of an individual founder or an individual company. And so here's an example of the importance of investing in and partnering, if you can, with talented fanatics. This is Munger: "I always cite the early history of National Cash Register. It was created by a fanatic who bought all the patents, had the best sales force, and had the best production plants. He was a very intelligent man and passionately dedicated to the cash register business, and it was a godsend to retailing when cash registers were invented." Think about that. There was a time where, you know, th- the amount of theft, I think the, the primary, in, in addition to, like, organizing your sales and keeping track

4. 10:38 – 13:47

   Talented Fanatics, Independent Judgment, and Opportunity Hiding in Plain Sight

   1. DSDavid Senra10:38

      of it, but I think it drastically, uh, reduced the amount of theft that would happen, you know, at the actual cash register for your employees stealing from you, in other words. "If you read an annual report prepared by John Henry Patterson," who's, he's describing, who was the CEO of National Cash Register, "any idiot could see that this was a talented fanatic who was very favorably located, and therefore, the investment decision was easy. We have the NCR annual report from 1904. Patterson not only tells you why his cash register is worth to people about 20 times what he's selling it for, but he also tells you that you're an idiot if you want to go into competition with him." Another idea that's explained beautifully with a story that none of this, none of this works if you cannot trust your own judgment. So Buffett says, "You can't expect anybody else to do this for you. People are not gonna tell you about wonderful little investments. You have to find them yourself. When I first visited Geico in January 1951, I, I left, and then the rest of the year I went down and w- would visit leading insurance analysts. I thought I had discovered this wonderful thing, so I went to see these great investment houses that specialize in insurance stocks," and, uh, he wanted to know what, what their opinion was, "and they told me that I didn't know what I was talking about." You can't look around for people to agree with you. You can't look around for people to even know what you're talking about. You have to think for yourself. An ability to detach yourself from the crowd is a quality that you need. Another note that I left myself, and really an idea that I absolutely love. There's just always, it's, it's always shocking to me, and this is I think I got obviously the benefit of reading biographies and studying history in general. There's just always opportunity hiding in plain sight. So think about the last, like, I think, uh, last few weeks. So Jerry Jones was the 76th person, right? Uh, 75 other people before buying the Dallas Cowboys said no. Right? Jerry Jones was the 76, and he said yes. He paid $140 million today. That's worth $10 billion, not including all the money he, you know, and the opportunities, uh, that came from that in the three decades that he's owned the team. Uh, the week before, I did the, the episode on Leon Hess. Uh, same thing. He literally, like Leon Hess, that family company just sold for, like, $53 billion, and it starts with Leon Hess saying, "Hey, that product that you as a refiner is throwing away, I'm going to make a business out of that," in the same way that Sam Zemurray built his banana empire, [laughs] right? Became the richest person in Louisiana, if I'm not mistaken, from saying, "Hey, you're throwing away those bananas because you can't sell them in two days. I'll just sell them in two days," and then obviously building a business from that. But it's shocking the amount of opportunity that's hiding in plain sight. And Warren makes the point where a lot of the things that he's invested in, some of his biggest wins, they were publicly available information. And so he's talking about one, this is, you know, he said this 30 years ago. But he goes, "What is complicated about Coca-Cola?" We're $3 billion pre-tax better off than a few years ago because of Coca-Cola. There's nothing I know about the product, its distribution system, its finances, or anything really that hundreds of thousands or millions of people don't already know. They just didn't do anything about it.

5. 13:47 – 18:04

   Knowing an Industry Better Than Anyone and Keeping a Fortress of Cash

   1. DSDavid Senra13:47

      And then another idea that I think is very important, and I've seen it a few times. John Rockefeller is obviously the, the first example of this. John Malone is another example of this. But there's been tons of examples that, from the biographies that you and I talk about. It's the idea that you can, if, you can go and actually know more about an industry than anybody else. And Warren's talking about some of the due diligence, and really, like, he went out. He wasn't just sitting in his office in Omaha, especially in his early career. He went out and tried to du- dig for information. And I like this idea of saying, "Hey, I'm gonna..." I think there's an opportunity, in this case, the industry is coal. I think there's an opportunity in, uh, in this industry, so I'm going to learn about every single major company in this industry. Uh, the reason I brought up Rockefeller about this is because in the early refining industry, he had this thing called secret allies. And what he'd went, he literally, and the same thing, he wasn't sitting in his office in Cleveland, and then later on when they moved to New York. He went and met every single other oil refiner. They wind up, uh, creating, I think it's called, like, the Refining Association of America, something like that, to band together. And then he would see the books of every single one of his competitors. And two, they g- they gave him a bunch of, um, advantages. Obviously, one, he could figure out, okay, this, this guy's a serious player. He's actually running a good business. This guy sucks. He's gonna go out of business. And he obv- obviously knew which ones he wanted to buy, uh, from this. So I, I think it's a really interesting idea. This is Buffett's version of that. "When I was 23 years old, I got interested in the coal business. I would go out and see the CEOs of eight or 10 coal companies. I'd ask them a lot of questions, but there were two questions I'd always ask at the end. If they had to put all of their money into any other coal company except their own and go away for 10 years, which one would it be and why?" Then the second question: "If they had to sell short in the equivalent amount one coal company, which would it be and why?" It sounds a lot like the Rockefeller example. It's like, "Oh, I see your books. I see how well you're, how well this company's run. You are my most formidable competitor." Or c- in, in many cases, you know, turns into one of his, uh, like, he'd buy it, and they'd turn into partners because he'd g- he'd give them the, uh, Standard Oil stock. Uh, so it says, "I would know more about the coal companies from an economic standpoint than any one of those managers probably would." I'm gonna mention Rockefeller again because there's a lot of similarities between the way Buffett and Munger think and the way Rockefeller did. When I, uh, went to Charlie Munger's house and h- got, got to have dinner with him, he actually said that he thought Rockefeller was the greatest entrepreneur of all time. So Buffett says, "We do..." He talks about the importance of having a fortress of cash. "We do like having a lot of money to be able to operate very fast and very big. We know we won't get those opportunities frequently. Certainly, in the next 20 or 30 years, there'll be two or three times when it'll be raining gold, and all you have to do is go outside." So later in the book, uh, at the very end, Munger gives, Munger and Buffett give a bunch of book recommendations, and Munger heavily recommends reading Titan, the biography of Rockefeller written by Ron Chernow. And listen to this. This is very similar to what Warren was just saying. You know, two or three times it'll be raining gold, and all you have to do is go outside. Says, "It is..." This is now r- I'm reading from Titan. "It is impossible to comprehend, to comprehend Rockefeller's breathtaking ascent without realizing that he was always, that he always moved into battle backed by abundant cash. Whether riding out downturns or coasting on booms, he kept plentiful reserves and won many bidding contests simply because his war chest was deeper." Keeping a fortress of cash is how he kept buying out his competitors and other refiners. And then he has another observation that it's not the, the speed at which you get the information. It's actually the quality. Like, are you actually getting the, the... Your top priority should be the quality of the information that you get. He's saying this in 1994. Imagine, like, the, I mean, the, the, the vast difference between, you know, the world when, when he's making this comment. Th- this problem is so much more pronounced now. And again, I, my, my own personal opinion on this is that, uh, attention spans just keep getting shorter and shorter and shorter. So if you do have the ability to focus on something for a very long time, I think that advantage just keeps getting more and more valuable in the future. But Warren says, "The speed of information really doesn't make any difference to us. It's the processing and finally coming to some judgment that has some utility, and none of that involves anything to do with quick information. It involves getting good information."

