#202 A Few Lessons From Warren Buffett

What I learned from reading A Few Lessons for Investors and Managers From Warren Buffett by Warren Buffett and Peter Bevelin. ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble. Speculation is most dangerous when it looks easiest. Now it is a funny thing about life; if you refuse to accept anything but the best you very often get it. —W. Somerset Maugham"Moats" —a metaphor for the superiorities they possess that make life difficult for their competitors. Business history is filled with "Roman Candles," companies whose moats proved illusory and were soon crossed. When a company is selling a product with commodity-like economic characteristics, being the low-cost producer is all-important. In a business selling a commodity-type product, it's impossible to be a lot smarter than your dumbest competitor. As a wise friend told me long ago, "If you want to get a reputation as a good businessman, be sure to get into a good business."The truly big investment idea can usually be explained in a short paragraph. Our managers have produced extraordinary results by doing rather ordinary things—but doing them exceptionally well. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as "widening the moat."We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. Charlie and I are not big fans of resumes. Instead, we focus on brains, passion and integrity. It's difficult to teach a new dog old tricks. Investors should understand that for certain companies, and even for some industries, there simply is no good long-term strategy. Most of our directors have a major portion of their net worth invested in the company. We eat our own cooking. Our trust is in people rather than process. A “hire well, manage little" code suits both them and me. Just run your business as if: (1) You own 100% of it; (2) It is the only asset in the world that you and your family have or will ever have; and (3) You can't sell it for at least a century. We believe in Charlie's dictum-“Just tell me the bad news; the good news will take care of itself". We do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus we feel no need to proceed in an ordained direction but can instead simply decide what makes sense for our owners. We always mentally compare any move we are contemplating with dozens of other opportunities open to us. Our practice of making this comparison- acquisitions against passive investments –-is a discipline that managers focused simply on expansion seldom use. We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and no staff to investigate a multitude of ideas presented by promoters and intermediaries. Instead, we simply hope that something sensible comes along-and, when it does, we act. Loss of focus is what most worries Charlie and me. Charlie and I know that the right players will make almost any team manager look good. We subscribe to the philosophy of Ogilvy & Mather's founding genius, David Ogilvy: “If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But, if each of us hires people who are bigger than we are, we shall become a company of giants."Our experience has been that the manager of an already high-cost operation frequently is uncommonly resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors. A compact organization lets all of us spend our time managing the business rather than managing each other. Thirty years ago Tom Murphy, then CEO of Cap Cities, drove this point home to me with a hypothetical tale about an employee who asked his boss for permission to hire an assistant. The employee assumed that adding $20,000 to the annual payroll would be inconsequential. But his boss told him the proposal should be evaluated as a $3 million decision, given that an additional person would probably cost at least that amount over his lifetime, factoring in raises, benefits and other expenses (more people, more toilet paper). And unless the company fell on very hard times, the employee added would be unlikely to be dismissed, however marginal his contribution to the business. In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. The most elusive of human goals- keeping things simple and remembering what you set out to do. Stay with simple propositions. Nothing sedates rationality like large doses of effortless money. Tomorrow is always uncertain. The less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. In allocating capital, activity does not correlate with achievement. The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster. Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a way to get very poor. The trick is to learn most lessons from the experiences of others. When a problem exists, whether in personnel or in business operations, the time to act is now. ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Senra?

  Customer Review: A Guide to Both Wisdom and Sherlock Holmes. We Sherlock Holmes fans, readers, and secret imitators need a map. Here it is. Peter Bevillen is one of the wisest people on the planet. He went through the books and pulled out sections from Conan Doyle's stories that are relevant to us moderns. A Guide to Both Wisdom and Sherlock Holmes. It makes you both wiser and eager to reread Sherlock Holmes. That was a review from Amazon, and it's also the way I discovered the book that I'm going to talk to you about today, which is A Few Lessons for Investors and Managers from Warren Buffett, and it was written and put together by Peter Bevillen. And that review was written by Nassim Taleb. I've read a bunch of Taleb's books.

• 0:45David Senra?

  I highly recommend them. They're some of my favorite books: Fooled by Randomness, Black Swan, Anti-Fragile, Skin in the Game, The Bed of Procrustes. And so I had the idea one day, I was like, well, what are the books that he likes to read? If I like reading his books, what are the books that he likes to read? So I was going through, and he writes a bunch of reviews, good and bad, on Amazon of the books that he reads. And so the title of the book that Taleb was reviewing there is A Few Lessons from Sherlock Holmes. I was like, what is that? That stuck out. So I wound up clicking on the Amazon Author page of Peter Bevillen, and then I realized, oh, wow, he wrote a few other books. He's got A Few Lessons from Sherlock Holmes, he's got the book I'm Holding My Hand, A Few Lessons for Investors and Managers, and then he has arguably his most famous book, which is Seeking Wisdom: From Darwin to Munger.

• 1:30David Senra?

  And so I started to click on the product description of his book, Seeking Wisdom, and I just want to pull out a little excerpt real quick from the product description. So it says, "His quest for wisdom originated partly from making mistakes himself and observing those of others, but also from the philosophy of Super-Investor and Berkshire Hathaway Vice Chairman Charlie Munger." And then this is what made me just order all of Peter's books. "A man whose simplicity and clarity of thought was unequal to anything Bevillen had seen." And that sentence describes, that's basically how I feel about Charlie Munger. I think he might be the wisest person I've ever come across. And so then I read Taleb's review of that book, Seeking Wisdom. He says, "A wonderful book on wisdom and decision-making, written by a wise decision-maker.

• 2:13David Senra?

  This is the kind of book you read first, then leave by your bedside and reread a bit every day." Let me pause right in the middle of his review, because I was going to say the exact same thing to you about the book that I hold in my hand. It's like a series of essays. You can read it, it's like less than 100 pages. You could read it in a day if you want. But I think the value is just keeping it out somewhere on a table, your bedside, wherever, and just picking it up and maybe reading for five, 10 minutes, and then thinking about what you read, and then doing that consistently. So let me go back to this. "A wonderful book on wisdom and decision-making, written by a wise decision-maker, rather. This is the kind of book you read first, then leave by your bedside, and reread a bit every day, so you can slowly soak up the wisdom."

• 2:56David Senra?

  It is sort of Montaigne, but applied to business. If you've ever read Taleb's books, he mentions Michel de Montaigne, probably pronounced that incorrectly several times, somebody he admires. It's sort of Montaigne, but applied to business with a great investigation of the psychological dimension of decision-making. I like the book for many reasons. The main one is that it was written by a practitioner who knows what he wants, but not an academic. Enjoy it. Okay, so that leads us to this book. Eventually, I haven't read the other two books. This is the only one of Peter's books I've read so far. I will do podcasts on those books in the future. I want to start off with, he tells us why. Well, first of all, I like that he starts his book with a quote and then ends it with a quote. Actually, you know what? Let me read the first one, because I think it's fantastic.

• 3:40David Senra?

  This is how he begins the book. "Now, it's a funny thing about life. If you refuse to accept anything but the best, you very often get it." And then he ends the book with a quote by Confucius. And he says, "In all things, success depends on previous preparation. And without such previous preparation, there is sure to be failure." Okay, so let's go to where he's talking about, like, what's the point? Like, why am I writing this book? He says, "Some managers have asked me, 'You always talk about the wisdom of Warren Buffett. Couldn't you put together a memorandum with some of his key quotes that are useful for us managers? There are a lot of good books out there about Warren, but I wanted to do it in a shorter, easy-to-read way.

