50th Year of Wisdom from Buffett and Munger
On May 2nd, 2015, I was in Omaha to participate in my annual ritual of attending the Berkshire Hathaway annual shareholders meeting. I like Warren Buffett and I absolutely adore Charlie Munger. Both are my heroes. They are full of wisdom and have shaped my thinking.
Following are highlights from the meeting:
Human Behavior
1. For some reason, no-haggling business breaks down after a while. People say that they don’t like to negotiate but they like getting a deal especially on big-ticket items.
2. “If people were not often wrong, we would not be so rich.” – Munger
3. There is no formula for buying businesses. Do business with people you trust.
4. When ego is involved people tend to do things that they are not supposed to do.
5. Jack Ringwalt, former CEO of National Indemnity, used to yell at his subordinate every time he brought the news of claims to be paid. The subordinate did not like to be yelled yet. So, the subordinate just stopped informing Jack about the claims. That resulted in a lot of damage to the company. The lesson of the story is to understand hidden incentives for people.
6. “Nothing is more important than behaving well in life.” – Munger
7. You can only fool people for a while. When you are old, you get the reputation you deserve.
8. Praise by name. Criticize by category.
9. Philanthropy should not come at the expense of your lifestyle.
10. Chains of habits are too light to be left and too heavy to be broken.
11. “Rationality is a moral duty.’” – Munger
Success
Skill and a few lucky events is why Buffett is successful.
There was trifecta of lucky strokes that Buffett attributes to his success:
1. When Buffett was young, he wanted to understand the insurance business. He started calling on executives at insurance companies and Lorimar Davidson, CEO of GEICO at the time, gave Buffett four hours of his time. This gave Buffett deep insights into the insurance business.
2. The quirky nature of Jack Ringwalt that made him sell National Indemnity in a few minutes. Buffett knew that if he did not buy the business on the spot, Jack would change his mind.
3. Ajit Jain came to Berkshire and started the reinsurance business
Insurance is something Buffett understood and enjoyed.
The best thing you can do is to be open to ideas as they come along.
Home Mortgages
1. There are three parties involved in any new home purchase:
i) Homebuilder
ii) Mortgage originator
iii) Home buyer
2. Generally, the mortgage originator sells the loans to some other party. Hence, the mortgage originator does not have the incentive to ensure that the loan will be collected.
3. Clayton homes, a Berkshire company, sells pre-manufactured homes and provides loans for people to buy these houses. It does not sell these loans to a third party. So, it acts both as homebuilder and mortgage originator. The home buyer wants to pay back the loan and Clayton homes wants to collect the loan. Hence, the incentives are aligned in this case. It is an unusual arrangement in the financial industry that is putting a lot of people in homes that they would not be able to afford otherwise.
4. The average cost of a Clayton home is $69,500. The default rate of Clayton homes loans is just 3%.
Company Culture
1. The culture at Berkshire is unique. 97% of shareholders vote that they do not want a dividend. The directors have to buy shares at market price.
2. Culture is everything at Berkshire. The culture they have built is self-reinforcing so it will last even when Buffett and Munger are gone.
3. Culture comes from the top.
4. Culture has to be followed up in communication and action
5. It is really hard to change an existing culture.
6. “If Charlie and I were to go to an existing culture, we could not have changed the culture in ten years.” – Buffett
7. Your behavior towards others has to be the same as when the positions are reversed.
8. Continuous learning by Munger and Buffett shaped Berkshire culture.
9. Henry Singleton, Founder of Teledyne, had a system of clever incentives that went too far and brought down Teladyne
10. During panic, the leader has to say something that is believed. For example, during the 2008 financial crises, people believed what Henry Paulson, US Secretary of Treasury during the 2008 Financial crisis, was saying and that stopped the run on money. The same thing happened when the crisis hit Europe. People believed Mario Draghi, the president of the European Central Bank.
11. There is no sense in running a fat operation. Buffett defended Berkshire partnership with 3G Capital.
12. Cost savings with synergies don’t work.
Sugar
1. “I am 25% Coke.” – Buffett
2. ”If I lived my whole life eating broccoli and brussell sprouts, I probably wouldn’t live as long.” – Buffett
3. Buffett does not see people who shop at Whole Foods any happier than he is.
4. Sugar makes Munger very happy. “Eating sugar prevents pre-mature softening of the arteries” – Munger
5. You have to do things that make you happy. That is the secret to long life.
Car Dealerships
1. There are no advantages of scale in the car dealership business. It is a very local business.
2. There are 17,000 car dealerships in the US. With the purchase of Van Tuyl, Berkshire owns the best 85.
3. Wells Fargo is the biggest lender for car loans.
Macroeconomics and Stock Market
1. Last year, US profits were 10.5% of US GDP. Traditionally, that number has been around 4-6%. This shows that US corporations are performing well.
