Buffett and Munger—A Study in Simplicity and Uncommon, Common Sense – Peter Bevelin

PART ONE: ON FATAL MISTAKES, PREVENTION AND SIMPLICITY

Mistakes are a fact of life

Don’t bother about mistakes that don’t actually matter

Avoiding problems is better than being forced to solve them

If we understand what works and not, we know what to do

It is better to try to be consistently not stupid than to be very intelligent

If we know what doesn’t work we don’t go there

Thinking backwards is a great tool for solving problems

Keep it simple and make it easy for yourself

The secret is ignorance removal

PART TWO: ON WHAT DOESN’T WORK AND WHAT DOES

Find and marry a lousy person

Turn your body and mind into a wreck

Only learn from your own terrible experiences

Use a hammer as your only tool and approach every complex problem as if it was a nail

Go through life with unreasonable expectations

Only take care of your own interest

Blindly trust and follow the recommendations of advisors and salesmen

Mindlessly imitate the latest fads and fashions

Overly care about what other people think about you

Let other people set your agenda in life

Live above your means

Go heavily into debt

  • On fretting on leveraged financial institutions. (p. 55)
    • relate with how being conservative can make look Berkshire losing money 99 times out of 100, but in the crucial one time Berkshire is designed to survive
      • this was mentioned in founders #380,
      • as discussed elsewhere, it’s the weakest link which gets hit (e.g., see pp. 54-55).

Go down and stay down when bad things happen

  • Low expectations, humor, friends and family (p. 57)
  • Interest rate independent (p. 58)
    • because interest is subjective phenomena and how Berkshire operates has nothing to do with natural rate of interest…revisit 
  • margin of safety is there to avoid ruin. on that one time out of 100. (pp. 58-59)
    • relate with the same memos
    • relate with Ray Dalio’s uncorrelated bet and Berkshire’s diverse businesses holding
  • Usually when the time is right the credit is tight. Have loaded gun. (p. 59)
  • Shakespeare quote on the black swan event (p. 61)
    • relate probability notes with black swan notes
  • Be wary of low probability events in financial arena than natural arena (p. 61)
    • because knowledge is subjective and created subjectively it’s more wild than nature.revisit 
  • Work with people who understand the Lucretius problem (p. 61)
  • Margin of safety is related with the black swan (p. 62)
  • And again, watch out for the weakest link (e.g., customers and suppliers) because if they go down it might hurt you (p. 62)

When in trouble feel sorry for yourself

Get even and take revenge even if you hurt yourself

  • Relate with give it time and distance yourself notes (p. 64)

Be envious

Be unreliable and unethical

Be a jerk and treat people really badly

  • It’s nice to be important, but more important to be nice (p. 70)
    • relate with notes on being nice
  • You’ll meet a lot of people you initially think they are one-stops but they aren’t (p. 71)
    • relate with second order effect notes
  • Deliver what you would buy if you were in the other end (p. 71)
    • relate with other similar quotes and notes from munger
  • Success is getting what you want and happiness is wanting what you get (p. 71)revisit 
  • Be lovable. You always get back more than you give away. If you don’t give any you want get any. (p. 71)
  • Ben Graham and the list of unattractive qualities in other people (p. 71)
    • inversion at play
  • Show up on time; don’t steal credit; don’t cut corners; avoid envy (p. 71)
  • Find, emulate, and associate with good people (and good businesses) (p. 72)
  • Remember Grant McFayden, he didn’t need a lawyer (p. 72)
  • Read Rules for Making Oneself a Disagreeable Companion, by Ben Franklin (pp. 72-73)

Have a job that makes you feel miserable

  • Passion is not the sufficient factor, but likely necessary for success (p. 73)
    • relate with Kobe Bryant quote and absence of evidence notes
  • There’s no substitute for strong interest (p. 73)
  • Munger’s three basic rules: don’t sell anything you wouldn’t buy yourself; don’t work for anyone you don’t respect and admire; work only with people you enjoy (p. 74)
    • relate with previous memo on deliver what you would buy if you were on the other side
  • Particularly avoid working directly under somebody you don’t admire and don’t want to be like. Maybe you have to keep doing it to keep eating for a while but don’t settle for it. You just go out and find somebody else. (p. 74)
  • Make yourself a person that you would want to hire. Trustworthiness is more important than brains. (p. 74)

