![what I’ve learned from Berkshire Hathaway annual meetings [business]](https://winwithflynn.com/wp-content/uploads/2024/05/image-24-740x430.png)
A few years ago, I stumbled across a podcast feed for the Berkshire Hathaway Annual Meetings. They are about five hours each, going back to 1994. So, like a psychopath, I started in on them.
And I loved every minute.
Their annual meetings are held in Omaha, Nebraska every spring, and after a short “meeting” to elect the board and check a few required boxes for the SEC, they turn the microphones over to their shareholders, letting them ask questions about Berkshire Hathaway specifically, business generally, and in more recent years, the art of living a good life.
I’d make a note when I heard something interesting, funny, smart, educational, or all the above.
Warren and Charlie ended up getting the same questions on multiple occasions and they gave the same answers. They were remarkably consistent. Towards the end, listening to these most recent years, and Charlie’s last years, I was struck by the feeling that I knew their answers before they gave them. Like listening to your parents tell the same stories over and over again. Those stories you respond to with an eyeroll. And those are the same stories, inevitably, you retell to your children.
Because they are important.
So, as my second entry into the “what I’ve learned from” series, I’m serving up my favorites from Warren Buffett and Charlie Munger, courtesy of the Berkshire Hathaway Annual Meetings.
Part One: Business
Part Two: Life (next week)
A bird in hand:
Warren Buffett: The first investment primer that I know of was delivered in about 600 B.C. by Aesop. Aesop said, “A bird in the hand is worth two in the bush.”
Now incidentally, Aesop did not know it was 600 BC. He was smart, but he wasn’t that smart. (Laughter)
Aesop was onto something, but he didn’t finish it.
He forgot to say exactly when you were going to get the two in the bush — and he forgot to say what interest rates were that you had to measure against.
But if he’d given those two factors, he would have defined investment for the next 2,600 years.
The question is, how many birds are in the bush. You may think there are two birds in the bush, or three birds in the bush, and you have to decide when they’re going to come out, and when you’re going to acquire them.
Now, if interest rates are five percent, and you’re going to get two birds from the bush in five years, versus one now, two birds in the bush are much better than a bird in the hand.
So, you want to trade your bird in the hand and say, “I’ll take two birds in the bush,” because if you’re going to get them in five years, that’s roughly 14 percent compounded annually, and interest rates are only five percent.
But if interest rates were 20 percent, you would decline to take two birds in the bush five years from now. You would say that’s not good enough, because at 20 percent, if I just keep this bird in my hand and compound it, I’ll have more than two birds in five years.
And that’s all investing is. It’s a value decision based on what it is worth. How many birds are in that bush, when you’re going to get them, and what interest rates are.
But, if you stand up in front of a class and you say, “A bird in the hand is worth two in the bush,” you know, you’re not going to get tenure. (Laughter)
It’s very important if you’re in the priesthood to look like you know a lot more than the people you’re preaching to.
If you’re a priest, and you just hand down the 10 Commandments and you say, “This is it,” and we all go home, it just isn’t the way to progress in the world.
Note from Dave: This is basic rule of 72 personal finance.
If you can magically get 20 percent interest rate, you’ll double your “birds” in just 3.6 years. And you’d have no reason to exchange that bird for two birds in 5 years.
Okay, now that you know what investing is, here is my biggest learning about how to invest.
Modern portfolio theory:
CHARLIE MUNGER: I want you to remember one of my favorite sayings as you do this asset allocation. “If a thing’s not worth doing at all, it’s not worth doing well.” (Laughter)
Students of America go to these elite business schools and law schools, and they learn corporate finance and investment management the way it’s now taught.
And some of these people write articles in the newspaper and other places and they say, “Well, the whole secret of investment is diversification.” That’s the mantra.
They’ve got it exactly back-ass-ward. The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple.
Diversification is for the know-nothing investor; it’s not for the professional.
WARREN BUFFETT: And there’s nothing wrong with the know-nothing investor practicing it. It’s exactly what they should practice.
