Charlie Munger quotes

Charlie Munger (born in 1924) is a legendary American billionaire investor (best known for being the longtime business partner of Warren Buffett at Berkshire Hathaway), with broad-ranging interests (e.g., investment, business, psychology, law, architecture, science, philanthropy) and a brilliant mind.

Below is a selection of Charlie Munger quotes about investing, business, and life, rearranged by themes:

Follow these rules for a successful career:

• Don’t sell anything you wouldn’t buy yourself.
• Don’t work for anyone you don’t respect and admire.
• Work only with people you enjoy.

Find something you are passionate about:

• Intense interest in any subject is indispensable if you are really going to excel in it.
• I have never succeeded very much in anything in which I was not very interested. If you can’t somehow find yourself very interested in something, I don’t think you’ll succeed very much, even if you’re fairly smart.

Surround yourself with trustworthy people:

• Oh, it’s just so useful dealing with people you can trust and getting all the others the hell out of your life. It ought to be taught as a catechism…
• The highest form that civilization can reach is a seamless web of deserved trust—not much procedure, just totally reliable people correctly trusting one another. . . . In your own life what you want is a seamless web of deserved trust. And if your proposed marriage contract has forty-seven pages, I suggest you not enter.

Avoid poisonous people (unless you’re a lawyer):

• But wise people want to avoid other people who are just total rat poison, and there are a lot of them.
• The best legal experience I ever got was when I was very young. I asked my father why he did so much work for a big blowhard, an overreaching jerk, rather than for his best friend Grant McFadden. He said, ‘That man you call a blowhard is a walking bonanza of legal troubles, whereas Grant McFadden, who fixes problems promptly and is nice, hardly generates any legal work at all.’

Focus / specialize on your circle of competence:

• Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.
• You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
• Just as animals flourish in niches, people who specialize in some narrow niche can do very well.
• I think people who multitask pay a huge price.
• Look at this generation, with all of its electronic devices and multitasking. I will confidently predict less success than Warren, who just focused on reading. If you want wisdom, you’ll get it sitting on your ass. That’s the way it comes.

Work hard or study hard:

• If we’re going to prosper, we have to work.
• Koreans came up from nothing in the auto business. They worked 84 hours a week with no overtime for more than a decade. At the same time every Korean child came home from grade school, and worked with a tutoy for four full hours in the afternoon and the evening, driven by these Tiger Moms. Are you surprised when you lose to people like that? Only if you’re a total idiot.
• It’s been my experience in life, if you just keep thinking and reading, you don’t have to work.

Behave honorably and with integrity:

• Remember that reputation and integrity are your most valuable assets – and can be lost in a heartbeat.
• How you behave in one place will help in surprising ways later.
• More often we’ve made extra money out of morality. Ben Franklin was right for us. He didn’t say honesty was the best morals, he said that it was the best policy.
• You ought to have an internal compass. So there should be all kinds of things you won’t do even though they’re perfectly legal. That’s the way we try to operate.
• Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.
• You should try to make money by selling people things that are good for the customer.
• The best way to get a good spouse is to deserve a good spouse.
• The best armor of old age is a well-spent life preceding it.
• Just because it’s a free market doesn’t mean it’s honorable.

Don’t be envious:

• Envy is a really stupid sin because it’s the only one you could never possibly have any fun at.
• There’s always going to be somebody who is making money faster, running the mile faster or what have you. So in a human sense, once you get something that works fine in your life, the idea of caring terribly that somebody else is making money faster strikes me as insane.

Learn to take blows:

• There should be more willingness to take the blows of life as they fall. That’s what manhood is, taking life as it falls. Not whining all the time and trying to fix it by whining.
• I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well, (…) to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion.

Don’t worry about things you can’t fix:

• I don’t think it’s terribly constructive to spend your time worrying about things you can’t fix.

Learn the big ideas from all disciplines:

• You need to know a lot about business and human nature and the numbers…
• Spend each day trying to be a little wiser than you were when you woke up.
• I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…
• Know the big ideas in the big disciplines and use them routinely—all of them, not just a few.

Continue learning and reading constantly:

• Warren is one of the best learning machines on this earth. . . . Warren’s investing skills have markedly increased since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is.
• In my whole life, I have known no wise people who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.
• I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy, does that help, particularly when you have a long run ahead of you.
• There are always people who will be better at some thing than you are. You have to learn to be a follower before you become a leader.
• You can progress only when you learn the method of learning.