Work with something that goes against your nature and talent

Believe you know everything about everything

Associate with assholes

  • Relate stupid people notes and pigs (p. 81) 
  • Buffett version of surround yourself with better people (p. 81)
    • relate with similar notes
  • When you have doubts about a person, you can pass. There are many other nice ones to interface with (p. 82)
  • On trust (p. 83)
    • no matter how many contracts you sign, the bad actors will find ways
      • relate with black swan
    • relate this with Bitcoin and smart contract notes.revisit 
  • On decentralization and no second guessing (p. 84)
  • Leave them alone, and treat them they you would like to be treated if the role is reversed, the Golden Rule again (p. 85)revisit 
  • Lack of oversight means we miss some things but overall it is a benefit (pp. 86-87)
    • relate with long term thinking memos and notes.
  • Culture, not rule books, determines organizations (p. 87)
  • People see what’s been done than said, both in children and businesses (p. 87)
    • relate with concentric learning notes
  • Businesses are acquired to be held—not to be exited out for cash—the businesses generate cash. (p. 88)revisit
    • it’s like holding its own version of SP500.revisit 
  • A good spouse and a good business partner, you have to deserve both (p. 89)
  • Garrett Hardin’s quote on the benefit of having two-way debate (p. 90)
    • relate two-way debate note and observation note.
  • No worries, have fun, know that terrible things do happen but stay optimistic >>> stresses (p. 91)
    • and if you’re still worried, correct it.