2. At 0% interest current stock prices are not expensive but if the interest rate goes up significantly then the current stock prices are expensive. It all comes down to opportunity cost. There aren’t many places to put your money right now.
3. “We have never done a deal based on macroeconomics” – Buffett
4. “Any company that has an economist has one employee too many” – Buffett
5. “ We are swimming all the time and [we] let the tide take care of itself” – Munger
6. The current federal policy is like spreading money from the helicopter. It has to lead to inflation. Both Buffett and Munger are surprised that inflation has not kicked in yet.
7. “The idea that Dodd-Frank has removed risk from high-finance is nonsense” – Munger
8. For an organization to be classified as SIFI (Systematically Important Financial Institution) otherwise known as “too big to fail”, 85% of its revenue has to come from financial activities. Berkshire is far from that.
9. 1973-74 was the cheapest time to buy stocks. The stocks at that time were cheaper than in 2008-09.
Law Firms in the US
“It is a pie eating contest. If you win, you get to eat more pie.” – Munger
Branding
1. A brand has to keep the promise it makes to its customers. When you acquire a brand, protect it and enhance it with time.
2. A brand is a wonderful thing to own during inflation
Investing
1. Investment principles do not stop at national borders.
2. Investing is easy game if you can control your emotions
3. “China would be better off copying Berkshire than copying Silicon Valley” – Munger
4. Nobody makes a lot of money the next day by buying a farm. Investing is similar to buying a farm.
5. Buffett is both an operator and an investor. Being an operator makes him a better investor and being an investor makes him a better operator.
6. If you have some free time, check out longbets.com
7. The best businesses are the once that you buy once and do not require capital outlays.
8. It was Hyperinflation and the Great Depression in Weimar Germany that brought Hitler to the world.
9. “Just don’t be a perfect idiot.” – Munger
1o. Munger’s grandfather used to say, “your main duty is to become as rational as possible.”
11. Secret to Buffett’s success in investing:
i) Great teacher (Benjamin Graham)
ii) Exceptional focus
iii) Emotional stability
iv) Enjoyed investing
US – China Relations
1. “Nothing is more important for future of the world than a good relationship between the US and China” – Munger
2. Munger is a big fan of Lee Kuan Yew, the first prime minister of Singapore. He fixed Singapore and now his philosophy is fixing China. Corruption is being eradicated in China following the Lee Kuan Yew model and that will do a lot of good in China. Lee Kuan Yew's death this year was big loss to the world.
US Taxes
1. For any change to happen, 281 House of Representatives and 51 Senators have to vote for it. Buffett is seeing progress in D.C. and thinks that it is not entirely impossible to have a new corporate tax code within a year.
2. The current US corporate tax rate is 35%. It used to be 52% and businesses did fine.
3. Munger is very unhappy about California’s 13.5% Long Term Capital Gain Tax which is not deductible at the Federal level. This is driving a lot of rich people outside of California. Florida has a better tax policy.
Philosophy
1. Adam Smith and Jon Maynard Keynes influenced Buffett's thinking. Another book he recommends everyone to read is “Where are the Customers’ Yachts?” by Fred Schwed.
2. Adam Smith taught Buffett about specialization. Focus on the tasks you are good at and give the rest to others to do.
Germany
1. The engineering talent in Germany is admirable.
2. Berkshire will make at least one more deal in Germany in the next five years.
Reinsurance Business
1. Most reinsurance businesses don’t know what they are doing. The best days of this business are behind it.
2. A lot of investors are in the reinsurance business because the pension funds like it.
3. “[Berkshire is successful in the reinsurance business because] We are not seeking a robust narrative.” – Munger
Friendships
1. “The only way I could get people to like me was by getting rich and being generous” – Munger
2. The best way to become likable is to make a list of three to four characteristics that you like in people you like. Adopt these characteristics. And, make a list of three to four characteristics that you dislike in people you don’t like. Get rid of those characteristics.
3. Don’t take credit for things that you did not do.
4. “There is no Forbes 400 in the graveyard” – Buffett
European Union (EU)
1. It was a noble idea but the system that has emerged is unwise.
2. “They have countries in there [European Union] that should not be there” – Munger
3. “You don’t form a business partnership with your thriftless drunkard brother-in-law [Greece]” – Munger
4. “[The European Union is] Investment bank aided fraud.” – Munger
5. Early on, Germany and France broke the EU rules and nobody did anything.
6. Buffett has a different opinion than Munger on the EU. There are flaws with the current structure. However, instead of abandoning it, Europe should fix it. The US Constitution had to be amended a few times.
