OtherIn the Chronicles of American Financial History, Charlie Munger will be seen as the proverbial enigma wrapped in a paradox. He is both a mystery and a contradiction at the same time. Warren Buffett said, Charlie's most important architectural feat was the design of today's Berkshire. The blueprint he gave me was simple. Forget what you know about buying fair businesses at wonderful prices. Instead, buy wonderful businesses at fair prices. Consequently, Berkshire has been built to Charlie's blueprint. How is it that Charlie, who trained as a meteorologist and a lawyer and never took a single college course in economics, marketing, finance, or accounting, became one of the greatest business and investing geniuses of the 20th and 21st centuries? Therein lies the mystery. The Tao of Charlie Munger, a compilation of quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth.
David SenraThe Tao of Charlie Munger by David Clark is easily the most impactful book I've read over the past five years. I've read it probably 20 times just to drill all of Munger's lessons into my head better than any MBA. So any time I see a tweet like that with such a high recommendation, I think it's foolish. I think you should economize and be frugal with most of your resources and most things in life, but I don't think books is one of the things you should economize on or anything that teaches you something. I think it's silly. I think that's what you should be. That's the purpose of money. That's what you should be spending your money on. So once I saw the tweet, I immediately downloaded the Kindle version and read the Kindle sample. Couldn't put it down. Immediately bought the book. Normally I like to read paperback books or physical books, but I didn't want to wait. So I downloaded the entire book and just couldn't stop reading. Before I jump into the book, I just want to talk about, if you're new to the world of Charlie Munger, now there's two other books that I'm going to be doing on future episodes of Founders About Charlie, one of them being Poor Charlie's Almanac, which is huge. But this is a really good introduction because what David Clark, the author, what he did is he took – the book is not like a normal chapter book. It's like 130 or 140, I would say, one to two-page essays. And so he takes a quote or an observation that he found of Charlie Munger and then kind of expounds on it in a few short paragraphs.
[2:43]
QuestionerSo it's the kind of book where you could read it in a weekend, but I would recommend –and I'm waiting for the paperback version to arrive – just keeping it around your houseand in a place where you see it all the time, pick it up, read one or two essays, put it kind of down.And that's the way I would consume it after you read it because I think it is very much like what the personthat's tweeting this is who read it 20 times.It's very much like an easy, digestible reference to the mind of Charlie Munger.Now, why, you might be asking, other than the fact that he's Warren Buffett's right-hand manand, like we just said, never really took a class on economics or any kind of business yet,has already had one of the most successful careers in business history.And the reason I was introduced to Charlie is because there's a lot of people that I respect the way they think.And so I try to follow what they read, what they write, if they're on podcasts, et cetera, like that.And what I notice, the pattern is a lot of the people that I already respect, respect Charlie Munger.And I think that's a good way.I've always talked about this idea that I was exposed to a few years ago that books are the original hyperlinks.They link us from one person or one idea to another.Well, same thing with people, where if there's somebody you really admire the way they think,you always go back and look who influenced them because we're a species that mimics, right?So inevitably, the people you admire were heavily influenced by other people.And this podcast is kind of an example of that because I started out being interested in peoplethat entrepreneurs like the basic people that a lot of people look up to now.Let's say like the Steve Jobs and the Jeff Bezos and the Elon Musks.But then the more you study them and you read their biographies, you watch videos of them talking,you realize like they always reference who influenced them.So think about this, like Steve Jobs, he was influenced by Robert Noyce, one of the founders of Intel.Robert Noyce was in turn influenced by people like Bill Hewlett and David Packard, founders of HP,who also influenced Steve Jobs.And I always talk about if you really want to understand Steve Jobs,you should really study the life of Edwin Land, who is I think one of the most, how would I say, not underrated.Like he had a huge impact in the world and yet not that many people know about him.
[5:03]
OtherSo whatever term you want to – whatever term describes that.Where, you know, when I discuss Edwin Land, I said, hey, you really should read his bookor read the book, the biography on him called Insisting on the Impossible.And you realize a lot of the ideas that we quote Steve Jobs, he's just quoting Edwin Land.And this happens all the time.So Jeff Bezos, who was he influenced by?Well, read the Everything story.He talks about Sam Walton, talks about a life-changing meeting with the founder of Costco.James Sinegal, I think is how you pronounce his name.Same thing with Elon Musk.He talks openly about being influenced by people like Benjamin Franklin and Henry Ford.So this is a long-winded way to say there's something – there's a lot of value to studying Charlie Munger.At least I found a lot of value in that because by and large almost every single person I look up toor that I enjoy the way they look at the world references the influence he's had.So we're going to see a lot of that today in this book.So this is not like a typical biography, but we are going to hear a little bit about –like the introduction covers a little bit about his early life.So let me just jump into that right now.And it says, Charlie spent much of his youth – he's 95 years old now.So he says, Charlie spent much of his youth reading the television and video games of his day.So that's what they're describing reading.Reading is a heavy, heavy theme in this book.Well, I'll just get – I won't step on my future points.And that is where he discovered a larger world.So Charlie and Warren both grew up in Omaha,and this is a little bit about his first job in an indirect way that he's going to wind up meeting Warren Buffett.So it says, Charlie was introduced to the world of business at the Buffett grocery store.So this is a grocery store that Warren Buffett's grandfather owned.He said he learned about – and this is really important.He said he learned about taking inventory, stocking shelves, pleasing customers,the importance of showing up on time for work,and how to get along with others while accomplishing a joint task.And, of course, running the cash register where money, the lifeblood of business, flowed.The people that are already on my email list will already know this because I just took notes on –it's like a 30-minute talk Charlie Munger gave in 2005.He was given a commencement address.I think it was at the University of Southern California School of Law.