Use what you learn:

• We read a lot. I don’t know anyone who’s wise who doesn’t read a lot. But that’s not enough: You have to have a temperament to grab ideas and do sensible things. Most people don’t grab the right ideas or don’t know what to do with them.

To address hard problems, solve them backwards:

• It is in the nature of things that many hard problems are best solved when they are addressed backward.
• Follow the injunction of the great algebraist, Carl Jacobi, who said, “Invert”. Always invert.”
• For example, if you were hired by the World Bank to help India, it would be very helpful to determine the three best ways to increase the man-years of misery in India—and, then, turn around and avoid those ways.

[Personal note: On this topic of inverting, Li Lu said of Munger: “When Charlie thinks about things, he starts by inverting. To understand how to be happy in life Charlie will study how to make life miserable; to examine how a business becomes big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market.“]

As such, know what you want to avoid:

• A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc.
• All I want to know is where I’m going to die, so I’ll never go there.

And instead of trying to be smart, avoid being stupid:

• It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid. Instead of trying to be very intelligent. There must be some wisdom in the folk saying: “It’s the strong swimmers who drown”.
• People are trying to be smart—all I am trying to do is not be idiotic, but it’s harder than most people think.
• Being rational is a moral imperative.
• Smart people aren’t exempt from professional disasters from overconfidence.
• In the corporate world, if you have analysts, due diligence, and no horse sense, you’ve just described hell.

Learn from others’ mistakes:

• The more hard lessons you can learn vicariously rather than through your own hard experience, the better.

Use checklists:

• Checklist routines avoid a lot of errors.

Be objective and don’t lie to yourself:

• Above all, never fool yourself, and remember that you are the easiest person to fool.
• One of the great things to learn from Darwin is the value of extreme objectivity. He tried to disconfirm his ideas as soon as he got ’em. He quickly put down in his notebook anything that disconfirmed a much-loved idea. He especially sought out such things.
• Dean Kendall of the University of Michigan music school once told me a story: ‘When I was a little boy, I was put in charge of a little retail operation that included candy. My father saw me take a piece of candy and eat it. I said, “Don’t worry. I intend to replace it.” My father said, “That sort of thinking will ruin your mind. It will be much better for you if you take all you want and call yourself a thief every time you do it.’
• Remember Louis Vincenti’s rule: ‘Tell the truth, and you won’t have to remember your lies.’

Know the other side’s arguments:

• It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents. This is a great mental discipline.
• You must force yourself to consider arguments on the other side.
• What’s the flip side, what can go wrong that I haven’t seen?

Be frugal, invest conservatively, and don’t expect miracles:

• Mozart is a good example of a life ruined by nuttiness. (…) He overspent his income his entire life—that will make you miserable.
• Conservative investing and steady saving without expecting miracles is the way to go.
• One of the great defenses—if you’re worried about inflation—is not to have a lot of silly needs in your life—if you don’t need a lot of material goods.

Be humble:

• Knowing what you don’t know is more useful than being brilliant.
• I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.
• It’s a good habit to trumpet your failures and be quiet about your successes.

Approach problems with various models:

• Most people are trained in one model—economics, for example—and try to solve all problems in one way. You know the saying: ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.
• What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models.
• You need a different checklist and different mental models for different companies.

Invest with the odds in your favor:

• My idea of shooting a fish in a barrel is draining the barrel first.
• You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.
• To us, investing is the equivalent of going out and betting against the pari-mutuel system. We look for a horse with one chance in two of winning, and that pays three to one. In other words, we’re looking for a mispriced gamble. That’s what investing is, and you have to know enough to know whether the gamble is mispriced.
• Move only when you have an advantage—you have to understand the odds and have the discipline to bet only when the odds are in your favor.
• Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect, but that’s what it’s all about.

Be patient and wait for the right opportunity:

• The desire to get rich fast is pretty dangerous.
• The way to get rich is to keep $10 million in your checking account in case a good deal comes along.
• It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.
• You have to be very patient, you have to wait until something comes along, which, at the price you’re paying, is easy. That’s contrary to human nature, just to sit there all day long doing nothing, waiting. It’s easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don’t feel active, you don’t feel useful, so you do something stupid.

