OtherFor the last five years, I've been writing a memo to myself.I have found this to be an excellent way to learn. The memo is in the form of a discussion between four characters.It's a story about a fictitious seeker and his visit to the Library of Wisdom, where he meets another fictitious character,the librarian, along with Warren Buffett and Charlie Munger.What has been reinforced in writing this memo is the efficiency, simplicity,clarity, and common sense of judgment that are the hallmarks of Buffett and Munger.Both have a remarkable ability to eliminate folly, simplify things, boil down issues to their essence,get right to the point, and focus on simple and timeless truths.They are the Einsteins of business and wisdom.If there is one goal of this book, it is to better understand how they think.That is from the very brief introduction of the book that I'm going to talk to you about today,which is all I want to know is where I'm going to die, so I'll never go there.Buffett and Munger, A Study in Simplicity and Uncommon Common Sense, and it was written by Peter Bevelyn.So I wasn't expecting to read this book right away. It was actually recommended by my friend Eric Jorgensen.Eric Jorgensen is also the author of the book that I covered on episode 199, which is The Almanac of Naval Ravikant.But anytime Eric recommends a book, I immediately order it. This book came a few days later.I pick it up, crack it open, trying to take a peek, see what the book was all about.I start reading it, and I never stopped.And I think the reason it resonated with me immediately is because when you read the book,I feel it as if Warren Buffett and Charlie Munger are speaking directly to you.And I told you this before, but the reason I've read every single book I can find on Warren Buffett or Charlie Mungeris because I really feel like they're the very wise grandfather figure that I never had.One of my grandfathers died when I was too young to remember him,and the other one was a psychopath and a monster and dumber than a bucket full of rocks.And so when I listen to Munger and Buffett speak or I read their writing,I really do view it as, hey, this is the wise grandfather figure that I never had.They have six decades more life experience than I do.They've seen all kinds of different things, and they've learned from that experience.And then they push that knowledge and the information that they've acquired
[2:06]
Otherover their very long lives down to future generations.And so almost all my highlights are Munger and Buffett talking directly to you and I.It is very surprising that they start the book on the subject of mistakes.And so it starts off with Munger saying, mistakes are a fact of life.I'm not gnashing my teeth over them or suffering or enduring them.I regard it as perfectly normal to fail and to make bad decisions.Buffett comes in.Remember, this is going to be like a dialogue between them.I guess just to tell you, so what's interesting about this bookcompared to the rest of the books that I've read on both Munger and Buffett is they quote heavily.He uses obviously any of the books written about Munger and Buffett,but also a lot of it is from the annual meetings that Buffett and Munger both put on.And so the author organized all this so we can read it in a conversational format.So you have Munger that says that.Buffett says, everyone makes mistakes.I've made a lot, and I'm going to make more.That's the nature of making a lot of decisions.Try to live your life totally free of mistakes is a life of inaction.Stupidity is inevitable.It happens to everyone.Wrong decisions are part of life.Being able to make them work out anyway is one of the abilities of those who are successful.And so that's one main theme that they repeat over and over againis the fact that since mistakes are inevitable,you have to structure your life and your business to be able to survivethe inevitable bad decisions that you're going to make.And Buffett has a funny little memorable way to describetheir approach to being able to survive mistakes.He says, the sign above the player's entrance to the field at Notre Dame reads,play like a champion today.I sometimes joke that the sign at the field in Nebraska reads, remember your helmet.Charlie and I are remember your helmet kind of guys.We like to keep it simple.And then they go into the fact that avoiding problemsis better than being forced to solve them.This is a really amazing way that Charlie Munger describes this idea.He says, wisdom is prevention.Then Buffett says, it wasn't raining when Noah built the ark,and he didn't even look that smart for 39 days.But there are some things you have to think ahead on,and prevention is enormously important.And so if wisdom lies in prevention, how do you gain wisdom?And Munger says, if wisdom is what you want,you're going to get it by sitting on your ass.
[4:14]
OtherIf you really want to be an outlier in terms of achievement, sit on your ass and read and do it all the time.
CharlieAnd then Munger goes into the fact that because they spend so much time gaining wisdom and preparing, that allows them to actually make decisions really quickly. When you have the few great opportunities in your life, they're presented to you. He says, we actually make decisions very rapidly. That's because we've spent so much time preparing ourselves by quietly sitting and reading and thinking.
WarrenBuffett chimes in. He says, unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world. Most men would rather die than think, and many do.
CharlieAnd then Munger says, if you get into the mental habit of relating what you're reading to the basic underlying ideas being demonstrated, you gradually accumulate some wisdom.
QuestionerSo then they ask the question, but how do you guys have so much time to read? I always believe that you were very busy all the time and that you had meetings all the time.
WarrenBuffett says, at Berkshire, we don't have any meetings or committees, and I can think of no better way to become more intelligent than sit down and read. I hate meetings, frankly. I have created something that I enjoy. He's obviously talking about his company. I've created something that I enjoy. I happen to enjoy reading a lot, and I happen to enjoy thinking about things.
CharlieMunger says, we both hate. This is something that I've really adopted. I think it's one of the best ideas that they have, and it's this idea that you have to schedule time to think, and you cannot. Munger's going to say something funny, where it's like most people, most business people schedule themselves like a dentist. He's like, well, if you do that every single minute of your day from the time you wake up to you go to bed is accounted for. When the hell are you thinking? And I'll get into why Jeff Bezos picked up on this is such an important thing in one second. Munger says, we both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. I've heard various stories over the years about this, but for example, like let's say you wanted to meet with Warren Buffett. You wanted to schedule something and say, you know, hey, can you meet, you know, the third week of next month? He's just going to say, no, if you want to meet me Friday,
[6:11]
Othercall me Thursday, and I'll tell you if I'm available.
David SenraI interact with a lot of founders.It's completely different than how most founders schedule their time.Maybe we should be learning from their experience.Munger says, we schedule time to think.Most people schedule themselves like a dentist.It's so easy to get so busy that you no longer have time to think,and you pay a huge price for that.And so when I got to this part,I thought of something that I read that Jeff Bezos said one time.This is in the book, Invent and Wander,the collected writings of Jeff Bezos.I covered it all the way back on episode 155.But Bezos said, I need eight hours of sleep.I think better.I have more energy.My mood is better.And think about it.As a senior executive, what do you really get paid to do?You get paid to make a small number of high quality decisions.If I make like three good decisions a day, that is enough.And they should just be as high quality as I can make them.Warren Buffett says he's good if he makes three decisions a year.And I really believe that.And I think what Bezos would tell you, what Buffett would tell you,what Munger would tell you is like,how the hell do you expect to make high quality decisionsif you're not spending any time deep in thought and you're focused?This leads directly into one of my favorite parts,something that they repeat over and over again,the dangers of multitasking.They say over and over again,what worries me and Charlie most is a lack of focus.Munger says this modern generation,which has gotten so good at doing two or three things at once,multitasking, all confidently predict will end up worse than peoplemore like Warren Buffett with solitary reading timeand less trying to do three things at once.I think people that are multitasking pay a huge price.I think Edwin Land, founder of Polaroid,somebody talked about over and over again on the podcast,that's Steve Jobs' hero.He would agree with exactly what they're saying.He talks about the powers of intense concentration hour after hour,who actually release things inside of peoplethat they didn't even know existed.I sent this video of Johnny Ive to a bunch of my founder friends.And in like three minutes, he talks about,hey, Steve Jobs was the most remarkably focused person I knew.And so this idea of the importance of focusappears over and over and over again.If you just pick up any of these biographies,
[8:04]
Otheryou're going to see it just jump out at you.It's so obvious.I think people that multitask pay a huge price.I think when you multitask so much,you don't have time to think about anything deeply.You're giving the world an advantage you shouldn't.Practically everybody is drifting into this mistake.This is amazing that what Munger says.I did not succeed in life by intelligence.I succeeded because I have a long attention span.And then Munger goes in.This is not rocket science.This is very obvious.And yet people don't do it.Johnny Ive in that video,the reason I sent it around so much is he talks about,listen, this seems really simple,but I'm shocked at how so few people do it.So I was whenever I hear something like that,where it's like this is really important,high priority, repeated over and over again.And yet it goes completely against human nature.And, you know, it goes against human naturebecause most people don't do it.I'm like, OK, that like like alarms go off in my mind.Like, OK, that is extremely important.That's something you need to master.Right. And so Munger goes into this.He goes, it's just this simple.We've have enough good sensewhen something was working well, we keep doing it.The fundamental algorithm of life.Repeat what works.Moving ahead, there's gonna be three main ideasspread across a couple of pages.They're going to repeat these ideas a lot,which is very surprising.One is something that I think, you know, well,but it's worth repeating.You should aim to be consistently not stupid.Then they talk a lot about do not let the thoughtsof others interfere with your own.And then something that I talk aboutthat that comes up a lot in conversationswith other founders is it's so difficultto build a successful business.And then what happens and what Munger and Buffettare always talking about, it's like, first of all,it's very difficult to build a very successful business.And most likely your downfall,once you're able to achieve somethingthat's extremely, extremely rare,is not that you're gonna be taken overby a competitor or something like that.It's that you're gonna mess it up.And they talk about that people,there's something in human naturewhere people are driven crazy by extreme success.And of course, they're able to describeall of these ideas in, you know, just a few sentences.The first thing here is Munger saying,hey, the one thing that has surprised me all my life
[10:01]
Otheris how many people with high IQsdo massively stupid things.Someone once said what most distinguishesthe foolish and the intelligentis the foolish consistently commits the same stupiditieswhile the intelligent always find new ones.So that's really funny, obviously.