• 4:20David Senra?

  So I selected and arranged his words from the annual reports and the owner's manual and added some headlines of my own." And then he talks about all the people he needs to thank for him being able to put together this project. But I thought it was really interesting how he directly thinks Warren. He says, "Thank you, Warren. You have really enriched my life. Your yearly letter and doses of timeless wisdom always bring sunshine to my day. You represent the very best of wisdom and human qualities." And then on the next page, he just has a quote from Warren Buffett that I've read before and I think is really good. "I am a better investor because I'm a businessman, and a better businessman because I'm an investor." Okay, so let's get into the actual book.

• 5:03David Senra?

  And this is what I think Peter did that is extremely smart. And I wish I did this, because I read every single Warren Buffett shareholder letter. It's like over 50 years of his letters. It's by far the longest book I've ever done for the podcast. It's the longest podcast. I think it's like three hours long. I think it's Founder's Number 88, if I'm not mistaken. I definitely am going to have to take another crack at it. One, because there's very few people that have ever existed that have studied and thought more about business than Warren Buffett and his shareholder letters. He's digesting all the knowledge and all the time he spent for many decades and telling us like what's most important and what he's learned. But I made the mistake, because when I recorded that podcast, I sat down and tried to do it in one shot. So I went through all my notes and highlights from something that's the size of a textbook.

• 5:49David Senra?

  And I just went in chronological order. What I think, what I think the better idea is to, I would take all my, I would read them again, extract out all my notes and lessons, right? Remove all the financial stuff because you know, you don't need, it's obvious, like, they put together the greatest investment record in the history of human civilization. So you don't need to know it's like 20% this and 50% that. But really, I think the most valuable part is just taking out the lessons and rewriting, and writing them and organizing them. And so what Peter did here is he organizes, most of what he's quoting from is the shareholder letters, right? And so what he did here is he organized it by topic. And then as he, he'll put in highlights at the end of like a paragraph, what year it came from.

• 6:30David Senra?

  So right now, the section I'm in, you know, he's got one paragraph that comes from 1996, another one that comes from 2007, another one that comes from 1983, another one comes from 2007. And so organizing it by topic, I think actually makes it easier for what Warren's trying to teach us, like to sink into our brain. I think, once I read this, I'm like, damn, that's a way better idea than what I did. So I'll hopefully rectify that mistake in the future. Let's go into what he's talking about. So really, he's like, what is, what a really great business is? The best definition of a moat that I've ever heard. Profit attracts competition. Steve Jobs on Disney doesn't want you to know how lucrative. I'm reading my notes that I'm leaving for myself, obviously, before I get into the highlights. And then I'd rather wrestle grizzlies.

• 7:14David Senra?

  And so in this section, let me back up real quick. In this section, they're going to talk about what's, like they're defining, what's a really great business? What's a good business? And what's a gruesome business? So it starts out, the best businesses are by far for owners, continue to be those that have high returns on capital and that require a little incremental investment to grow. So they're going to start out with the really great business. And so what Peter does here is he adds highlights and like summaries in bold of what he thinks that like, trying to like distill down what Warren's trying to teach us, right? So this is Peter's summary, the really great business. And he just lists some of these characteristics. High returns, a sustainable competitive advantage, and obstacles that make it tough for new companies to enter.

• 7:58David Senra?

  So they're making a lot of money, that the ability to make money is sustained over a long period of time, and it's so tough to compete with them that very few people are able to, to create new companies to sail their position. Okay? So now we get to Warren. A truly great business must have an enduring moat that protects excellent returns on invested capital. And then Warren, in his 2007 shareholder letter, defines that for us, which is fantastic. So he says, "Motes, a metaphor for the superiorities that a business possesses that make life difficult for their competitors." So I thought of, it's a very famous character when you read Warren Buffett's shareholder letters, or if you hear him speak. It's Rose Blumkin. She founded Nebraska Furniture Mart. It's funny, because he winds up talking to her.

• 8:43David Senra?

  She's like 70, 80-year-old lady at that time, and she started the company with 500 bucks. Right? One of the greatest entrepreneurs to ever live. I'm surprised there's not like a biography on her. Maybe there is. I should actually go look. But he winds up handing her a check. They do a deal. It's like, how much do you want? She said, what is it, 60 million, 70 million? I can't remember what it was. So he shows up a couple of days later, hands her a check for an absurd amount of money. She barely looks at it, right? Folds the check pit in the pocket, and then she says something to him like, "Mr. Buffett," or "Warren, we're going to put our competitors through a meat grinder." And so he always references in his talks and writing, he's like, "Listen, I'd rather wrestle grizzly." Like, she's so good that you'd rather wrestle grizzlies than compete with her. So that's what, that when he talks about moat, that's why I jotted down that note to myself.

• 9:26David Senra?

  So he says, "The dynamics of capitalism guarantee that competitors will repeatedly assault any business that is earning higher returns." And so this is why, I think, something that becomes very obvious when you study the history of entrepreneurship and you read these biographies. And the maxim I always use is, "Bad boys move in silence." The people that make money shut up about it. They try, and this is for the very reason. The dynamics of capitalism guarantee, and to the, they shut up about it to the, to the degree that they can. If it's a private business, obviously, they'll shut up about it. We just saw this when I did that recent three-part series on Jeff Bezos. I think it wasn't until The Amazon Unbound, so it was part three of that three-part series, the book that just came out by Brad Stone, where they finally had to reveal, in that book,

• 10:11David Senra?

  they talk about, they didn't want anybody to know how big AWS was. They would try to bury the revenue and profit. And eventually, they had to pull it out. And they said, you know, "We didn't, we didn't want to, we didn't want our competitors to have this number. They, we didn't want them to know how lucrative that business was." So that, when I'm reading this little paragraph, right, that reminded me of something I read a long time ago. I would say the best biography of Steve Jobs is Becoming Steve Jobs. The one written by Isaacson is great, too. But this one, I really, really enjoyed. And I think that's like Founder's Number 18 somewhere. It's way back there. You can find it in the archive. When he was in that book, it tells the story of the founding of Pixar and just how difficult it was. And Steve Jobs intently studied Disney. For years and years and years, he studied Disney.

• 10:57David Senra?

  He had in his mind, you know, there was going to be an eventual. I think he knew for a long period of time that eventually Pixar, like there was only one home. Like, it was going to be such a valuable property. And it goes in that book goes into more detail about his strategy, which was genius. And the deal that Steve did with Bob winds up, Steve winds up being the largest single shareholder in Disney. It was really quite amazing. But anyways, he said something in that book that I thought was very interesting. And he talks about how much money Disney was making in animation and that they're not going to tell you how lucrative it was. So let me just read that. I should have just read this to you instead of rambling. So it says, this is Steve talking. "You can't go to the library and find a book titled 'The Business Model for Animation,' Steve explained.

• 11:40David Senra?