Bet heavily and decisively when a great opportunity comes along:

• Successful investing requires this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.
• A lot of opportunities in life tend to last a short while, due to some temporary inefficiency… For each of us, really good investment opportunities aren’t going to come along too often and won’t last too long, so you’ve got to be ready to act and have a prepared mind.
• You should remember that good ideas are rare—when the odds are greatly in your favor, bet heavily.
• Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.
• You do get an occasional opportunity to get into a wonderful business that’s being run by a wonderful manager. And, of course, that’s hog heaven day.
• The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it, but didn’t act on it. They’re huge mistakes—we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it. There are two types of mistakes: 1) doing nothing—what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.
• Our biggest mistakes, were things we didn’t do, companies we didn’t buy.

Invest in quality businesses, at a fair price:

• A great business at a fair price is superior to a fair business at a great price.
• The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.
• We’ve really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock.
• The number one idea, is to view a stock as an ownership of the business [and] to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you’re paying for.
• No matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life.
• Understanding how to be a good investor makes you a better business manager and vice versa.
• If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing.
• Once we’d gotten over the hurdle of recognizing that a thing would be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.
• Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him… It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.
• It’s even more important than usual to not practice ‘blind’ value investing. In blind value investing, an investor just looks backwards at the financial history, assumes that something similar will occur in the future, and considers a company a bargain if it’s cheap relative to historical profits. That is still a good place to start, but a lot more judgement needs to be exercised to guard against adverse fundamental changes to the business.

Know the attributes of a good business:

Good ethics

• Good businesses are ethical businesses. A business model that relies on trickery is doomed to fail.

A durable competitive advantage

• We need to have a business with some characteristics that give us a durable competitive advantage.
• Judge the staying quality of the business in terms of its competitive advantage.
• The only duty of a corporate executive is to widen the moat. We must make it wider. Every day is to widen the moat.

Monopolies with unregulated prices

• I think it’s dangerous to rely on special talents—it’s better to own lots of monopolistic businesses with unregulated prices.

Niche businesses

• Just as animals flourish in niches, people who specialize in some narrow niche can do very well.

Management with talent and integrity

• We would vastly prefer a management in place with a lot of integrity and talent.

Differentiated features (often to the extreme)

• The [automotive] industry is as competitive as I’ve ever seen. Everyone can make good cars, they have the same suppliers, and cars last forever. It just has all these commoditized features. So I don’t think the auto industry is the place to be.
• In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables—like the discount warehouses of Costco.

[Personal note: in some the following paragraphs, Munger uses as an example a hypothetical soft drinks company, modeled on Coca-Cola. Obviously, some of these features apply to consumer products only, but the underlying principles are very interesting. The habit-forming, social proof principles described below have also been harnessed with great success by social networks such as Facebook or gaming companies.]

Strong brand (habit forming, harnessing social proof, combinatory reinforcing features, ubiquitous)