CharlieMunger then continues, while an excess of self-regardis often counterproductive in its effects on cognition,it can cause some weird successes from overconfidencethat happens to cause success.So what does that mean?That's kind of a weird language there.This is, he breaks it down into a maximthat I've heard Munger repeat several times.And he says, never underestimate the manwho overestimates himself.
WarrenBuffett chimes in, he says,I would say if Charlie and I have any advantage,it is because we're rational and we very seldomlet extraneous factors interfere with our own thoughts.
David SenraYou're gonna hear Buffett and Munger sayvariations of this idea over and over again.Let me go back to what Buffett's saying.He's like, hey, we try to be rational.We don't let, we try to mute the outside world, right?We're not gonna let the outside worldinterfere with our own thoughts.We do not let other people's opinioninterfere with our own.And then Munger goes back into this thing.Don't mess it up.You need patience and disciplineand an ability to take lossesand adversity without going crazy.You need an ability to not be driven crazyby extreme success.And then they go on for multiple, multiple pagesabout one of their favorite ideas.This idea of inversion.I've covered this idea a lotin the other Munger and Buffett episodes.I will list all of them in the show notes down belowin case you wanna check out,I don't even know how many there are.There might be like eight or 10 or something like that.You can also go to founderspodcast.comand see like all the show notesin case it doesn't show up on your podcast player.But I'm gonna try to avoid covering thingsI've covered in past podcastsbecause I just assume when I make the podcastthat you're just like me, that you're a maniac.And then when you find somethingthat you're interested in,like I was interested in Charlie Munger, Warren Buffett,I'll read every single book and get my hands on.I would listen to every single podcast.So I will list them all.And obviously if you're interestedin learning more from Warren Buffett and Charlie Munger,just listen to them and listen to them again.And so they're gonna talk about inversion
[12:03]
Otherthroughout the entire book.
OtherMunger starts off.
CharlieThat is very much my approach to wisdom. I go around figuring out what doesn't work and then I avoid it. Invert, always invert. I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes.
OtherSo that is in his personal, like his personal life, right? But he also talks about it's extremely useful in studying why other people fail in business. To examine how businesses become big and strong, Charlie first studies how businesses decline and die.
Warrenwe have been a student of other people's folly and it has served us well.
OtherAnd then Buffett has a great line on how do you actually practice this. This is fantastic.
WarrenThis is an inversion process. You start out with failure and then engineer its removal.
OtherAnd this is one of my favorite ideas in the book. Another way to think about an idea I've already been previously exposed to. It's like, oh, you should figure out what you don't like to get to what you do like. And so Munger says the mental process that has really worked for me my whole life and I use it all the time is turning everything into reverse. I figure out what I don't like instead of figuring out what I like in order to get what I like.
OtherAnd so they go on giving examples of inversion over and over again and interspersed through all these examples of inversion. They say stuff like this.
WarrenHey, I think a lot, this is Buffett. I think a lot of people make things more complicated than they need to really think you should keep things simple in both business and investments. It's usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.
OtherAnd then they end this section of the book with why they're saying this.
WarrenThis is something you and I have talked about for years. Repetition is persuasive.
OtherThey said some things may seem a little repetitious but repetition is the mother of learning.
OtherAnd so if you pick up this book and read it and I hope I can encourage you to do so you're gonna be maybe surprised but a large part of this book is actually on the human psychology and then observable human nature throughout history. And if you think about this, like, okay why would some of the greatest founders and investors of all time and Munger and Buffett? Why would they be so obsessed with that? Because business is people, right? Your business partners are people. Your customers are people. And so they just have a lot of it
[14:05]
Otheris like avoiding, they talk about, you knowthere's a lot of low quality traits in human beingsand low quality people on this earth.You need to avoid them.Again, I think they give you a simple way to do this.And so Buffett talks about like, wellwhen you're picking people to do business withhe just has this thing.He's like, you know, if you need like a 50 page contractto protect yourself from the person you're dealing withyou need to walk away from that deal immediately.He says, I like to deal with peoplewhere I feel a one page contract would do the job.And one apparent, almost contradiction.When you read, they talk about, Hey, you knowwe spent so much time studying history, reading biographieslearning from the experiences of others.And then they keep repeating thatmost people do not learn from other people.And Munger's got a great illustration at this point.He goes, you can tell that most people don't learnfrom the experience of other peoplebecause there's little originalityin the disasters of mankind.We'll get there in one second.Buffett said, the trick is to learn most lessonsfrom the experience of others.Munger says, the more hard lessons you can learn vicariouslyrather than through your own hard experience, the better.You can see the results of not learningfrom other people's mistakes by simply looking around you.How little originality there isin the common disasters of mankind.He goes on to list some drunk driving deathsincurable venereal diseases, conversionof bright college students into brainwashed zombiesas members of destructive cults, business failuresthrough, this is such a great line, business failuresthrough repetition of obvious mistakes madeby predecessors and so on.I just love that idea.It's like, you can tell people are not learningor most people are incapable of learningfrom the experience of other peoplebecause there's no originalityin the common disasters of mankind.They just repeat over and over again.I think you'll learn a lot from other people.In fact, I think you learn basicallyif you can learn basically everything from other peopleyou don't have to get too many new ideas on your own.You can just apply the best of what you see.And then a few pages later, they essentiallygive an enthusiastic endorsementof listening to Founders Podcastbecause they say study effective individuals.Buffett says, look at effective individualsand try to figure out why they're effective.
[16:07]
CharlieI think history is very helpful. It enables you to keep things in perspective. So the history of civilization and the history of finance and investing, it is very useful.
WarrenI like history. I like financial history. It is useful to realize how extraordinary things can happen occasionally.
OtherThis is a great, great line. Everything that needs to be said has already been said but since no one was listening, everything must be said again.
OtherNow we've got a couple of different ideas all centered around this one main idea. Focus on the essence, the most important thing, the core. Always try to simplify things to their essence, the fundamental or most important aspect of something. The core is the way to think about it.
WarrenCharlie's got the best 30 second mind in the world. If I call him and describe a problem to him, any kind of situation, he gets to the essence of it immediately.
OtherWhen we make decisions, we focus on the most important thing. Something that I preach over and over again is get into a good business and allow the miracle of compound interest to do most of the work for you. I talk about this over and over again with you that time carries most of the weight.
WarrenCompound interest is a little like rolling a snowball down a hill. You start with a small snowball and if it rolls long enough, you'll have a real snowball at the end. It's better if you're not in too much of a hurry and keep doing sound things.