Share Buybacks
1. Activist Investors are making companies buy back stock when the companies are overvalued. It makes no sense.
2. Buying back is a pretty simple decision. If the company’s market value is less than its intrinsic value then you buyback stock. If it is not then you don’t.
3. Berkshire buys back its shares when the market value goes down to 120% of its book value. Buffett thinks that the intrinsic value of Berkshire is more than 120% of its book value.
Income inequality
1. Between 1930 and 2015, GDP per capita has risen six times. However, the cost of living has risen much more. There are many causes for income inequality and Buffett will write about the subject soon.
2. Raising minimum wage drastically will create a lot of unemployment.
3. The Earned Income Tax Credit is a good idea. However, it has a lot of fraud in it. It should be reformed and expanded.
Education System
1. The costs will continue to rise until something drastic happens.
2. There is no real reason for costs to be so high except people are willing to pay for it.
3. During the Great Recession, Universities had to lay off a lot staff and that turned out to be better. Same thing needs to happen again.
4. It is ridiculous to think that a college education is worth “x” because that’s the amount you can make over people who do not go to college. You have to look at multiple variables.
Understanding Business Operations
“How do you figure out the operational metrics of a business in a new industry?” was my question to Buffett and Munger. Their Response:
1. Seek Wisdom.
2. Have right values and find right people.
3. Buffett and Munger were lucky because they grew up in the right families. They had people to admire in their families. That helps a lot.
4. In the early days, they were constrained by capital. To buy something, often they had to sell something else. They did not really know how to evaluate a business. All they knew was that they needed a feel for the future of the business. They made a lot of mistakes like getting into the department store business and the green stamp business.
5. “It's harder to learn faster than when you get your nose whacked by a bad experience.” – Munger
6. Both Munger and Buffett made a lot of mistakes but had fun along the way.
7. They looked for highly likely decent returns versus less likely great returns.
Marriage
1. What is the secret of successful marriage? It is not the looks, the money, the intelligence, or anything else. The secret to marriage is low expectations.
2. Instead of trying to change your partner, change yourself. It is much easier.
See my notes from the last year's meeting here.
The article was originally published on Forbes.com on May 7th, 2015.
 |
| 40,000 people standing in line to get into a shareholder meeting! |
Following are highlights from the meeting:
Human Behavior
1. For some reason, no-haggling business breaks down after a while. People say that they don’t like to negotiate but they like getting a deal especially on big-ticket items.
2. “If people were not often wrong, we would not be so rich.” – Munger
3. There is no formula for buying businesses. Do business with people you trust.
4. When ego is involved people tend to do things that they are not supposed to do.
5. Jack Ringwalt, former CEO of National Indemnity, used to yell at his subordinate every time he brought the news of claims to be paid. The subordinate did not like to be yelled yet. So, the subordinate just stopped informing Jack about the claims. That resulted in a lot of damage to the company. The lesson of the story is to understand hidden incentives for people.
6. “Nothing is more important than behaving well in life.” – Munger
7. You can only fool people for a while. When you are old, you get the reputation you deserve.
8. Praise by name. Criticize by category.
9. Philanthropy should not come at the expense of your lifestyle.
10. Chains of habits are too light to be left and too heavy to be broken.
11. “Rationality is a moral duty.’” – Munger
Success
Skill and a few lucky events is why Buffett is successful.
There was trifecta of lucky strokes that Buffett attributes to his success:
1. When Buffett was young, he wanted to understand the insurance business. He started calling on executives at insurance companies and Lorimar Davidson, CEO of GEICO at the time, gave Buffett four hours of his time. This gave Buffett deep insights into the insurance business.
2. The quirky nature of Jack Ringwalt that made him sell National Indemnity in a few minutes. Buffett knew that if he did not buy the business on the spot, Jack would change his mind.
3. Ajit Jain came to Berkshire and started the reinsurance business
Insurance is something Buffett understood and enjoyed.
The best thing you can do is to be open to ideas as they come along.
Home Mortgages
1. There are three parties involved in any new home purchase:
i) Homebuilder
ii) Mortgage originator
iii) Home buyer
2. Generally, the mortgage originator sells the loans to some other party. Hence, the mortgage originator does not have the incentive to ensure that the loan will be collected.