  'The reason you can't is because there's only been one company, Disney, that's ever done it well. And they're not interested in telling the world how lucrative it was.'" And to me, that what Steve obviously picked up there is exactly, is very similar to what Warren's saying here. It's like, listen, if you're making a lot of money and people know about it, they're going to try, hey, I can do that, too. "The dynamics of capitalism guarantee that competitors will repeatedly assault any business that is earning high returns. Therefore, a formidable barrier, such as a company being the low-cost producer." So he's talking about the businesses that he's trying to make money on. And how do you, essentially, how do you overcome competition? So you have an advantage because you can be the low-cost producer. So then your competitors can't compete with you.

• 12:24David Senra?

  He uses Geico and Costco as an example of that. "Are those possessing a powerful worldwide brand," and he used an example like Coca-Cola or American Express, "is essential for sustained success." Business history is filled with Roman candles, which are companies whose moats proved illusionary and whose moats were soon crossed. And so a way to analyze a company's moats, he's like, well, ask yourself if you had a ton of money and a lot of skilled people, like, could you actually compete with them? And I think he uses examples like if you gave somebody $20 billion to overcome Coca-Cola's market share, that's like impossible. So he says, "One question I always ask myself in appraising a business is how I would like,

• 13:08David Senra?

  assuming I had ample capital and skilled personnel, to compete with it." So I'm going to skip over the good business part because I want to get to the gruesome. Before I get to the gruesome, though, there's just a quote from his 1991 shareholder letter. It's fantastic. So he's talking about buying Seize Candy. He says, "In our Seize purchase, Charlie and I had one important insight. We saw that the business had untapped pricing power." So it just took one to know that myself is you only need one important insight to make a fortune, even if, obviously Berkshire is one of the best companies that have ever been created in human history. But even if you just own Seize, you'd be unbelievably wealthy. They bought the business for $25 million. This is a quote from 2007 shareholder letter. "Pre-tax earnings since the purchase

• 13:51David Senra?

  of that $25 million Seize Candy over a few decades had been," and this is cash going back to Berkshire, "had been $1.35 billion." Okay, so now let's go to the gruesome business. And this is really the type of business you don't want to be in, which I love studying, not only the great, but like the worst, right? So the completely opposite end of the spectrum. Peter's note here is that it requires a lot of capital at a low-return business. Warren says, "The worst sort of business is one that grows rapidly, requires significant capital to engender that growth, and then earns little or no money. Think airlines. Here's a durable competitive advantage has proven elusive ever since the days of the Wright Brothers."

• 14:35David Senra?

  And that's an example. He says in many industries differentiation cannot be made meaningful. He's again, this is the type of business you don't want to be in. Hence, the constant struggle of every vendor to establish and emphasize special qualities of product or service. So he talks about, you know, you can't really do that in airlines. He's going to compare and contrast where you can and cannot do that. This works with candy bars, his example of seeds, right? Customers buy the brand name. They don't come in asking for a two ounce candy bar, but it does not work with sugar. How often do you hear someone say, I'll have a cup of coffee with cream and C and H sugar, please? And so now he's going to say, well, what do you, what do you do if you find yourself in a situation like that? I think he would, he would say, get out of that business. But if you're in it and you're not leaving, the only way you can make money is if you were

• 15:20David Senra?

  the low cost operator. So he says, when a company is selling a product with commodity like economic characteristics, being the low cost producer is all important. And I would say probably the greatest historical example of that is John D Rockefeller. This is exactly what he did. He would, he was obsessed with eliminating waste. He was the lowest cost provider in the oil and the, I think, the first for finding kerosene, if I remember correctly. But what happened is the way he would even, he would, he would, his costs were so low that he was able to make a profit at prices where his, his competitors would lose. So he'd go and try to buy his competitors, right? And he would show them their books.

• 16:03David Senra?

  And because at first they're like, no, no, I'm not going to sell to you. And then he would, like, they would see his books and they'd realize, oh my God, this guy can make a profit at a price that would bleed me dry. And Rockefeller would also say crazy shit to his competitors, like, I have ways of making money you knew nothing about. It's kind of spooky. But anyways, seeing this, many of his competitors, you know, they saw the writing on the wall. So they wind up selling to him and this helped him consolidate. And so let's reread what Buffett just said. He didn't say, this is one of the things that's important. He's like, this is the most important thing. With a company that's selling a product with commodity like economic characteristics, being the low cost producer is all important.

• 16:40David Senra?

  And this goes on for many pages of, because he has experience in this. Warren winds up, he talks about the original buying Berkshire Hathaway, it was a textile company. He winds up making more money. When he bought Rose's furniture store, right? He winds up making more money in 19 months selling furniture than he did in 15 years selling textiles. So he has a lot of personal experience, like, hey, I made this mistake, don't do this, like, just get out of these crappy businesses. And so this goes on for many, many pages, much longer than describing what a great or a good business is. But I'm just gonna pull out a couple quotes for you here. He says, "This devastating outcome for shareholders," and he's talking about himself, "indicates what can happen when much brain power and energy are applied to a faulty premise."

• 17:23David Senra?

  So he's talking about the folly of investing and continuing to invest in textiles. And this is what makes Warren so great. He takes these complex issues and he puts them into these low anecdotes and stories and maxims that are just so easy to digest. "The situation is suggestive of Samuel Johnson's horse. A horse that can count to 10 is a remarkable horse, not a remarkable mathematician. Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company, but not a remarkable business." We get an important truth here. "In a business selling a commodity-type product, it is impossible to be a lot smarter than your dumbest competitor."

• 18:08David Senra?

  So that's the way Warren describes it. And let me pull out another quote from John D. Rockefeller again, who built an empire in a commodity-like business, right? And so let me, actually, let me reread that section real quick. So it says, "In a business selling a commodity-type product, it's impossible to be a lot smarter than your dumbest competitor." Okay, so Warren is saying that in 1990. This is something that John D. Rockefeller said in the 1800s. "Oftentimes, the most difficult competition comes not from the strong, the intelligent, the conservative competitor, but from the man who is holding on by the eyelids and is ignorant of his costs. And anyways, he's gotta keep running or bust." So on the next page, he's like, "This is what you should have done. As a wise friend told me a long ago, if you want to get a reputation as a good businessman,

• 18:53David Senra?

  be sure to get into a good business. My conclusion from my own experiences and from much observation of other businesses is that a good managerial record, measured by economic returns, is far more a function of what business boat you get into than how effectively you row." I'm going to pause there. This is a very fascinating idea. All the backman founders number 50, I read through all of Marc Andreessen's blog archive, right? And he has, at the time, he was writing this, I think in like 2007, he's like, you know, what is, what's most responsible for a business's success? You know, Marc has this like encyclopedic knowledge of business history, I would say. If you hear him talk, it's crazy. But, so he's like, you know, it's the product, is it the team, is it the market?

• 19:35David Senra?

  And he goes through and argues the other side of what other people would tell you, right? It's the product, it's the team. And he's like, "No, no, I think it's the market. I think the market is the most important predictor of a business's success." This is very similar to what Warren's saying. It's like, "Listen, it's more of a function of what business boat you get in than how effectively you row, although intelligence and effort help considerably, of course, in any business, good or bad." The smartest person, the smartest, most capable person with the best product in a bad market like textiles, I mean, Warren just went on for page after page, like, "This is stupid. This is a mediocre business. I should have gotten out and then used my talents on something that actually is capable of producing profits." And so there's another category of businesses after the gruesome, and they just call this other tough businesses. These are businesses you want to try to avoid.