OtherThe reason I wanted to read you that paragraph is really for this next two sentences. Berkshire was a small business at one time. It just takes time. It is the nature of compound interest. You cannot build it in one day or one week.
OtherGoing back to this idea that once you're in a good business, stay in a good business, let time do the work. Charlie Munger talks about this as staying on the wave. So he says, when new businesses come in, there are huge advantages for the early birds. And when you're an early bird, there's a model that I call surfing. When a surfer gets up and catches the wave and just stays there, he can go for a long, long time. But if he gets off the wave, he becomes mired in the shallows. People get long runs when they're right on the edge of the wave. And so he uses an example like Microsoft or Intel. Stay on the wave.
OtherAnd then they give some ideas on both that are effective for sales and effective for managing other people within your organization. Mary Kay once said, it's so simple,
[18:18]
Questioneryet makes such a difference.Pretend that every single person you meethas a sign around his or her neck that says,make me feel important.All human beings work better if they get reinforcement.If there are constant rewards for doing well,you will be driven to do more of the same.And then they have a theme that they repeatover and over again with different little stories.And a lot of it actually is relatedto like Buffett loves baseball stories.But it's just this idea that there's just,most of the world is by definition has to be mediocrein that if you can actually do the work necessaryto turn yourself into a formidable individualand then work with just the best,first of all, work with the best possible peopleand work in the best possible industries and businessesthat will do most of the work for you.And to be able to do that,you have to be kind of ruthless with cutting peoplethat aren't up to your standards out of,like you don't wanna do work.You can't work with C players or even B players.So Buffett says the real issue is mediocrity.There are too many 240 hitters.So he loves this baseball analogy.If you were a fantastic hitter, you'd be a 400 hitter.That's something he's gonna repeat over and over again.In this case, you have somebodythat may even think they're a 400 hitter,but are actually a 240 hitter.So that's what he's talking about.The real issue here is mediocrity.There are too many 240 hitters in business.Businesses often settle for a notch or two above mediocrity.There are strong human instincts at work.And then they also give advice where it's like,listen, you think you might be able to turn around a businessor turn around a person.You're just better off getting into a better opportunity.This is something where I always sayit's like actions express priority.It's one of my favorite maxims.People do what they actually wanna do.And you can tell what people wanna do.It's just like, how do you spend your time?What are your, it doesn't matter what you tell me.Hey, this is important to me.It's like, just, I can look at what you do.And this is great advice from Buffett.People just do what they want to do.And you're just better offjust not trying to change their behaviorbecause only they can do that.So he says, in almost 60 years of investing,we found it practically useless to give advice to anyone.And this is even in situations where you figure,hey, they should have a lot of influence and control here.
[20:16]
OtherAnd he says, listen, Charlie and I have beenon boards of companies in which we wereamong the largest shareholders.And even then we had very little luckchanging their behavior.So we think that if you buy stock in a company,you better not count on being ableto change the course of action.And then they go back into the importanceof understanding human behavior.And then they touch a little bit on why so many foundersand investors have it, like they love history.They like studying history.They find it very useful for their careers.Buffett says, you really should understand human behaviorif you're gonna run a business.Munger says, once you have the ideas, of course,you must continuously practice, amen.Something you and I talk about over and over again.Once you have the ideas, of course,you must continuously practice their use.If you don't practice, you can't perform well.A wise man engaged in learning some important skillwill not stop until he is really fluent in it.So more on this idea of, it's really importantif you're gonna run a business to understand human nature.Again, this is, all these ideas,these are not on the same page.So this is how you know it's important to thembecause what's important to people, they will repeat.And so this is, really, it's a story about imitationis the note that I left myself when I read this.But no, what Charlie's about to tell us,he's telling us a story about human nature.That's very fascinating.And if you think about like their bird's eye viewthat they've had in the finance industry,which has been full of panics and bubblesand booms and busts, right?This is just absolutely fantastic.So Charlie Munger says, one of my favorite storiesis about the little boy in Texas.The teacher asked the class,if there are nine sheep in the pen and one jumps out,how many are left?And everybody got the answer right,except this little boy who said, none of them are left.And the teacher said, you don't understand arithmetic.And he said, no teacher, you don't understand sheep.And Buffett adds onto the story by saying,it always amazes me how high IQ people mindlessly imitate.And then Buffett describes this phenomenon by this ideahe calls the three eyes.And so he says, you get what I call the natural progression,the three eyes, the innovators, the imitators,and the idiots.So skipping ahead, let's go back to this ideathat they repeat over and over again.
[22:18]
David SenraSpend a lot of time thinking, reading, formulating your own thoughts and mute the world. And so Buffett says, we do not read other people's opinions. We want to think, we wanna get the facts and then think. This was such a mind blowing realization because you never know when you're reading something, when it just is gonna suddenly click or kind of interact with maybe an idea that was previous in your mind or you weren't necessarily completely understood how important it was. When I was reading Buffett's shareholder letters and then obviously this is like years ago. So this is probably like in 2019 maybe. And listening to Charlie Munger speak, they kept bringing up this guy named Henry Singleton. And I was like, what the heck is going on here? In my opinion, Buffett and Munger have studied, the people living and maybe people who've ever lived, they've probably studied more different businesses and more company founders and managers and CEOs than almost anybody else, right? They've been at it since, in Buffett's case, since he was a little kid and he's been doing all this for a hundred years, right? And yet they kept bringing up Henry Singleton, Henry Singleton. They're like, hey, this guy was, Charlie Munger says Henry Singleton was the smartest person he ever met. Munger said that his returns in business were utterly ridiculous. Buffett says it's literally a crime that business schools don't study this guy. And the reason it's hard to study him is you actually have to, like there's not a lot written about him. I've done two episodes on him, but episode 110, there's this book called, Dissent Force, which is written by Singleton's like right-hand guy. And it's really the history of the company Teledyne that they built together. But what was so remarkable and just made, I don't know why, just clicked when I started reading about Singleton is like how he spent his time. But the point of all this is like, there's a description in that book that really resonated with me that you have to do the work necessary to be able to trust your own judgment or none of this is gonna work. And so I'm gonna read a quote from Dissent Force, it's episode 110. I'm about to reread this and collect all the other information. In fact, a bunch of listeners actually sent me really valuable information about Singleton, like old press articles and stuff they found in like public libraries and stuff. But I wanna read this because I really think this is exactly
[24:11]
Otherwhat Buffett is saying here.Let me reread Buffett before I get there, right?He's like, listen,we don't read other people's opinions.We wanna think,we wanna get the facts and then think.In many ways,Singleton was Buffett before Buffett, right?So it says, quite often,Henry simply talked about his philosophyof running a corporationand the various financial strategiesthat he came up withas he sat in his office each day,often working in his Apple II computer.He was a brilliant strategistand he came up with many creative ideas,ideas that were sometimescontrary to the currently accepted methodsof managing a large corporationthat prevailed in those days.One of the things that blew my mindwas the fact that Henry Singletonwas friends with Claude Shannon,the inventor of information theory,a universal genius,one of the rare universal geniusesthat the world has seen, right?And Claude Shannon,and Claude Shannon was actuallyon the board of Teledyneand an advisor.So when Henry would go outand when he was building his conglomerate,trying to buy through acquisitions,he would actually have to be able to tap.Imagine being able to likecall up Claude Shannon,like, hey, what do you thinkabout this new technology?It's just crazy to me.Anyways, this is what Shannon said.Check this out.Shannon is talking about Singleton,observing Singleton, how he works.He says, he always triesto work out the best movesand maybe he doesn't like to talk too muchbecause when you're playing a game,you don't tell anyone elsewhat your strategy is.Where did the strategy come from?The same place that Buffett nowin this book that I'm holdingin my hand is saying,came from him sitting therein his room thinking.Singleton was obviouslyextremely well-read,just like Buffett as well.Let me go back to Buffett.I'm going to repeat this for the third time.We do not read other people's opinions.We want to think,we want to get the factsand then think.Now we're many pages deep in the bookand they go back to this theme.Default to know,keep an open calendarso you can actually think.The difference between successful peopleand very successful peopleis that very successful peoplesay no to almost everything.Munger, that was Buffett.Munger says,both Warren and I haveamazingly open calendarand we're very reluctantto put new commitments in there.I like flexibilityand has worked for me.And so Buffett takes this so seriouslythat, you know, at this,
[26:13]
David Senraat the point they're talking about this,I think he ownedlike 80 different businesses.And so he would actuallyevery few years,he would write the managersof his business a letter.And it's all about the factthat Buffett ruthlesslyguards his time.This is what the letter says.Please turn down.This is Buffett writing, right?This is to all of the CEOsand the managersof all the subsidiaries and Berkshire.Please turn out all the proposalsfor me to speak,make contributions, etc.Sometimes these requests for you,for you to act as an intermediarywill be accompanied by,oh, it can't hurt to ask.It will be easier for both of usif you just say no.And he means no right away.As an added favor,don't suggest that they insteadwrite or call memultiply 80 or so businessesby the periodic.Oh, I think he'll be interestedin this one.And you can understand why it's betterto just say no firmly and immediately.And then they touch on a main themein the history of entrepreneurship,the importance of frugality,guarding the resources that you have,not spending foolishly,no matter how much money you have.Charlie and I have always been big fansof living within your income.And if you do that,you'll hope you'll havea whole lot more income later on.If you monger saysif you want to get rich,you've got to underspendyour underspend your income.You've got to intelligently investthe money that you haven't spent.The money will work for youfor a longer period of time.You have to save.And so I actually found,I'm going to reread his biography.And if I got another book on him, too,actually found this guybecause it's another entrepreneurthat Buffett and Mungertalk about from history.It's this guy named James J. Hill.And I covered him all the way backin episode number 96.And he's one of the,maybe the greatestrailroad builder in history.And there's somethingthat he talks aboutand he would repeat in his work.You know, this was 1800s,probably, let's see,mid to late 1800swhen he says this.And he said,if you want to knowwhether you are destinedto be a success or failure in life,you can easily find out.The test is simpleand it's infallible.Are you able to save money?If not, drop out.You will lose.You may think not,but you will lose as sure as you live.The seed of success is not in you.So then they spend some timetalking about the dangers of debt.That debt is an easy way,a common way for really rich peopleto go broke.