6. 18:04 – 26:25

   Building a Business Natural to You and Opportunity Costs

   1. DSDavid Senra18:04

      Another idea that I absolutely love is the importance of building a business that is natural to you. I have, um, I read both of Michael Dell's autobiographies. They're excellent. I'm gonna make episodes on them soon. And in the second autobiography, one of my favorite ideas that he had was, you know, this idea of Dell was completely natural to, to how he wanted to spend his time, and he actually got energy. So where other people in his organization would burn out, Michael Dell was able to keep going because it's like this, I, I designed a business that is completely natural to how I wanna spend my time. And so Warren Buffett is talking about, you know, there's, there's different, bunch of different ways to run your business. Uh, he was talking about there's a bunch of different ways to invest. He was d- he was comparing and contrasting the way he wants to invest with Peter Lynch. And I, I'll skip over m- m-, uh, most of the parts, but I just wanna get to the, the punchline. He says, "I've said on in- on investing, there's more than one way to get to heaven. I would not do as well if I tried to do it the way Peter does it, and he probably would not do as well if he tried to do it exactly the way I do it." So that idea of building a business that's completely natural to you and how you wanna spend your time, and how you wanna actually organize. Like, what is your actual company building philosophy? What do you want to do? Uh, I think it's something you should, you know, uh, spend a lot of time thinking about, and then of course refining over a long period of time. Munger, one, one of my favorite, one of my favorite things about this book is there's just great, you know, stories that Munger tells that really, uh, are self-explanatory and memorable. And here's one: "Berkshire has a substantial shareholder whose father accumulated the original position, and when he died, he left a very large estate. Practically all of it was in two securities, Berkshire and one other outstanding company. A bank was a co-trustee, and the bank officer said, 'You've got to diversify this.' It was a very large estate. And the young man said, 'Well, you know, if my father believed the way you do, he might have been a trust officer in a bank instead of leaving this large estate.'" And this goes with their reoccurring theme. The advice they have is, like, you really should, should be trying to find a wonderful business or build a wonderful business, and if you do that, you'll, you'll have your entire family for generations will be wealthy. And so they said, "If you look at how the fortunes were built in this country, they were built by someone who identified a wonderful business. Coca-Cola's a great example. There aren't 50 Coca-Colas. A really wonderful business is very well protected against the vicissitudes of the economy over time and competition. We're talking about businesses that are resistant to effective competition." So when they're like, "Hey, if you look at how the fortunes in this country were built," that, uh, that popped out into my mind, right? And then the second thought, second thing where like, hey, we're talking about businesses that are really resistant to effective competition, so those two things in- coming one after another in short order, I thought of Michael Bloomberg, right? [laughs] How many people have said, "I, I started a Bloomberg killer"? And the guy 50 years later is just still printing cash. And what was fascinating is, um, Bloomberg's autobiography, I think it's episode 228 of Founders, somewhere in there, uh, it's one of my favorite books I've ever read because, you know, he's unapologetically extreme. What was fascinating is, you know, he had this huge windfall, and he's on Wall Street, and he's just like, "Okay, well, what am I gonna do? Like, what's my next act here?" Um, and he decides, there's actually a line where he's talking, uh, the reader through his decision-making process, figuring out, you know, what's the next thing I'm gonna do, which obviously his next thing he's gonna do is Bloomberg. And he realized, like, actually most of, like, the great, great wealth in the, the country was not through just pure investing; it's the entrepreneurs. You know, I love that line from Nick Sleep, one of my favorite lines ever. It's like, "The greatest investors aren't investors at all. They're entrepreneurs who never sold." You know? Bloomberg still owns all of his company. Uh, so Bloomberg writes in his, his autobiography, "Although few of the great fortunes have been made i- in investing," uh, so, "From John D. Rockefeller to Sam Walton to Bill Gates, great financial success comes from starting businesses with concrete products in the real world, building jobs, creating value, and helping people." And so I think Bloomberg's a perfect example of what Buffett and Munger are saying th- here. If you look at how fortunes were built in this country, they were built by someone who identified a wonderful business, something Charlie Munger repeats over and over again, and this is an idea that I think of all the time, and I try to make all my decisions through this just because I learned it from Charlie. In fact, I was on the phone, uh, with a friend of mine, and he was trying to make decisions, too, and I was like, "You just gotta think of, like, your alternatives. Like, you should, should be running every single f- uh, decision through opportunity costs." Munger says, "All intelligent people should think primarily in terms of opportunity costs." There's a great book, think it's episode 286 of Founders. It's called All I Want to Know Is Where I'm Going to Die So I'll Never Go There. I think it's a Buffett and Munger uncommon common sense, something like that. I forgot the actual subtitle, but [clears throat] it's one, it's one of my favorite episodes I've ever done. If you could only read one book on Buffett and Munger, that's the book I would read, and I wanna pull a line out of that book that Munger says, "Decisions in life are all about opportunity costs, and wise people think in terms of personal opportunity costs." In other words, it's your alternatives that matter. That is how we make all of our decisions. So this idea of using opportunity costs as a filter to make decisions I think is one of the most powerful ideas. This next page, this is re- to me, this is related to opportunity costs. Charlie Munger: "We ordinarily don't like small positions." Buffett: "We like to go in heavy. If we wanna invest in a business through the stock market, we wanna put a lot of money in. We do not believe in a little of this and a little of that." Buffett continues, "If we find an idea that we wanna put $500 million in, we probably would be even happier if we could put 3 or 4 billion in. Good ideas are too scarce to be parsimonious with once you find them." And Munger perfectly summarizes this entire section in one sentence, as he is prone to do. "The whole secret of investment is to find places where it's safe and wise to not diversify." A few pages later, they continue this. "Charlie and I, when we read about one business, we're always thinking of it against a screen of dozens of other businesses. It just happens automatically. But it's just like a scout in baseball thinking about one baseball player against an alternative. It- you only have a given number on the squad. One guy may be a little faster. One guy can maybe hit a little better, that sort of thing. But always in your mind, you are prioritizing and selecting in some manner. My own feeling about the best way to apply that is to just read everything in sight." Again, so they have this historical business knowledge in their head. The way I would put it, I, I love this, um, is Charlie Munger's description. He's 95 when he says what I'm about to read to you, and this is Charlie Munger on Li Lu. And Munger says, "Li Lu is not normal" He is the Chinese Warren Buffett. He's very talented. In 95 years, I have given Munger family money to an outsider to run once. Once in 95 years, and that is Li Lu, and he has hit it out of the park. It is pretty picky, but once I have Li Lu, if I am comparing to him, remember using opportunity cost as a filter, who else am I gonna pick? By the way, that is a good way to make decisions, and that is what we do. If we've got one thing we can do more of, we are not interested in anything that is not better than that. That simplifies life a great deal. And so one way to refine your ability to, to make decisions through opportunity cost, they're constantly talking about, you know, the importance and the value of reading history. If you've never watched a baseball game, and you've never seen a statistic on it, you wouldn't know whether a .300 hitter was a good hitter or not. You have to have some kind of mosaic there that your thinking is implanted against. You'll have a pretty good idea of what happened over time in America, in American business if you do so. He says, "I like to have that material going all the way back. I'll go back and read Fortune, uh, articles from the 1930s on a specific company. I like a lot of historical background on things, just to get it in my head how the business has evolved over time." And I don't know if you can hear that, but I keep flipping pages, and they keep saying the same stuff. When deciding whether to do something, compare it with the best opportunity you have. Next page. Everything we do comes back to opportunity costs. There's a bunch of great lines. I don't think most of these even need explanation. We love working with people who are just plain nuts about their business. The best thing to do is learn from the other guy's mistakes. George Patton used to say, "It's an honor to die for your country. Make sure the other guy gets the honor."