[7:21]
QuestionerAnd so he references history constantly.He's very much a student of history.And so the author, David Clark, is picking up on that here in the introduction.He says, Charlie often brings up the horrors of the Great Depression at Berkshire Hathaway annual meetingsas a reminder of just how bad things can get.And that's one thing you're going to notice about –Charlie has like a very – almost like a stoic philosophy on understanding that, hey,most of what happens to us in life we can't control, but we can control how, like, we react to it.And he references, like, how studying history will put things into your perspective.Like you may be suffering, but people have suffered way worse than you, and they've survived through it.So that when I read that part about constantly reminding yourself about the Great Depressionand how things can get, there's a book that I read.So it says – well, first let me read the note out for myself.It says, there is a value in studying these time periods.I'd recommend reading The Last Highlander.It teaches you what humans are able to adapt and overcome.And the audiobook is like a long podcast.And so then I went back and looked for my notes on that book.And I'm just going to read them to you.Let me pull it up right now.Okay, it says – so these are notes I wrote.It says, I just finished The Forgotten Highlander, my incredible story of survival during the war in the Far East by Alistair Urquhart.So I was posting something I said I'd highly recommend.But let me just tell you the basic plot here.I'm just going to read my notes directly to you, okay?This is really important.So the guy that wrote the book is – it's like a first-hand account.It says, Alistair Urquhart was conscripted into the British military to fight during World War II.He was 19 years old.He was sent to Singapore.The Japanese invaded and he was taken hostage.He survived 750 days in the jungle working as a slave on the death railway and the bridge on the River Kwai.Most of the time he was forced to work completely naked.So imagine you're a slave of the Japanese Imperial Army, you're butt naked, and you're in the jungle.What do you think is going to happen?He contracted dysentery, malaria, and tropical ulcers a lot.If you want to gross yourself out, Google what a tropical ulcer looks like.He was then transferred after 750 days as a slave.He was transferred to what's called a Japanese hell ship.
[9:40]
OtherThe ship was torpedoed by the Allies.Almost everyone on the ship died.He did not.He spent five days adrift at sea until he was picked up by a Japanese whaling ship.As bad as his life has been so far, right?It's about to get worse.He was sent to Nagasaki and forced to work in a mine.Two months later, he was struck by the blast from the atomic bomb.He was freed by the U.S. Navy shortly thereafter.He returns home to Scotland and finds out his best friend died in the war,and the girl he loved got married and moved to Canada.At 90 years of age, he wrote the book, The Last Highlander,to inspire others to persevere when they are faced with hardships in their life.I think it's a great book for entrepreneurs.The story demonstrates the adaptability of humans, our fierce desire to survive,and puts the stress of building companies into the proper perspective.The entire story only takes three hours and 14 minutes,so if you happen to subscribe to Audible like I do,I definitely recommend using one of your credits on that because I think it's fantastic.Okay, so let's go back to more of his early adulthood.So it says, after high school, 17-year-old Charlie enrolled in the University of Michigan to study mathematics.He turned 19 a year after Pearl Harbor, dropped out of college, and joined the U.S. Army Air Corps.The Army sent him to Caltech in Pasadena, California to study meteorology.There he learned the difference between cumulus and cirrus crowdsand fell in love with the sunny Southern California weather.While the teenage Warren Buffett was busy learning about odds and probability at the horse racing track,Charlie Munger was learning important investment skill while playing poker with his Army buddies.That's where he learned to fold his hand when the odds were against himand to bet heavy when the odds were with him.So betting heavy when you have an opportunity, he talks about constantly.A strategy he later developed to investing, or he later adapted to investing.So he ends up going to law school, then he joins a prestigious corporate law firm.He doesn't last long as an attorney.And then he also becomes a director of an international harvester dealership,which I think just sells farm equipment.But he talks about some of the lessons he learned from the dealership.It was a volume business that required a lot of capital to pay its costly inventory.Most of it was financed with bank loans.
[12:06]
QuestionerIt was a lot of stuff.So after a couple of bad seasons, carrying a costly inventory starts to destroy the business.So he learns, like, what's a bad business, which I think is very valuable to learn.So, I'm sorry, at this point in the book he's still an attorney.So it says, Charlie thought a lot about business during that time.He made a habit of asking people what the best business they knew of.He longed to join the rich, elite clientele that his silk-stocking law firm served.He decided, this is really important, he decided that each day he would devote one hour of time at the officeto work on his own real estate projects.He wanted to develop real estate.And by doing so, he completed five, five projects.He said that the first million dollars he put together was the hardest money he ever earned.It was also during that period that he realized he would never become rich,or never become really rich, practicing law.He'd have to find something else.So, I think that's obviously really important.Listen, there's nothing wrong with having a normal job.It's just you're not going to become wealthy being an employee.I mean, go look at how, the great thing that I was exposed to by accident,which is a really good idea, was you can pull IRS data.And let's say you want to know, okay, what are the people that make over, say, $10 million a year,what's their occupation?And so, a lot of it comes from financial services.So, if you're making $10 million plus a year, this data is a couple years old.It might even be a decade old.But at the time, it was like 45% of the people reporting $10 million a year income.It comes from interest, dividends, capital gains, stuff like that.The next category is business income.So, entrepreneurs are something like 30%.And then, you know, it goes from there.But I think that, so that's one way to do it.Charlie just realized, hey, like I want to be on the other side of this transaction.I want to be the people hiring the attorney, not the one actually doing the work.So, he drops out and goes, leaves California.Actually, I don't know if he leaves permanently.I think he's just back in Omaha.But he winds up meeting Warren Buffett.He meets Warren at a lunch through mutual friends, and they instantly hit it off.Like the first time they talked, they wound up talking for hours.The rest of their friends leave lunch, and they just wind up building this relationship they still have today.
[14:18]
OtherSo, it says, after Charlie returned to California, he and Warren talked several times a week on the phone over the next couple years.And in 1962, Charlie finally started an investment partnership with an old poker buddy who was also a trader at the Pacific Coast Stock Exchange.He also started a new law firm.So, he starts his own law firm called Munger Tolls Hills and Woods.And within three years, he stopped practicing law to focus on investing full time.So, he goes through a couple of these investment partnerships.I think he even has what I guess you would call a hedge fund at the time.He winds up closing down after the financial panic, I think, of 1973 to 1974, if I'm not mistaken.And in 1979, Charlie became Berkshire Hathaway's first vice chairman.It was from those two positions, so he was – oh, I skipped something.Charlie wound up buying a company called Blue Chip Stamp, and then that merged with Berkshire Hathaway, but he was running the company.So, it was from those two positions that Charlie would help Warren make the investment and management decisions that would take Berkshire Hathaway from a net income of $148 million and a stock price of $1,200 a share in 1984 to an income of approximately $24 billion and a stock price of $210,000 a share in 2016.Warren, in summing up Charlie's impact on his investment style over the last 57 years, said,Charlie shoved me in the direction of not – this is important.This is what Warren was referencing at the beginning of the podcast about how he credits Charlie with being like the architect behind the strategy of Berkshire.So, he says, Charlie shoved me in the direction of not just buying bargains as Ben Graham had taught me.This was the real impact that he had on me.It took a powerful force to move me on from Graham's limiting view.It was the power of Charlie's mind.And that mind is what I was referencing earlier where people that I admire their mind tend to admire Charlie Munger's mind.Alright, so now we're into the book where it's going to move a lot faster because he gets to his points really, really quickly.So, to start off, Charlie Munger is very against this idea of fast money.He doesn't believe in it.And his quote is, the desire to get rich fast is pretty dangerous.And now we're going to hear the author expound, David Clark expound on that.He says, trying to get rich fast is dangerous because we have to gamble on short-term price direction of some stock or other asset.