• 20:19David Senra?

  He talks about, "Hey, you know, you can succeed in retail, but it's tough. Like, your competitors are always copying you, consumer tastes are fickle, they'll abandon you right away." And so he, I like this idea that he calls a retail business and similar businesses like that, they are, "I have to be smart everyday businesses." He's like, "You do not want a business where you have to be smart every day because we're, humans are not smart every day, right? It's so much harder." So avoid, the main takeaway from this section, avoid the "I have to be smart everyday" business. In contrast to this, meaning retail, in contrast to this "have to be smart everyday" business, there is what I call the "have to be smart once" business. For example, "If you were smart enough to buy a network TV station very early in the

• 21:02David Senra?

  game, you could put a shiftless and backward nephew to run things, and the business would still do well for decades."

• 21:11David Senra?

  And then a few pages later, they're trying to identify, what are the key factors for success or harm? And how predictable are they? This is just going to pull out. I'm going to, one of my favorite ideas that I learned from Charlie Munger, maybe his most powerful idea is find a simple idea and take it seriously. Right? And this is, I was actually just, right before I started recording, I was on the phone with a friend because I was telling him about this, this book I was reading. He's like, what do you think? Like, what's the benefit? Like, you keep reading books on Buffett and Munger and all these people. And the easiest way for me to summarize that quickly is like, they do simple things extraordinarily well for a long period of time. And that is just hard for most humans to do. Warren has this great quote. It's like something like, humans have a perverse, there's a perverse characteristic in human nature to make simple things complex.

• 21:56David Senra?

  It's just so hard to keep things simple. Do the simple things extraordinarily well and do that for a long period of time. This is all, this is like anathema to our nature. Right? So he says, investors should remember that their scorecard is not, and again, investors and entrepreneurs, anybody running a business too, investors should remember that the scorecard is not computed using Olympic diving methods. Degree of difficulty doesn't count. If you are right about a single business, or excuse me, about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had to correctly analyze an investment alternative characterized by many constantly shifting and complex variables. And later on, if I'm not mistaken, I have a note or highlight in there

• 22:41David Senra?

  where he compares like the likelihood of, the probability of your success if you have one characteristic of your business you have to focus on as opposed to getting 10 correctly. I'm pretty sure I cover that later on. And then finally, this summarizes this whole section. The truly big investment idea can usually be explained in a short paragraph. And so then we're going to sum up, Peter and Warren are going to sum up. It says, to sum up the great, good, and gruesome. Think of three types of savings accounts. The great one pays an extraordinary high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added.

• 23:23David Senra?

  Finally, the gruesome both pays an inadequate rate of return, or interest rate, and requires you to keep adding money at those disappointing returns.

• 23:35David Senra?

  Business experience, direct and vicarious, produce my present strong preference for businesses that possess large amounts of enduring goodwill and that utilize a minimum of tangible assets. Next section that Noda left myself is kind of what I was just telling my friend. Do ordinary things extraordinarily well and consistently over a long period of time, and that creates miracles. Our managers have produced extraordinary results by doing rather ordinary things, but doing them exceptionally well. Our managers protect their franchises, they control their costs, they search for new products and markets that build on their existing strengths, and they don't get diverted. They work exceptionally hard at the details of their businesses. And he wrote that in 1987.

• 24:19David Senra?

  He expounds on that idea in 2005. If we are delighting customers, eliminating unnecessary costs, and improving our products and services, we gain strength. But if we treat customers with indifference and we tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible. Cumulatively, though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticed actions, we describe this phenomenon as widening the moat. And then he tells us explicitly why doing so, like doing this on a consistent basis over a long term is so important. And doing that is essential if we are to have the kind of businesses

• 25:04David Senra?

  we want a decade or two from now. We always, of course, hope to earn more money in the short term. But when short-term and long-term conflict, widening the moat must, he italicized that, must take precedent. You must do that. But when short-term and long-term conflict, widening the moat must take precedence. This reminds me of something I heard Peter Thiel say. He wrote it in his book, too. In Zero to One, but I've heard him say, it's very counterintuitive. Almost all of a business's profits are 10 to 20 years into the future. So in Zero to One, he says, "Listen, the overwhelming importance of future profits is counterintuitive, even in Silicon Valley. For a company to be valuable, it must grow and endure. But many entrepreneurs focus on short-term growth. They have an excuse.

• 25:49David Senra?

  Growth is easy to measure, but durability isn't." And so he gives the example of PayPal. He had done, he's like, "Listen, by the time the business has been, at this point that he's writing, or excuse me, what he's writing about at this, he's writing about the time in history when PayPal had only been around for 27 months. He found that 75% of the company's present value would come from profits that would be generated 10 years later." And so that was actually hard for me to get my head around for such a long time. It's like, "What do you mean, almost all business profits are 10 to 20 years in the future?" But you see this when people post, it's like, "Oh, you know, the first year, the sick company like Salesforce, they did like, I'm making these numbers up, by the way, they did $5 million a year in their revenue the first year.

• 26:34David Senra?

  Now they make $5 million every eight hours," or something like that. And I've seen posts and calculations done like that for Amazon, Apple, all that kind of stuff. So that's where you really try to wrap your head around. It's like, what might seem like a big number today can be comparatively much smaller in the future for a business that has been widening a moat for 10, 15, 20 years. Now, we're going to get into, really, the people part of the business. If you read Warren and Charlie, they talk about, you know, Charlie says over and over again, like, "Most people are rat poison." He's very much like an elitist point of view. He's like, "You've got to stay away from the scumbags, and there's plenty of scumbags crushing business." So he says, "We do not wish to join the managers who lack admirable qualities. We do not wish to join with them.

• 27:17David Senra?

  No matter how attractive the prospects of their business," he summarizes this here, "we've never succeeded in making a good deal with a bad person." And they talk about like, how do they like, what do they use to determine like the quality of a person? What don't they use, rather? Charlie and I are not big fans of resumes. Instead, we focus on brains, passion, and integrity. So, don't rely on resumes if you need to find undiscovered talent, which new companies have to do, right? Because if the talent was discovered, you'd have a much wealthier company, just overpay for that talent that you can't do. That's exactly what Nolan Bushnell did in the early days of Atari by hiring a 19-year-old Steve Jobs. Most recently, more recently, a couple of podcasts ago, Jeremy Fry. That's what he did. He was able to hire a young, smart

• 28:00David Senra?