7. 26:25 – 29:18

   Avoiding Ruin, Mistakes of Omission, and Lean Headquarters

   1. DSDavid Senra26:25

      One thing they're constantly preaching to protect yourself against, they've saw so many people go broke because they abused leverage, so avoiding the self-destruction is obviously very important. Big thing you want is to protect yourself against the insanity in market prices and volatility wiping you out, and the way they teach this, in my opinion, the best way to teach this, is these stories. So Munger says, "One of my children knew a man who had a $2.5 million house and $5 million worth of securities, but he couldn't live as comfortably as he liked on the income from his securities, so he got in the habit of picking up easy money. He kept selling naked puts secured by his account, and in due time, he didn't have the $5 million of securities, and he didn't have the house, and he now works in a restaurant." Two things that, that, that Buffett and Munger both repeat is these mistakes that, that tend to be hidden, hidden, which is not buying when you know you have a great opportunity, and then selling too early. So Munger says, "The mistakes that have been the most extreme in our history are mistakes of omission. They do not show up in our figures. They show up in our opportunity costs. In other words, we have an opportunity and we almost do it, but they don't." And so he gives us an example of this that cost him $200 million personally. When I was younger, I was offered 300 shares of Belridge Oil. Any idiot could have told you there's no possibility of losing money and a large possibility of making money, so I bought it. The guy calls me back three days later and offered me 1,500 more shares, but this time, because he was limited on money, I had to sell something to buy the damn Belridge. That mistake of not buying more shares has cost me $200 million. Another idea told in a funny way, uh, is this idea that, you know, they prioritize having essentially like a lean headquarters, low-cost structure, really deliberately understaffed. And so Munger says, "Somebody once subpoenaed our staffing papers on some acquisition. Not only did we not have any staffing papers, we didn't have any staff." And so that reminded me of Steve Jobs when he came back to Apple, was going through some kind of lawsuit. I think it was with probably like with Google. Might have been with Microsoft. But they subpoenaed all of like the, the employee records, and, uh, one of the employees is talking with one of Apple's lawyers, and they're like, "Where's your employee fire, file?" And so he opens a file, and it's like one piece of paper. And so the guy goes to Steve, and he's just like, "Where's our annual reviews? Like, where's all this stuff?" He's like, "I don't bel- Like, why would I give you an annual review? It's ridiculous. I give you feedback all the time." And so this idea is like really question the decisions. Like, do you need this process? Do you need this person? Do we actually need to be doing this? Steve, Steve thought annual reviews were the dumbest thing ever because he's like, "I'm giving you feedback constantly. Why would I wait for twel- o- you know, once a year, uh, to give you feedback?" It didn't make any sense, but I love this idea. It's like we didn't have any staffing papers, and we didn't have any staff. Just, again, like I just love the, the simplicity to all this. Buffett says, "When we bought

8. 29:18 – 35:26

   Simple Deals, Trusting Your Own Judgment, and Making Yourself Easy to Work With

   1. DSDavid Senra29:18

      the Scott & Feltzer Company in 1986, it had been shopped by First Boston to more than 30 partners. I read about it in the paper, so I sent a letter to Ralph Shea. I had never met or talked to the guy, but I figured I'd gamble 21 cents or whatever a st- a first class stamp cost. And I said, 'We'll pay $60 a share. If you like this idea, I'll meet you in Chicago on Sunday, and if you don't like the idea, tear up this letter.' Ralph met me, and we made the deal, and we paid $60 per share." So there's actually a guy named Jim Clayton. I read his biography a long time ago, and, uh, Warren actually buys his company. And in Jim Clayton's autobiography, he talks about what it was like to negotiate with Warren Buffett. And by this time, Jim Clayton had let his son Kevin become the CEO of Clayton Homes. So it says, "Buffett told Clayton, the CEO of Clayton Homes, he wanted to buy the company and would pay $12.50 a share. Kevin said that his board would give consideration to an offer of $17 per share. Buffett responds, '$12.50.' Kevin replied the board was interested in considering $15 per share. Buffett responded with, '$12.50.'" Kevin said, "The board will accept $13.50 per share." Buffett responded with $12.50, and then he hit him with this closer. He says, "Even if all..." This is Buffett now. "Even if all the capital and stock markets shut down, you can still bank on my $12.50 price." And that is the price that Buffett bought the company for. And then Buffett talks about the importance of being able to trust your own judgment, and really shouldn't really be asking other people's opinion, or being paying attention to people when they're buying or selling your stock, or if you wanna make an investment or buy a company, or do something with your company and other people disagree. Says, "Every day, somebody sells a few shares of Berkshire and somebody buys a few shares, and they're probably coming to differing opinions on the valuation. It really doesn't make any difference to us. We don't pay any attention to what people say. You really should not make decisions based on what other people think." So there's a great comment about, uh, from Jeff Bezos about he knew the fundamentals of Amazon even when his stock was dropping like a rock. And so this is what he said: "I watched the stock fall from $113 to six, but I was also watching all of our internal business metrics, numbers of customers, profit per unit. Every single thing about the business was getting better and fast, even as the stock was dropping. It's a fixed cost business, and so what I could see is that from the internal metrics, it is that at a certain volume level, that we would cover our fixed costs and the company would be profitable." And then a bunch of lines on the importance of keeping things as simple as possible, and really just keeping the main thing the main thing. "We have no human relations department, no legal department, no investor relations, no public relations. We don't have any of that. We've got a bunch of all-stars out there running businesses, and we just ask them to mail the money to Omaha. Another thing, the important thing we do with managers generally is to find the 400 hitters and then not tell them how to swing." And then this is my favorite one. It reminds me of, uh, Novak Djokovic. "We have a number of people working for us that have no financial need to work at all, and they probably outwork 95% or more of the people in the world, and they do it because they just love smacking the ball." Now, I don't watch tennis, but I do love excellence in every form. And there is a 2018 interview in the Financial Times with Novak Djokovic, and I went back and r- r- I read the interview, but 'cause he says, "I can carry on playing at this level because I like hitting the tennis ball." This is simple to, "I'm gonna keep doing this and keep playing this 'cause I love it." The simple act of hitting the tennis ball, which is the main thing, right? I kept the main thing, the main thing. I actually love it. The interesting part is the, the, the person interviewing him in the Financial Times follows up, "Are there tennis players who don't?" And Djokovic says, "Oh, yes. There are people out there who don't have the right motivation. I can see it, but I don't judge." And so you go back and you can see how many majors did he have, you know, in 2018? He was like, I don't know, let's say fifth or sixth or something like that in total majors in all of tennis history. And then you fast-forward, you know, a decade or l- even less, what, half a decade, and he's number one. "I can carry on playing at this level because I like hitting the tennis ball." This next quote is really a combination of two ideas, the importance of designing a business that's natural to you and making yourself easy to interface with. So Buffett says, "Before I ran this, I had a partnership. I had a great group of partners, and essentially, I liked to be left alone to do what I did. I liked to be judged on the scorecard at the end of the year rather than on every stroke, and not second-guessed in a way that was inappropriate. I liked to have people who understood the environment in which I was operating in." And one of the most important things is Buffett told his partners what he liked to do, how he wanted to spend his time, how he wanted to run his business. They do this over and over again. And then you can decide, "Hey, do I wanna, do I wanna, wanna be a shareholder? Do I wanna partner with these guys?" And like, o- one thing that they bring up over and over again is in their wholly owned businesses, unless it's gonna completely drain a bunch of money, they're not gonna sell them, uh, even if, you know, they could say, "Oh, we're, we used to make 15%, now we make 5. Let's sell it, and then we can take that money and we can make 15%." They're like, "This is just the quirk of us, how we run our r- how we wanna run our businesses." But I think telling people that, making yourself easy to interface with about what's important to you, what you actually like to do, uh, is ver- I think very, very important. Another great idea that they repeat is that [laughs] good news takes care of itself, so just tell me the bad news. [laughs] I don't need to know the good news. That'll take care of itself. And make sure you don't let problems fester. Uh, "You ought to jump on everything. Charlie has pushed me all my life to make sure that I attack unpleasant problems that surface, and that's sometimes not easy to do when everything else is going fine. When I procrastinate, Charlie has been the one that jabs me into action. He's performed a lot of services that you don't know about."