• How would you try to create a brand that competes with Disney?
• Coke is a brand associated with people being happy around the world.
• [Coke spent] 100 years getting people to believe that trademark had all these intangible values too.
• Take See’s Candies. You cannot destroy the brand of See’s Candies. Only See’s can do that. You have to look at the brand as a promise to the customer that we are going to offer the quality and service that is expected. We link the product with happiness.
• The informational advantage of brands is hard to beat. And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is $0.40 and the other is $0.30, am I going to take something I don’t know and put it in my mouth—which is a pretty personal place, after all—for a lousy dime? So, in effect, Wrigley, simply by being so well known, has advantages of scale—what you might call an informational advantage. Everyone is influenced by what others do and approve. Another advantage of scale comes from psychology. The psychologists use the term “social proof.” We are all influenced—subconsciously and to some extent consciously—by what we see others do and approve. Therefore, if everybody’s buying something, we think it’s better. We don’t like to be the one guy who’s out of step. Again, some of this is at a subconscious level and some of it isn’t. Sometimes, we consciously and rationally think, “Gee, I don’t know much about this. They know more than I do. Therefore, why shouldn’t I follow them?” All told, your advantages can add up to one tough moat.
• How do we make a lot of money out of a new cold beverage? Out of twin doctrines from microeconomics and law, obviously it must be a trademarked beverage with its own label and trade dress. And we have to arrange that people don’t order just a generic bottle or glass of out beverage. They must order it by name—our trademarked name. We will never get very rich from this business except by using a trademark and creating a brand strong enough that people order our new beverage by its trademarked name.
• In the most important two segments in every psychology book, you find conditioned reflexes. Obviously, if someone is constantly buying a trademarked beverage, they are demonstrating a conditioned reflex—with the trademark, the shape of the bottle, the color of the liquid, etc. being the stimulus and their buying it and consuming it being the response.
• How do you get Pavlovian mere-association effects? Obviously, you associate this beverage and its trademarks with every other good thing that people like generally: exalting events, sex objects, happy times—you name it.
• And since we want to play this Pavlovian mere-association game in all of our advertising, we know a heavy percentage of revenues will have to go into advertising.
• Another model that I like very much like, I’ve taken from E. O. Wilson. Harvard’s great ant specialist biologist—and that is autocatalysis in chemistry. If you get a certain kind of process going in chemistry, it speeds up on its own. So you get this marvelous boost in what you are trying to do that runs on and on.
• In designing our new beverage, we are mindful of combinatorial effects. And we are mindful of autocatalysis and so forth. Once we get this thing going, we want it to run. We want as powerful a reinforcing effect as we can possible get. So we together think out what we are going to do to this beverage to make it a powerful reinforcer. And what do we do? We put in food value. The reason rats, pigeons and so forth are trained in operant conditioning with food is that food is nearly an automatic reinforcer. So we’re going to include some caloric value in our drink.
• Another reinforcing trick is a stimulant—for instance, caffeine. Why should we hold back? We want fancy combinatorial effects. And once we realize that we get extra-powerful effects—what I call lollapalooza effects—from combining a bunch of things to work in the same direction, we are not going to stop with food value. We are going to have food value plus a stimulant: caffeine.
• Flavor is a very important reinforcer. And, here again, we know enough physiology and biology to know that people are genetically programmed to like sweet flavors. So it is going to be some kind of sweet flavor.
• How do you lose a conditioned reflex that is working for you? Well, the customer tries something else and discovers that it is a big reinforcer. So he shifts brands. We know, in matrimony, that if you are always available, the spouse is less likely to shift brands. And people don’t tend to organize marriage to include permanent long separations. Similarly, if you are selling a product and it is always available, people are less likely to shift to some other product and get reinforced by it.

Hard to copy

• We want it to be reasonably complicated because we want to achieve a big edge that others can’t easily copy.
• Obviously, we want protection. We know enough microeconomics to know that anything that works will get competition… we think forward and backwards. And thinking backwards, we know that we need antidotes to competition. Well, you can’t copyright or trademark a flavor. So we do the next best thing. We are going to keep the formula secret.

Pricing power (especially if it is untapped)

• When we bought See’s Candy, we didn’t know the power of a good brand. Over time, we discovered we could raise prices 10% a year and no one cared. Learning that changed Berkshire. It was really important.
• There are actually businesses, that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices—and yet they haven’t done it. So they have huge untapped pricing power that they’re not using. That is the ultimate no-brainer. Disney found that it could raise those prices a lot and the attendance stayed right up. So a lot of the great record of Eisner and Wells … came from just raising prices at Disneyland and Disneyworld and through video cassette sales of classic animated movies… At Berkshire Hathaway, Warren and I raised the prices of See’s Candy a little faster than others might have. And, of course, we invested in Coca-Cola—which had some untapped pricing power.
• We won’t do what the Coca-Cola Company was so mistaken to do as it started out—which was to give bottling franchises in perpetuity at fixed prices for syrup. That was insane.
• If we can sweep the country fast with our product, we harness another doctrine right our of the psychology books: social proof. If you see everybody else drinking Coca-Cola, you are likely to drink it. People are enormously influenced by what they see other people doing.

Economies of scale

• On the subject of economies of scale, I find chain stores quite interesting. Just think about it. The concept of a chain store was a fascinating invention. You get this huge purchasing power—which means that you have lower merchandise costs. You get a whole bunch of little laboratories out there in which you can conduct experiments. And you get specialization. If one little guy is trying to buy across twenty-seven different merchandise categories influenced by traveling salesmen, he’s going to make a lot of dumb decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people who know a lot about refrigerators and so forth to do the buying. The reverse is demonstrated by the little store where one guy is doing all the buying. So there are huge purchasing advantages.
• You can get advantages of scale from TV advertising. When TV advertising first arrived—when talking color pictures first came into our living rooms—it was an unbelievably powerful thing. And in the early days, we had three networks that had whatever it was—say 90 percent of the audience. Well, if you were Procter & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so damn many cans and bottles. Some little guy couldn’t. And there was no way of buying it in part. Therefore, he couldn’t use it. In effect, if you didn’t have a big volume, you couldn’t use network TV advertising—which was the most effective technique. So when TV came in, the branded companies that were already big got a huge tail wind.
• …in terms of which businesses succeed and which businesses fail, advantages of scale are ungodly important. … In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm. And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, “To hell with it. We’re either going to be # 1 or #2 in every field we’re in or we’re going to be out.”
• The fastest way to do it is to franchise. After all, we are poor and small when we start. And that is the way that Coca-Cola did it.
• We want more control over our franchisees than Coca-Cola originally got. We want to do it more like McDonald’s did way later.