[16:38]
OtherThere are a huge number of people trying to do the same thing, many of whom are much better informed than we are.The short-term price direction of any security or derivative is subject to all kinds of wild price rings due to events that have nothing to do with the actual long-term value of the underlying business.Last but not least, there is the problem of leverage.To get rich quick, one often has to use leverage or debt to amplify small price swings into a really huge gain.That's fine, but if things go against us, they can also turn into really large losses.In his early days, Charlie did use a lot of leverage on his stock arbitrage investments.But as he got older, he saw the grave danger he was putting himself in and now passionately avoids using debt and only bets on the long-term economics of a business, not the short-term price swings of its stock price.Okay, so that was fast money.He has this idea where he talks about a lot where you need to know your circle of competence.And so this is a direct quote from Charlie.He says, knowing what you don't know is more useful than being brilliant.What Charlie is saying here is that we should become conscious of what we don't know and use that knowledge to stay away from investing in businesses we don't understand.Another one of his famous axioms is avoid being an idiot.And I don't really need to expound on this quote.It's pretty straightforward.People are trying to be smart.All I am trying to do is not be idiotic, but it's harder than most people think.Another one of my favorite quotes of his, he talks about getting rich by sitting on your ass.So it says, sit on your ass investing.You're paying less to brokers.You're listening to less nonsense.And if it works, the tax system gives you an extra one, two, or three percentage points per annual.So he talks about, you know, you should be buying and then never selling.Like he's not really into this idea of day training.The same applies to founding and running your business.Start something to sell.In the entrepreneurship world, starting something to sell fast is glorified.But the type of person who is able to build a business and sell it is probably not going to be content sitting on their ass with just money to show for it.They inevitably start again, and most times they sold the best idea.So now they are working on their second or third best idea.So he's talking about, Charlie is saying, hey, you know, do your homework, read, research.
[19:10]
QuestionerThen once you make your purchase decision, like that's it. You're done. Don't do anything else. Now work on the next purchase decision. Don't go and be all frantic and live like this, this like hectic lifestyle where it's like, okay, now it's up. Now I'm going to cash in on it. And I've always referenced this multiple times on the podcast. Go look at the, there's graphs. Just type in Warren Buffett's net worth, and you're going to see, I don't know what the percentage is. Let's say 50% of it's happened in the last five years because all good things in life are from compounding, and you can't have things that compound if you don't invest the time. So it says the important investment philosophy assumes that one is better off buying a business with exceptional business economics, working in its favor, and holding it for many years than engaging in a lot of buying and selling. Now for our purposes, let's change engaging in a lot of buying and selling to engaging in a lot of starting and selling, starting and selling, so on and so forth. I love Jason Fried's opinion on this. He's like, I'm a proud non-CEO entrepreneur. He's like, I got a good idea, and I'm going to stick with it. Trying to anticipate market trends, constantly buying and selling means constantly being taxed. So that's what Charlie was talking about. You have a huge economic advantage over the people that do this. If one holds an investment for 20 years, there's only one tax to pay, which according to Charlie equates to an extra one to three percentage points of profit per year over the entire time you hold it. Charlie knows that time is a good friend to a business that has exceptional economics working in its favor, but for a mediocre business, time can be a curse. That's a really good point. There's a short little video. It's taken from one of the Berkshire Hathaway shareholder meetings, and it's just Charlie Munger and Warren Buffett talking about diversification because if you went to any kind of business school or finance school, they teach you to diversify, diversify, diversify. Charlie calls diversification twaddle. He says, this worshipping at the altar of diversification, I think that's really crazy. So he talks about diversification is only for people that don't know how to value businesses. But in that talk, he's like, listen, the idea where – first of all, he says there's only so many businesses that one human being can actually understand
[21:20]
Questionerat like a fundamental level, right?And so this idea where you've identified one, two, or three really great businesses,but in the name of – for the sake of diversification,instead of putting more money into the things that you think are sure winners,you're going to put it into like the 35th best business?He's like, this is stupid.Like the people teaching you – and he talked about this in the book somewhat.He has no respect for like for almost all of modern financial education,and I use education loosely because it's mostly bullshit.
David SenraOkay.Charlie discovered that if we invest in companies that have great economics working in their favor at a reasonable price,we can bring the number of companies we own down to 10 or fewerand still be protected against an unexpected business failureand have good growth on our portfolio over a 10 to 20-year period.As the saying goes, too much diversification and we end up with a zoo.It is much easier to keep a sharp eye on our basket if there are only 10 eggs in it.Now, if you listen to the three-part series I just did on Andrew Carnegie and Henry Frick,this comes up over and over again.What Charlie and Warren are saying, let's say in the 1980s, 1990s, 2000s,Andrew Carnegie said 150 years before that.He said this idea that you should put all your eggs in one basket and watch that basket.That's probably Andrew Carnegie's most famous quote.Then Andrew says in his autobiography or maybe it was in one of the books with Frick,but he's like, listen, study how the great fortunes are made.It's not a scattershot approach.They've identified the best business possible and they put all their energy and effort into it.That's certainly what Andrew Carnegie did.It's another example.Charlie is going to talk about this a lot, about when you bet heavily.You should remember that good ideas are rare.When the odds are greatly in your favor, bet heavily.The same thing applies to business.If you've identified a business that's worth something, that there's clear demand,people are willing to pay you for it, you enjoy running it,why are you going out and starting a side project?Very few people in the world, in history, or even if you want to limit it to people who are alive today,find one great business.That is so rare.You found one great business, you already won, just stick with it.But again, that kind of goes against human nature, which Charlie talks about a lot.