9. 35:26 – 40:49

   Hiring, Paying, and Incentivizing Great Managers

   1. DSDavid Senra35:26

      They're constantly talking about the importance of working with the best people you possibly can. Again, the way I think about this is never, ever, ever forget the dynamic range of humans. Uh, so in, in many cases, like you wanna overpay for talent because if they're truly talented, you, it's almost impossible to overpay for talent. My g- the f- the greatest example of this is when Apple buys NeXT. You can think of that as, hey, they spent half a billion dollars to rehire Steve Jobs, and they got the deal of the century. They say, "Large sums don't bother me. I do not mind paying a lot for performance. In the end, if you get a great manager, you want to pay him very well. You want a big carrot out there for them if they achieve the results that you've set out." And a few pages later, it picks up on you have to be very careful how you design. Like, you wanna reward great people in your business. Be j- j- be careful how you desig- design this incentive structure. He s- he says you don't wanna award profits alone. So you talk about the fact that GEICO spends like, uh, and this number's probably even higher today. They spend like, you know, $800 million a year on advertising or something like that. And so it's like, well, if people working at GEICO, if we say your, your individual compensation is just tied to, you know, short-term profits, what's the be- best way short term to increase our profits? It's like we're just gonna pull back on advertising. And he says it'd be the dumbest thing you could do. You don't wanna award on profits alone. You just quit advertising, and then you'll start shrinking the business a little. And so there's two actually ideas that popped in my mind about this section That, that are, you know, I don't hear repeated very much. And so David Ogilvy, he talked about that advertising is actually a production cost. This is what he says: "I have come to regard advertising as part of the product, to be treated as a production cost, not a selling cost. It follows that it should not be cut back when times are hard any more than you would stint on any other essential ingredient in your product," assuming that you need to advertise to sell your product, right? So if that's the case, then advertising is actually a production cost. Now, Izzy Sharp had the best application of this. Izzy Sharp was the founder of Four Seasons, and he talked about the fact that one of the benefits, uh, in his business is that his other competitors building hotel brands, they all did the same shit. When there was a pullback in the economy, they would automatically pull back their advertising budget. He would either maintain or, if he could, extend and spend more on advertising, so he wound up picking up a bunch of market shares in financial downturns because his, his competitors wind up cutting back their advertising costs when he realized it's the ex- he needed to do the exact opposite. And I think a few pages later, Munger didn't have Izzy Sharp in mind, but really if you think of- if you analyze what Izzy Sharp was doing by making decisions like that, uh, it- that, that's how you know he was a great manager. So Munger says, "I think almost all good businesses have occasions where their managers are willing to make today's results look a little worse than they would otherwise to help tomorrow." And again, the, the importance of this is, like, you can really see in the behavior, uh, the fact that most businesses are actually poorly run. And even you would think they ta- they talk about in, in this example that the, the, even the variance, like think about the Fortune 500 CEOs, the variance in performance even in that subset, right? "There's an enormous difference, frankly, in the talent of American business managers. The CEOs of the Fortune 500 are not selected like the members of the Olympic track and field team. You do not have the uniformity of top quality that you get with the American Olympic team. You get some very, very terrific people, but you also get a lot of mediocrity." And I think that's why Munger's always saying, "Listen, find great people and stick with them." Really, uh, Buffett has his own version of this, right? He's not talking about himself, but, but, but Munger uses Buffett as an example, where Buffett says really outstanding managers are invaluable. And I love what, uh, what Munger says here. He goes, "You should not be looking for other Warrens on the theory that they're under every bush." [chuckles] It's like there is not other Warrens. Um, and then they give you some, some advice. I, I love this. They talk about, uh, you know, when they're picking managers, uh, to run their businesses. "We don't like banjo hitters who suddenly proclaim that they could become power hitters." So my friend Brent Beshore, uh, runs a, a company very similar to, in some ways, to Berkshire. He's, he spent time with both, uh, Buffett and Munger. Brent buys a bunch of private companies, keeps them forever, and sometimes he has to find new CEOs for these companies. And so one time he was having dinner with Charlie Munger, and he was just asking him like, "How do I solve this problem?" And it's one of my favorite stories 'cause it's just like the simplicity of Munger's thinking. And, you know, Brent was like, "Well, how do you hire great CEOs?" And Munger's response to Brent was something like, "We find somebody that did a good job before and ask them to do the same job for us." [chuckles] And, uh, the follow-up question, Brent's follow-up question was something like, "Yeah, but what about, you know, hiring for potential or youth?" And Munger's like, "We, we don't do that." [chuckles] Just like it couldn't be any more simple. You-- We found somebody who was a great CEO and said, "Great. Become a g- Come over here and be a great CEO for us." [chuckles] Uh, but I just love that idea. It's like, okay. Or you could say, "I'm a ban..." You know, try to take the chance on the banjo hitter, and maybe the banjo hitter can transform into the power hitter. Uh, but most times they don't. [chuckles] And so I just love Munger's, again, beautiful simplicity on that. And then again, I think this is the perfect illustration of how do you communicate ideas so they're memorable, right? And you could say, "Hey, you know, you really should be organizing your life and your business in a way that, you know, they can withstand and they will actually survive." Or you can say, "Hey, you don't wanna drive yourself into a vat of beer at one point in your life."

10. 40:49 – 45:57

    Surviving the Vat of Beer and Why Buffett and Munger Get Opportunities

    1. DSDavid Senra40:49

       So what does that mean? Saying that, "If you're a shareholder in Berkshire, your returns in 99 years out of 100 will probably be penalized by us being excessively conservative, and one year out of 100 will survive when other people don't. When I set up my office in 1962, I put seven items on the wall. I went down to the library, right? And I made photocopies of pages from financial history. One was a story that happened in May 1901 when the Northern Pacific corner occurred. Harriman was trying to get control of the Northern Pacific Railroad, and James J. Hill was the largest stockholder, was trying to retain control. Uh, and in that paper in 1901, the whole rest of the market was totally collapsing 'cause Northern Pacific went from $170 a share to $1,000 a share in one day, trading for cas- cash because the shorts needed it. And there was a little item at the top of that paper, which I still have hanging up in my office, where a beer brewer in New York committed suicide by driving into a vat of hot beer because he received a margin call. He probably knew how impossible it was that in one day a stock could go from $170 to 1,000 to cause a margin call. But he ended up in a vat of hot beer, and I've never wanted to end up in a vat of hot beer." There is something interesting when I had dinner or, uh, with, with Munger. One of the most fascinating things he said, it was so odd. He thought it was very unusual to be so wealthy and loved, that that goes against human nature. The fact that him and Buffett, everybody obviously knows they were super rich, but they were also really beloved. And my own theory of this, and I didn't think about this to ask him at the time, but it popped in my mind, is like why would that be the case? And I actually think it's because it's the benefits of teaching. You know, it, it's not like they, they hoarded the knowledge that they o- of their six or seven-decade career. They wrote about their shareholders. They talked about the AGM. They, you know, people wrote books on it. You could just pick it up and be like, "Oh, you know, Munger and Buffett found some [chuckles] really good ideas. I should probably take them, uh, and use them." And there's also, uh, other benefits as well, where by doing this, this is m- multiple times. I actually read a book called What I Learned Before I Sold to Warren Buffett. I think that's the title of the book. Uh, it's a guy that, uh, third generation of Helzberg Diamonds, and, you know, he had a very prosperous, privately held family business. And when the, he realized it's probably the right time to sell the business, he had one person in mind, Buffett. Why'd he have a b- b- because he went to the meetings. He read the shareholder letters. I'm pretty sure he was a shareholder. It's like I, I, I benefited so much from all the teaching. And so they're actually talking m- it starts out with Munger and then, and then Buffett chimes in about the fact that they have all this opportunity by the fact that they built this following, and I think they built the following through the best way. It's just like, "Hey, I'm gonna sit there and learn all this stuff through my day-to-day job, and I'm gonna turn around and, like, share it with you, and you can hopefully benefit as well." So Munger says, "We get offered things by people who would not sell to anyone else. That is really peculiar, and it has happened a lot." Buffett chimes in, "It's happened, and on important ones. When I heard from Iscar," uh, that's the metal cutting tools company, "I had never heard of Iscar or its founder." Uh, his name is Eaton Wertheimer. I think is how you pronounce it. "He basically told me that he wanted to sell to Berkshire and-- or he didn't want to sell to anybody else. We met, and we made a deal." Another thing they repeat is the fact that they are individual opportunity-driven. In fact, there's a great line in Napoleon that is related to this. But they're talking about, you know, when they, when they started, it was like, "We didn't know what we were building," right? "We just had a lousy textile mill. It isn't like Charlie and I sat down and worked out some plan. We'll run this dumb textile business for 20 years, and then we'll finally have to fold it, and then we'll do this, that, and everything. We just kept putting one fit, one foot in front of the other." Napoleon approached his life the same way. He says, "I had very few really definitive ideas, and the reason for this was that instead of obstinately seeking to control circumstances, I obeyed them, and they forced me to change my mind all the time. Most of the time, I had no definitive plans, only projects." Buffett continues, "Our partnership was the same way. We sat down with people, and in my case, I handed them a little sheet of paper. It laid the ground rules. I wanted to be sure that we were on the same page. You don't have to read the partnership agreement. There's no way in the world I would take advantage of you. You shouldn't be here if you think I would. But I do want you to be on the same page and be measuring me by the same yardsticks that I measure myself." So I already repeated this. I love that idea because it, it combines really a number of things, but really being easy to interface with, right? Making yourself easy to interface with by just telling people what's important to you, and then working with people where you would be comfortable with just a handshake agreement. And then in case you were doubting the importance of never, ever, ever forgetting the dynamic range of humans, Buffett is asked, "What's the best investment he ever made?" Listen to his response: "The best investment was getting Charlie to be my partner."