Distort your problems so they fit your wishes

Stick to, justify and rationalize your actions no matter how dumb they are

  • Deprival-Superreaction Tendency and Inconsistency-Avoidance Tendency: we don’t like to lose what feels rewarding (pp. 94-95)
    • relate with biases notes
    • for the latter relate
      • making it public memos and notes
      • iteration-habit notes (upside)
      • leverage (how time put in doesn’t matter) notes
  • Ben Franklin and J.P. Morgan quote on our ability to make excuses (p. 95)
    • relate with Sherlock notes
  • E.O. Wilson: old beliefs die hard even when demonstrably false (p. 96)
    • relate with let the ideas die in your place notes 
      • relate with don’t be an idea notes
  • Self-justification (p. 97)
    • isn’t Leibniz’ 最善説 a form of self-justification? maybe he was partially correct in arguing for his form of multiverserevisit
      • relate with explanation must be rooted in opportunity cost memos and notesrevisit 
  • Max Planck: science advances one funeral at a time (p. 97)
  • If one’s incentive is for him to not change, then it’s tough to change him (p. 97)
    • this applies to the individual as well as to collective
    • relate with people change notes
  • Hammer syndrome is incentive-caused bias, combined with other psychological biases including commitment and consistency biases (pp. 97-98)
    • what are the other biases?
  • Spend no time arguing with people whose idea you know to be stupid (p. 98)
  • George Soros: once we realize that imperfect understanding is the human condition, there’s no shame in being wrong, only in failing to correct our mistakes (p. 98)
    • relate with error-correction notes
  • Study, and look for, counter-evidence. (p. 99)
    • relate with try to attack your business memos and notesrevisit 
  • H.L. Mencken quote. (p. 99)
    • relate with science advances one funeral at a time memos
  • Consider yourself a journalist. Assign a story. Assume it’s correct. But look for facts. And don’t be selective in choosing which facts to look at. Don’t let the hypothesis dictate which facts to look at. (pp. 99-100)
    • relate with data need theory notesrevisit
  • On negative evidence (p. 100)
  • Surround yourself with smart people who don’t always agree with you. Remember Lincoln. (p. 101)
  • Remove ignorance piece by piece. Scramble out of your mistakes. (p. 101)
    • relate with piecemeal error correction notes
  • On bridge. Information compounds. (p. 102)
    • relate with more is different notes
  • On master planning. What is needed is the kind of propensity to disbelieve by changing your previous conclusions. Mike Tyson quote. (p. 102)
  • “If the terrain and the map disagree, follow the terrain.” “One look is worth thousand words.” (p. 102)
  • Bion of Borysthenes’ quote on adapting to circumstances just as sailors do (p. 103)revisit 
  • The greatest advantage is in not having a strategic plan (p. 103)
  • Big ideas pop up occasionally >>> a strategic plan (p. 103)
  • Carlyle (William Osler’s favorite quote): “the task of man is not to see what lies dimly in the distance, but to do with what’s clearly at hand” (p. 103)
  • On deprival-superreaction syndrome. It’s about loss aversion and our asymmetric reaction to gains and losses. (p. 103)
    • relate with biases notes
  • Deprival superreaction tendency is about loss aversion to both possessed reward and almost possessed reward (p. 104)
  • Five positive interactions = one negative interaction (p. 104)
  • A man reacts with intense irrationally to even a small loss (p. 104)
  • Defenders of a territory >>> intruders of the same species (p. 105)
  • Never contend with a man who has nothing to lose, but more so with a man who has everything to lose (p. 105)
    • relate with negotiation and biases notes
  • Loss aversion is why we overvalue what we give over what we get. Think from counterparty’s point of view. Take a stand on only important things. (p. 105)
  • On negotiation. Don’t get into one where you can’t afford to walk away from. Don’t bargain with people you love. (pp. 105-106)
  • Don’t throw good money after bad (p. 106)
  • The stock doesn’t care what you paid or that you own it (p. 106)
    • develop implication for activists
    • develop implication for ownershiprevisit
  • Fold early when the odds are against you (p. 106)
  • Decisions should be based on the present and where you want to be. Not where you’ve been. (p. 106)
    • relate with sunk cost and anchoring notes and
    • relate price is essentially about future notesrevisit
  • Consistency and deprival is linked (p. 107)
  • The reciprocation tendency can work in the negative (p. 107)
  • Praise by name. Criticize by category. (p. 107)
  • “We don’t try to change people. We accept people the way they are.” Think about marriage. (p. 107)
    • relate with management memosrevisit 
  • Get in with a culture that’s already the right kind (p. 108)
    • relate with save keystrokes notes
  • A culture of trust with reality feedback >>> a culture of trust. Tell people but also to yourself the truth. (p. 108)
  • Chuck Huggins’ story (See’s). “Hire friendly people.” (p. 108)revisit 
  • Appeal to interest (not exclusive to financial) and not to reason if you want to change conclusions (p. 109)
    • relate with deprival memos (e.g., losing status)
  • And explain why. Remember Carl Braun. Always communicate Who is to do What, When, Where and Why. (p. 110)
    • show them the process not just the result, relate with algo notes
  • And appeal to the fear of losing what they value (p. 110)
  • And (if it makes sense) use an authority figure, a friend, consistency bias for the better (p. 110)
  • Ben Franklin having someone lend a book to him tactic example (p. 111)
    • relate with /Franklin
  • Franklin tactic can work in reverse (p. 111)
  • Ben Franklin: “he that would live in peace and at ease must not speak all he knows nor judge all he sees” and what says that his opinion or solution is the correct one (p. 111)
    • don’t trigger defensive responses in othersrevisit 
  • Henry Ford on secret to success is changing perspective. If you do this, you understand why they do what they do. (p. 111)revisit
    • relate with 主語の転換 memos
    • relate with Carl Braun quote memos
    • relate with argue only when you can argue better than the opponent notes 
  • Goethe: misunderstanding and neglect is more often than trickery and malice (p. 112)
    • relate with Hanlon’s razor notes (elaborate how’s it’s rooted epistemologically, that is, perfect replication is impossible and no two minds share the same worldview and knowledge is created individually notes)revisit 
  • Nietzsche: the value is not in what you get, but what you pay for it, in what it costs us. Fight only important battles. (p. 112)
    • relate with cost is multiversal notes
    • relate with value (or price) is about the opportunity cost notes (if any)revisit 
  • If you start objecting to this and this and this, pretty soon people will pay less (or no) attention to you. Save bullets only when it matters. Worse yet, you will not be listened in other occasions too. Don’t shout. (p. 112)
    • relate with information is difference notes (elaborate what constitute noise)
    • relate with stuff translate memosrevisit 
  • “Sometimes peace is better than being right. Sometimes you must know when to accept a loss and quit.” (p. 113)revisit
    • Roy T. Bennett: be selective in your battles.
    • Peace ≠ the absence of conflict.