A know-nothing investor will get decent results as long as they know they’re a know-nothing investor.
Diversify as to time they purchase their equities, and as to the equities they purchase. That’s crazy for somebody that really knows what they’re doing.
And you will find opportunities that, if you put 20 percent of your net worth in it, you’ll have wasted the opportunity of a lifetime, you know, in terms of not really loading up.
You do not have to have tons of good ideas in this business, you just have a good idea that’s worth a ton, occasionally.
CHARLIE MUNGER: The game hasn’t changed at all in terms of its basic arithmetic. That’s why modern portfolio theory is so asinine. (Laughter)
WARREN BUFFETT: It really is folks.
CHARLIE MUNGER: Most people aren’t going to find thousands of things that are equally good; they’re going to find a few things where one or two of them are way better than anything else they know.
Note from Dave: This is the biggest change I’ve made in my investment thinking over the years of listening to Warren and Charlie.
Most of my investing mistakes have come from trying to diversify, get cute, and outsmart the market, instead of just buying more Costco.
You can apply this thinking to books, movies, friends, and coworkers too. Who and what is worthy of your valuable resources (time)? The list is shorter than you think. Instead of going to that networking event, you should just see Pearl Jam with your big brother. Instead of the latest best seller, read ZMM again.
No “degree of difficulty” bonus:
CHARLIE MUNGER: Around here I would say that if our predictions have been a little better than other people’s, it’s because we tried to make fewer of them. (Laughter and applause)
WARREN BUFFETT: We also try not to do anything difficult, which ties in with that. There are things in life that you don’t have to make a decision on. That are too hard. If something is staring you right in the face, the easiest decision in the world, the payoff can be huge.
You know, this is not like Olympic diving. In Olympic diving, they have a degree of difficulty factor. And if you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive.
That’s not true in investments. You get paid just as well for the most simple dive, as long as you execute it all right. And there’s no reason to try those three-and-a-halfs when you get paid just as well for just diving off the side of the pool and going in cleanly. (Laughter)
You don’t have to do exceptional things to get exceptional results.
Some people think that if you jump over a seven-foot bar that the ribbon they pin on you is going to be worth more money and it just isn’t true in the investment world.
We get paid, not for jumping over seven-foot bars, but for stepping over one-foot bars.
And the biggest thing we have to do is decide which ones are the one-foot bars and which ones are the seven-foot bars so when we go to step, we don’t bump into the bar. And that is something that I think we’re reasonably good at.
Charlie?
CHARLIE MUNGER: Obviously.
Note from Dave: Great investing advice. Great management advice. Great parenting advice. Just like the Ravioli Problem, you don’t get extra credit for making it fancy.
Financially fat:
WARREN BUFFETT: I came to the conclusion that PetroChina was worth a hundred billion, and then I checked the price, and it was selling for 35 billion, roughly.
Now, if I thought the company was worth 40 billion and had been selling for 35 billion, then at that point you have to start trying to refine your analysis more. But there’s no reason to refine your analysis. I mean, I didn’t need to know whether it was worth 97 billion or 103 billion if I was buying it at 35 billion.
Any further refining of analysis would be a waste of time when what I should be doing is buying the stock.
If you have to carry it out to three decimal places, it’s not a good idea. It’s like, if somebody walked in the door here and they weighed somewhere between 300 and 350 pounds. I might not know how much they weigh, but I would know they were fat. (Laughter)
That’s all I’m looking for, something that’s financially fat. And whether PetroChina weighed 95 billion dollars or 105 billion didn’t make much difference. It was selling for 35 billion.
We’re not looking for needles in haystacks or anything of the sort. We like haystacks, not needles.
If you really need to figure out if the discount rate is 9.6 percent instead of 9.8 percent — forget about the whole exercise. Just go onto something that shouts at you. And essentially, we look at every business that way.
The false precision that goes into saying that this is a two standard deviation event, or this is a three standard deviation event, and therefore we can afford to take this much risk and all that, it’s totally crazy.
