It’s a bittersweet feeling listening to one of Charlie’s final interviews.
As usual, his words of wisdom were always timeless and insightful.
During this interview, he discussed how to succeed in life, how he looks at investment opportunities, and his life philosophy.
Here are my 15 key takeaways:
1. Create a huge advantage in life by:
Avoid selling anything that you wouldn’t like to be on the receiving end.
Work with people you admire & trust.
Pay attention during math.
“It’s just a huge advantage if you start doing that young and keep doing it consistently through life. It isn’t very hard, stay awake in high school math and deal with the good people instead of the bad people and sell what you would buy if you were the buyer, not what you can sell by misleading people. These are very simple ideas. But it’s just absolutely amazing how well they work for people who relentlessly follow these simple ideas.”
2. When incentives conflict with values, people rationalize bad behavior.
I see this playing out time & time again. It doesn’t matter if these people are rich. When incentives collide, their values go out the window.
Avoid both people & incentives structures like these.
“A lot of people rationalize selling drugs to other people to make money. If you go back to Franklin Delano Roosevelt, his money mostly came from his grandfather selling opium to the Chinese and he was selling it to Chinese bandits, too. And he was very respectable when he got back to the United States and lived in a big house, and I’m sure behaved well in dealing with those tradesmen and so forth.
But I don’t want to make that money by selling opium to the Chinese. It’s a terribly disgusting way to make money, but a lot of the early money that came to Harvard, Yale and Princeton and so forth, they also made money, those early tradesmen in that area, by selling opium to the Chinese.
So a lot of people have rationalized all the terrible conduct in the history of the world. And I think it’s safer and surer and better just to eliminate that whole system from your repertoire. Just get the bad people out of your life and the bad activities out of your life, just exclude them.”
3. To succeed in investing & in life:
Play games where you have an advantage over others.
Have confidence in the field you are pursuing.
Know the edge of your competency.
“By and large, we haven’t invested in pharmaceuticals because we’ve got no edge. I don’t know enough about biology and medicine and chemistry to have any edge in guessing which new pharmaceutical attempt is likely to succeed and other people who know those things, not that they have perfect knowledge, but it’s way better than mine. Why in the hell would I play against other people in a game where they’re much better at it than I am when I’m playing for something desperately important to me like a way of feeding my family. So of course, we didn’t go near it.
I would argue that they’re — in practical life, you want to succeed, you got to do two things. You got to have a certain amount of confidence. And you have to know what you know and what you don’t know. You have to know the edge of your competency. And if you know the edge of your competency, you’re a much safer thinker and a much safer investor than you are if you don’t know it. And I constantly meet people, better to have an IQ of 160 and think it’s 150 than an IQ of 160 and think it’s 200. That guy is going to kill you because he doesn’t know the edge of his own competence and he thinks he knows everything.”
4. Why didn’t Munger & Buffett invest in Amazon early on even though it resembles Costco?
While they have been successful in investing in early stage companies as well as established companies, they have had better results investing in established companies, so they gravitated towards those investments and passed over Amazon early on.
“We’ve actually started a business or two, and we bought some little ones that we made big. So we have done some things that look like venture capital and some of them have been quite successful. But average that, we bought existing businesses that have a lot of momentum as well as all the talent and just rode those things.
So we made way more money by finding something that’s already working in a business and just buying in, then we have starting new ones from scratch. NetJets was an interesting business. We lost money or broke even for 10 to 12 years. And now it’s just a gold mine of a business. We look like venture capitalists. I guess we were in that case.”
5. Not all businesses with fast cash conversion cycles are the same
Businesses that turn their working capital over quickly by squeezing their suppliers are not as good as those that turn their inventory over quickly.
“They learn for instance, that if you just pay the suppliers in 90 days and sell in 30 days, then you get all this — somebody else is furnishing your working gaps. So they abuse the supplier, who’s a little supplier, because they can get by with it. I don’t think those models are safe or good. I think that’s a dumb way to treat little suppliers. So I don’t believe in that kind of brutality to little suppliers.”