Be an extreme ideologue

  • Try to formulate the opposing argument better than the opponents (p. 114)
    • relate with knowledge creation is about debate and reconfiguration
  • Medical maxim, first do no harm. (p. 114)
  • Exactitude ≠ Truth (p. 114)
  • Montaigne: “Yes, but is it true?” (p. 115)
  • Science is about not fooling yourself (p. 115)
  • Take ideas seriously and show how absurd that idea is (p. 116)
    • this is implied in extending the Portfolio Structure (price quotations) to the Plan Structure (the underlying businesses)revisit 
  • On writing and orangutan theory (pp. 117-118)
  • Simplicity reflects clear thinking—and it’s rare (p. 118)

Make it easy for people to cheat, steal and behave badly

  • Serpico Syndrome (p. 119)
  • Social-Proof Tendency: stop any bad behaviors before it spreads and foster and display all good behaviors (p. 119)
    • relate with biases notes
  • If the incentives are wrong, behavior will be wrong (p. 120)
    • Xerox and Joe Wilson (p. 120)
    • Federal Express and the night shift (pp. 120-121)
  • You get what you reward for (p. 121)
  • Always follow the incentives and there you’d find solutions and truth (p. 121)
    • relate with Sherlock notes and there’s always a motive memo
  • Rewards include nonmonetary items like sex, friendship, companionship, status, power, influence, ego (p. 121)
  • Avoiding losses and what’s painful is also a reward (p. 122)
    • relate with counterfactual notes and what counts cannot be counted notes
  • Jean de La Bruyere quote on associating your incentives with that of others (p. 122)
    • this backfires when the system doesn’t prevent social-proof tendency (remember “independent” board)revisit 
  • Upton Sinclair quote on understanding and incentives (p. 122)
    • relate with notes on understanding othersrevisit 
      • i.e., they won’t understand you if the incentive facilitates that
  • Tie incentives to performance and factors that contribute to the ultimate end—value (remember Soviet nail factories) (p. 122)
    • relate with know what you want memos and notes (create if none)
    • relate with you find what you want to want in market memos and notes (maybe management is about constantly refining what you want to achieve and recalibrating the team) 
  • Pay for what can be controlled (e.g., low finding cost) over uncontrollable (e.g., oil price) (p. 123)
    • relate with focus on few variable memosrevisit 
  • If a CEO bats .150 but Berkshire as a whole performs well, he still gets paid as a .150 hitter (p. 123)
    • make your incentives uncorrelated with others and only correlate with his own performance
      • relate with uncorrected bets notes
      • relate with bat boy anecdote (you cannot uncorrelated anything since everything is somewhat connected)revisit 
  • Being a partner means in for both directions. To have both carrots and sticks. Remember Kiewit Corporation. (p. 124)
    • relate with Taleb, Spitz, and Ayache, also relate with volatility notes (options wouldn’t be as prevalent under free market?)revisit 
  • Charles Frankel quote on a responsible system. Ask: who bears the consequences? Remember the Roman system for arc builder. (p. 124)
    • relate with Taleb, Spitz, Saifedeanrevisit 
  • Don’t blame the tiger when he gets out of the cage and goes on a rampage. The cage has to be stronger and the keepers should know better than to leave the door unlocked. (p. 125)
    • relate with human nature notes and Everett notes (ask: human nature doesn’t really change?)revisit 
  • Maimonides quote on observation (p. 125)revisit 
  • Dread and avoid rewarding people for what can be easily faked (p. 125)
  • Achieving complete fairness is impossible. Tolerate a little unfairness to some to get a greater fairness. Remember the Navy anecdote. (pp. 125-126)
  • Complete foolproof is impossible (p. 126)
  • Don’t complicate the system. Keep it simple. Remember the Dean of USC School of Music anecdote on “replacing” candy. (p. 126)
    • relate with other keep it simple memos and notes
  • Complicated system begets people who game the system. And often these gamers don’t understand the system as a whole (e.g., its purpose and meaning). Complicated system often goes out of control. (p. 126)