[23:29]
QuestionerThe reason that him and Warren are successful is because they have patience, but why?
Patience seems simple, right?
Your parents taught you, hey, be patient.
But that's not in our nature to be patient.
That's why it's so heavy.
It's not that these ideas are even like rare or unknown.
It's the application of the idea that's so rare.
He's going to talk more about financial crisis equals opportunity.
And he says, if you, like me, lived through 1973 to 1974, or even the early 1990s,
there was a waiting list to get out of the country club.
That's when you know things are tough.
If you live long enough, you'll see it.
So at the same time I was reading that part, I was listening to Bill Gurley,
another person that I respect the way he thinks.
He just has a really interesting and unique mind.
And I was taking notes on him, and he was asked, like,
how has experiencing multiple booms and busts impacted your investing mentality?
And he talks about, I have multiple views on the subject.
He says, I've read every book on the history of financial markets that I could.
You can get a ton of exposure to it if you just look for it.
Silicon Valley is an interesting place because I've never been around a group of people
where risk is forgotten so quickly.
And I think having that historical background is a huge advantage.
And I think what Bill talks about this multiple times,
like if you're really interested in something, there's no reason,
like you have no excuse in the age of the Internet not to be well read on it.
And I think if you're looking for other books or other things like to –
just like I think obviously reading biographies is a good use of your time,
I think studying the history of financial markets is a really good use of your time
because it influences business and entrepreneurship.
And that's basically what Charlie's telling us.
He's like, listen, if you live long enough, you'll see this over and over and over again.
So I always laugh when you have these people like, oh, no, we're going to control the business cycle.
No, you're not. You're absolutely not.
Like bubbles and busts are part of human nature.
They're not going anywhere.
Okay, so this is a description.
Now he's going to talk about like what does Charlie do during a financial crisis.
He said, I would be amiss if I didn't point out that random recessions and crashes
are programmed into Charlie's buying strategy.
Both Charlie and Warren let cash pile up waiting for a recession and crash
[25:47]
Othereven if it means getting low rates of return on their cash holding.So this is so funny to me.This is what I mean about like what you're told works and what actually works.There's usually two different things where people like, oh, you should never have like an abundance of cash.That is the dumbest because like, oh, it's going to be inflated away.Well, it's not going to be inflated away if asset prices decrease when you have these regular buststhat decrease asset prices by 50 percent.What are you talking about?And so this is what Charlie and Warren are saying.Like arguably Charlie makes the point that Berkshire probably has the most successful investment recordin the history of humanity.That's a hell of a statement.And he's probably right.And what are they doing?They're letting cash pile up because they know what's going to happen.They've studied history.When a crash happens, everybody runs for the exit.And then asset prices drop and, oh, shit, look, I have all the money.Guess what?I just bought up that thing that was for pennies on the dollar.That's how you get really, really wealthy.That's how they got really, really wealthy.And there's even some numbers in the book.I'm not going to share them on the podcast because it gets a little boring.Like, oh, they bought something for $280 million during a crash.Five years later, it's worth $2 billion.You see those examples.So really, really do buy this book.There's no reason not to spend $15 on the book.There's just not.Even if it means getting low rates of crash.Okay, so they'll sit on cash even if it means getting low rates.Listen to the word they use here.They wait for the inevitable.When the crash hits, they make their purchases.And then he's going to hit on this.Cash is key.The way to get rich is to keep $10 million in your checking accountin case of a good deal that comes along.So they hit on the same themes in different ways.So it really, like, seeps into, at least it seeped into my brain.Probably will to you.So it says, Charlie advocates keeping $10 million in cash,and Berkshire keeps $72 billion sitting around in cash,waiting for the right deal to show up.Obviously, that number changes over time.The lousy return their cash balances are getting is a tradeoff.Poor initial rate of return in exchange for years of high returnsfrom finding excellent businesses selling at a fair price.This is an element of the Munger Investment Equation
[27:48]
Otherthat is almost always misunderstood.Why?Because most investors cannot imagine that sitting on a large pool of cashyear after year, waiting for the right investment,could possibly be a winning investment strategy,let alone one that makes them super rich.And why is that so hard for other humans to understand?Because it goes against our nature.We think, oh, I have to do something.If I'm not doing anything, I'm not being productive, I'm wasting time.It's like, no, you just have to be patient and wait for the right opportunity.So I always love this because I've talked about this the last few weeks.This is a reminder that companies love to create made-up metrics,and I find it unbelievably – like I cannot believe that the – I should –I mean, I don't even know what I'm talking about.Like why wouldn't the media – but the media amplifies fake numbers.It's like who is writing these stories?Don't you know this is a made-up number?I talked about this last week with Steve Jobs lying about next phantomprofitable quarter, and that was carried.It's like they didn't do any kind of investigating.So it's like, oh, he said that.Okay, so let me just amplify that to other people.So it says – this is – Charlie says, I think that every time you see the word –let me just spell it out – E-B-I-T-D-A,you should substitute the word bullshit earnings.So this stands for earnings before interest, taxes, depreciation, and amortization.Charlie considers interest, depreciation, and taxes to be very real expensesbecause they are.They have to be paid.Insurance and taxes have to be paid in the current year.Depreciation and costs have to be paid at a later date.For example, when a plant and equipment eventually need replacing,that eventual replacement is a capital cost,and capital costs can destroy what otherwise appears to be a really great business.According to Charlie, if we use this E-B-I-T-D-A to determine the earnings of a company,we will get an unrealistic view of the company's true economic nature.Charlie is going to give us some lecture on overconfidence.Smart people aren't exempt from professional disasters from overconfidence.Here Charlie is referring to the collapse of long-term capital management,which was a hedge fund set up by the famed Wall Street bond trader John Merriweather in the late 1990s.Merriweather brought together some of the smartest people from Wall Street and academia,
[29:59]
Otherincluding PhDs in mathematics and economics,several of whom were Nobel laureates.Those brilliant minds devised strategies for investing in bonds and derivativesusing tremendous amounts of leverage,which, if things went their way, would earn outrageous returns on their partners' invested capital.The problem with the strategy was the potential for losses was catastrophic.You've probably heard about long-term capital management.It winds up going under.Within a day, they become insolvent.Charlie's lesson here is that a combination of super smart peopleand large amounts of leverage often end in disaster.I might add that the combination of really dumb peopleand large amounts of leverage usually ends in disaster as well.Okay, so this is Charlie on waiting.It's waiting that helps you as an investor,and a lot of people just can't stand to wait.So, I don't know how to pronounce this guy's first name,but you've heard his last name.I'm pretty sure you've heard of this guy, Pascal.I'm not going to try to blasé, maybe.I don't know.I'm just going to refer to him as I've heard him referred to, Pascal.Pascal, the 17th century French mathematician, said,all of humanity's problems stem from man's inability to sit quietly in a room alone.Charlie agrees.You have to wait for the right company,one with a durable competitive advantage that is selling at the right price.When Charlie says wait, he means wait as long as it takes,which can mean many years.Now, this is interesting.I didn't know about this.Let me just read it to you.Warren got out of the stock market in the late 1960s,and he waited five years before he found anything he was interested in buying.I know for sure I wouldn't have that kind of patience.That's amazing.There's more than just waiting to find something to buy.Once you buy a stock, you have to wait for the business's underlying economicsto grow the company and lift its stock price.When Charlie and Warren say that they intend to hold an investment forever,they mean forever.Who on Wall Street would make such a statement?That's one of the reasons Charlie and Warren have never worried about mimicking,I love that word, it's very important,mimicking their investment style because no other institution or individualhas the discipline or patience to wait as long as they can.So the note I left myself is patience is a superpower,and this is where in my own life I need to work on
[32:11]
Otherbecause I'm probably the most impatient person that I've ever met.