[28:28]
Charliesmart men go broke in three ways,liquor, ladies and leverage.
Warrenwhenever a bright and rich person goes broke,it's usually because of leverage.Any series of positive numbers,however impressive the numbers may be,evaporates when multipliedby a single zero.History tells us that leverageall too often produces zeros,even when it's employedby very smart people.One of the things you will find,this is still Buffett talking,one of the things you will find,which is interestingand people don't think of enoughwith most businessesand with most individuals,life tends to snap youat your weakest link.You can have somebodywhose aggregate performance is terrific,but if they have a weakness,maybe it's with alcohol,maybe it's a susceptibilityto taking a little easy money,it's the weak link that snaps you.And frequently in the financial markets,the weak link is borrowed money.And so the other side of the coinof this idea is like,hey, they tell you over and over again,you gotta be real careful with debt,be real careful with leverage.They will preach the factthat you should try,your business should have mountainsand mountains of cash.Cash is a lot like oxygen.You don't notice it 99% of the time,but when it's absent,it's the only thing that you notice.We have maximum financial flexibilityto face both hazards and opportunities.Buffett says,we keep our cash largelyin US treasury billsand avoid other short-term securities,yielding a few more basis points.Somebody sent me,and this is not my world,so I don't know,but somebody said that right now,they have a hundred billion in cashearning 4% risk-free.We agree with investment writer,Ray DeVos observation,more money has been lostreaching for yieldthan at the point of a gun.And why do they say that?Because cash ensures your survival,something you and I talk aboutover and over again,you have to stay in the gamelong enough to get lucky.Buffett says,it pays to conduct your affairsso that no matter how foolishother people get,you're still around to play the gamethe next day.
CharlieI am not a victim,I am a survivor.
WarrenAnd then they start giving adviceon just interpersonal relationships.You're going to like people,you're going to deal with bad peoplethroughout your life.It's inevitable,but you can't control what they doother than you can avoid them,obviously,but you can control your reactions.And so then Buffett,in the middle of this,
[30:38]
Otherhe talks about,hey, this is some of the best adviceI ever got in my life.And so he says,40 years ago,Tom Murphy,who was the former CEO of Cap Citiesand ABC,gave me one of the best pieces of adviceI've ever received.He said,Warren, you can always tell someoneto go to hell tomorrow.You haven't missed the opportunity.Just forget about it for a day.If you feel the same way tomorrow,then you could tell them,but don't spout off in a moment of anger.And then this is one of the most importantfundamental insights into human naturethat I've learned personallyfrom Charlie Munger.And he's like,listen,everybody thinks that the worldis driven by greed,but the world is not driven by greed,it's driven by envy.And your life will be a lot betterif you could just eliminate envyfrom your life.And so Charlie says,I've heard Warren say half a dozen,I guess he learned this from Warren.I've heard Warren say half a dozen times,it's not greed that drives the world,but envy.Buffett says,our experience is that envyis what really drives people.You can give someone a $2 million bonusand they're happyuntil they see the next guy got 2.1 millionand then they're miserable.And Munger illustrates why this is so ridiculous.If you're comfortably richand someone else is getting richer faster than you,so what?Someone will always be getting richer faster than you.This is not a tragedy.Someone else is always going to be doing betterat any human activity you can name.Let me go back to this idea,something that I believe with my whole heart,that time is the best filter.Buffett says,Gianni Anginelli maybe,is the former chairman of the car company Fiat.So it says,Gianni once told me,one time told me,when you get older,you'll have the reputation that you deserve.You can fool some people,some of the time,but not forever.I believe the same is true for companies.And now when I read that,that's probably like,what?The third or fourth time.I think the fourth time I've readthat particular highlight,something else just jumped at mewhere he says,hey, you know,with time you can't fool people.You can fool people some of the time,but not forever.Over time,you're going to have the personal reputation that you deserveand your company will have the reputation you deserve.Buffett says something in this book that's fantasticwhere he describes what an actual brand is.And he says,brand is a promise.So I'm not sure why,but when I reread that section just now,
[32:46]
David Senrathat's the idea that popped in my mind.And so then Charlie adds to this,the best way to get a reputation for yourselfand your business is to actually work backwards.He is going to quote Sol Price.Buffett and Munger are both fans of Sol Price.I did an episode on him.It's episode 107.I would make the argument that Sol Priceis the most influential retailer to ever live.Sam Walton,Trader Joe,Jim Sinegal,Bernie Marcus from Home Depot,Jeff Bezos.They all used ideas in their business,variations of Sol Price's ideas in their business.And so we have Munger talking about like,okay, well,you should decide what kind of businessthat you do not want, right?So it says,Sol Price used to say success in businesscame from deciding which businessyou could intelligently do without.He had a list of businesses that he did not want.He didn't want business from people who wrote bad checks.He didn't want business of peoplewho clogged up his parking lot without buying very much.He carefully invented a system.He's the one that came up with the idea,everybody knows Costco.That Costco idea is Sol Price's idea.It was just actually brought to life by Jim Sinegal,which is Sol Price's mentee.Jim, when he was real young,actually worked for Sol Price.He greatly admired him.In fact, the autobiography,excuse me,the biography of Sol Price that I read for episode 107,Jim Sinegal wrote the forwardor the introduction of that book.And he says,like when people would interview him,it was like,oh, you knew Sol for 50 years before he died.You must've learned a lot from him.He's like, no, no, I didn't learn a lot.I learned everything.Everything from him.So that's what Charlie's talking about.He's like, well, he just designed a business.You know, how many businesses do you have topay a membership fee to shop at?Like, that's extremely rare,but why is he unusual?Why is he doing that?Because he's designing,he's getting to the business he wantsby avoiding the things he does not want.And that membership fee,that barrier to entry eliminates a lot of thingsthat Charlie's talking about here.He didn't want business of peoplewho clogged up his parking lot without buying very much.He carefully invented a systemwhere he kept those people outand succeeded by decidingwhat he would be better off without and avoiding it.This is a very good way to think,and it is not common.And so then Buffett goes into somethingthat he repeats over and over again.