  James Dyson. Listen to what they're asking for. "Brains, passion, and integrity." That's the description of James Dyson, right? "One reason they're not big on resumes or what degree you have, and really just focusing on passion, brains, and integrity." Says, "Our experience with newly minted MBAs had not been that great. Their academic records always looked terrific, and the candidates always know just what to say, but too often, they are short on personal commitment." I underline that twice, and I'll tell you why in a minute. "Too often, they are short on personal commitment to the company and general business savvy. It is difficult to teach a new dog old tricks." So, "short on personal commitment" is the opposite of "puts forth maximum effort." One

• 28:41David Senra?

  of the things I'm most proud of about my daughter when she gets her report card is the teachers for years. They have put this on, "puts forth maximum effort." I don't even care what the grade is that she gets, but the fact, and she gets straight A's because she's like really into school and really well behaved, basically the opposite I was when I was a child. But I'm just so proud when I hear, when I read, "puts forth maximum effort." That is fantastic. Now, if somebody says that about you, that's a hell of a compliment, right? But what, that is so devastating. Like, it's a devastating insult for somebody that has professional pride, that if someone would say that you're "short on personal commitment." Oh, that's gross. "We do not remove superstars." Now, this is another no doubt myself. Warren, he just knows the powers of maxims. Like, he's fantastic about

• 29:26David Senra?

  this. "We do not remove superstars from our lineups merely because they have attained a specific age. Superb managers are too scarce a resource to discard simply because a cake gets crowded with candles."

• 29:40David Senra?

  So now he gets into a little bit about corporate governance, like who's on the board, who are you hiring to run the company? Essentially, like, who do you have around you? Who are the people you have around you? And, you know, he's nicer about it than other people have been. Isambard Kingdom Brunel, we saw, could be ruthless. Steve Jobs could be ruthless. You know, Jeff Bezos is ruthless about this, but they just edit, edit, edit, constantly editing the actual people that they have around them. And Warren says it in a nicer way here, but he says, "Listen, this means that directors must get rid of a manager who is mediocre, no matter how likable he is." He's talking about the directors he chooses. "In selecting a new director, we were guided by our longstanding criteria, which are that board members have to be owner-oriented, business savvy, interested,

• 30:23David Senra?

  and truly independent." And then he says, "The rarest of these qualities is business savvy." Many people, and that's a great thing about reading Warren's notes, shareholder letters, and why it's, I think, a valuable use of time, is because not only is he telling you the good ideas that he's come across, a lot of it is watching, like, really terrible behavior, which he says is abundant in corporate America, and then doing the opposite, right? So he says, and this is a pretty crazy thing, "The rarest of these qualities is business savvy. These are people that have already made it onto boards, right? Many people who are smart, articulate, and admired have no real understanding of business." And so he talks about, like, when they're trying to select new people on the board, new people to run the companies, like, "You guys are focused on the wrong thing. Over the years,

• 31:08David Senra?

  I've been queried many times about potential directors and have yet to hear anyone," he italicized that word, "anyone ask, does this person think like an intelligent owner?" And so one way to figure out, like, are you choosing the right personnel, is he has this idea, it's like, "What is this? Ask yourself, what is the specialized activity that I'm in?" And then, obviously, the next note I left myself, not obviously, because I haven't said it yet, the next note I left myself was "eat your own cooking." So, let's start with this idea, like, "What is the specialized activity you're in?" "At Berkshire, we are in the specialized activity of running a business well, and therefore, we seek business judgment." So put that at the top of your list. He's talking about, you know, "What education does this person have? What age are they? Are they a man? Are they a woman?"

• 31:52David Senra?

  He's like, "No, no. Are they an intelligent owner or not? Do they have business judgment or not? What are you people talking about?" "Most of our directors have a major portion of their net worth invested in the company. We eat our own cooking." We want the behavior of our directors to be driven by the effect their decisions will have on their family's net worth. And so this is what I mean when you study Warren and Charlie. They have a sophisticated, advanced understanding of human nature. And part of that, in my interpretation, is the fact that if you expose, whether they expose me, you, any number of humans that live now or live in the future, have lived in the past, to similar stimuli, we act in remarkably similar ways depending on that stimuli.

• 32:37David Senra?

  So this idea, you need to have a lot of money in here because your decisions will be better if your family benefits from your decision or can be harmed by your decision. You have to eat your own cooking. We want the behavior of our directors to be driven by their effects, their decision will have on their family's net worth. Moving on to management now. Hire well, manage little is the maxim here. At Berkshire, managers can focus on running their businesses. They are not subjected to meetings at headquarters, nor financing worries, nor Wall Street harassment. Our trust is in people rather than process. A hire well, manage little code suits both them and me.

• 33:19David Senra?

  And this might be my favorite thing in this entire book because it's simple and so powerful. It's a great way to think about how to run your business. So he says, "Just run your..." There's three things here, okay? Just run your business as if, one, you own 100% of it. Two, it is the only asset in the world that you and your family have or will ever have. And three, you can't sell it for at least a century. Imagine if that was like the rubric in which you make business decisions through, right? Just run your business as if, one, you own 100% of it. Two, it's the only asset in the world that you or your family have or will ever have.

• 34:03David Senra?

  And three, you can't sell it for at least a century. And then on the bottom of this page, we get a dictum from Charlie Munger. At Berkshire, we believe in Charlie's dictum. Just tell me the bad news, the good news will take care of itself. Here's a quick one for you. When setting compensation, think, "I get what I reward for."

• 34:23David Senra?

  This is another note I left myself. Warren understands human nature, which I was just repeating. Make sure incentives are tied to the same variables that determine value for owners and tied to the result of the area that the manager is responsible for and can impact. When we use incentives, they are always tied to the operating results for which a given CEO has authority. We issue no lottery tickets that carry payoffs unrelated to business performance. So he uses the business that he bought, Scott Feltzer, a bunch as an example in the book. And the guy running the business, Scott Feltzer, is this guy named Ralph Shea. So he says, "We compensate Ralph based on the results of his business rather than those of Berkshire.

• 35:04David Senra?

  What could make more sense, since he's responsible for one operation but not the other? A cash bonus or a stock option tied to the fortunes of Berkshire would provide totally capricious rewards to Ralph. He could, for example, be hitting home runs at Scott Feltzer while Charlie and I rank up mistakes at Berkshire, thereby negating his efforts many times over. Conversely, why should option profits or bonuses be heaped upon Ralph if good things are occurring in other parts of Berkshire but Scott Feltzer is lagging?" And why are they doing this? Because they know if the compensation's out of whack, it's going to generate irrational decisions made by that person because they're optimizing for their own incentives over that of the business, right?

• 35:47David Senra?

  So he says, "Arrangements that pay off in capricious ways unrelated to a manager's personal accomplishments may well be welcomed by certain managers, who, after all, refuses a free lottery ticket. But such arrangements are wasteful to the company and cause the manager to lose focus on what should be his real areas of concern. Additionally, irrational behavior at the parent company may well encourage imitative behavior at subsidiaries." And then he's saying, "The rewards that you're setting, your compensation, should be large. Why are you capping them?" In setting compensation, we like to hold out the promise of large carrots, but make sure their delivery is tied directly to results in the area that a manager controls. We do not put a cap on bonuses.

• 36:32David Senra?