Low costs (from other sources)

• Just using elementary engineering and mathematics, we know that we don’t want to ship a lot of water and extra weight and volume of containers all over the world. Obviously, that would cost us a fortune. Therefore, basically, what we are going to sell is syrup.

High replacement cost

• Do you know what it would cost to replace Burlington Northern today? We are not going to build another transcontinental.

Network effects

• It would be easier to screw up American Express than Coke or Gillette, but it’s an immensely strong business.

Ability to retain cost savings from technology

• There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.
• Conversely, if you own the only newspaper in Oshkosh and they were to invent more efficient ways of composing the whole newspaper, then when you got rid of the old technology and got new fancy computers and so forth, all of the savings would come right through to the bottom line.

Free cash flow (that can either compound or be extracted)

• There are two kinds of businesses. The first earns 12%, and you can take it out at the end of the year. The second earns 12%, but all the excess cash must be reinvested—there’s never any cash. It reminds me of the guy who looks at all of his equipment and says, “There’s all of my profit”. We hate that kind of business.
• Understanding both the power of compound return and the difficulty of getting it is the heart and soul of understanding a lot of things.

High returns on capital

• Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you are not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you will end up with one hell of a result.

Concentrate on a few good investments:

• I have fond memories of Phil Fisher. The idea that it was hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But 98% of the investment world doesn’t think this way.
• Our investment style has been given a name – focus investing – which implies ten holdings, not one hundred or four hundred.
• We believe almost all good investments will involve relatively low diversification.

Use opportunity cost as a filter:

• If you take the best textbook in economics by Mankiw, he says intelligent people make decisions based on opportunity costs — in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some kick — there’s even a cost of equity capital. A perfectly amazing mental malfunction.
• The right way to make decisions in practical life is based on your opportunity cost.
• There is this company in an emerging market that was presented to Warren. His response was, ‘I don’t feel more comfortable buying that than I do of adding to Wells Fargo.’ He was using that as his opportunity cost.

All intelligent investing is value investing:

• The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price. It’s just that simple.
• The whole concept of dividing it up into ‘value’ and ‘growth’ strikes me as twaddle. It’s convenient for a bunch of pension fund consultants to get fees prattling about and a way for one advisor to distinguish himself from another. But, to me, all intelligent investing is value investing.
• The basic concept of value to a private owner and being motivated when you’re buying and selling securities by reference to intrinsic value instead of price momentum – I don’t think that will ever be outdated.
• The idea of a margin of safety, a Graham precept, will never be obsolete. The idea of making the market your servant will never be obsolete. The idea of being objective and dispassionate will never be obsolete. So Graham had a lot of wonderful ideas.

You don’t need to be good at macroeconomic forecasting:

• Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.
• Neither Warren nor I have any record of making large profits from interest rate bets. That being said, all intelligent citizens of this republic think a bit about this. In my lifetime, I’ve seen interest rates range from 1% to 20%. We try to operate so that really extreme interest rates in either direction wouldn’t be too bad for us. When interest rates are in a middle range, as they are now, we’re agnostic.
• …by regularly reading business newspaper and magazines I am exposed to an enormous amount of material at the micro level.. . I find that what I see going on there pretty much informs me about what’s happening at the macro level.

If you own a truly good business, sit on it:

• Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.
• The tax code gives you an enormous advantage if you can find some things you can just sit with.
• If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15%—or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening…

Don’t spend too much time on calculations:

• “Warren talks about these discounted cash flows. I’ve never seen him do one.” “It’s true,” replied Buffett. “If the value of a company doesn’t just scream out at you, it’s too close.”
• People calculate too much and think too little.
• Practically everybody overweighs the stuff that can be numbered, because it yields to the statistical techniques they’re taught in academia, and doesn’t mix in the hard-to-measure stuff that may be more important.