Risk what you have and need, to get what you don’t need

Only look at the sunny upside

PART THREE: ON WHAT ELSE DOESN’T WORK AND WHAT DOES IN BUSINESS AND INVESTING

Invest your money in overpriced assets—preferably businesses without any competitive advantages or future and with lousy and crooked management

If you are a businessman think like an investor and if you’re an investor think like a businessman

Investing is about where to allocate your capital

Buy “wrongly” cheap productive assets you understand

Things are often cheapest when people are fearful and pessimistic

  • on bull market and sex (p. 141)
  • human behavior (of others) allows for success if you are able to detach yourself emotionally (p. 141)
  • on fear and greed as unpredictable diseases (p. 142)
  • Buffett: “Be fearful when others are greedy and be greedy only when others are fearful—the less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs”revisit

Be opportunistic and adapt and change when the facts and circumstances change

Stick to businesses where you can assess that their economics is good and getting better

Buy assets protected with a durable competitive advantage run by able and honest people

Understand why it has a moat—the key factors and their performance

One test of the strength of a moat is essentiality and pricing power

  • The Daily Racing Form, Reed-Elsevier (pp. 152-153)
  • Transportation and energy are essential (p. 153)
    • remember DS
    • Berkshire’s energy businesses holding is composed such that all are recession resistant and uncorrelated and can withstand regulatory attack.
  • Moat of railroad companies is saturation (p. 154)
  • Homes, auto, and insurance are essential. (p. 154)
  • Have a special place on people’s mind then you can raise the price (p. 154)
    • relate with DMU notes and symbol (or association) notes
  • Pricing power implies essentiality. Look at the pricing behavior of the product (not the stock). (p. 154)revisit
  • Get the basics well. You don’t have to do extraordinary things to get extraordinary results, don’t get diverted and instead focus on what works. (p. 155)
  • You should’ve shorted horses instead of buying up autos. Ask: who loses? (p. 156)
  • Can you name any single American TV or radio manufacturer? (p. 156)
  • Growth in an industry doesn’t mean profitability because of competition (p. 157)
    • relate with tiptoe memo and notes (emergent disorder)
  • Munger on Facebook (lol) (p. 157)
  • Business ≠ industry (p. 158)
    • relate with individuals ≠ society memos and notes
  • Business ≠ franchise. Many operations are in between weak franchise and strong business. (p. 158)
  • Dead fish won’t swim how hard you try proverb (p. 159)
    • relate with Marc Andreessen memos and notes again
  • Permanent problem ≠ temporary setback. Differentiate the two. (p. 159)
  • Bad news—if you see one, usually there’s more (p. 159)
    • relate with sloppy one thing likely means sloppy elsewhere memos and notes, and anything else related (e.g., bad news is easy to detect and likely gets exaggerated notes)
  • Share of mind >>> share of market (p. 160)
  • You rarely get poor investing in utilities (p. 160)
  • Good business throws up one easy decision after another (p. 162)
  • In commoditized businesses, you can’t really differentiate yourself (p. 162)
  • Get attractive security in attractive industry (p. 162)
  • Tech is based on change; and change is the enemy of the investors (p. 163)revisit 
  • Ask: can I compete and hurt a business with a billion dollars? (p. 164)
    • a business should be attack-prone
  • Andy grove and silver bullet question (p. 164)
  • I wish I didn’t know now what I didn’t know then quote (p. 165)
  • Retailing is competitive (p. 165)