  Okay, so now we go into more of like their unique operating philosophy. We keep it simple. We don't, this is notes, I left myself on this page. We keep it simple. We don't have strategic master plans. We like to steer the boat every day. Singleton, which I'll tell you more about in a minute. It's Henry Singleton, that is. And it's rare for people to consider opportunity costs, but you should. And our approach is haphazard. So let's see what all those notes mean. Our acquisition technique at Berkshire is simplicity itself. We answer the phone. We do have a few advantages, perhaps the greatest being that we don't have a strategic plan. Thus, we feel, now, why wouldn't you do that? We feel no need to proceed in an ordained direction, which would be a course leading almost invariably to silly purchase prices,

• 37:17David Senra?

  but can instead simply decide what makes sense for our owners. So let me pause there. Somebody I learned from by hearing Warren speak and Charlie is Henry Singleton. And so I wind up reading, I read two books, so you can find them in the archive. I'd start with Founder's Number 110, which is a book that's really hard to find. It's called Distant Force. I'm pretty sure I paid over 100 bucks for that book, if I remember correctly. Very hard to find, but worth every penny. And what I, I studied intently Warren and Charlie's approach way before Singleton, right? I didn't even know who Singleton was, but they kept saying, it was like, listen, man, this is, this guy put up the greatest record in American business history. Munger said something like his returns were utterly ridiculous. And what blew my mind, and I talked about on the two podcasts I did with Singleton, is like, I'm starting, I start reading these books, I'm like, oh, my God.

• 38:01David Senra?

  Like, he's like the proto Warren Buffett. Like, a lot of the things that I thought were Warren Buffett's ideas, Singleton had done, you know, a decade or two before. And so what they're talking about here, that like, they have the same approach. Like, we don't have this big master plan. So I'm going to read a quote from Distant Force, Founder's Number 110.

• 38:22David Senra?

  And here it is, and this is Henry Singleton's response for not having a business plan. "Once criticized for not having a business plan, Henry replied that he knew a lot of people running companies had very definitive plans. They followed assiduously. But we're subject to a great number of outside influences on our businesses, and most of them can't be predicted. So my plan is to stay flexible." He told the reporter who was interviewing him, "My only plan is to keep coming to work every day. I like to steer the boat each day rather than plan way ahead into the future." And Singleton, if you haven't already read up on him, but his business career was wild. I think he starts his first business, Teledyne, it was his first business, right? He starts it at 44, if I remember correctly.

• 39:05David Senra?

  And if you had invested a dollar, I think his career lasted maybe 15 years, something like that, I forgot the exact, maybe 20 years. But anyways, for every dollar you put in, you would have got back nearly 200, I think maybe $180. So his returns were quite ridiculous. So let's go back to what Warren is saying here. This is the summary from Peter. "What is the best use of my cash?" So he's asking these questions, right? "Think about this before you invest in anything, whether your time, money, whatever. Do I want to invest my cash into this business at the price today? Or is there something else I would rather do with my cash?" Now, this is Warren talking, writing here. "In doing this, we always mentally compare any move we are contemplating with dozens

• 39:48David Senra?

  of other opportunities open to us. Our practice of making this comparison is a discipline that managers focus simply on expansion seldom use." So he's describing his haphazard approach to acquisitions. "We have no master strategy, no corporate planners delivering us insights about socioeconomic trends, and no staff to investigate a multitude of ideas presented by promoters and intermediaries. Instead, we simply hope that something sensible comes along, and when it does, we act." So those words are written by Warren Buffett. I could see Henry Singleton writing those exact words as well.

• 40:34David Senra?

  Another thing, let's see, the note I left for this page is "focus." And then it's a misconception that a movement in any direction is progression and then a funny story. So let's see what this is about. "Leaders, business or otherwise, seldom are deficient in animal spirits and often relish increased activity and challenge, even if that increased activity and challenge isn't actually beneficial for what they're trying to do. In many of these acquisitions, managerial intellect wilted in competition with managerial adrenaline. The thrill of the chase blinded the pursuers to the consequences of the catch. Pascal's observation seems apt. It has struck me that all of men's misfortunes spring from a single cause, that they are unable to sit

• 41:18David Senra?

  quietly in a room." And then about a decade after he wrote those words, he expounds on this idea. "A serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse. Loss of focus is what worries Charlie and me the most." And now, this is a funny story and a great example of that. "I can't resist repeating a tale told me last year by a corporate executive. The business he grew up in was a fine one, with a longtime record of leadership in its industry. Its main product, however, was distressingly glamourless. So several decades ago, the company hired a management consultant

• 42:02David Senra?

  who naturally advised diversification and then into the then-current FAD. Before long, the company acquired a number of businesses, each after the consulting firm had gone through a long and expensive acquisition study. And the outcome, said the executive sadly, "When we started, we were getting 100% of our earnings from the original business. After 10 years, we were getting 150% from our original business."

• 42:30David Senra?

  So this is how to think about acquisitions are what I learned from 50 years of experience. And so he's saying, before you buy something, especially if you're giving your company stock, understand the true value of what you're giving up. I've been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers. The bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than 50 years of board memberships, however, never have I heard the investment bankers or the management discuss the true value of what is being given. He's saying all they're focused on is like what they're trying to buy, but what is the value of what you're giving away?

• 43:14David Senra?

  Managers and directors might sharpen their thinking by asking themselves if they would sell 100% of their business on the same basis. They are being asked to sell a part of it. That's a really interesting idea, right? And if it isn't smart to sell all on such a basis, they should ask themselves why it's smart to sell a portion. Okay, so now this section, remember, they're all, I think it's like 15, what is this? Yeah, 15 different essays. This is on management issues. And the note I have myself is, this part is so good, just read it all. Okay, Charlie and I know that the right players will make almost any team manager look good. We subscribe to the philosophy of Ogilvy and Mather's founding genius, David Ogilvy. If each of us hi-

• 43:59David Senra?

  This is a quote from Ogilvy, obviously. If each of us hires people who are smaller than we are, we shall become a company of dwarfs. But if each of us hires people who are bigger than we are, we shall become a company of giants. Protect the reputation. The priority is that all of us continue to zealously guard Berkshire's reputation. We can't be perfect, but we can try to be. And as I've said in these memos for more than 25 years, we can afford to lose money, even a lot of money, but we cannot afford to lose reputation, even a shred of reputation.

• 44:35David Senra?

  And then he gets into the management and its effect on cost efficiency. At some companies, corporate expenses run 10% or more of operating earnings. This tithing, that's such a great description of it. The tithing that operations thus make to headquarters not only hurts earnings, but more importantly, it slashes capital values. Charlie and I, and this is why he's bringing this up. Charlie and I have observed no correlation between high corporate costs and good corporate performance. In fact, we see the simpler, low-cost operation as more likely to operate effectively than its bureaucratic brethren. Our experience has been that managers of an already high-cost operation is uncommonly

• 45:17David Senra?

  resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below that of his competitors.

• 45:32David Senra?

  So Tiger doesn't change his stripes, I think is the maxim there, right? Size seems to make many organizations slow-thinking, resistant to change, and smug. In Winston Churchill's words, "We shape our buildings, and afterwards, our buildings shape us." That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. And so he's saying, just get rid of like, you're gonna make mistakes either way, but you'd rather have a mistake of a bad decision than moving too slowly. So he said, "We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly or not at all because of

• 46:17David Senra?

  a stifling bureaucracy. A compact organization lets all of us spend our time managing the business rather than managing each other." And then this, this, something he learned from Tom Murphy, which is the CEO of Cap Cities. This is really smart. I don't know if I've ever, like, I don't know if I've ever heard anybody else think like this. So he's talking about like, don't, be careful, don't overstaff when times are good. When your business is doing well, you're like, oh, we have plenty of money, we're gonna hire. Because thinking about not just the decision at that time. So let me just read this section to you. 30 years ago, Tom Murphy, who was then CEO of Cap Cities, drove this point home to me with a hypothetical tale about an employee who asked his boss for permission to hire

• 47:02David Senra?

  an assistant. The employee assumed that adding $20,000 to the annual payroll would be inconsequential. But his boss told him the proposal should be evaluated as a $3 million decision, given that the additional person would probably cost at least that amount over his lifetime, factoring in raises, benefits, and other expenses. And unless the company fell on very hard times, the employee added would be unlikely to be dismissed, however marginal his contribution to the business. And so the next section is good, whether it's good or bad times, you should be cost efficient and do what makes sense. Don't let the temporary either increase in business or decrease in business have you making a rational decision.