11. 45:57 – 48:20

    Eliminating Overhead and Reading the Public Record: PetroChina

    1. DSDavid Senra45:57

       Another great idea, maximize the amount of time that your company spends on making magic for your customers, and minimize or eliminate overhead or processes that get in their way. We really free up our managers of our business to spend 100% of the time thinking about what is good for their business. Ideally, what he wants the managers of the Berkshire businesses to be doing, spending all their time focused on what counts for the business and eliminates the distractions that often come in with, come with running a business. He says, "I would guess that CEOs of most public companies waste a third of their time, at least, on all kinds of things that really don't add a thing to the business, and in many cases, subtract from the business. We allow them to spend 100% of their time focused on what counts, and that is a rare occurrence in American businesses." It'd be very fascinating if you have a tool that can actually ca- calculate, like, what percent of your company's time is actually focused on making magic or improving things for your customers as opposed to, you know, all this overhead, these processes, these things that actually don't matter to the customer. I've never heard of or seen anybody tracking that as a metric, but actually, I think that's a really good idea. I wanna go back to this idea where he says, you know, there's these low-hanging fruit. Maybe not low-hanging fruit, 'cause you have to know how to analyze it, but they, you know, there's a bunch of public information that if you have good judgment and you have-- like, you can interpret differently, and you can profit from this. So he winds up investing $400 million, I think, in PetroChina in the early 2000s. He's gonna sell this for a few years later for a $3.5 billion profit, but I just wanna pull out some, the way he was thinking about this. "It was right there in black and white in a report that anybody could get. We just sit in office and read those things, and we were able to put $400 million out that now is worth $1.2 billion." So again, he gets like $3.5 billion when, when he winds up selling the stock. "The PetroChina annual report came out, and I read it. That's the only thing I ever did. I never contacted management, read a brokerage report, or asked for anybody's opinion. I came to the conclusion that it was worth $100 billion, and it was selling for $35 billion. What is the sense of talking to management? Any further refining of analysis would be a waste of time when what I should be doing is buying the stock. It is like somebody that walked in a door, and they weighed somewhere between 300 and 350 pounds. I might not know how much they weigh, but I would know that they were fat. That's all I'm looking for, something that is financially fat."

12. 48:20 – 52:21

    Specialization, Circle of Competence, and Todd Graves

    1. DSDavid Senra48:20

       There's a line that Munger says. It's not in this book. He's actually got a funny way to say it in this book I'm gonna read to you, but it's something I think of constantly, and he says, "In business, we often find that the winning system goes almost ridiculously far in maximizing and/or minimizing one or a few variables." He has a great line in this book. He says, "I think it's a great strategy for the great mass of humanity is to specialize. Nobody wants to go to a doctor who's half proctologist and half dentist." And so they quote the former CEO and chairman of IBM, Thomas Watson, where he says, "I'm no genius. I'm just smart in spots, and I stay around those spots." So they're talking about s- Uh, circle of competence. Really, the way I think about it is like they're, they're talking about the, the multiplication of effects of extreme, extreme focus. I talk about one of my favorite entrepreneurs in America. People are surprised when I say this 'cause I just think it's hilarious, and he's only done, like, one interview, and I think the interview's, like, two or three o- years old. This guy named Todd Graves, okay? Todd Graves is the founder of this place called Raising Cane's. Todd Graves sells chicken fingers. That is all he does. He just happens to do it better than anybody else in the world, and he has done that for 25 years with extreme levels of focus, and he's worth $10 billion, and he sells fucking chicken fingers. And one of the things I absolutely love when... If I ever sold chicken fingers, and I'm not going to, uh, based on what he said in this one interview I heard from him, it's like that's exactly the way I would do it. I loved everything about his mentality, the way he thought about his business. It is unbelievably similar to countless of, you know, history's greatest founders that, that I've read biographies of and that you and I have just, have talked about on this podcast. It's crazy. It just, he applied it to chicken fingers. And so he said one thing in that interview I actually love. He goes, "I believe in doing one thing and doing it better than anyone else." I run into people all the time, and sometimes it's people I read about, sometimes it's people I actually meet, that they invest and build in only one industry, and they do that for a long time, that if you track every great company or every great person in that industry, somehow they're in that deal, and I think that's a sign of wisdom. There's a great line where, um, I think it's Buffett, that says, "If you have doubts about something being in your circle of competence, it isn't." And I think it takes discipline and, you know, wisdom and self-control over a long period of time. In that interview that Todd Graves did, they're taking, like, all these phone calls from people, like, they're calling in, uh, or making videos, and they're asking him questions, and it's just like, "I love what you do." This happens over and over again. It's, it's remarkable. Part of human nature. "I love what you do. I love..." It's like, I, I get this myself. It's like, "I love what you do, X. Have you ever thought about doing Y?" And I'm like, "If I do Y, that means I do, I spend less time on X, and you just said you love that I do X." And so he kept getting this, like, "I love what you do. Why don't you do, you know, add dessert to the menu or make it spicy or do all this other stuff?" And Todd, he was very li- likable, comes off very likable in the, the interview. He's just like, "No, I..." Like, "The menu is the way it is today. That was exactly how it was the day I opened." And he talks about the benefits of extreme focus, and it goes down to even how fast he's able to turn cars over in the drive-through. And that may, may make, may make a tiny difference when you got five locations, but he's got, like, 600 or 800. It makes a massive difference. And in a business that's working, that difference only expands over time. Again, I believe in doing one thing and doing it better than anyone else. I actually had a friend of mine, uh, who's really good at, uh, new business creation, heavily focused on technology and AI, and he met with a guy who was, like, the grandson of, like, a shipping magnate. And the guy's like, "Oh, I wanna do what you wanna do." And he's just like, "Why would you think that's possible?" He's like, "Do you see me trying to go buy oil tankers? Like, what is going on here? If I jumped in your game, you would kick my ass. Why do you think this, the reverse is not true?" It has a very fascinating quirk to human nature to me. It's like y- y- I don't know if we can see it in ourselves. Maybe other people have to tell us what the case is. I don't know. I just... And maybe it's also, like, prone to my personality. It's why the- these lines jump out in the books. It's just like I just like doing one thing and doing it over and over and over again. Uh, it just speaks to my soul.