David SenraOkay, enduring problems.
David SenraThis is what I meant about he has kind of like this stoic nature about himself.
David SenraSo it says,An isolated example that's very rare is much easier to endurethan a perfect sea of misery that never ceases.
David SenraCharlie's talking about the difference between an excellent company,which might confront a major problem a few times in the span of 20 years,I also think it applies to your personal life too,compared with a mediocre company,which might go from problem to problem year after year.
David SenraA perfect example of an excellent company is the Coca-Cola company.
David SenraOver the last 50 years, Coca-Cola has screwed up twice.
David SenraOnce when it got in the movie business,and again when it reformulated its flagship productand came out with New Coke.
David SenraIt solved both problems by getting rid of them.
David SenraThe perfect example of a mediocre businessthat goes from one problem to another is any airline,which has union problems and fuel cost problemsand is in a price competitive business.
David SenraThis bit of wisdom is also applicable to our personal lives.
David SenraIt is far easier to endure a brief moment of intense painthan it is to suffer a misery that drags on year after year.
David SenraThat made me think of that famous quote,where most men live lives of quiet desperation.
David SenraDon't be most people.
David SenraWe're all temporary beings.
David SenraThere's no reason to be miserable.
David SenraJust fix whatever needs fixing.
David SenraA few good companies.
David SenraIf you buy something,you've hit on this trend.
David SenraHe's said it a couple of different ways already in the book.
David SenraYou don't need to have 200 great opportunities.
David SenraI think Warren says,if you can identify one to tworeally truly fantastic businesses in your lifetime,that's enough to get fabulously wealthy.
David SenraThis is Charlie saying,if you buy something because it's undervalued,then you have to think about selling itwhen it approaches your calculation of its intrinsic value.
David SenraThey're talking about Ben Graham's approach to value investing.
David SenraThat's hard.
David SenraBut if you can buy a few great companies,then you can just sit on your ass.
David SenraThat is a good thing.
David SenraHe doesn't mean when he says sit on your ass,like sit around and do nothing.
David SenraThese guys are basically going to read all day long.
David SenraHe says,if somebody was to follow Warren Buffett around with a camera,he says,it looks very academic.
David SenraHalf the time he's sitting on his ass reading.
David SenraThe other half of the time he's talking one-on-one with people
[34:35]
Questionerthat he respects,that he can learn from.I just remember Charlie saying,it doesn't look like work.It looks like academia.This is more about him talking about a few good companies.Charlie Warren's theory is that a companywith a durable competitive advantage,they say that over and over again,has business economics that will expandthe underlying value of the business over time.And the more time passes,the more company's value will expand.They're talking about in the case of public markets,but I say this applies to entrepreneurship too.The longer you're able to hold on your company,the difference is if it's a private company,if you own it,the value will surely extend in time.Just as it would mimic what it would doin the public market,where you see the compounding of these businessesover a long period of time.The difference is you as the entrepreneurreap all that benefitsinstead of selling it off,selling the equity,which is the most valuable part of the business,to other people.So it says,thus, once the purchase is madeor once the founding is made,it is wisest to sit on the investmentas long as possible.And what he's saying to entrepreneurs is don't jump.I use that quote,like a rabbit-eyed kid,quit jumping.Focus.Just stay with what you have.It's going to be hard to dobecause it's against your nature.I'm speaking to myself more than anybody else too.So thus, once the purchase is made,it is wisest to sit on the investmentas long as possiblebecause the longer we own the company,the more it grows in valueand the more it grows in value,the richer we become.And I always use Yvon Chouinard,founder of Patagonia for this.It's a multi-billion dollar company now,40 years later.It wasn't at the beginning.What if he sold it fiveand he had the opportunity to?What if he sold it five or 10 years in?He'd be a lot less wealthy than he is today.Not that he even cares about that,but okay, what's this?Oh, here's Charlie talking aboutnot being stupid again.It is remarkable how much long-term value,or excuse me,how much long-term advantagepeople like us, meaning him and Warren,have gotten by trying to be consistently not stupidinstead of trying to be very intelligent.There must be some wisdom in the folk sayingit's the strong swimmers who drown.So again, people trying to be really intelligent,really smart, really cutting edge,those are long-term capital management kind of people.He's saying that's not what me and Warren do at all.