[34:55]
QuestionerIn fact, one of the best gifts I've ever gottenis for Father's Day,my wife got me this mugand it says like the wisdom of Warren Buffett.And all it is is Warren's facewith a bunch of quotes that he said.And all I do is like fill up this cupmultiple times a day with espressoand then read, right?And one of my favorite thingsis because it's like these ideas are in the bookand they're in the podcast.And yet this like physical item brings that outand it's like serves as like a reminder every day.And on one of the things that he sayson this coffee mug is the best thing I didwas to choose the right heroes.This is something that him and Mungerrepeat over and over again.I'm gonna read this section real quickand then tell you something Munger also says.I think it's very important to have the right heroes.Choose your heroes carefullyand then figure out what it is about them that you admire.Then you figure out how to do the same thing.It is not impossible.And then I've actually seen clipsfrom Warren saying this at the shareholder meeting.And then Charlie adds,you also should not relegateyour selection of heroes to the living.That the eminent dead,obviously a main theme of this podcast, right?The eminent dead provide some of the best models around.And then they have some more advice for our career,for our work that you really should try to maneuver yourself.Get yourself in a position where you can do workthat you have an intense interest in.If you listen to my three-part seriesabout Paul Graham's essays, episode 275, 76, and 277.This is a main theme of his writing as well.The big thing you wanna do is you wanna enjoy every day.So you want to have a job that you loveand you wanna work with peoplethat you like, admire, and trust.Munger says, in my whole life,I have never been good at somethingI wasn't very interested in.It just doesn't work.There is no substitute for strong interest.They also talk about a very common mistakethat smart people make,that successful people makeis because they were successful in one domainthat knowledge actually transfers to other domains.The best example of this is like,I always say, Henry Ford's one of the entrepreneursI most admire professionally, not personally.And I really like his philosophy of company building.But you see this illustration,if you read about Henry Ford,he was a master at building the Ford Motor Company.But then he thought he could control the morals
[37:10]
Otherof his employees.He thought he could figure out a wayto stop World War I from happening.He had all these things where he failed spectacularly at,where he thought, okay, well,I have some kind of knowledge I derived from my businessand it's applicable to this domain.And it definitely wasn't.
Warrenfor us to think thatbecause we've made a lot of money,we're gonna be better at giving advice on every subject.Well, that just doesn't make sense.That's crazy.
OtherI'm very suspect of the personwho is very good at one business,who starts thinking they should tell the worldhow to behave on everything.They start repeating this idea.You really should try to be seeking outand working with and associating onlywith first-class people.
Charlieour basic rule has always beenthat we do not deal with assholes.I have turned down business dealsthat were otherwise decent dealsbecause I didn't like the peoplethat I'd have to work with.You have to, you want to avoid other peoplewho are total rat poison.And there are a lot of them.You want to associate with first-class people.
OtherThen they go back into the most important asset.One of the most important assetsin running a business is passion.That's very interesting.Let's say that you wanna,they're asked a hypothetical questionby a fictitious character in this book.So that question says,let's say I wanna hire somebody.What is important to think about?
Warrenyou look for the logical things,passion, an interest in running the business,honestly, or honesty, excuse me.Do they love the business or do they love the money?This is the first filter.Do they love the business or do they love the money?This is the first filter.I mean, real passion.
OtherIf temperament is the most important personal assetin managing money, in business, it's passion.It's also why Jeff Bezos says that missionariesmake the best products.Missionaries, not mercenaries.He says mercenaries are in it just for the money.Missionaries actually careabout what the business is doing.What service is that business giving to the world?You wanna try to hire peoplethat are complete in alignment with youand look at it like you do.It's a mission.They also spend a lot of time talking about company culture.The fact that you have to be very intentionalon how you build the culture at your business,that once the culture's in place, it is nearly impossible.You're better off just starting a different company
[39:13]
Otherthan trying to change the culture.So he says, we try to provide an environment for them,meaning the managers and the CEOs of their businesses,which is exactly like we'd wantif we were running a business.We would like to run our own business in our own way.So they're like, hey, we try not to mess with them.We're only working with A players.A players don't like to be micromanaged.And if I had to micromanage them,why did I buy the business to begin with?That doesn't make any sense.We will never allow Berkshire to become some monoliththat is overrun with committees, budget presentations,and multiple layers of management.Instead, we plan to operate as a collectionof separately managed, medium-sized, and large businesses,most of whose decision-making occursat the operating level.All of the businesses that we ownare run autonomously to an extraordinary degree.In most cases, the managers of important businesseswe have owned for many years have not been to Omahaor even met each other.We adapt to their methods rather than vice versa.
OtherSo then Buffett talks about like his own strategy.Like what is Buffett's thing?Like what is his competitive advantage, right?He is trying to be a, like not trying to be, he does this.He's a buyer of businesses.I would argue that Buffett's shareholder lettersis the greatest single example of content marketingthat the world has ever seen.I talk about this more on episode 227,which is the essays of Warren Buffett,where it talks about like he publishes a letterthat he shows like he was interestedin buying this person's business.He actually publishes the letterthat he sent the person, the owner of the business.I feel it's like a masterclass in product differentiation.And so he touches on how he thinks about thisand how he positions himself.And so he says, our long avowed goalis to be the buyer of choice for businesses,particularly those built and owned by families.The way to achieve this goal is to deserve it.That means we must keep our promises,avoid leveraging up acquired businesses,grant unusual autonomy to our managersand hold the purchase companies through thick and thin.Our record matches our rhetoric.Most buyers competing against us follow a different path.For them, acquisitions are merchandise.We have a decided advantagewhen we encounter sellers who truly careabout the future of their businesses.If you truly care about your businessand the future of it, it's not a merchandise to you.
[41:27]
OtherIt's not just a big exit.It's like you actually care.Like if you are gonna sell your business,like you care what happens after you leave the business.And so Buffett's like, well, if you're one of those people,of course, but Berkshire would be,if you look at our track record,Berkshire would be your first choice.So he says the reverse is apt to be true also.When an owner auctions off his business,exhibiting a total lack of interest in what follows,you will frequently findthat it has been dressed up for sale.And therefore what Buffett's saying,it's not a high quality.Like if somebody truly cares,most likely they truly, they built a,like a wonderful business.Somebody is just in it to start, scale and sell.They probably don't give a shit.And so therefore the long-term prospectsof a business like that are very suspectand Buffett's not interestedin buying those kinds of businesses.There is a great line in the Anthony Bourdain biographythat I read for episode 219that jumps out at this next,when I read this next sentence.It says, life isn't a green room for something else.Go for it.Buffett says, we're here on the earth only one time.So you ought to be doing somethingthat you enjoy as you go alongand you can be enthusiastic about.Then we have two great quotes.The first one is from Buffett.When a problem exists,whether it's in personnel or in business operations,the time to act is now.Munger says, wise people step on bigand growing troubles early.There's several times in the bookthat Munger talks about his abilityto make decisions very rapidly.We heard Buffett say earlierthat Munger has the best 30-second mindthat he's ever encountered.And so in his points,they have an idea of the businessesthat they're interested in,they're in their mind,the characteristics of the stuff they're interested in.So even like he'll get a phone calland within like 15 seconds,they're like, nope.And he'll just like hang up the phone.He's like, there's no point.I know I don't want this business.There's no point us,like we have limited time on this earth.Like I'm not gonna waste,sit here and just be polite for 15 minutesjust to give you a nothat I can give you a no in 30 seconds.And so Munger says,spend no time arguing with peoplewhose idea you know to be stupid.I think a main theme that comes up againand again in these life storiesthat you and I go overis the fact that future opportunitiesare unpredictable to you.