If it’s too hard, take a pass:

• There are a lot of things we pass on. We have three baskets: in, out, and too tough…We have to have a special insight, or we’ll put it in the ‘too tough’ basket.
• We just throw some decisions into the ‘too hard’ file and go onto the others.
• Berkshire is in the business of making easy predictions. If a deal looks too hard, the partners simply shelve it.
• We have no system for estimating the correct value of all businesses. We put almost all in the “too hard” pile and sift through a few easy ones.

Follow the occasional great manager into a mediocre business:

• Averaged out, betting on the quality of business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely, you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business.

Keep a cold head and don’t mimic the herd:

• We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a period of years.
• If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.
• A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.
• Mimicking the herd invites regression to the mean.
• Following the crowd and investing in what is fashionable is a recipe for disaster. Instead, look for solid companies with strong balance sheets that are either out of favor with Wall Street or, better yet, not even on Wall Street’s radar screen.
• If people weren’t wrong so often, we wouldn’t be so rich.
• We have a history when things are really horrible of wading in when no one else will.
• Thanks to the early 1930s and the behavior of the capitalists in the robber-baron days… stocks yielded dividends that were twice as much as the interest rates on bonds. It was a wonderful period to be buying stocks. We profited from others’ demoralization from the previous generation.

Build a disaster-resistant portfolio and avoid excessive debt:

• Favorable surprises are easy to handle. It’s the unfavorable surprises that cause the trouble.
• We are more disaster-resistant than most other places. We haven’t pushed it as hard as other people would have pushed it.
• As you can tell in Berkshire’s operations, we are much more conservative. We borrow less, on more favorable terms. We’re happier with less leverage. You could argue that we’ve been wrong, and that it’s cost us a fortune, but that doesn’t bother us. Missing out on some opportunity never bothers us. What’s wrong with someone getting a little richer than you? It’s crazy to worry about this.
• When I came out to California, there was this playboy and he spent all his time drinking heavily and chasing movie stars. His banker called him in and said that he was very nervous about his behavior. He told his banker, “Let me tell you something: my municipal bonds don’t drink“.
• There’s a lot of leverage in those carry-trade games. Other people are more certain than I am that the aircraft can always be leased.

Shorting can be dangerous and frustrating:

• It’s dangerous to short stocks.
• Being short and seeing a promoter take the stock up is very irritating. It’s not worth it to have that much irritation in your life.
• It would be one of the most irritating experiences in the world to do a lot of work to uncover a fraud and then at having it go from X to 3X and have the crooks happily partying with your money while you’re meeting margin calls. Why would you want to go within hailing distance of that?

Remember that the stock market can be foolishly excessive:

• Ben Graham [had] his concept of “Mr. Market”. Instead of thinking the market was efficient; he treated it as a manic-depressive who comes by every day. And some days he says, “I’ll sell you some of my interest for way less than you think it’s worth.” And other days, “Mr. Market” comes by and says, “I’ll buy your interest at a price that’s way higher than you think it’s worth.” And you get the option of deciding whether you want to buy more, sell part of what you already have or do nothing at all. To Graham, it was a blessing to be in business with a manic-depressive who gave you this series of options all the time. That was a very significant mental construct….
• It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds, based on roughly rational projections of use value in producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up, so far.
• To some extent, stocks are like Rembrandts. They sell based on what they’ve sold in the past. Bonds are much more rational. No-one thinks a bond’s value will soar to the moon.
• Crowd folly, the tendency of humans, under some circumstances, to resemble lemmings, explains much foolish thinking of brilliant men and much foolish behavior.
• Today, it seems to be regarded as the duty of CEOs to make the stock go up. This leads to all sorts of foolish behavior.
• There is more dementia about finance than there is about sex.
• If you, like me, lived through 1973-74 or even the early 1990s… there was a eaiting list to get OUT of the country club—that’s when you know things are tough. If you live long enough, you’ll see it.

Don’t underestimate the wealth effect:

• The wealth effect is the extent to which consumer spending is goosed upward due to increases in stock prices. Of course it exists, but to what extent? I made a speech a while back when I said that the wealth effect is greater than economists believe. I still say this.

Don’t equate volatility with risk:

• Using volatility as a measure of risk is nuts. Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return. Some great businesses have very volatile returns – for example, See’s usually loses money in two quarters of each year – and some terrible businesses can have steady results.
• An isolated example that’s very rare is much easier to endure than a perfect sea of misery that never ceases.