[36:44]
OtherWe just try to avoid being dumb.And if you can avoid being dumbover a long period of time,you will get wealthy.Anyway, I didn't understand this sentence he said.It's the strong swimmers who drown.I guess the explanation was likestronger swimmers are the ones who actually,they become overconfidentso they'll swim further away from shore,and that gets them in trouble.Weaker swimmers stay close to shorebecause that's where it's most safe.So that's what he means by that.If you get anything out of this book,this is just a random one sentence.If you get anything out of this book,you will learn the importance that Charlie puts on patience.I need to have that tattooed on me or somethingbecause I need to work on that.Academic sorcery.By and large, I don't think too much of finance professors.It's a field of witchcraft.He also talked about,when I took notes on that other talk he gave,that he firmly believesyou can learn everything you need to knowabout finance in a week.And that the people that try to sell you other things,the problem is,if you can learn something that fast,there's no market for people to sell it to you.So you can't have,what are you doing a degree in finance for?If you can learn everything in a week,they have to fill your head with all this other nonsense.And he calls it twaddle, sorcery, witchcraft,all kinds of ways to describe it,but it's the same thing.He's like, this is bull crap.Don't pay attention to it.This is why I think you're better off reading a biography.Oh my God, I think he's actually gonna,I think he talks about,yes, he does.Oh, okay.Let me just read it to youand then I guess I'll expound my own thoughts on it.It says, there's no single formula.There isn't a single formula.You need to know a lot about businessand human nature and the numbers.It is unreasonable to expectthat there's a magic system that will do it for you,meaning having a successful careeras an investor and entrepreneur.It says, people are looking for a simple methodthey can learn from reading one bookthat will make them rich.It doesn't happen that way unless they get really lucky.One, this is really interesting,one is actually better off readinga hundred business biographiesthan a hundred books on investing.Why?Because if we learn the historyof a hundred different business models,we learn when the businesses had tough timesand how they got through them.We also learn what made them great or not so great.
[39:01]
QuestionerSo in other words,he's telling you to listen to Founders Podcast.And I obviously agree with that,like I don't read it.Like when I was younger,I read a bunch of business booksand then you realize, wait,this could have been a blog postor oh, this actually doesn't even,like this idea doesn't even make sense anymorebecause their target marketis people that want like a simple solution.There is no simple solution.What is the, what's the word?I just, I learned.So Marc Andreessen calls it a complex adaptive system.That's what starting companies is.Bill Gurley used something elsebecause he was recommending a book to read.Hold on, let me look for this real quickbecause I think it's interesting.Okay, so he's talking abouthis one single favorite book isComplexity, the Emerging Scienceof the Edge of Order and Chaos by Mitchell Wardrop.And this is why, he says,it's about multivariable nonlinear systems.Yeah, I read it when I was 25 or 26.It had a profound impact on high C models,systems, economies, businesses, opportunities, investmentsbecause most things in lifeare a multivariable nonlinear system.And that's what business is.So you can't read just a business bookthat's going to give you the one answeron how to do it.You're better off reading biographies.Okay, so that, we covered that.I just love this quote.He's talking about this phenomenon,at least in America, the country I live.I don't know where it is in the country you live in,but this idea of too big to fail,which I hate.And Munger's going to very succinctly describewhat's the problem with this.And he says, capitalism without failureis like religion without hell.Another quick aphorism dealing with carrots and sticks.If we're going to prosper, we have to work.We have to have people subject to carrots and sticks.If you take away the stick,the whole system won't work.You can't vote yourself rich.It's an idiotic idea.This very much sounds like one of my favorite writersand I seem to love.It says, I do not think you could trustbankers to control themselves.They're like heroin addicts.This is another way for Munger to tell usto be patient.It says, buy and hold.We just keep our heads downand handle the headwinds and tailwindsas best we canand take the result after a period of years.Once Charlie gets his hands on an excellent businessat a fair price,he knows that the smart thing to dois to hold on to itand let the company's accumulated earnings pile up.
[41:27]
OtherThis will increase its underlying intrinsic valueand over time will cause the stock price to go up.Same thing when he's saying,hey, I got my hands on an excellent business.The smart thing to do is to hold on to itand let the company's accumulated earnings pile up.I think that's French.I guess it doesn't even matter what I think.Charlie's saying if you're trying to optimize for wealth,you should hold on to things that are valuable.Going to extremes.This is really interesting.This would be one of my favorite points that he makes.I never really thought about.He says, in business we often findthat the winning systemgoes almost ridiculously farin maximizing or minimizing one or a few variableslike the discount warehouses of Costco.Think about that.They're going ridiculous.This is absurd how far you're goingand what you're focusing on.You can only go that deep on a handful of things.He says, what did he say, one or two?Yeah, one or a few.This is an example of Costco.Costco's obsessed with keeping operating costs to a minimum.It does not provide shopping bags.Customers bring their own bagsor use an empty packing box to store supplies,saving Costco $0.02 to $0.05 on plastic bagsand $0.10 to $0.25 on paper ones.That might not seem significant.Remember, they're going deep on costs.They want to keep their costs low.But consider this.Costco does $15 million a year in sales.If the average customer spends $100 per shopping trip,you spend way more than that at Costco, by the way,that means Costco has approximately150 million customer checkouts every year.If three paper bags at $0.10 per bagwere used per checkout,the total bag cost multiplied by 150 million,basically he's saying Costco would saveapproximately $45 million a yearjust on this one single decision.That's going to the extremes.It's also knowing what your customers value.But you're going to Costco not for the experience.You're going because you want to save money.And this is something,this almost like religious adherenceto watching your costsis something that's very commonin the Berkshire Owl portfolio.It's just the one thingthat all of Berkshire Owl's businesses have in commonis that they're managed by peoplewho are willing to go to great lengthsto keep costs low.And, of course, we see that over and over and over again.And in the books that we're studying,Andrew Carnegie, Henry Frick,they don't tell me your revenue.
[43:46]
OtherI don't care about that.
OtherThat's going to change.
OtherIt's going to go up and down and everything else.
OtherBut your cost savings are forever.
OtherTwo kinds of businesses,according to Charlie Munger.
OtherThere are two kinds of businesses.
OtherThe first earns 12% a yearand you could take it out at the end of the year.
OtherThe second earns 12%,but all the excess cash must be reinvested.
OtherThere's never any cash.
OtherIt reminds me of the guywho looks at all his equipment and says,that's all of my profit.
OtherWe hate that kind of business.
OtherOh, so this is a really good reminderthat no matter what.
OtherSo my opinion is you should take your craft seriously.