[43:28]
QuestionerLike you just have to trust in something,obviously do as good a job as you canwith whatever's in front of you.But like there's going to,if you keep going alongand you keep getting better,that's going to unlock opportunitiesyou can't possibly predict.And I feel like there's a currentrunning through the thinking of Buffett and Mungerthat talks about this.It's like, listen,we're not really big into master plans.We know we want to own wonderful businesses.We know we want to own piecesof wonderful business in public markets.But essentially like instead of going deepin this inflexible master plan,like we're just going to keep reactingto the game that's on the field.And so it says, Munger says,I have a deep distrust in master planning.There has never been a master plan.Anyone who wanted to do a master plan,we fired because it takes on a life of its ownand doesn't cover the new reality.Buffett says, we do have a few advantages,perhaps the greatest beingthat we don't have a strategic plan.Thus we feel no need to proceedin an ordained direction,but can instead simply decidewhat makes sense for our owners.Charlie and I don't sit aroundand talk about the future of industries.We have no reports or staff.We just review what comes inand look for companieswith a durable competitive advantageat an attractive price.And so think about that.That is a rather simple plan.We're just going to review what comes in.We constantly get people offering to sell,like we have inbound requeststo buy their businesses.We'll just review it.Is this a companywith a durable competitive advantageand attractive price?If it is, okay, we'll buy it.And if it isn't, we'll just sit on our assand we'll read and we'll thinkand we'll pile up money.It's really hard to loseif that's the two different modesthat you have in your business, right?This goes back into the futilitythat people just,the futility of tryingto change other people's minds.Better to just select different people to work withthat people just do what they want to do.And Buffett says, I'd say that the historythat Charlie and I haveof persuading decent, intelligent peoplewho we thought were doing unintelligent thingsto change their course of action has been poor.When people want to do something,they want to do something.We don't try to change people.It doesn't work well.We accept people the way they are.And then Charlie passes on a bit of wisdom
[45:31]
Otherthat he thought was very valuablein running a business.It's from this guy named Carl Braun,who was an engineer and an entrepreneur.And it says, few practices are wiserthan not only thinking through reasonsbefore giving orders,so orders to people in your company,but also communicating these reasonsto the recipient of that order.No one knew this better than Carl Braun,who designed oil refinerieswith spectacular skill and integrity.He had a very simple rule.You had to tell who was to do what,where, when, and why.If you wrote a communication leaving offyour explanation of why the addresseewas to do what was ordered,Braun was likely to fire youbecause Braun knew, well,Braun well knew that ideas got through bestwhen reasons for the ideaswere meticulously laid out.People have to know whyis what Charlie's telling us.Or even simpler way to think about thatis always tell the other person why.Charlie just told us that there's no,that you should spend no timearguing with people whose ideayou know to be stupid.There's another great line in this regard.You do not have to attend every argumentthat you're invited to.So then they talk aboutCharlie's orangutan theory,which I absolutely love.The first time I was introducedto this theory is actually,I read the autobiography of Catherine Graham.It was actually episode 152.And she talked about that in her case,her the way Warren Buffettwas helping her learnhow to run her business.And that she thought thatWarren was her version of the orangutan.And so Munger's orangutan theory is this.If a smart person goes into a roomwith an orangutan and explainswhatever his or her idea is,the orangutan just sits thereeating his banana.And at the end of the conversation,the person explaining comes out smarter.There's something about smart peopleexplaining ideas to an orangutanthat makes their decision making better.And it's this idea thatyou're just speaking.This is actually forcesyou to organize your thought.It clarifies your thinking.It's very helpful.Remember at the beginning of the book,they said repetitionis the mother of learning.Charlie Munger goes back to this idea thatit's so hard to get rich.And yet most likely when you get rich,you're going to mess it up.Just don't mess it up.The problem is not getting rich,Munger says.It is staying sane.For whatever reason,extreme success tends to warp people's minds.They cannot handle it.And then I actually love this section
[47:46]
Questionerbecause it talks about like,you know, we talked about this,like history doesn't repeathuman nature does.That there's ideas in history booksthat are worth billions of dollars.I'm about to read you something, right?That sounds like Warren Buffettsaid it today.We just went from thiszero interest rate environment.Rates are going up.Valuations are being in flux.And yet what I'm about to read you,he said in 1994,I just had a weird experience where,you know, I share a lot of likehighlights and stuff from books.I read on Twitter and on LinkedIn.I tweeted this outand Elon Musk responded back to it.Basically agreeing with what Buffett saidagain in 1994 from this book,but is just as accurate as today.Buffett says the value of every business,the value of a farm,an apartment,or any other economic assetis 100% sensitive to interest rates.That's because all you're doingwhen you're investingis transferring money to someone nowin exchange for a stream of money,which you expect to come back in the future.And the higher the interest rates are,the less that present value will be.Interest rates are to asset prices,sort of like gravity is to an apple.When interest rates are low,there is little gravitational pullon asset prices.This is a crazy sentence, right?I didn't understand this.Maybe it wasn't somethingthat was relatively importantto my business, right?But it's just amazingwhere I just wish I understood.I wish I understood this before now,because if you understood this in 1994and you knew that this entire time,you could have profited heavilyoff of this transition back and forthbetween high interest ratesto low interest ratesand now from low interest ratesto higher interest rates.So this is like ideasreally will put money in your wallet,if there's a way to think about it.I'm going to repeat this second paragraphbecause I interrupted it,but this is very fascinatingand I'll tell you the punchlineat the very end.Interest rates are to asset prices,sort of like gravity is to apple.When interest rates are low,there is little gravitational pullon asset prices.This is the punchline.Interest rates power everythingin the economic universe.Another thing they repeatis the importance.Always go for quality.Wonderful businesses are so rare.So if you get into a wonderful business,do not leave it.It is just a rare thing to happen.If you are in a wonderful businessfor a long time,even if you pay a little bit too much
[50:00]
Othergoing in, getting into the business,you will get a wonderful resultif you stay in that business for a long time.
QuestionerBuffett talks about early in his career,he did not really understoodthe power of brands.It's like this weird abstraction, right?It came from his purchaseof See's Candy many, many years ago.He's like, oh, brands are extremely valuable.They're extremely powerful and valuable.And so this leads to other investments,profitable investments in the future.And so he says, additionally,through watching See's Candy in action,I gained a business educationabout the value of powerful brandsthat opened my eyesto many other profitable investments.And this is an example of why I think Buffettis one of the world's greatest communicatorsthat has ever livedbecause he can communicate thingsthat are relatively complex,make them simple,uses humor, talks to us in stories.But this was really interesting.I don't think I've heard this beforeanywhere in any other book too.And he talks about like there is sometimeslike you can be inexactand there's just times when further analysisis actually a waste of time.And it sounds crazybecause of the giant numbersthat he is throwing out here in this investment.But he'll tell the story.And I think it'll make sense to you at the end.With something like PetroChina,my reaction is similar to seeing somebodywho weighs somewhere between 300 and 350 pounds.I might not know how much they weigh,but I know that they're fat.And that's all I'm looking for.Knowing if an opportunity is financially fatand whether PetroChina weighed $95 billionor $105 billion.He's talking about the true valuation of it.If it's 95 or 105, right?It did not make much difference.Why didn't it make much difference?Because at the time,it was selling for $35 billion.Any further refining of analysiswould have been a waste of time.In that case, he's saying, just jump on it.You know, it's a good opportunity.It doesn't matter.You're paying 35 billion,whereas with 95 or 105, it doesn't matter.It is a financially fat opportunity.So we were very inexact.You'd be amazed at how inexact we are.Using precise numbers is, in fact, foolish.Working with a range of possibilitiesis the better approach.Now, this is one of my favorite.This is where it just clicked for me, right?We're in the middle.You can't see thisbecause you can't see the book that I'm holding.We're in the middle of the bookwhere at this part,
[52:16]
Questionerthey're all talking about like the irrational behaviorthat occurs in bull marketsand that just happens over and over again, right?
And I'll pull out a couple of quotesbecause I think that's very interesting.
I think you and I can learn from that.
And yet what sticks out the most to me,clicked is I'm going to read this firstand I have no idea whyI finally like had a deeper understanding of this.
So Buffett says,Charlie and I do not expect to win you overto our way of thinking.