(examples of businesses driving capital efficiency without squeezing small suppliers)
“Well, Costco is one (by turning the inventory quickly). Yes and doing that because they have fewer stocking units and they’re way more efficient.”
6. Why Costco membership is brilliant:
– Reduce merchandising thefts by customers
– Reduce the number of people who use bad checks
– Reduce parking spaces taken up by people who don’t spend much
Successful businesses are as much about who they serve as about what they do.
“But Costco, it’s an amazing culture. The whole damn culture of the place is so subtle and it just marches from triumph to triumph. It was smart to have a small number of stocking units flowing through with enormous speed. It was right to have a membership system.
There are three things that Costco didn’t want. Didn’t want people who stole merchandise. They didn’t want the people who used bad checks, and it didn’t want people cluttering up his goddamn parking lot without spending a hell of a lot of money in stores. So a membership system, where they accept only a certain kind of a member, all of a sudden now they’ve got nothing but people who buy a lot per trip.
Costco has always had the lowest shrink rate in the world. Tricks the inside too. So the net theft rate at Costco was always below 2/10 of 1%. That’s unheard of.”
“You figure out what you want to avoid. And they want to avoid theft losses, embezzlements, bad checks and cluttering up the parking lot without buying much. And their system caused all those effects at once.”
7. Why wealth management has almost zero chance of outperforming a low cost index:
– After the Great Depression, the economy recovered from a low base
– There’s large pools of capital today, making it tough to manage
– Way more smart people has entered the business
“Of course, it’s gotten harder, way harder. It’s gotten so hard that most of the people who are in wealth management have an almost zero chance of outperforming an unmanaged index like the S&P.”
“There’s so much more of this wealth invested in securities. And so we’ll get a whole lot of big sums to manage. And of course, it’s a long time to buy in, a long time to sell out, costs are higher. And so it’s way harder to manage a large sum of money to make a lot of money at high returns than it is to manage a small sum of money. And then way more brains came into the business. So it’s gotten brutally competitive.”
(why it was easier in the old days)
“The Great Depression so demoralized everybody, they were utterly despised and then the economic system improved a lot. And the combination of the investment climate, the economic situation together evolving, just made it unusually good…Just because it worked for the last 100 years does not mean it’s going to work for the next 100 years…United States, country prospered, a lot of good stuff happened at once that caused that very good result. It’s not always going to work that way.”
8. On managing difficulties in life:
Don’t feel sorry for yourself.
“I have one standard set of advice for all difficulties, suck it in and cope. That’s all any human being can do, suck it in and cope. Partly, you have to be shrewd. That’s one way of coping is to be as shrewd as you can possibly be. But that’s my recipe. And I must say it’s worked pretty well for me. It will work very well for any other person who uses my methods.”
9. On declining birth rates:
– It’s better for the society that we don’t have overpopulation
– But it might not be better for the individuals
– Charlie thinks having kids earlier has merits for growth & happiness
“It (low birth rates) creates a different kind of a world. Well, I don’t see that mankind would be at all smarter if everybody had six children. I think that just jams up the population way too much starting with 7 billion for the whole world. So I think it’s good that the population is growing more slowly.
I think the people who married at 21 or 22 and grew up fast because they had to because they have those young children. In a sense, I think they were a luckier generation than the people who came along with all these different options and who delay marriage into late age and have one or two children, I’m not at all sure it’s good for the people who are having these new options, but it is good for the population.”
10. Search for win-win situations
Nothing is better than that—both sides wanting each other to win.
When it comes to investing, Charlie will not invest in casinos or tobacco companies—companies that win while customers lose.
“How can anything be more important (referring to win-win situations)? It isn’t just that it works better in terms of creating plenty for all. It’s better morality. Of course, both sides want both sides to win, that’s more moral than trying to take advantage of other people when it’s so obviously the right way to live and it’s the right way to do business.”