13. 52:21 – 57:24

    Technology Disruption: The Internet, World Book, and Billy Durant

    1. DSDavid Senra52:21

       So, uh, this is very interesting. You see their take on the internet over time and, and really technology, and this isn't... What I'm about to read to you is not really about the internet. Th- I don't think that for, for our purposes, like, how we should be thinking about this. So, they say this in 2000, and they're talking, and it was obvious to them, like, "Oh, sh- shit, we got some businesses here [chuckles] that we own that are gonna get wrecked by the internet." And so for us, for, for me and you, I, I think, like, when we're, when we're... I'm gonna read this to you. But not th- don't think about, like, you know, encyclopedias or the newspaper or internet. It's like really what we wanna know is, like, what is... All technology is is a better way to do something, and usually it's better and cheaper. So, what is it, what is happening now? What are the businesses that are happening now? What, which ones will decline as a result of the new technology that is created today? And I think the proper response to this is to be like Billy Durant, the founder of General Motors, and I'll, I'll explain to you what I mean by that. So, this is from the 2000 meeting. Buffett says, "15 years ago, print encyclopedias were the best tool for educating not only young children, but for educating me or Charlie when we wanted to look something up on a subject." That was in 1985. Worked fabulously, right? And they owned World Book Encyclopedias. It was a marvelous product, but it requires... This is, again, why you think of technology as all technology is, is a better way to do something. So, for me to learn back then, you know, in '85, I'm picking up the World Book Encyclopedia. What does it cost? Like, h- how did that get to me? Uh, "The World Book Encyclopedia requires chopping down trees, operating paper mills, binding and printing, and delivery of a 70 f- uh, 70-pound UPS package. It was t- put together in a way that for 4 or 500 years was the best technique for taking that information and moving it from those who assembled it to those who wanted to use it. Then the internet came. We pay..." And then they talk about, okay, so the internet's gonna destroy that, obviously. You know, you have Wikipedia. It's free. You can use it anytime you want, and that, that's just, like, the, the tip of the spear there. Then they talk about the fact that they were, at one point, uh, in the book, they talk about, you know, the, just from owning a single newspaper, which is the Buffalo News, they were making, like, $40 million a year in profit that they could not pr- uh, reinvest in the business. So, it was just shooting off $40 million a year in cash flow that they would then take and buy other businesses. "We pay a significant percentage of our circulation revenue at the Buffalo News to our carriers, and we pay additional money to the district managers, and then we pay for trucks to deliver the product out, and we pay for huge printing presses and all that sort of thing. And people chop down trees in order to give us the raw material to transmit information in Buffalo about what the Buffalo Bills did on Sunday." Now you have the internet that has virtually no incremental unit cost and can deliver the information instantaneously. It is incredibly low cost compared to most of the other methods of conveying entertainment and information now." They're saying this in the year 2000. "We were asked if we're afraid the internet would hurt some of our businesses. The answer is yes." So even if famously, you know, Buffett and Munger are not great technology investors, I guess, you know, the Apple investment not notwithstanding, you know, th- even if they, they didn't make a lot of money in all these internet stocks, they clearly saw what, which w- [chuckles] like, they saw it very clearly, like, the internet is going to destroy our newspaper business and our World Book Encyclopedia business. But again, what is th- the, the point of here is, is like, okay, what is like this today? And then if you've identified that maybe you're in, you're in a business like that now, what is the proper response? And the reason, the, the proper response, in my opinion, is to be like Billy, Billy Durant. So what do I mean? If you go back and you actually think about the American automobile industry, I, I would argue the two most important founders in the history of this industry that, that, you know, changed our, our geography, for God's sake, uh, was Henry Ford and Billy Durant. Billy Durant was the founder of General Motors. Now, what was interesting to me is what Billy Durant was doing before he founded General Motors. He created one of the most successful horse carriage manufacturing companies. And y- as soon as he realized the car was coming, and this is at a time, this is before w- this is a decade and a half before Ford actually, uh, solved the problem of how to mass produce cars, right? So he saw this early, right? He's like, "Wait a minute, the car," even though I think there's, like, a couple hundred on the road in Detroit, and most of them, all of them were handmade, most of them didn't get, go very far. He immediately switched. He's like, "The car, they're gonna improve the car. They're gonna figure this out. I'm getting out of the horse carriage business because this new technology has come around," and he immediately jumped into the automobile business. That's why I said, if you can, if you are in a business or you're identifying one or maybe you're in one where technology is going to do what you're doing today better and cheaper, the move is to do what Billy R- Durant would do, which is to jump into that oncoming phenomenon that was impossible. It was impossible for any one person to stop the phenomenon of the automobile. And I would guess there's a ton of industries and businesses that are going to be severely diminished as a result of all the new technology that's coming out right now.