OtherIt doesn't matter what you do,whether you're an employee, a business owner,an athlete, whatever.
OtherWhatever you're going to spend your time doing.
OtherWhy are you doing itif you're not going to try to be really good at it, right?
OtherSo you should take your craft seriously,but don't make yourself miserable.
OtherNone of us are getting out of this alive,and so Charlie's kind of telling us that herewith his quote on about few companies surviving.
OtherOver the long term,history shows the chances of any business survivingin a manner agreeable to a company's ownersare slim at best.
OtherThis is some more lessonsfrom a lifetime of owning businesses,and it's the dichotomybetween easy decisions and painful decisions.
OtherSo it says,the difference between a good business and a bad businessis that good businesses throw up one easy decisionafter another.
OtherThe bad businesses throw up painful decisionstime after time.
OtherSo it says,a lifetime of investing and owning companieshas taught Charlie and Warren many lessons.
OtherThey've both owned a few bad businesses in their day.
OtherSo they talk about a department store,a windmill manufacturer,a textile factory, and an airline.
OtherWhy are those businesses bad?
OtherSo now they're going to tell us.
OtherBecause they're involvedin an intensely competitive industriesthat beat each other up over price,which brings their profit margins down,kills their cash flow,and diminishes their chance of long term survivability.
OtherBut Charlie and Warren's education in miseryhas been our gain.
OtherNow we know that the secretis always to go with the better businessthat has a durable competitive advantage.
OtherHow many times are we going to say this,durable competitive advantage?
OtherIf they repeat it over and over again,it's obviously trying to drill into our minds.
OtherAnd can raise prices at will.
OtherMeaning it's not a commodity business.
[46:06]
OtherThis allows it to keep its margins high,which creates a lot of free cash flowto spend on new business opportunities.So kind of a simple formula there.But yeah, most people seem to be attractedto businesses with a lot of competition.This is probably true for life as well.It's a quote on market declines.If you're not willing to react with equanimityto a market price decline of 50%,two or three times a century,you're not fit to be a common shareholderand you deserve the mediocre resultyou're going to get compared to the peoplewho do have the temperamentwho can be more philosophicalabout these market fluctuations.Same thing.Inevitably, bad things are going to happen in your life.And he's talking about,look at the words he uses there.React with equanimity.Temperament.Being philosophical.That's interesting.So another quote, one of my favorite quotesfrom the big short.It comes from the same guy, Steve.Actually, it's not in the book.It's in a YouTube video I watchedof an interview with him.And he says that the one sentence descriptionof the financial crisis wasthey mistook leverage for genius.So this is Charlie Munger lecturing us onbeing careful with leverage.Specifically saying, use less leverage.As you can tell in Berkshire's operations,we are much more conservative.We borrow less and on more favorable terms.We are happier with less leverage.You could argue that we've been wrongand that it's costing us a fortunebut that doesn't bother us.Missing out on some opportunity never bothers us.What's wrong with someone gettinga little richer than you?It's crazy to worry about this.I love this idea too.And this is really hard for me to internalize toobecause you can't really plan.When I say the world is more complexthan we understand,if I've ever actually internalized that message,it also goes against my natural personalityto want to plan things.It's not about planning.It's about being adaptable to a situation's change.That's much more important.So this is him, Charlie, sayingthe idea of having master plan is twaddle.At Berkshire, there's never been a master plan.Anyone who wanted to do it, we firedbecause it takes on a life of its ownand doesn't cover new reality.We want people taking into account new information.Now he's giving us advice on life, education,the pursuit of happiness, which I think is...So there's four parts in the book.We're in the last part now.The last part, I read the book in order,
[48:33]
Otherbut I definitely wouldn't...I should have looked ahead firstbecause I would have read this first.This section was fascinating to me.One step at a time.Spend each day trying to be a little wiserthan you were when you woke up.Discharge your duties faithfully and well.Slug it out one inch at a time, day by day.At the end of the day, if you live long enough,most people get what they deserve.This is Charlie's incremental approachto getting ahead in life.And another way to frame this is consistencyis way more important than intensity.When he was practicing law, he implemented...This is going back to his early life.When he was practicing law,he implemented a self-education regimefor one hour a day to learn such thingsas real estate development and stock investing.It was slow going at first,but after a great number of yearsand thousands of books read,he started to see how different areas of knowledgeinterplay with each otherand how knowledge, like money, can compound,making one more and more awareof the world in which he or she lives.He has often said that he's a much better investorat 90 than he was at 50.That's interesting.In fact, he attributesto the compounding effect of knowledge.Here's his three rules of career advice.Three rules for a career.One, don't sell anything you wouldn't buy yourself.Two, don't work for anyone you don't respect and admire.And three, work only with people you enjoy.More life advice on know-it-alls.I try to get rid of peoplewho always confidently answer questionsabout which they don't have any real knowledge.And I would argue that's most of human communication.Another one, admitting stupidity.I like people admittingthat they were complete stupid horse's asses.I know I'll perform betterif I rub my nose in my mistakes.This is a wonderful trick to learn.Charlie believes that we can learn from failuresonly if we accept responsibility for themand examine exactly why we failed.Blaming someone else and shirking responsibilityis a missed learning opportunity.That is why Berkshire's annual reportis always quick to point out Warren and Charlie's screw-upsand the lessons they learned,such as their investment in U.S. Airways,which they thought was going to be a good investmentbut proved to be a real stinker.This nose-rubbing exercise is one reasonwhy they never make the same mistake twice.I've heard him talk about this a number of times,being frugal, not living beyond our means.
[51:03]
CharlieMozart is a good example of a life ruined by nuttiness. His achievement wasn't diminished. He may have had the best innate musical talent ever, but from the start, he was pretty miserable. He overspent his income his entire life, and that will make you miserable. One of the keys to Charlie's accumulation of wealth is that in his youth, he was fanatical about not spending money. He didn't buy his first new car until he was almost 60, and he lived in an upper-middle-class house long after he became a multimillionaire. Every dollar saved was a dollar that could be invested. Overspending can make us miserable, but underspending and investing wisely will help us speed along the road to riches. Same thing for when you're spending your company money. Out with the old. Any year that passes in which you don't destroy one of your best-loved ideas is a wasted year. Out with the old and in with the new. This shows an evolution in our thought process, which means we are actually thinking. There's no really explanation needed for this. I have never succeeded very much in anything in which I was not very interested. If you can't somehow find yourself very interested in something, I don't think you'll succeed very much, even if you're fairly smart. This chapter, or this essay, is called Being Frugal. One of the great defenses, if you're worried about inflation, is not to have a lot of silly needs in your life if you don't need a lot of material goods.