Avoid investment traps:

• In terms of business mistakes that I’ve seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes… Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.
• Every time you see the word EBITDA, you should substitute the word “bullshit earnings”.
• Everywhere there is a large commission, there is a high probability of a rip-off.
• The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. (…) The people who sell the machinery—and, by and large, even the internal bureaucrats urging you to buy the equipment—show you projections with the amount you’ll save at current prices with the new technology. However, they don’t do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer. I’ve never seen a single projection incorporating that second step in my life.
• You cannot just go invest in China, however. The first movers can get killed. There’s a saying in Indonesia: “What you’re calling corrupt is Asian family values”.

Don’t count on most independent directors:

• As a general rule in America, boards act only if there’s been a severe disgrace.
• I think you get better directors when you get directors who don’t need the money. When it’s half your income and all your retirement, you’re not likely to be very independent. But when you have money and an existing reputation that you don’t want to lose, then you’ll act more independently.

Beware of excesses in the financial sector:

• I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away.
• Even the best banks drift with the times and do stupid things.
• Where you have complexity, by nature you can have fraud and mistakes… This will always be true of financial companies, including ones run by governments. If you want accurate numbers from financial companies, you’re in the wrong world.
• AIG is a lot like GE. It is a fabulously successful insurance operator, and with success it morphed into a massive carry business—borrowing a lot of money at one price and investing it at another price. AIG was a big operator that was a lot like GE Credit. We never owned either because even the best and wisest people make us nervous in great big credit operations with swollen balance sheets. It just makes me nervous, that many people borrowing so many billions.
• Mortgage lending became a dirty way to make money. You take people that can’t handle credit and try to make very high returns by abusing and encouraging their stupidity—that’s not the way I want to make money in banking.
• Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top. I know one guy; he’s extremely smart and a very capable investor. I asked him, “What returns do you tell your institutional clients you will earn for them?” He said, “20 percent.” I couldn’t believe it, because he knows that’s impossible. But he said, “Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!” The investment-management business is insane.

Avoid diworseifications:

• When you mix raisins with turds, you still have turds.

If you made a mistake or the odds have changed, face the facts:

• I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.
• Forgetting your mistakes is a terrible error if you are trying to improve your cognition.
• There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke. You’ve made an enormous commitment to something. You’ve poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think,” Now it has to work. If I put in just a little more, then it ’all work…. People go broke that way —because they can’t stop, rethink, and say,’ I can afford to write this one off and live to fight again. I don’t have to pursue this thing as an obsession —in a way that will break me.’
• I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.
• Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand—you must learn to handle mistakes and new facts that change the odds.
• We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire.
• Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.

Over the long term, even great businesses and civilizations do not survive:

• Over the very long term, history shows that the chances of any business surviving in a manner agreeable to a company’s owners are slim at best.
• Over the long term, the eclipse rate of great civilizations being overtaken is 100%. So you know how it’s going to end.

Forget master plans and cookie-cutter solutions:

• At Berkshire there has never been a master plan. Anyone who wanted to do it, we fired because it takes on a life of its own and doesn’t cover new reality. We want people taking into account new information.
• ‘One solution fits all’ is not the way to go. . . . The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.

Put smart people in control:

• How is [Berkshire] organized? I don’t think in [the] history of the world has anything Berkshire’s size [been] organized in so decentralized a fashion.
• Berkshire is in GM because on of our young men likes it. Warren, when he was a young man, got to do whatever he wanted to do, and that’s the way it is.
• In a democracy, everyone takes turns. But if you really want a lot of wisdom, it’s better to concentrate decisions and process in one person. It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in an enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.

Use positive reinforcement:

• All human beings work better when they get what psychologists call reinforcement. If you get constant rewards, even if you’re Warren Buffett, you’ll respond… Learn from this and find out how to prosper by reinforcing the people who are close to you.

Acknowledge the power of incentives:

• The iron rule of nature is that you get what you reward for. If you want ants to come, put sugar on the floor.
• Upton Sinclair said it best of all. He said, “It’s very hard to get a man to believe non-X when his way of making a living requires him to believe X.”
• From all business, my favorite case on incentives is Federal Express. The heart and soul of their system—which creates the integrity of the product—is having alk their airplanes come to one place in the midd of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time. They tried everything—moral suasion, threats, you name it. And nothing worked. Finally, someone got the idea to pay all these people not so mich an hour, but so much a shift—and when it’s all done, they can go home. Well, their problems cleared up overnight.
• Capitalism without failure is like religion without hell.
• We have to have people subject to carrots and sticks. If you take away the stick the whole system won’t work. You can’t vote yourself rich. It’s an idiotic idea.
• An example of a really responsible system is the system the Romans used when they built an arch. The guy who created the arch stood under it as the scaffolding was removed. It’s like packing your own parachute.