14. 57:24 – 1:05:46

    Learning From Mistakes and Staying in the Game Long Enough to Get Lucky

    1. DSDavid Senra57:24

       One thing that Buffett and Munger taught me is that learning is not memorizing information. Learning is changing your behavior. And so there's multiple examples where they identify a supremely talented person, and they sell way too early. So two examples of this that pop to mind is Buffett knew Bob Noyce, founder of Intel, and met Walt Disney, and knew without a doubt how talented these people were. So they were sitting, uh, there, there's a, um, college in Iowa called Grinnell, and both Bob and Warren Buffett were sitting on the board of this, uh, the, the chairman of the board of trustees of Grinnell College, and the investment decisions of that endowment were made by the board of trustees, sp- specifically Buffett. And Grinnell actually buys 10% of the private placement that was the initial funding of Intel. Uh, and he says, "We bought 10% of the original issue at Grinnell." The g- this is Buffett talking now. "The genius who ran that investment committee," which was him, "managed to sell it a few years later." He says, "I won't give you his name," which is him, "and there's no prize for anybody who calculates the value of those shares now." What is also fascinating, so again, learning is not memorizing information. Learning is actually changing your behavior. You knew how talented Noyce was, how much you respected him, and you sold too early. He also did this, and again, they're, they're, they, they talk about the importance of rubbing your nose in your own mistakes so you avoid doing that in, in the future because the, the amount of gains they gave up, you know, in the oil, Belridge Oil Company, he said it was $200 million. If you, if you think about, you know, missing out on Google when even though the ads were working, the, the increase in Intel, even though you knew Bob Noyce, and then maybe the most egregious of all is Disney. Uh, you know, you're talking, I don't know, maybe hundreds of billions of dollars, depending on how much money they had and they could have put into it at time. But the reason I bring this up is 'cause Buffett bought Disney stock after meeting Walt Disney in 1966. He paid 31 cents a share and, uh, sold, uh, when the stock went to 48 cents a share. Another person they identified as a talented fanatic, as somebody who's ferociously intelligent, was they loved Jeff Bezos. And, you know, they talk about the fact that it's remarkable what he's done. They saw how talented he was relatively early on, obviously maybe not at the IPO or before that, and they never acted on it. They never bought a single share. Buffett loves Bezos. So I just wanna read a couple things that he was, he said about him. Uh, "It's really remarkable, one person who built an extraordinary economic machine in two really different industries almost simultaneously from a standing start at zero, while facing competitors with lots of capital and everything else. To do it in retailing and to do it in the cloud like Jeff Bezos has done at Amazon is really incredible. The truth is that I watched Amazon from the start, and I think what Jeff Bezos has done is something close to a miracle. I had a very, very, very..." I'm not stuttering. He said it three times, or he wrote it three times, or said it three times. "I had a very, very, very high opinion of Jeff's ability when I first met him, and I underestimated him." And I love the way they think about or describe, you know, this, this, the constant ever-changing nature of technology. And I think one of the things that Walt Disney did spectacularly is you just stay in the game long enough to get lucky. Someone else can actually invent a technology that will drastically increase, uh, the market for your products, the value of your company. They were talking about, and Buffett knows this. He, he was saying somewhere way back, somebody invented television, and then they invented cable. So a baseball player who could bat .406 in 1941 was worth $20,000 a year. Now, a baseball player, even a marginal big leaguer, will make vastly greater sums because, in effect, these inventions of these two technologies Uh, the stadium size was increased from 40,000 to the entire country, and in many cases, even the entire world. And so one thing I think about this, and this comes up a bunch in the book, sustain the game long enough to get lucky. Someone else can invent a technology that drastically increases your market. Walt Disney blew up a partnership, okay? I think this was with United Artists, and one of the founders of United Artists was Charlie Chaplin, which was one of Walt Disney's heroes. He blew up a partnership because he refused to sell them the rights, the, the Disney's rights to television. And he did that at a time when there was only a few thousand TVs in existence. So again, stay in the game long enough to get lucky. Someone else will invent a technology that can drastically increase the value of your business market, right? Munger and Buffett talk about, you know, the fact that Coke benefited, Coca-Cola, uh, benefited incredibly because somebody else that did not work at Coca-Cola invented refrigeration. There's a great line, um, [chuckles] there's a great line in Rockefeller's autobiography. You know, he writes that he's a much older man. He's probably in his 80s at the time, if I'm not mistaken, and he's talking about the fact that, "Oh, this, this guy that I absolutely love, this young, this young fellow, uh, Henry Ford, came to visit today, and I just love spending time with him." I was like, "Yeah, I bet you do," 'cause Rockefeller made more money in retirement from his oil stocks because Henry Ford invented the Model T and invented the mass production of automobiles, which then what does that do? Drastically increase the demand for Rockefeller's product. Yeah, I bet you love spending time with him too. Uh, so I just, I just love that idea. Again, like, stay in the game long enough to get lucky. W-what would have been the difference in Rockefeller's wealth, you know? He re- what if he decided to retire and sold his stock before the invention of the automobile? It's an interesting question to, to think about. Another interesting question to think about is how many people do I actually need? They talk about i- over time, in industries that are working, you actually see they become more efficient on a per person basis. So one example they give is the oil companies are a classic example. If you look at employment relative to barrels produced, refined, and marketed, it's gone down dramatically over 20 years. Munger continues, "If you put it in reverse, you say name a business that has been ruined because it was over-downsized. I cannot think of a single one. But if you ask me to name businesses that were half ruined or ruined by bloat, I could rattle off name after name after name. It has gotten fashionable to assume downsizing is wrong. Well, it may have been wrong to let the business get so fat that it eventually had to be downsized." Goes back to being almost deliberately understaffed. There's a great example in, um, in Sam Walton's autobiography where they're interviewing other people around him, and he's constantly questioning. He gets annoyed at, like, any level, any extra le- level of layer, any extra level of process. And, you know, he, he says over and over again in, in his autobiography, like, if you, you either serve customers or you support the people that do, or we don't need you. And, you know, there was this one example where they were having a problem, uh, when, when inventory comes into the Walmart stores of actually putting the right prices on there, so they had to add another layer of these guys that would go around, and they would, like, have these, like, handheld devices, and they would scan every single thing to make sure that the price that the computer says it should be is actually the price that the customer sees. And their, their mere presence would annoy Sam. He kept asking, like, "Why do we have this extra layer?" Like, "Why don't we just do it right the first time?" And I think implied in there is his, his, his correct instincts that you have to be very careful of being bloated, of jumping immediately that the solution to the problem is more people. Then there is an interesting, uh, comment here where they're like, "We really don't wanna clutter our, clutter up our minds, and so we try to focus on what is important and what is knowable." And so when, um, I was lucky enough to have a two-hour lunch with Sam Zell before he died, and we, we talked about this because anybody that knows Sam Zell says the same thing. So what they say about Sam is what Sam said about Jay Pritzker. So Jay Pritzker was his, his mentor when Sam was a very young man. I think he was still in his 20s when he met Pritzker. And he said that Pritzker was the, the greatest financial mind of anybody he ever met. And that, you know, Sam would bring him a deal, or they would talk about buying a business or whatever, and he's like, "Okay, here's, like, a list of eight things or seven things that, that we need to worry about." And Pritzker's like, "Bullshit." He's like, "That's the one thing. There's only one variable, and if you solve for that variable, the deal will work out." And so they're talking about, you know, if you went back in 1919, you could have bought a share of Coca-Cola for 40 bucks, and in between that, bunch of times it, it, it dropped by 50%. There was World War II. There were pandemics. There was invention of atomic bomb. And really, the only important thing was how many servings of Coca-Cola were gonna be served every day, you know, many years into the future.