  • On retailing (e.g., Costco and Amazon) (p. 165)
  • Pay attention to mistakes of omission, and learn from them (p. 167)
    • relate with absence of evidence notes
  • Check the track record of Berkshire’s investments (p. 168)TODO 
  • small mistakes are fine—it’s about payoff (p. 168)
  • acknowledging and analyzing errors >>> agonizing over errors (p. 169)
  • Ask: is this a good (or bad) business? Why? (p. 169)
  • Buffett’s quote on reality centered cast of mind (p. 169)
    • relate with Sherlock and Deutschrevisit 
  • The company should be viewed as an unfolding movie, not a still snapshot (p. 171)
  • The story of an ailing horse, again. Ask: is the business for sale because it’s walking just fine? (p. 171)
  • Mark Twain: a mine is a hole in the ground owned by a liar. (p. 172)
  • Buffett and Keynes on business is success is about future, not past. And you also have to explain why the business was successful in the past. (pp. 172-173)
    • relate with tracing the origin notes and quote from Paul valery
  • Ask: what forces can stop the current ongoing success? (p. 173)
  • Ben Franklin: a small leak will sink a great ship (p. 173)
    • relate with small changes can go unnoticed until too late notes
  • ABCs of business decay: arrogance, bureaucracy, and complacency. “Whom the gods want to destroy, they send forty years of success” (p. 174)
  • Don’t employ unnecessary assistants. Parkinson’s law. (pp. 174-175)
  • Widen the moat, build enduring competitive advantage, delight customers, and fight cost (p. 175)
  • Don’t underestimate the ability of others to do the same exact thing you’re about to do (p. 175)
  • The tendency gets magnified with disliking bias of competitors. Be aware. (p. 176)
    • relate with biases notes
  • Andrew Carnegie: look out for the boy sweeping floors, not the rich man’s son (p. 176)
    • relate with outsider notes and others
  • Buffett comments on food inflation. Also if horses could’ve voted, they would’ve voted down tractors. (p. 176)
    • relate with Saifedean’s argument on food inflation, and also Fiat Food.
  • Schumpeter quote on innovation: it strikes not at the margins, but its very foundations and lives (p. 176)
    • relate with /econ notes (e.g., Rothbard)revisit 
  • Businesses die. Sometimes better to just get out. Remember the Northern Pike Model (e.g., Walmart vs other chains). (pp. 176-177)
  • Stop digging. Fight wishful thinking, consistency bias, and loss to aversion bias. Stop wasting resources (e.g., time). Get out leaking vessels. (p. 177)
    • relate with biases notes
  • You don’t have to make it back the way you lost it (p. 178)
  • Businesses are bought for keeps (p. 178)
  • With stocks and bonds, if we find something more attractive, we sell (p. 178)
    • relate with opportunity cost notes
  • Not price but value is what matters with investment. (p. 178)
  • Organization foolish in one way is likely foolish in other areas (p. 179)
    • relate with sloppy in one area memos and notes
  • We just find people who’ve batted .350 for 10-50 years. We don’t train them. (p. 179)
    • relate with the decision should be obvious memos and notes
  • You can’t put passion into someone, but it’s easy to take it away. Don’t do that. (p. 180)
  • Work with winners. Remember Eddie Bennett and Yankees. (p. 180)
  • Being good at one thing doesn’t mean you’ll be good at another (p. 181)
    • relate with sloppy in one area memos (as a counter?)

Go in a field, in which you have no interest, not any competence or talent for, no edge in and where the competition is huge

Think about where the business is going to be in the future—not macro factors

Common sense is better than advanced math and computer models (pp. 190-192 has a summary)