3. Clayton homes, a Berkshire company, sells pre-manufactured homes and provides loans for people to buy these houses. It does not sell these loans to a third party. So, it acts both as homebuilder and mortgage originator. The home buyer wants to pay back the loan and Clayton homes wants to collect the loan. Hence, the incentives are aligned in this case. It is an unusual arrangement in the financial industry that is putting a lot of people in homes that they would not be able to afford otherwise.
4. The average cost of a Clayton home is $69,500. The default rate of Clayton homes loans is just 3%.
Company Culture
1. The culture at Berkshire is unique. 97% of shareholders vote that they do not want a dividend. The directors have to buy shares at market price.
2. Culture is everything at Berkshire. The culture they have built is self-reinforcing so it will last even when Buffett and Munger are gone.
3. Culture comes from the top.
4. Culture has to be followed up in communication and action
5. It is really hard to change an existing culture.
6. “If Charlie and I were to go to an existing culture, we could not have changed the culture in ten years.” – Buffett
7. Your behavior towards others has to be the same as when the positions are reversed.
8. Continuous learning by Munger and Buffett shaped Berkshire culture.
9. Henry Singleton, Founder of Teledyne, had a system of clever incentives that went too far and brought down Teladyne
10. During panic, the leader has to say something that is believed. For example, during the 2008 financial crises, people believed what Henry Paulson, US Secretary of Treasury during the 2008 Financial crisis, was saying and that stopped the run on money. The same thing happened when the crisis hit Europe. People believed Mario Draghi, the president of the European Central Bank.
11. There is no sense in running a fat operation. Buffett defended Berkshire partnership with 3G Capital.
12. Cost savings with synergies don’t work.
.JPG) |
| The audience for wisdom |
Sugar
1. “I am 25% Coke.” – Buffett
2. ”If I lived my whole life eating broccoli and brussell sprouts, I probably wouldn’t live as long.” – Buffett
3. Buffett does not see people who shop at Whole Foods any happier than he is.
4. Sugar makes Munger very happy. “Eating sugar prevents pre-mature softening of the arteries” – Munger
5. You have to do things that make you happy. That is the secret to long life.
Car Dealerships
1. There are no advantages of scale in the car dealership business. It is a very local business.
2. There are 17,000 car dealerships in the US. With the purchase of Van Tuyl, Berkshire owns the best 85.
3. Wells Fargo is the biggest lender for car loans.
Macroeconomics and Stock Market
1. Last year, US profits were 10.5% of US GDP. Traditionally, that number has been around 4-6%. This shows that US corporations are performing well.
2. At 0% interest current stock prices are not expensive but if the interest rate goes up significantly then the current stock prices are expensive. It all comes down to opportunity cost. There aren’t many places to put your money right now.
3. “We have never done a deal based on macroeconomics” – Buffett
4. “Any company that has an economist has one employee too many” – Buffett
5. “ We are swimming all the time and [we] let the tide take care of itself” – Munger
6. The current federal policy is like spreading money from the helicopter. It has to lead to inflation. Both Buffett and Munger are surprised that inflation has not kicked in yet.
7. “The idea that Dodd-Frank has removed risk from high-finance is nonsense” – Munger
8. For an organization to be classified as SIFI (Systematically Important Financial Institution) otherwise known as “too big to fail”, 85% of its revenue has to come from financial activities. Berkshire is far from that.
9. 1973-74 was the cheapest time to buy stocks. The stocks at that time were cheaper than in 2008-09.
Law Firms in the US
“It is a pie eating contest. If you win, you get to eat more pie.” – Munger
Branding
1. A brand has to keep the promise it makes to its customers. When you acquire a brand, protect it and enhance it with time.
2. A brand is a wonderful thing to own during inflation
Investing
1. Investment principles do not stop at national borders.
2. Investing is easy game if you can control your emotions
3. “China would be better off copying Berkshire than copying Silicon Valley” – Munger
4. Nobody makes a lot of money the next day by buying a farm. Investing is similar to buying a farm.
5. Buffett is both an operator and an investor. Being an operator makes him a better investor and being an investor makes him a better operator.
6. If you have some free time, check out longbets.com
7. The best businesses are the once that you buy once and do not require capital outlays.
8. It was Hyperinflation and the Great Depression in Weimar Germany that brought Hitler to the world.
9. “Just don’t be a perfect idiot.” – Munger
1o. Munger’s grandfather used to say, “your main duty is to become as rational as possible.”
11. Secret to Buffett’s success in investing:
i) Great teacher (Benjamin Graham)
ii) Exceptional focus
iii) Emotional stability
iv) Enjoyed investing
US – China Relations
1. “Nothing is more important for future of the world than a good relationship between the US and China” – Munger
2. Munger is a big fan of Lee Kuan Yew, the first prime minister of Singapore. He fixed Singapore and now his philosophy is fixing China. Corruption is being eradicated in China following the Lee Kuan Yew model and that will do a lot of good in China. Lee Kuan Yew's death this year was big loss to the world.