• 47:47David Senra?

  Charlie and I do not believe in flexible operating budgets, as in, non-direct expenses can be X if revenues are Y. Our expenses should be 5% of revenue. Should we really cut our news, the news reporters at the Buffalo News? Are the quality of the product and services at Sees Candies simply because profits are down during a given year or quarter? Or conversely, should we add a staff economist or corporate strategist, an institutional advertising campaign, or something else that does Berkshire no good simply because the money currently is rolling in? So Trader Joe's, when I just did that biography a few weeks ago, Joe Colombo, Colomba? I don't know how to pronounce his name, but Trader Joe, I'll just call him. He didn't think this made any sense either.

• 48:31David Senra?

  He's like, his competitors in the grocery and retail business, they would do like advertising budgets based on, you know, do spend 10% of your revenue on advertising. He's like, why? And so he does like this content. He took a lot of Ogilvy's ideas and Ogilvy on advertising and he did content marketing and mailing lists for that thing called the fearless flyer. And he wound up drastically expanding his business and actually spending less on advertising. He's like, I don't, this doesn't make any sense to me. So now Warren says it doesn't make sense to him either. That makes no sense to us. We neither understand the adding of unneeded people or activities because profits are booming, nor the cutting of essential people or activities because profitability is shrinking. That kind of yo-yo approach is neither businesslike

• 49:12David Senra?

  nor humane. Our goal is to do what makes sense for Berkshire's customers and employees at all times and never to add the unneeded. Okay, so now they have the entire section on risk. How to reduce risk. Says Charlie and I detest even small risks unless we feel we are being adequately compensated for doing so. Charlie and I believe, so he's saying you can't delegate risk control. Charlie and I believe that a CEO must not delegate risk control. It is simply too important. If the CEO is incapable of handling that job, he should look for other employment. And so one way to minimize risk is just keep things simple. In both business and investments, it is usually far more profitable to simply stick with the easy and obvious than it is

• 49:57David Senra?

  to resolve the difficult. The most elusive of human goals, keeping things simple and remembering what you set out to do. That's so great. I gotta repeat it again. The most elusive of human goals, keeping things simple and remembering what you set out to do. This is about mastering the fundamentals. Ben Graham taught me 45 years ago, that in investing, it is not necessary to do extraordinary things to get extraordinary results. In later life, I've been surprised to find that this statement holds true in business management as well. What a manager must do is handle the basics well and not get diverted. So this idea of mastering the fundamentals is something you see not just in business. It's all masters of their craft do this. The example I always use, because it's the greatest illustration

• 50:42David Senra?

  of this, is one of the last interviews that Kobe Bryant did before he died. He's relaying a conversation that him and Michael Jordan had because his daughter, who unfortunately perished with him, was really into playing basketball. And he was looking at, you know, eventually he's texting Michael, he's like, listen, I'm having a hard time. Kobe's suspicion was that, like, you should just focus on mastering the fundamentals, right? He's like, why are you teaching your 12-year-old? Like, all this complicated fancy stuff in basketball, right? So Kobe took the opposite approach. He's like, I just teach my kids the basics, and then we do it over and over again. That sounds exactly like Warren and Charlie's approach to business, right? I just keep teaching my kids the basics and do it over and over again. So he's bouncing this idea off Michael Jordan in this conversation.

• 51:26David Senra?

  He's like, dude, they're just doing, they're having these 12-year-old kids do way too much. Like, I'm having a hard time remembering what I was doing at basketball when I was 12. What were you doing? And Michael's like, dude, I was playing baseball. And Kobe tells, I'm pretty sure it's A-Rod interviewing him, he says, think about that. Let that sink in. Greatest basketball player to ever live hadn't even picked up the ball yet. What is the chance your 12-year-old needs all this fancy shit? And so we get to the point where he breaks down. Like, if you can just have a business with one variable you have to focus on, that your chance of success is a lot higher. So it says, if only one variable is key to a decision, and that variable has a 90% chance

• 52:07David Senra?

  of going your way, the chance for a successful outcome is obviously 90%. But if 10 independent variables need to break favorably for a successful result, and each has a 90% probability of success, the likelihood of having a winner is only 35%. Now we get to something that Charlie Munger says, I think maybe one of his most important ideas, just stop trying to be brilliant. It's next to impossible. Just avoid being, doing dumb things over a long period of time, and you'll come out way better than most people, right? Peter says, it is better, it is better to just try to avoid the really dumb things, what can really hurt you, than try to be very smart. And Warren says you can produce outstanding long-term results primarily by avoiding dumb

• 52:52David Senra?

  decisions rather than by making brilliant ones. Charlie and I have not learned how to solve difficult business problems. What we have learned to do is avoid them. We adopted a strategy that required our being smart and not too smart at that only a few times a year. And that's really what I would take away from his writing and Charlie's writing too, is like it's impossible to be smart every day. So don't set yourself in a position where you have to be smart every day. You just can't. It doesn't matter how smart you are. So it says, we have adopted a strategy, we just need to be smart a few times a year. Indeed, we will now settle for one good idea a year. And then he just has a maxim here, I think that applies to not only like personal life, investments, but also business.

• 53:32David Senra?

  A fat wallet is the enemy of superior investment results. And that's not, that's, that's, that's not all that different. It's very similar to a few weeks ago, maybe the Rothschilds, I can't, I think it had to be the Rothschild podcast I was doing where the Game of Thrones, like that, that scene from Game of Thrones made me think of that. So Warren saying here, a fat wallet is the enemy of superior investment results. That was like, who, you know, who made your, who made your family rich? Was it the fancy lads in silk? No, it was the hard bastard. So the hard bastard usually coming up with not, with not any money. That's part of what's driving them, right?

• 54:14David Senra?

  There's an investor named Josh Wolfe, who has a great maxim on this. He says, chips on shoulders puts chips in pockets. And this is what Warren says. Intelligent investing is not complex, though that is far from saying that is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note the word selected. You don't have to be an expert on every company or even many. You only have to be able to, to evaluate companies within your circle of competence. The size of that circle is not very important. Knowing its boundaries, however, is vital.

• 54:53David Senra?

  And so that idea, note the word selected, you don't have to be an expert on every company or even many. And in a lot of cases, the greatest fortunes the world has ever seen, they had to know one business. There's a quote in the second Buffett biography I read, the one by Lowenstein, the one I did most recently, maybe like, I don't know, two months ago. But it says, "What John D. Rockefeller, Andrew Carnegie, Sam Walton, and Bill Gates have in common is that each owes his fortune to a single product or innovation." And then another maxim, two more maxims here from Buffett. "Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

• 55:36David Senra?