Note from Dave: You may not know how to value Chinese petroleum operations, and that’s okay. That’s why Warren gets paid the big bucks. But what about the house, the car, or the job?
You can make the pros and cons list, you can do all sorts of calculations, but “if you have to carry it out to three decimal places, it’s not a good idea.”
Every year people ask Warren and Charlie about their investment process. They are looking for stock screening filters and calculations. They are looking for the algorithm. But that is not how they’ve picked their big winners.
What really pays off is correctly predicting the future.
Correctly predicting the future:
CHARLIE MUNGER: You can use filters to sift the investment universe. And if you stick with stocks that can’t possibly be wonderful, but are underpriced, then you have to keep moving around all the time.
As they get closer to what you think the real value is, you have to sell them, and then find others. And so, it’s an active kind of investing.
The investing where you find a few great companies and just sit on your ass because you’ve correctly predicted the future, that is what it’s very nice to be good at.
Note from Dave: I have several excel files that attempt to predict the future. They help me understand businesses, their total addressable market, moats, insider ownership, free cash flow per share, etc. But you know what really works? Seeing the iPhone and understanding that it will change the world.
And being right.
It’s all obvious in hindsight, but to some, it was obvious in real time as well. And when it is, you’d be smart to act.
The burning theater:
WARREN BUFFETT: The only way that you leave your seat in a burning theatre of financial markets is to find somebody else to take the seat. And that is not always easy.
Note from Dave: Every share of stock that you buy is being sold by someone. Why are they selling? In finance, you need to ask why the person wants to sell their seat at the theatre. If it is to attend a different show, that is understandable. But if it’s because the place is on fire, that is something to be understood before you exchange money.
We really want products where people feel like kissing you:
WARREN BUFFETT: American Express was an interesting situation because Diners Club got there first. I think American Express went into the credit card business because they were worried about what was going to happen to traveler’s checks.
But when American Express went into competition with Diners Club, instead of charging less than Diners Club and going in figuring they were going against the established guy and they’d come in at a lower price, they went in it at a higher price.
The American Express centurion was on that card. And frankly, if you were a salesperson out with somebody, and you could pull out that American Express card with that centurion, you looked like you were JP Morgan. And if you pulled out the Diners Club, it had a whole bunch of flashy symbols, you looked like a guy that was kiting his checks from one month to the next.
Ralph Schneider and Al Bloomingdale developed the Diners Club. And they were very smart about getting there first, but they weren’t smart about how they merchandised it subsequently.
See’s Candy, you know, if you live in California and you were a teenage boy, and you went to your girlfriend’s house and you gave the box of candy to her and she kissed you, you know, you lose price sensitivity at that point. (Laughter)
So, we really want products where people feel like kissing you, you know — (laughs) — rather than slapping you.
American Express had this huge salad oil scandal right around the time [President] Kennedy was shot. And there was a worry about whether the company would survive.
But nobody quit using the card. Nobody quit using the traveler’s checks. And they charged a premium price for their traveler’s checks. So, there are things you can see around consumer products that sometimes can give you a pretty good insight into the future.
Costco has an enormous appeal to its constituency. They surprise and delight their customers. And there is nothing like that in business. You have delighted customers, you’re a long way home.
Note from Dave: No mention of margins or operating cash flow. Delighted customers create a brand that can endure. And that brand does not need to be the first mover.
Think in terms of share of mind:
WARREN BUFFETT: We always think in terms of share of mind versus share of market because. If share of mind is there, the market will follow.
Probably 75 percent of the people in the world have something in their mind about Coca-Cola. And overwhelmingly it’s favorable. Everybody in California has something in their mind about See’s Candy, and overwhelmingly it’s favorable.
The job is to have it in a few more California minds — or world minds in the case of Coke — over the years, and have it even be a little more favorable as the years go by. If we have that, everything else follows.
Note from Dave: Share of mind will eventually lead to share of market, and I’ll add that share of market without share of mind is not safe from competition. This is a wonderful framework for branding. When I think about the future of this blog, and my writing, I’m trying to hold a slightly larger share of mind each year. If I can do that, things will work out.
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