QuestionerThis is such an interesting idea. I've never thought about frugality as a hedge against inflation. I would never put that together. It says both Charlie and Warren have lived in upper-middle-class homes and driven older model cars most of their lives. Why? To keep their expenses low so that they could accumulate lots of cash to invest. How does this protect them against inflation? If you don't need something, you don't have to buy it, so who cares if it goes up in price? I've never heard this term before. He calls it a catchism.
OtherOh, it's just so useful dealing with people you can trust and getting all the hell out of your life. It ought to be taught as a catchism, but wise people want to avoid other people who are just total rat poison, and there are a lot of them, meaning they're just a lot of low-quality human beings. So he says, a catchism is the summary of a doctrine that is used to teach young students, usually religious instruction. So he's saying this should be taught to everybody.
[53:22]
OtherWhat Charlie's advocating hereis a philosophy that sayswe need to jettison our least trustworthy friendsand business associates.I try to practice this in my own lifewhere I'd rather have a small handfulof really deep friendshipsthan a lot of really shallow ones.Learning machines,something hugely important.Also something I've heard both Warren Buffettand Charlie Munger repeat a lot.Warren is one of the best learning machines on the earth.Warren's investing skills have marked an increasesince he turned 65.Having watched the whole process with Warren,I can report that if he had stoppedwith what he knew at earlier points,the record would be a pale shadow of what it is.He talks about this ideawhere you ever stop learning.It's just silly nonsense.There's another point I've noticedwith men and womenwho truly excel at their craft or profession.They keep on learning and improving themselveslong after most people would have retired.So this is a secret to wisdom.Look at this generationwith all of its electronic devices and multitasking.I will confidently predict less success than Warrenwho just focused on reading.If you want wisdom,you'll get it sitting on your ass.That's the way it comes.And again, he means sitting on your ass and reading,not sitting on your ass and doing nothing.Reading personal biographyallows one to experience multiple livesand successes and failures.Reading business biographiesallows one to experience the vicissitudes of a businessand learn how problems were solved.Both Charlie and Warren are copious readersof personal and business biographies.Somebody tell them about Founders Podcast, please.I might add that if Charlie ever wrote an autobiography,it would probably be titledHow I Read My Way into Fame and FortuneWhile Sitting on My Ass.He's going to talk more about reading.It's interesting.He waded to the life advice section of the bookto talk about reading a lot.He says,In my whole life,I have known no wise people who did not read all the time.None.Zero.You'll be amazed at how much Warren readsand how much I read.My children laugh at me.They think I'm a book with a couple of legs sticking out.Back to learning machines.I constantly see people rise in lifewho are not the smartest,sometimes not even the most diligent,but they are learning machines.They go to bed every nighta little wiser than they were when they got up,and boy, does that help,particularly when you have a long run ahead of you.
[55:38]
OtherThis is something I need to work on for sure.
OtherHe's telling us to stop multitasking.
OtherI think people who multitask pay a huge price.
OtherMany people believe that when they multitask,they are being super productive.
OtherCharlie believes that if you don't have timeto think about something deeply,you're giving your competitorswho are thinking deeply a great advantage over you.
OtherCharlie's ability to focus intenselyand really think about somethinghas been his competitive edge.
OtherThis is just an idea I'm including in the podcastbecause I've never thought about this before.
OtherHe calls it a seamless web.
OtherThe highest form that civilization can reachis a seamless web of deserved trust.
OtherNot much procedure,just totally reliable peoplecorrectly trusting one another.
OtherIn your own life,what you want is a seamless web of deserved trust.
OtherMy question there is how,they can't have that with the society, right?
OtherThere's a limit to the amount of,like how large a group of people can getwhere you can have this seamless web.
OtherAt least maybe with the invention of the internet,there is some kind of way to do this.
OtherI mean, you can have what?A seamless web of trust with family,maybe a small group of friends,maybe like a small company,but at some point,the sheer numbers are going to overwhelm this.
OtherOkay, mischances.
OtherHe talks about his respectfor the former slave-turned-philosopher,Epictetus.
OtherSo he says,I think the attitude of Epictetus...
OtherCome on, man.
OtherWhy can I not pronounce things?
OtherEpictetus is the best.
OtherHe thought that every mischance in lifewas an opportunity to behave well,every mischance in lifewas an opportunity to learn something,and that your duty was not to be submerged in self-pity,but that's what I meant about not being miserablein our one life to live,but to utilize the terrible blowin a constructive fashion.
OtherThat's a very good idea.
OtherHe talks about that.
OtherMost people don't know,Charlie lost a child to leukemia,which, you know,that's probably the most painful thinga person has to go throughis the death of a child.
OtherPerspective.
OtherIt is bad to have an opinion you're proud ofif you can't state the arguments for the other sidebetter than your opponents.
OtherThis is a great mental discipline,and very rare.
OtherNext time you see a bunch of peoplewasting time arguing on Twitter,just remember that.
OtherHow many of them can saythat they're proud to have an opinionif you can't state the arguments for the other sidebetter than your opponents?
OtherThis is great mental discipline.
[57:56]
David SenraAnd the last one,a reminder that nothing lasts forever,and this essay is called Civilization.Over the long term,the eclipse rate of great civilizationsbeing overtaken is 100%,so you know how it's going to end.Applies to countries,applies to empires,applies to businesses,applies to individual lives.All right,so that's where I'm going to leave this story.If you want to,I recommend picking up this bookjust as a reference.I paid,I think $11.99 for the Kindle,and I think 15 bucks for the paperback.I don't even know if it's paperback or hardcover.I haven't gotten it yet,but yeah,buy whichever.I'll leave a link in the show notes,or you can just go to amazon.comforward slash shop,forward slash founders podcast,and you buy it there.Then the podcast gets a small percentage of the sale.No additional cost to you.I would definitely recommend picking it up.Okay,so I guess that's it.Thank you very much for your support.I got to figure out what I'm reading next week.