We've observed enough human behaviorto know the futility of that.
But we do want you to be awareof our personal calculus.
And I was like, oh my God.
Sometimes I read and you probably do this too.
We're like, you know, that's two sentences,you know, three lines in a book.
And yet you just sit there and you stare at itand like you read it againand you like really think aboutwhat the hell he's talking about.
And I was like, okay,that's actually really interesting.
Charlie and I don't expect to win you overto our way of thinking.
We've observed enough human behaviorto know the futility of that.
But we do want you to be awareof our personal calculus.
What I wrote to myself in this click to me,learning is not memorizing information.
Learning is changing your behavior.
There is no point for you and Ito spend all this time reading,listening to educational podcastsif it doesn't change what we do.
And if it doesn't change what we do,we didn't actually learn it.
He's telling you,we've seen enough human behavior.
You're not going to actually do anythingwith this information that we're giving you.
Very few people.
He's obviously some people were.
And so that's what they talk about.
Like most people,they don't say all people,but they're saying most peoplecannot learn from the experiences of other people.
They're saying the exact same thing herethat we've seen enough human behavior.
We could tell you not to do this.
A lot of people are going to do it.
The smart ones,the ones that are able to learnfrom other people's behaviorare going to have a massive advantagebecause they know that learningis not memorizing information.
Learning is changing your behavior.
That's like, I love that.
Whatever clicked right thereas super important for meand hopefully for you as well.
It's not memorizing information.
Did the book that I read,the podcast I listened to,did it change my behavior?
Did it actually have an effect in the real world?
Oh, OK.
So then they go into like this irrational behavior
[54:23]
Otherthat you see in bull markets.The sheep story that he told earlieris like a good indication of that.And he's got funny ways.Buffett's got a funny way of reminding you about this.Like when you should feel that you're in danger.Because it says like the problem is it looks so easy.So that's what attracts you to it.And so he says,but remember the late Barton Briggs observation.A bull market is like sex.It feels best just before it ends.And so Munger says,how do you take advantage of that?If you stay rational yourself,the stupidity of the world helps you.Wall Street never changes.The pockets change.The suckers change.The stock change.But Wall Street never changesbecause human nature never changes.Then it goes back to this ideaof they don't have a master plan.They are opportunity driven.That's a great way.That's like a great use of language by them.Really gets this idea into our brains.We don't have a master theory of capital allocation.Or excuse me, of asset allocation.We're simply opportunity driven.Individual opportunity driven.Our acquisition technique at Berkshire is simplicity itself.We answer the phone.Something I love about doing the podcastis getting to read these stories.This idea where multiple people that we coverhave figured out the value of having a personal motto, right?So Stan Lee, the founder of Marvel,had like, I can't even pronounce it,but it means like ever upward.Shackleton says, by endurance we conquer.One of my favorites is actually Teddy Roosevelt.And he says, get action.It was actually a personal motto of his fatherthat he adopted for his own life.Very similar to what Munger's saying here.Do not be too timid.Go at life with a little courage.So in the past few episodes,and really, I mean, this is a main theme throughout Founders,but it has been especially pronounced in,actually it's episode 283 of Andrew Carnegieand 284 of Andrew Carnegie and Henry Clay Frick.And now that I'm looking at all the episodes,it's actually 282.Jeff Bezos talks about this quite a bitin his show, Whole Letters Too.And there's two twin themesthat run throughout the history of entrepreneurshipthat I think are most pronounced in the books.And I observe less frequently in like modern day,meaning they're obviously very valuablebecause they're very hard for people to do.And that's this idea of extreme focus and extreme frugality.I love what Buffett does here.And so he's talking about the fact that
[56:39]
Otherif you really think about it,like two different founders,two different business managers,one is unbelievably gifted at cost-conscious frugal culture.They're watching their costs over and over again.And one is not, like they're not,even if they're in the same industry,they're completely different businesses.This is really interesting, his use of language here.So he says, one of the best modes in many respectsis to be a low-cost producer.Being a low-cost producer of somethingthat's essential to peopleis going to be a very good business.It is like comparing a copper producerwhose costs are $2.50 a poundwith a copper producer whose costs are $1 a pound.This next sentence is crazy to,would be crazy to most people.I don't think it's gonna be crazy to you and I.Those are two different kinds of businesses,but we were like, no, wait,they're both producing copper.And Buffett's point is like,no, this advantage meansit's just completely other business.Why?One is gonna go broke at $1.50 a poundand the other one is going to still be doing fine.This idea that they're completely different businesses.Regardless, same product, same industry, doesn't matter.They're completely different,just the way they're managed.So let's go back to something that's above this.Why does the business have an edgeagainst its competitors?You're asking yourself questions, right?Ask, why can't company A do what company B does?What stops some competitor from entering the market?And so Buffett's answer to this hypothetical questionis the best way to understand this,meaning why does that company have an edge?Whether it's a company that you're running yourselfor a company you wanna invest in.Why do they have an edge?The best way to understand thisis to study businesses that have achieved it.The question then is, how does a company get its edge?And the way companies,it talks about building up the moat.And it's this idea of focus and frugalityleads into his copper story.The moat is not the product,in this case, the moat is not the product.The moat is not the industry.The moat is the management of the businessin regards to its costs.This is a very old idea.This is something Buffett is saying in 2009.And yet it's something that Andrew Carnegie knew in 1865.And then this is what I mentioned earlier,my favorite definition of a brand I think I've ever read.A brand is a promise.That is a quote from Warren Buffett.
[58:45]
OtherThen he goes into the important part.
OtherBuffett's gonna talk a lot about here.It's just like, you know,business can be fundamentally simple.It's you should be really obsessing over your customers.This is, you know,one of my favorite maxims in the history of entrepreneurshipcomes from Jeff Bezos.He says obsessed over customers.I don't have any tattoos, but if I did,I almost feel like it'd be beneficialif I like tattooed this on my forearm.Just obsess over customers.There's just so much hard earned knowledgein those three words.Buffett is going to agree with Bezos here.And he says in the end,nobody that's ever taken good care of the customerhas ever lost.Like Sam Walton once said,there's only one boss, the customer,and he or she can fire everybody in the companyfrom the chairman down on downsimply by spending his or her money elsewhere.And a few pages later,look how this actually ties together, right?These two quotes I'm reading,the ones I just read in this one are, you know,separated by maybe 20 pages or something.This is crazy.Warren Buffett said this about Amazon in 2012.And he says, Amazon could affect a lot of businesseswho don't think they will be affected.For Amazon, it is very hard to find unhappy customers.A business that has millions and millions of happy customerscan introduce them to new items.It will be a powerhouseand could affect a lot of businesses.And this is where you really get excited, right?When you think about this, okay,Warren identified that,sees, oh, this is very unusual,says that in 2012.That is after, because Jeff is writing,you know, in the late 90s,I think 97 is his first shareholder letter.It's 15 years separatingfrom the first shareholder letter.You know, he'd been practicing thatin the few yearsthat he'd been running Amazon before that.But this idea is like,that is the end resultof what Bezos set out from day one.He's like, no, we're gonna obsess over customers.We're gonna build the world's most customer-centric company.15, 20 years later,and you're seeing Buffett's like,oh, this dude's gonna be a problem.And he's gonna be a problem for other businessesbecause he's got millions of happyand satisfied customers.And how do you get millions of happyand satisfied customers?You build the world's most customer-centric companyand you obsess over customers.This is, how could that not excite you?I love when I see these ideas,they just stick together.