US Taxes
1. For any change to happen, 281 House of Representatives and 51 Senators have to vote for it. Buffett is seeing progress in D.C. and thinks that it is not entirely impossible to have a new corporate tax code within a year.
2. The current US corporate tax rate is 35%. It used to be 52% and businesses did fine.
3. Munger is very unhappy about California’s 13.5% Long Term Capital Gain Tax which is not deductible at the Federal level. This is driving a lot of rich people outside of California. Florida has a better tax policy.
Philosophy
1. Adam Smith and Jon Maynard Keynes influenced Buffett's thinking. Another book he recommends everyone to read is “Where are the Customers’ Yachts?” by Fred Schwed.
2. Adam Smith taught Buffett about specialization. Focus on the tasks you are good at and give the rest to others to do.
Germany
1. The engineering talent in Germany is admirable.
2. Berkshire will make at least one more deal in Germany in the next five years.
Reinsurance Business
1. Most reinsurance businesses don’t know what they are doing. The best days of this business are behind it.
2. A lot of investors are in the reinsurance business because the pension funds like it.
3. “[Berkshire is successful in the reinsurance business because] We are not seeking a robust narrative.” – Munger
Friendships
1. “The only way I could get people to like me was by getting rich and being generous” – Munger
2. The best way to become likable is to make a list of three to four characteristics that you like in people you like. Adopt these characteristics. And, make a list of three to four characteristics that you dislike in people you don’t like. Get rid of those characteristics.
3. Don’t take credit for things that you did not do.
4. “There is no Forbes 400 in the graveyard” – Buffett
European Union (EU)
1. It was a noble idea but the system that has emerged is unwise.
2. “They have countries in there [European Union] that should not be there” – Munger
3. “You don’t form a business partnership with your thriftless drunkard brother-in-law [Greece]” – Munger
4. “[The European Union is] Investment bank aided fraud.” – Munger
5. Early on, Germany and France broke the EU rules and nobody did anything.
6. Buffett has a different opinion than Munger on the EU. There are flaws with the current structure. However, instead of abandoning it, Europe should fix it. The US Constitution had to be amended a few times.
Share Buybacks
1. Activist Investors are making companies buy back stock when the companies are overvalued. It makes no sense.
2. Buying back is a pretty simple decision. If the company’s market value is less than its intrinsic value then you buyback stock. If it is not then you don’t.
3. Berkshire buys back its shares when the market value goes down to 120% of its book value. Buffett thinks that the intrinsic value of Berkshire is more than 120% of its book value.
Income inequality
1. Between 1930 and 2015, GDP per capita has risen six times. However, the cost of living has risen much more. There are many causes for income inequality and Buffett will write about the subject soon.
2. Raising minimum wage drastically will create a lot of unemployment.
3. The Earned Income Tax Credit is a good idea. However, it has a lot of fraud in it. It should be reformed and expanded.
Education System
1. The costs will continue to rise until something drastic happens.
2. There is no real reason for costs to be so high except people are willing to pay for it.
3. During the Great Recession, Universities had to lay off a lot staff and that turned out to be better. Same thing needs to happen again.
4. It is ridiculous to think that a college education is worth “x” because that’s the amount you can make over people who do not go to college. You have to look at multiple variables.
 |
| I had to win a lottery to ask a question |
Understanding Business Operations
“How do you figure out the operational metrics of a business in a new industry?” was my question to Buffett and Munger. Their Response:
1. Seek Wisdom.
2. Have right values and find right people.
3. Buffett and Munger were lucky because they grew up in the right families. They had people to admire in their families. That helps a lot.
4. In the early days, they were constrained by capital. To buy something, often they had to sell something else. They did not really know how to evaluate a business. All they knew was that they needed a feel for the future of the business. They made a lot of mistakes like getting into the department store business and the green stamp business.
5. “It's harder to learn faster than when you get your nose whacked by a bad experience.” – Munger
6. Both Munger and Buffett made a lot of mistakes but had fun along the way.
7. They looked for highly likely decent returns versus less likely great returns.
Marriage
1. What is the secret of successful marriage? It is not the looks, the money, the intelligence, or anything else. The secret to marriage is low expectations.
2. Instead of trying to change your partner, change yourself. It is much easier.
See my notes from the last year's meeting here.
.jpg) |
| Join me next year! |