11. What Charlie would change about fund reporting:
– Mutual funds creating smaller funds to get a phony big record
– Instead of reporting historical returns, report it per dollar year
“If I were running the SEC and had the power to do it, I wouldn’t allow people to publish a record saying, “Here’s what I did over the last 20 years, when I started with $2 and went up to $200 million.” because it misleads people. And of course, we will create mutual funds, create little ones to get a phony big record. I would forbid that kind of stuff.
I would force everybody who is a big-time money manager to report his investment record per dollar year instead of historical, and that would take the miscreancy out of it. And it would be so simple, and it would radically change the whole industry.”
“Yes. How much return — for every dollar year, what was your return? And of course, that’s a very different figure. I know of a case of a hedge fund where the proprietor made a lot of money, but per dollar year, the net return was zero. Because when he got a lot of money, he really made a lot of dumb mistakes.
He made a lot of money when this one didn’t matter much. And yet it looks like a wonderful record. But in fact, it was terrible. And why wouldn’t that be a fair thing to require?”
12. When assessing investments, here’s what Charlie focuses on:
Durability.
Collison asked how he would evaluate Stripe as an investment.
Charlie’s response?
“Is it likely to remain forever as a money generator? And that’s a more complicated subject. It’s hard to know how the world is going to evolve. If Kodak could suddenly be obsoleted away, maybe it’s not utterly unthinkable if Stripe could.
The company that dominates software for architects, terribly prosperous company, but some other companies come up in that field a lot and it no longer dominates as much as it did. So not everything in software always wins. So I do not have the feeling — the venture capitals tend to think everything in software is always going to win. I don’t believe that for a minute.”
13. Charlie is less comfortable with China now
China’s system has deviated quite significantly since Xi took over.
“Obviously, I’m more uncomfortable now than I was. The guy who changed the whole system and said, “I don’t care if the cat is black or white as long as it catches mice.”, he wanted the goddamn economy of China to work like Singapore’s. Of course we love that guy. And the new guy isn’t quite as much like that guy as we would consider ideal.”
14. Berkshire’s secret: trust and no bureaucracies
Do business only with people you can trust, even without contracts.
This combination allows you to overcome complicated problems and achieve great results.
“Berkshire is pretty extreme in culture. We are deeply aware of how bureaucracies tend to create their own internal dynamics so that everybody protects everybody else and nobody changes anything, ruffles any feathers. And the net result is that a lot of bureaucracies make some very stupid decisions and we try and avoid that.
And another thing is, we like very trustworthy people. I’d rather have a brief telephone with somebody I trust than I would a 40-page contract prepared by the finest law firm in the world with somebody I don’t trust. And so we like to deal with trustworthy people and to be able to count on their oral promises.
If you look to go into a Mayo operating room is what I call a seamless web of deserved trust. The surgeons trusting the anesthesiologist, the anesthesiologists trusting the surgeon, the nurses are trusting — everybody trusts everybody else. There’s no bureaucracy at all. They don’t have time for bureaucracy.
It’s in patients’ interest to get it over as soon as possible. And so that seamless web of deserved trust can do these very complicated procedures. We like a business system that operates as much as possible like a Mayo operating room, and that requires having very good people who are experienced enough with one another to trust one another.”
15. Two people Charlie recommend you study:
– Lee Kuan Yew
– Benjamin Franklin
“So as far as I’m concerned, the politician who looks the most like Poor Charlie’s Almanack is Lee Kuan Yew. And I’m not surprised that he got ahead better than any other nation builder that ever lived. That was all he did. It was pretty goddamn simple… Everybody ought to study Lee Kuan Yew. In this house, I’ve got 2 busts of other people. One is Benjamin Franklin, one of them is Lee Kuan Yew. That’s all I have.”
This is the end of my notes and thank you for reading.
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Speak soon,
Thomas