  • On dot-com bubble and on changing expectations given the available facts, and why thinking like businessmen helps because often what’s been speculated is absurd. (pp. 188-189)
    • relate with quotes from /Holmes
    • the statement here clearly shows Buffett’s view that the Portfolio Structure will reflect the underlying Plan Structure
      • does Lachmann share the same view?
      • can the Portfolio Structure change the Plan Structure not temporality or on surface but substantially?
        • I think it does and that’s what happens in case of malinvestment caused by fiat money printing by the government
          • if so, what’s the implication for Buffett’s view?revisit
  • Roughly right >>> Precisely wrong (p. 189)
  • Common sense >>> Computer models (p. 189)
  • You shouldn’t need a spreadsheet to decide (p. 190)
  • people calculate too much and think too little (p. 190)
  • It’s not competency if you don’t know the edge of it (p. 192)
  • on one or few factors. less is often more. (p. 192)
  • Sandy Gottesman (p. 193)
  • write down your investment decision, preferably in a paragraph (p. 193)TODO
  • investing is about finding a mispriced gamble, and you have to know enough to decide if it’s mispriced (p. 194)
    • the statement here implies that nothing is objectively mispricedrevisit
      • relate with there is no such thing as mispricing note and refine it to there is no such thing as objectively mispricedTODO
  • Mr. Market >>> PnL (p. 195)
    • to be more precise, when your measurement criteria is PnL, then Mr. Market might dictate yourevisit
      • relate with other memos and notes elsewhere—you want to use Mr. Market, never to be used
  • the playing field (the Plan Structure) >>> scoreboard (the Portfolio Structure) (p. 196)
  • not where the puck is, but where it’s going (p. 196)
    • relate with price is fundamentally about future notes
  • risk is loss of purchasing power (p. 197)
    • why does Buffett not invest in Bitcoin?
  • simple stuff is generally overlooked (p. 197)
    • relate with simple stuff might not spread fast memo
  • questions to ask when investing (p. 197)
  • best time to get rich is in a crisis. independent thinking, financial preparation, and mental preparation. it doesn’t take brains (although you need the right basic ideas)—it takes temperament. (p. 198)
    • relate with cash is the gun to hunt rare fast-moving elephants memo

PART FOUR: ON FILTERS AND RULES

The right filters conserve thought and simplify life

Never lose sight of what you’re trying to achieve or avoid

The TUNE OUT “FOLLY” filter

The IMPORTANT AND KNOWABLE filter

The CIRCLE OF COMPETENCE filter

The TOO TOUGH filter

The OPPORTUNITY COST filter

The “AND THEN WHAT” filter

The “COMPARED TO WHAT?” filter

Checklists help—assuming we are competent enough to pick the key factors and evaluate them

Have some avoid-rules

Learning never stops

A Few Lessons for Investors and Managers from Warren Buffett – Peter Bevelin

1. What Investing in Financial Assets is All About

Laying out cash today in order to get more cash back in the future

What return I will get on my cash depends on the price I pay, how much cash I get back, and when I get it back

This return can then be compared with the expected return from other available opportunities

Since my return depends on the price I pay compared to what it’s worth, I should never pay more than what I get back in value

To do that I need to be able to figure out what a financial asset is worth—how else can I know what kind of return I can expect at a given price?

2. Valuation

Follow the cash—it’s the only thing I can spend

So valued, all financial assets become economic equals

It doesn’t matter where the cash comes from —it all spends the same

The financial asset that has the highest value compared to its price is the one that gives you the highest return

Since the future is unknown, value is naturally a rough estimate, not a precise figure

And fancy computers don’t help

A rough approximation is enough

3. The Value of a Business

A business is similar to a bond but there are some important differences

Book value is almost unrelated to value

And so are a lot of other yardsticks

  • The likes of dividend yield, PER, PBR, growth rates per se don’t matter (p. 5)
  • Discounted-flows-of-cash is what matters. Volatility doesn’t matter. (p. 6)

Cash flow from a business or “owner earnings” is after capital expenditures

The tooth fairy doesn’t pay for capital expenditures

Watchout for optimistic accounting and “accounting maneuvers”

Watch out for managers who seduce you with fancy predictions

4. Return on Tangible Invested Capital Reflects the Cash Flow Generating Characteristics of the Business

  • Goodwill is that excess mentioned in (p. 5) capitalized (pp. 8-9)
  • Return on invested capital depends on sales, cost, and the amount of capital required (p. 9)