[1:00:57]
QuestionerAnd what makes me,they fit together rather.And what makes me even more excitedis like you have another genius.You got two geniuses there.You got another genius realizing,oh, what this other genius is doing is genius.All we have to do,I'm not a genius.All I have to do,all you have to do is just copy them.Like, hey, that's a good idea.Thank you very much.I'm gonna apply it to my business.This is not rocket science.And it gets even betterbecause on the next page,Munger gives us a tactic.It's like, oh, you like that idea?Here's how you actually implement it.One of the directors of the Daily Journalsaid very simply,we should make a list of everythingthat irritates our customers.And then we should eliminatethose defects one by one.Then I love this idea by Buffett.Like, this is how you findthe best operator in your industry.When I interview managers,I ask what their business nightmare is.If you had a silver bulletand you could put it through the headof one competitor,which competitor and why?You will find out who the best,asking this question,you will find out who the best guyin the industry is.He continues,ask the management of each company,which competitor they would be willing to,this is the other side of that, right?It's like, okay,if you could knock out of the game,only one of your competitors,who that is,the other side is,what if you had to betall of your net worthand you could like,you invested all your net worthin one of your competitors,who is that?Ask the management of each company,which competitor they would be willingto put their net worth infor the next 10 years.Then ask which of their competitorsthey would short.This will provide important insightsinto the industry,into your industry,that even those who worktheir whole life in the industrywould not realize.Two pieces of advice,one from Munger,one from Buffett.This is something you and Italk about all the time.Charlie Munger says,successful places tend to get bloated.He's talking about successful companies.Successful companies tend to get bloated,fat, complacent.It's the nature of human life.Most companies,when they get rich,get sloppy.Warren Buffett,this is one way to avoid that.Widen your moat,build an enduring competitive advantage,delight your customersand relentlessly fight costs.And Munger and Buffett both know thisbecause they have this crazy,like historical base of knowledgein the history of business.
[1:02:56]
Charlieit is the nature of things that most big businesses eventually fall into mediocrity or worse. Look at the history of big companies in the world and the record is not good. Almost all great records eventually dwindle. I think that's the natural consequence of competitive life.
OtherAnd then Munger talks about one of the fiercest competitors that the business landscape has ever seen. Something somebody you and I have talked about over and over again. The latest episode I did on him, which will not be the last, is episode 234, Sam Walton. I've never heard this before and it's absolutely fantastic. It is Charlie Munger's Northern Pike model and his point is, if you're running up against somebody like this, you should just get out of the business.
Charlieone of the models in my head is the Northern Pike model. You have a lake full of trout, but if you throw in a few Northern Pike, pretty soon there aren't many trout left, but there are a lot of Northern Pike. Walmart in its early days was the Northern Pike. It figured out how the customer could be better served and just gallop through the world like Genghis Khan.
OtherSo there's a few ideas here. This is on passion, intense interest, and working only with winners. This is one of my favorite of his. This is probably my favorite of Buffett's baseball stories when it regards to business.
CharlieI cannot put passion into someone. They either have it or they don't. There's nothing you can do about it.
OtherAnd Buffett goes in, the importance of working with winners.
WarrenMy managerial model is Eddie Bennett.
OtherSo he's talking about this is, I'm just going to copy Eddie Bennett, who was a bat boy, his idea for how I run Berkshire. This metaphor is fantastic.
WarrenMy managerial model is Eddie Bennett, who was a bat boy. In 1919, Eddie began his work with the Chicago White Sox, who that year went to the World Series. The next year, he switched to the Brooklyn Dodgers and they won their league title. However, our heroes, meaning Eddie, smelled trouble. He changed boroughs and joined the New York Yankees in 1921, and they promptly won their first title in history. Now, Eddie settled in, shrewdly seeing what was coming. In the next seven years, the Yankees won five American League titles. What does this have to do with management? It is simple. To be a winner, work with winners. In 1927, Eddie received $700 for his share of the World Series winnings. This sum, which Eddie earned by working only four days because New York swept the series,
[1:05:18]
Otherwas roughly equal to the full year paythen earned by bat boyswho worked with ordinary associates.So just what he madefrom working four days in the World Seriesis what a person with his same jobwould make all yearbecause they were workingwith ordinary players, right?Eddie understood that how he lugged batswas unimportant.What counted instead was hooking upwith the cream of those on the playing field.I've learned this from Eddie.At Berkshire,I regularly hand batsto many of the heaviest hittersin American business.And then just one more thingfrom Buffett on passion.He says, passion adds to your productivity.Munger says the secretto being successful in any fieldis getting very interested in it.I could never excel in anythingwhich I didn't have an intense interest.Now, these next two pages are so good.It's essentially saying,unusual records are a resultof high levels of talentin low competition environments.Buffett says,I don't want to play a gamewhere the other guy has an advantage.Somebody asked,how do you beat Bobby Fisher?The answer was you play himin any game except chess.He continues,one of the best moats in many respectsis sometimes just having more talent.And then once you have the talent,he says you want to workwhere there is little competition.One of the secrets of lifeis weak competition.The unusual records have been achievedby those who have workedrelatively neglected fieldsin which the competition was light.Munger now jumps in.Competence is a relative concept.I realized what I needed to get aheadwas to compete against idiots.And luckily for me,there was a large supply of idiots.And then I love how much Charlie Mungertalks about the importance of practicein this book.This is something obviouslythat really stuck in my mindfrom reading the biographyof Michael Jordan on episode 212.So Munger says,obviously if you want to get good at something,which is competitive,you have to think about itand you have to practice a lot.You have to keep learningbecause the world keeps changingand your competitors keep learning.You have to go to bedwiser than when you got up.As you try to masterwhat you're trying to do,people who do thatalmost never fail utterly.Very few have ever failedwith that approach,meaning just trying to bea little wiser every day, right?Very few have ever failedwith that approach.You may rise slowly,but you're sure to rise.And so then they go back to this
[1:07:39]
Otherand they go on this for quite a while.The idea is like,we're not listening to the opinionsand the predictions of other people.That is just absolutely useless.Forming macro opinionsor listening to the macroor market predictions of othersis a waste of time.It is dangerousbecause it may blur your visionto the facts that are truly important.I pay no attentionto economic forecasting.I worry about being in a good businesswith good people.That is all I focus on.This is Buffett speakingabout this entire time.In the 54 yearsthat we have worked together,we have never forgonean attractive purchasebecause of the macroor political environmentor the views of other people.
CharlieThen Munger says,he's talking about the futilityof trying to predict the futurein forecasting.People have always had this cravingto have someone tell them the future.Long ago, kings would hire peopleto read sheep guts.There's always been a marketfor people who pretendto know the future.Listening to today's forecastersis just as crazyas when the king hired the guyto look at the sheep guts.It just happens overand over and over again.
WarrenAnd this is an absolutely fantastic line,still about forecasters.And it says, this is Buffett,market forecasters will fill your ear,but they will never fill your wallet.
CharlieAnd then Munger goesinto the important rolethat continuous education,seeking of knowledgethat him and Buffetthave dedicated their lives to,why that was so influentialwith the recordthat Berkshire was able to achieve.What people meanwhen they say a man has common senseis uncommon sense.We don't have any new tricks.We just know the old tricks better.Berkshire loves educationand it loves peoplewho like to learn.I think the one thing that we didthat worked best of all,we were always dissatisfiedwith what we already knew.We wanted to know more.If Warren and Ihad stayed frozen in time,Berkshire would have beena terrible place.It's only that we kept learningthat made it work.And I don't thinkthat'll ever stop.Had Warren not beenlearning all this time,our record would bea mere shadow of what it is.And he's actually improvedsince he passed the ageat which most other people retire.Most people don't even try this.It takes practice.
OtherAnd that is where I'll leave itfor the full story.Highly, highly recommendbuying the book.The great thing about this bookis it's you don't haveto read it all at once.You don't even reallyhave to read it in order.
[1:09:57]
David SenraThat's the way I did.But I think it's justa great thing to keep out.You pick up, maybe readfive, ten minutes,maybe read, you know, a few pages.To me, it's really a tool,a way to downloadthe thinking of Buffett and Mungerinto your brain consistently.So if you buy this bookusing the link that'sin the show noteson your podcast player,you'll be supporting the podcastat the same time.Another great wayto support the podcastis to sign upto the Founders Premium feed.The Founders Premium feedcontains AMA,Ask Me Anything episodes.Subscribers to that feedget to ask me questions directly,which I then answerthose questions on AMA episodeson the Founders Premium feed.If that sounds interesting to you,that link is down belowin the show notes,and of course, availableat founderspodcast.com.That is 286 books down,1,000 to go,and I'll talk to you again soon.