Don’t believe everything finance professors, economists, and other experts say:

• By and large I don’t think too much of finance professors. It is a field with witchcraft.
• Beta and modern portfolio theory and the like – none of it makes any sense to me.
• The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification.
• Efficient market theory [is] a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won — he shared a Nobel Prize — and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn’t quite as efficient as you think, he said, “Well, it’s a two-sigma event.” And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas — better to add a sigma than change a theory, just because the evidence comes in differently. And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.
• I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.
• Black-Scholes is a know-nothing system. If you know nothing about value — only price — then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it’s crazy to get into Black-Scholes.
• Black-Scholes works for short-term options, but if it’s a long-term option and you think you know something, it’s insane to use Black-Scholes.
• You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some similar psychological force that is obviously present. But there are also cases where you have to recognize that you have no wisdom to add—and that your best course is to trust some expert.
• I don’t care if somebody makes a lot of money and holds it like a miser.

Avoid ideologies:

• Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind.

Too much liquidity and trading is dangerous:

• After the South Sea Bubble, Britain outlawed public corporations—only private ones allowed. And they led the world for 100 years. A modest amount of liquidity will serve the situation. Too much liquidity will hurt human nature. I would never be tenured if I said that. But I’m right and they are wrong.
• We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activities than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. When it happened in the past, there were bad consequences.
• Mortgage lending became a dirty way to make money. You take people that can’t handle credit and try to make very high returns by abusing and encouraging their stupidity—that’s not the way I want to make money in banking.
• We have monetized houses in this country in a way that’s never occurred before. Ask Joe how he bought a new Cadillac—from borrowing on his house.
• If you intelligently trade derivatives it’s like a license to steal, so you can understand why they all want to do it… but what is the big plus in having everyone gamble with everyone else? I lived in a world with low gambling for decades when I was younger and I liked it better. I think it was better for the country. It’s like having thousands of professional poker players. What damn good are they doing for anybody?

The financial sector needs to be regulated:

• Banks will not rein themselves in voluntarily. They need adult supervision.
• I do not think you can trust bankers to control themselves. They are like heroin addicts.
• These crazy booms should be watched. Alan Greenspan didn’t think so. He’s a capable man but he’s an idiot. You should not make him the father of all banking. His hero is Ayn Rand. It’s an unlikely place to look for wisdom. A lot of people think that if an ax murderer goes around killing people in a free market it’s all right.
• People really thought that giving a predatory class of people the ability to do whatever they wanted was free-market enterprise. It wasn’t. It was legalized armed robbery. And it was incredibly stupid.
• The whole world is better when you don’t reduce engineering standards in finance. We skipped a total disaster by a hair’s breadth… I’m a big fan of the people who took us through the crisis. I’m not a big fan of the people who caused the crisis. Some of them deserve to be in the lowest circles of hell.
• The people who carry the torch in accounting are in a noble profession, yet these people also gave us Enron.

Governments are prone to inflation, but it does not prevent successful investments:

• I think democracies are prone to inflation because politicians will naturally spend—they have the power to print money and will use money to get votes. [Personal note: Philip Fisher made a similar argument, in a more detailed and less contentious manner, in his book Common Stocks and Uncommon Profits, see PE Investor blog post on Philip Fisher]
• If you look at inflation under the Roman Empire, with absolute rulers, they had much greater inflation, so we don’t set the record. It happens over the long-term under any form of government
• I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I’ve seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not.

Hydrocarbon reserves are precious:

• I think the hydrocarbon reserves in the United States are one of the most precious things we have, every bit as precious as the topsoil of Iowa. Just as I don’t want to export all the topsoil in Iowa to Iran or someplace, just because they are willing to give us some money, I love the hydrocarbon reserves we have in the ground. The fashion is to be independent and to use them up as fast as we can. I think that’s insanity as a national policy.

Trade helps maintain peace:

• China and the United States have to get along. Each country would be out of its mind not to get along with the other. I think trade helps us to get along. [Personal note: In his book Sophismes Economiques, published in 1848, French economist Frédéric Bastiat made a similar argument, to counter protectionist contentions that dependence on foreign countries was dangerous in case of war, that trade itself, as a form of mutual dependence, was actually a way to prevent war . This was also the main rationale for the European Union project, and it seems to have worked quite well so far in keeping peace between longtime foes France and Germany.]