5. Business Characteristics: The Great, the Good and the Gruesome

A. The Greatrevisit

B. The Good

C. The Gruesome

D. Other Tough Businesses

  • Tech is usually unpredictable, and only few will win big (p. 21)
    • 2-1a1a4a ‘Probabilistic thinking’ - Do not assume miracles!
    • But in the greater scheme of things, even if your expectations turn out to be wrong and you end up doing worse than “the average” it’s not the end of the world—because as long as there’s progress going about you might end up richer in the real sense of the word.
      • To associate the former with being poorer assumes a zero-sum game in a static environment—unfortunately a prevalent assumption.
        • Of course when you are wrong and the way you are wrong hurt you (i.e., if you take stupid riskwrong wrongly, as it were), you will be poorer both in nominal and real terms.
      • Instead what you have to understand is the non-linear impact from knowledge creation: a man can change the world and himself be very rich, but at the same time his invention can benefit the society as a whole—the game is positive-sum where there is knowledge creation.
        • Just that such “benefit” cannot be quantified meaningfully, since knowledge creation literally changes the game.
          • Metrics to measure such non-linearity is probably better understood as our attempts to capture its game-changing nature (e.g., see Elie Ayache).revisit
  • Growth has its limits (p. 21)revisit

E. On Accounting Goodwillrevisit

F. The Key Factors for Success (or Harm) and their Predictability

6. Past Results as a Guide: Sometimes Useful and Sometimes Dangerousrevisit

7. The Importance of Trustworthy and Talented Management

Stick to proven management with a lot of integrity, talent and passion

Culture counts

Existing cultures are hard to change so avoid situations where you have to change people

One doesn’t need an MBA to be talented

What management does with the cash is very important

  • Ask: who’s allocating the capital? (p. 34)
  • In Lachmann’s parlance, the Portfolio Structure must account for the portfolio companies’ management ability in managing the Plan Structure (and often the Plan Structure itself includes capital allocation as in the case for Berkshire with Buffett). (p. 34)revisit

Focus on the three questions that truly count

  • First, does the company have the right CEO? Second, is he (or she) overreaching in terms of compensation? Third, are proposed acquisitions more likely to create or destroy per-share value? (p. 35)

8. The Importance of Clear Yardsticks to Judge Management Performance

Don’t automatically be impressed by higher earnings

When things don’t work some change the yardstick

Beware of those who explain away bad results by using “except for”

Or blaming it on their long-term focus

9. Corporate Governance

10. Owners and Management

Just follow the Golden Rule (p. 41)

And how can I hold someone responsible if I tell them what to do?

  • Most managers are happiest when they are left alone to run their businesses (p. 42)
    • Berkshire has its own mini free market, as it wererevisit

Often I get a better management result through decentralization and non-control

11. Management Compensation: I Get What I Reward For

  • At Berkshire, management (i.e., Buffett and Munger) has the same interest as owners (shareholders). (p. 43)
  • Avoid capricious incentive structure (p. 44)
    • An option holder has no downside risk, hence will not be a part of good incentive structure (p. 46)
    • Ask: is the current incentive structure “capricious”?
    • Ask: would rewarding XXX based on the performance of YYY capricious?revisit

12. Mergers and Acquisitions: Dumb Acquisitions Cost Owners Far More than Most Other Things

13. A Few Management Issues

  • Imitation has a limitation (p. 56)
    • Henry Singleton: “If everyone’s doing them, there must be something wrong with them”
  • No yo-yo approach—do what makes sense for the customers, and never add the unneeded. (p. 59)
  • What needs to be reported is data that helps financially-literate readers answer three key questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? (3) How good a job are its managers doing, given the hand they have been dealt? (p. 59)

14. How to Reduce Risk: Prevention is Better than Cure

15. Sometimes Mistakes are Made

The Outsiders (see Henry Singleton)

The Investor as CEO

Other Sources

The Tao of Buffett (Founders #101)

Bevelin on Buffett (Founders #202)

The Essays of Buffett (Founders #227)

  • Bruce Lee: “It is not daily increase but daily decrease, hack away the unessential. The closer to the source, the less wastage there is.”
  • A good business run by a good manager is rare.
  • It’s all about free cash flow.
  • Watch the basket.
  • When dumb money acknowledges itself as such, it ceases to be dumb money.
    • Confucius: “Real knowledge is knowing one’s ignorance
    • Buffett: “Risk comes from not knowing what you are doing”
  • Avoid dragons. No need to slay them.
  • Money provides margin of safety.
  • Fees never falter
  • Buffett’s pitch (1:35:00)
  • There would be no auto industry with horses

Bevelin on Buffett and Munger (Founders #286)

400 pages of Buffett and Munger (Founders #380) ~1h7m