15. 1:05:46 – 1:12:58

    Focus on the One Variable, Royalties, and the Power of Brands

    1. DSDavid Senra1:05:46

       So you think about it, it's like what is the most important factor? That's what Jay, that's what Sam Zell, or Jay Pritzker taught Sam Zell. That's what Sam Zell taught other people. And that's what they're saying here. It's like, you know, world wars be damned. Uh, economic, financial crisis be damned. Like, if I'm buying the stock for the long term, and I forgot how long, they may have been holding this for three decades. Are they gonna be serving more Coke on a daily basis, you know, in the future? And all that mattered was by 1998, they were selling one billion servings a day. And Buffett makes the point here, "The person that can make people a little happier a billion times a day around the globe ought to make a few bucks doing it. If you developed a view on any other subject in any other way that forestalled you on acting on that which is most important, the specific narrow view about the future of the company, you would have missed a great ride." And then I love this part because they're talking about an ideal asset or ideal business. They're talking about during inflation, but really I think it obviously applies d- during times of low inflation as well. The ideal asset is a royalty on somebody else's sales, where all you do is get a royalty check every month, and it's based on their sales volume. You came up with a product originally, licensed it to them, and you never have another bit of capital investment. You have no receivables, no inventory, and no fixed assets. And there's actually, I've come across some of these crazy deals. Where people have become very wealthy as a result of that. So I did this episode on Jimmy Buffett, and what's fascinating, if you go and look at, like, there's a list of, like, the top 10 wealthiest musicians of all time. They all, like, kinda make sense. You know, they had huge hits. They were very well-known. And you have, like, this, th- the, the one outlier on that is Jimmy Buffett. You know, had, like, two hits. Uh, they weren't even that big. Um, you know, and they were like 20 years apart, and yet this guy, you know, had a multiple billion dollar net worth, uh, when he passed away, not including all the money he was taking out of the business. I forgot, I forgot what it was on the podcast, but he, he was making something like $70 million a year. And when you read about how he did that is because he had all these license agreements that were using, like, the Buffett name and, and Margaritaville, and Jimmy Buffett and Warren Buffett were actually friends. It's also one of the reasons that popped, popped to my mind. But then you also look at some of the craziest deals in history, like Michael Jordan's, uh, royalty. He gets 5% of all the, uh, the sales of the Jordan brand. I think he made, like, 300 million last year doing that. Maybe, like, 150 million the year before, and it's, like, keeps growing. Uh, Coco Chanel became the richest woman in the world when she was alive based on the deal where she got either 2%, I think 2% of all sales of Chanel, and in the contract it said that the, her former partners had to pay every single one of her living expenses, which is very fascinating. There's one that came up recently. Uh, Steven Spielberg, for, for quite a while, has gotten 2% on all of Universal Studios ticket sales, and I think it's at every single Universal Studios throughout the world. In fact, because that's a public company, they, uh, he's been making anywhere from, uh, I've read different reports from, like, 30 million to, like, 70 million a year for a while. And they had this disclosure in, um, in their, Universal had their disclosure where they're, they estimated to buy him out of the deal would cost, like, another, like, $1.5 or $1.7 billion. So this idea, it's like, well, you're just getting a check every month. It's based on the sales volume. Uh, you know, you don't have to invest any other capital into the business. It's ju- just, you have no receivables, no inventory, and no fixed assets. It's very interesting. Now, uh, we talked about earlier that you can sometimes spot an inv- uh, spot an opportunity based on this, like, in, this parallel or related industry to the one you're working in. There's actually an example of this that's, it's, it's kinda similar to this where you have a deeper understanding that only happens through experience. There's two things. They, they mention See's Candy over and over again forever. It's probably the most commonly mentioned business in this book. Maybe Coca-Cola is, uh, up there as well. But one of the most, th- the only part I really wanna pull out about See's is that it taught them i- there's two benefits. One, all the money coming out of it. I think they've pulled at least 2 billion of cash out of it. I think the number's gotta be higher now, and I think they were still doing, like, 100 million a year in cash flow that they can then obviously reinvest into other businesses. But I th- uh, that, that's fascinating. Obviously, they only paid 25 million for the, the company, right? But what was fascinating is they didn't understand the power of brand, like the magic that is a brand, until they actually own a, a, a business that was a brand, and you have these benefits that seem undeserved but are directly related to the fact that you have a brand that is beloved in the consumer's eyes. And when you have that, a lot of weird things happen. "See's not only provided us with earnings used to buy other businesses, but beyond the earning, it also opened my eyes to the power of brands. You could say that we made a lot of money in Coca-Cola partly because we bought See's. I understood brands to some degree, but there's nothing like owning one and seeing the possibilities to educate yourself about things you might do in the future. If we had not owned See's, I would not be surprised if we would have never owned Coca-Cola later on." And so that's related to the fact that Buffett really loves mindshare, like having mindshare in a consumer's mind, like See's Candy does for a, you know, much smaller group of people, Coca-Cola does for the entire world. Talks about Walt Disney, the fact that, you know, no mom is gonna be like, "I wanna go to the store and buy, you know, Paramount Pictures' movie." [chuckles] It's like, no, it's Disney's the only brand. It's super, super valuable to have this mindshare, and you see this with GEICO and how much money they spend on advertising and how important it is. We'll spend, and th- these numbers are, you know, more than a decade old, so they probably even spend more now. We'll spend about $800 million a year on advertising. We were spending a little over 20 million a year when we bought control in 1995. So he's drastically increased. Buffett has drastically increased the amount of money he spends on adv- advertising. He's, he's aiming for ubiquity is the way you can think about this. "We want everyone in the United States to have in their mind the fact that there's a good chance they can save money by picking up the phone or going to the website and checking it out. When we get that message in people's minds, you never know when it's going to pay off later down the line. We love spending money on advertising at GEICO. We want to be in everybody's mind. A brand is a promise." That's still the best description or the best, uh, yeah, the best, the best definition of a brand I've ever come across. A brand is a promise. But I, I just think this is just a great line to describe what you're really aiming for. You know, this mindshare, this, like, the brand is a promise. There's something that's happening in the mind, uh, that just gives you these, you know, unex- unexpected and, like, compounding benefits for a very long time. And Munger talks about Costco. You know, my wife's family, they're Costco fanatics. I didn't even know what the hell Costco was before I married into this family. And I told you they've been Costco members, I don't know, 20 s- no, it's gotta be longer now. 27, 29 years in a row. They're never canceling that menu or that, that, that membership. I don't even know if they shop anywhere else. It's, it's freaking nuts. So again, I think this is just a great line. "Costco has created ferocious customer loyalty, and of course, strange things happen when you do that long enough." And again, Coca-Cola ch- has ferocious customer loyalty. Disney, you know, Costco, all these interesting brands have ferocious customer loyalty.

16. 1:12:58 – 1:17:29

    State Farm, Book Recommendations, and Closing

    1. DSDavid Senra1:12:58

       Now I wanna get to this part that I've been quoting over and over again. It's my favorite line in the book, right? [chuckles] Pick one example. Pick one extreme example and, uh, ask what in the hell is going on here. So they're talking about the fact that You know, well before they bought into Geico, uh, they knew all about the history of the US auto insurance, and there's all these other outliers that they found interesting. So they said State Farm was started in 1922 by a fellow in Bloomington, Illinois, who had no money, no capital into the business. And over time, in a huge industry, he becomes the dominant player, and at this point, this is like 20 years ago, he was like more than twice the size of the number two player, which is very interesting. And incidentally, State Farm, on the Fortune 500 list, has the third-largest net worth of any company in the United States. Number three. From Bloomington, Illinois, with a guy who had no money. How does that happen? You find, you find some interesting aspects in studying how a company could become the third-largest in net worth in a country with no apparent advantage going in. So this is when Munger follows on. Again, I love this idea. "Picking some extreme example and asking my favorite question, 'What in the hell is going on here?' is the way to wisdom in this world. When something like a State Farm happens, you should try to understand it." And if you think about that, that's exactly what you and I are doing together every week. The-- you can't have a more extreme subset of the human population than somebody that was so good at their job that somebody decided they had to write a book about that person's life. That is the smallest percentage. That you can't-- Th- there, there is not more of, uh... I don't know of many... There i- probably isn't another way to pick a more extreme, like, subset of the human population and ask, "What the hell is going on here?" And then interesting enough, this book ends with a bunch of book recommendations from Charlie and Warren over the years, so I just wanna read a few to you. Some of these I've done podcasts on, and some of these I bought immediately. So it says, "I very much enjoyed Connie..." This is Charlie Munger speaking. "I very much enjoyed Connie Bruck's book Master of the Game, which is a biography of Steve Ross, who headed Warner and was later CEO of Time Warner. She's a very insightful writer, and it's a very interesting story. I'm rereading a book I really like, which is Carl Van Doren's biography of Ben Franklin. I'd almost forgotten how good a book it was. We've never had anybody quite like Franklin in this country and never will again." Buffett says, "There's one chapter in The General Theory by John Maynard Keynes that relates to markets, the psychology of markets, and the behavior of market participants. You'll get as much wisdom from reading that as anything written in investments." Buffett also says, "I read The Quotable Einstein. It's a lot of his commentary over the years, and it's a great read. I just ordered it." I think it's like, again, 400 pages of just Einstein in his own words. Uh, I'll have that book soon. If it's good, I'll make a podcast on it. Uh, Munger says, uh, "Robert Hagstrom sent me his latest book on Warren Buffett, The Buffett Portfolio. I was flabbergasted to find it not only very well-written but a considerable contribution to the synthesis of human thought on the investment process." Munger also says, "Another book I like very much is Titan by Ron Chernow." I, I did this on episode 248 if you haven't listened to it. It's obviously the biography of John D. Rockefeller. "That's one of the best business biographies I've ever read," Munger said. Uh, Warren Buffett says, "You should read Katherine Graham's autobiography, Personal History. It's a terrific book." That's episode 152. Uh, Buffett says, "Probably the most representative book on my views is the one that Larry Cunningham has put together, The Essays of Warren Buffett" I love that book, too. That's episode 227. Uh, "because he essentially has taken my words and rearranged them and put together... What he put together there best represents my view." And then Munger says he just read In the Plex by Steven Levy about Google, and he found it very interesting. "I find it interesting the way people have created these engineering cultures, which are quite peculiar and different from most of what we have at Berkshire." I haven't read this book. I actually just ordered it. "I certainly enjoyed learning it, and if I enjoy learning it, I regard it as important because I think that's what you're here for, to go to bed every night a little wiser than when you got up." And hopefully you feel this podcast helps you do just that, makes you a little bit wiser than you were before you listened to it. That is where I'll leave it. For the full story, highly recommend buying the book. I think it's a no-brainer. Uh, again, I wouldn't read it straight through. I definitely think of it more as a reference, and I would, uh, jump around based on the table of contents. But if you buy the book using the link in the show notes, you'll be supporting the podcast at the same time. That is 380 books down, 1,000 to go, and I'll talk to you again soon.

Episode duration: 1:17:29