1. “All you had to do was figure that America was going to do well overtime.” – Buffett
Buffett kicked off the meeting by providing the audience with “a perspective on how you might think about investing.” The entire audience leaned in. Isn’t this why we all traveled to Omaha? On March 11, 1942, young Warren Buffett made his first stock purchase. He was eleven years old. Warren held up a copy of the front page of the New York Times that day. It was filled with bad news. America was fighting two wars on two different fronts, and neither was going well.
Buffett posed a hypothetical. Suppose one had invested $10,000 in the S&P 500 index on that same day. The S&P Index had not yet been invented, but assume for a moment it had. How much would that $10,000 investment be worth today? You could almost hear the wheels turning in the arena as 40,000 people attempted to calculate the compound growth of that investment. When it comes to compounding, our intuitions are terrible, so even many Berkshire shareholders were surprised when Buffett revealed the answer: $51 million. All the hypothetical, patient investor had to do was make the initial investment and then let American business work its magic. They never had to lift a finger. The overriding question for investors is really, “how will America do over the course of your lifetime?” The answer is, “really, really well.”
2. “When there is nothing to do, Warren is really good at doing nothing.” – Munger
It sounds simple. You make one investment in 1942, and then just sit on your ass and do nothing for 76 years. Because of the nature of human behavior, it’s actually extremely difficult. This is part of the genius of Buffett. What he teaches is simple, but it’s really hard to execute. That’s why there aren’t more Warren Buffett’s around. Munger, as usual, cut through the clutter to clarify one of the great characteristics of Buffett or any successful investor. Sometimes doing nothing is the best option. It prevents you from doing something stupid.
3. The scandal at Wells Fargo “proved the efficacy of incentives.” – Buffett
The root cause of the scandal at Wells Fargo was, according to Buffett, due to incentives. When you incentivize people to open up new accounts, they will find ways to open new accounts. When a measurement becomes a target it ceases to be a good measure. Munger is fond of saying, “Never, ever think about something else when you should be thinking about the power of incentives.” But setting up a flawed incentive compensation system was not Wells Fargo’s biggest mistake. Buffett understands that managers will make mistakes from time to time. The bigger problem was that Wells Fargo violated the Cardinal sin of Berkshire. “They ignored the fact that people were misbehaving.” Buffett’s rule to his managers; “when we find something wrong we need to do something about it.”
4. “Younger shareholders; those of you who sell your shares after we’re gone, I don’t think you’ll do as well.” – Munger
The question of what Berkshire will look like when Buffett and Munger are gone is on the mind of most shareholders. Buffett conceded it’s difficult to predict exactly, but he and Munger are confident that some things will remain the same. Namely, the principles, values, philosophy and culture. Berkshire will always have a long-term focus, treat shareholders as partners, maintain a strong financial position and act with integrity. These principles will be in place at Berkshire fifty years from now.
5. “I don’t think he’d want to take us on in candy.” – Buffett
Elon Musk recently made the following comment about moats: “I think moats are lame. If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation.” Buffett was asked to respond to this comment. Buffett conceded that innovation is an advantage in today’s pace of business, but that doesn’t mean the idea of moats is completely obsolete. “Certainly, you should be working at improving your own moat, defending your own moat, all of the time. And Elon may turn things upside down in some areas. But I don’t think he’d want to take us on in candy.” The power of the Sees Candy brand is a moat. Buffett also points to GEICO as an example. “Being a low-cost provider is a moat. That is an advantage.”
6. “The reputation belongs to Berkshire now.” – Buffett
When great companies want to sell, Berkshire is often the first place they call because they trust Buffett. But what will happen when he’s gone? Will Berkshire still attract these great companies. Buffett’s response was an unequivocal “yes.” The reputation of Berkshire does not reside in Buffett or any one individual. As Buffett says, the reputation of the company belongs to Berkshire now. “We are absolutely the first call, and we will continue to be the first whether Charlie or I answer the phone or whether somebody else does.”
7. “There is a tendency to think our present politicians are worse than people we had in the past. We forget how terrible the politicians of the past were.” – Munger
There is much talk these days that America is “more divided than it’s ever been.” Buffett doesn’t agree. Not only did America survive a Civil War, but multiple times in Buffett’s lifetime he has heard people claim we are “more divided than ever.” In Buffett’s 87 years, there have been 14 Presidents; 7 Democrat and 7 Republican. During this period, which included an assassination and the Vietnam war, the country experienced prosperity and growth that is almost unbelievable. Per capita GDP has grown by six times in Buffett’s lifetime. “This country really, really works.”
8. “If you’re going to live a long time, you got to keep learning. What you formerly knew is never enough.” – Munger
When Buffett and Munger started out in the investment business, they followed the Benjamin Graham approach of finding companies selling at below liquidation value. But along the way, the world changed. Munger went on to say, “Lots of luck if you can find those in the present market. And if you can find them, they’re so small that Berkshire wouldn’t find them of any use anyway. So we’ve had to learn a different game.” The new game they learned was to find great companies at a fair price. To make this transition Buffett and Munger had to continue learning and improving. And they had to give up on ideas that worked in the past and replace them with even better ideas. Again, one of those Buffett traits that’s easier said than done.
9. “It’s been an interesting development…you now have the four largest companies, by market value, in the United States — a $30 trillion market — you have four companies that essentially don’t need any net tangible assets.” – Buffett
There’s been a shift in the US economy in the past twenty or thirty years. It used to be that the largest companies owned large assets. Steel companies, auto manufactures, railroads, AT&T, they were asset intensive. In the digital economy, companies like Amazon, Google, Facebook and Apple generate tremendous earnings, yet they require very little by way of assets. Buffett thinks that this is the driving factor that is increasing profitability. For the 20th century, U.S. after-tax profits remained in a range of 4% – 6% of GDP. Since 2008, U.S. after-tax profits have consistently been in the 8% – 10% of GDP. Buffett calls this an asset-light economy and it’s not something he predicted twenty years ago. Munger added; “And so it just shows that it’s hard to make these economic predictions.”
10. “We really want products where people feel like kissing you.” – Buffett
How do you know a good business? Buffett has said in the past, a good business is when “you have the power to raise prices without losing business to competitors.” To reinforce this point, Buffett referred to Sees Candy; “if you live in California and you were a teenage boy, and you went to your girlfriend’s house and you gave the box of candy to her or to her mother or father and she kissed you, you know, you lose price sensitivity at that point.” When it comes to businesses like American Express and Coke, these are great brands that allow for a degree of price insensitivity. And that brand advantage can produce incredible returns when compounding over many years. Buffett mentioned Costco as another example; “Costco has an enormous appeal to its constituency. They delight — they surprise and delight their customers. And there is nothing like that in business. If you have delighted customers, you’re a long way home.”
If you like these pearls of wisdom and you want more, CNBC launched the Buffett Archives, an incredibly broad and searchable resource for all things Buffett and Berkshire.
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