  And then his point he's about to make here is you've got to be really careful when things look easy. This actually reminded me of something Bob Noes, founder of Intel, said. "Speculation is most dangerous when it looks easiest." So Bob said he would give advice to young entrepreneurs. He's like, "Listen, if you see a business," or he says, "When you look at another guy's business and it looks easy, you don't know enough about it." That's a paraphrase. He said it a lot better. But this next section's on avoiding deceiving yourself. "Nothing sedates rationality like large doses of effortless money." And so this whole section, I don't think I'm being clear here. This is all about risk.

• 56:17David Senra?

  It's about speculation and leverage and when things look too easy. So he's just going through, I'm just pulling out some highlights here. So this is an example. "Every generation has had to get his own head chopped off in its own way. Throughout history, there have always been bubbles and busts." And so his point that he made on the previous page, actually, no, I should read to you. Let me go find it real quick. So he's talking about that there's always uncertainty. Like, you've got to be really careful when you have these overconfident prognosticators. Like, they're just full of crap, right? "Commentators today often talk about a great uncertainty. But think back, for example, to December 6, 1941, October 18, 1987." So before, the day before Pearl Harbor, the

• 56:58David Senra?

  day before the huge crash in the 80s, and September 10, 2011, or, excuse me, 2001, day before September 11, obviously. "No matter how serene today may be, tomorrow is always uncertain." So let me go back to this other page. Every generation has to get their own head chopped off in its own way. Throughout history, there have always been bubbles and busts, yet they take us by surprise every time. I read a book like probably 15 years ago about this called The Eight Centuries of Folly, and it's all about bubbles and busts in human history. I thought it was interesting. "The less the prudence with which others conduct their affairs..." So he's saying, "This happens over and over again, so what do you do? How do you reduce risk here?" And this is a very good, simple sentence, right?

• 57:39David Senra?

  "The less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs." So I take that to mean that when everybody else around you is getting sloppy, tighten up. Then he's going to talk about leverage, the importance of surviving and keeping control so you don't have to rely on other people. Unquestionably, some people have become very rich through the use of borrowed money. However, that's also been a very good way to get very poor. Once having profited from its wonders, very few people retreat to more conservative practices. Leverage often produces a zero, even for smart people. Over the years, a number of very smart people have learned the hard way that a long string... This is so good.

• 58:23David Senra?

  This is like classic Warren here. "Very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is not an equation whose effects I would like to experience personally." And his whole point is like if leverage is going to wipe you out of the game, you can't win the game if you can't survive and actually finish the game. "The fundamental principle of auto racing is that to finish first, you must first finish. That dictum is equally applicable to business." Another great way to think about this, "The roads of business are riddled with potholes. A plan that requires dodging them all is a plan for disaster."

• 59:06David Senra?

  So this is why he's talking about why they value liquidity so much. "We will never become dependent on the kindness of strangers. Having loads of liquidity lets us sleep well."

• 59:18David Senra?

  And why? Because it's the nature of his business. If you want to shoot rare, fast-moving elephants, you have to carry a loaded gun. Or, excuse me, you should always carry a loaded gun. And he's writing these words all the way back in 1980. "The most attractive opportunities may present themselves at a time when credit is extremely expensive or even unavailable. At such a time, we want to have plenty of financial firepower." During the episodes of financial chaos-- now, he's writing this in 2010. "During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped, both financially and emotionally, to play offense while others scramble for survival."

• 1:00:01David Senra?

  So, this is-- I wrote, just jotted down this note on this paragraph. This is kind of a gangster statement from Warren about what he's about to say here. So, let me start that over, and you'll see what I mean by that. "During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped, both financially and emotionally, to play offense while others scramble for survival." That's what allowed us to invest $15.6 billion in 25 days of panic following the Lehman Brothers' bankruptcy in 2008. And so, I went back. I was like, whoa. It's not just saying, like, you guys are panicking. You're going broke, and you're panicking. Meanwhile, I'm sitting on a vast fortress of fortune, right? So, I went back and looked, and the numbers I'm about to give you are a couple of years

• 1:00:46David Senra?

  out of date. But just in-- one of those investments was $5 billion of that money into Bank of America. And so, the numbers I have are seven years later. So, that's 2017. Sorry, nine years later, he made-- so, he invested $5 billion into Bank of America. He winds up making $21 billion, so a profit of $16 billion since the investment was made, plus the investment now pays Berkshire more than $400 million per year in dividends when he exercised the warrants in 2017. So, again, go back to what he just said. "We're equipped, both financially and emotionally, to play offense while others scramble for survival." We've invested $15.6 billion in 25 days of panic.

• 1:01:32David Senra?

  And so he did that. So he's writing about, he did it in 2008. He's writing about it in 2010. Let's go back to what he said in 1987. If you want to shoot rare, fast-moving elephants, which is what he did for Bank of America and all the other investments he made then, you should always carry a loaded gun, which he did. 1980, 30, he waited 30, what is that? 28, rather, not 30. 28 years to put this idea into practice. I mean, he obviously put it in practice before then, but on such a large scale. "The most attractive opportunities may present themselves at a time when credit is extremely expensive or even unavailable. At such a time, we want to have plenty of financial firepower." He wrote that in 1980.

• 1:02:13David Senra?

  That's wild. See, this is what I meant about why Peter did such a smart move by taking all this, like arranging it instead of by year, he arranged it by topic. Because now all this is on one page for me to reference. And you see the idea formulate and then the application many decades later. That's really cool. We're still in the section on risk. I have a ton of highlights in this section, apparently. So this is really on just the dangers that we're, we constantly want to copy everything that's going on around us. So a way to think about this is just ask yourself a question. Are you just copying the behavior around you? "The tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so." He calls this the managerial trap of the institutional imperative.

• 1:02:57David Senra?

  So he's defining it as the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. And so he's got a maxim for us. "What the whys do in the beginning, fools do in the end."

• 1:03:11David Senra?

  He hits this over and over again, year after year, "The behavior of pure companies will be mindlessly imitated." And so one way to get around it is asking like, "Why am I doing what I'm doing?" Ask why is his counter to this. "I would rather be wrong in a group than..." And he's describing the behavior that he sees, this ridiculous behavior. "I would rather be wrong in a group than right by myself." We are willing to look foolish as long as we don't feel we acted foolish. And the final section is just about, it's really, really short, it's like three pages. It's about, listen, you're gonna make mistakes. So what are you gonna do? Mistakes are going to be made. What are you going to do? You have to do postmortems on your dumb decisions.

• 1:03:54David Senra?

  Agonizing over errors is a mistake, but acknowledging and analyzing them can be useful. That practice is rare in corporate boardrooms. There, Charlie and I have almost never witnessed a candid postmortem of a failed decision. Triumphs will be trumpeted, but dumb decisions either get no follow-up or are rationalized. So this part reminded me of, again, another one of this interview that Kobe did before he died. And he talks about like, you know, win or loss, win or lose, your response should be the same. And that when you lose, you have a lot of valuable information if you go back and actually analyze it, right? So he was talking to, he was like a big promoter of women's basketball.

• 1:04:36David Senra?

  And so he's talking to one of the best women's basketball players in the country, Katie Lou Samuelson. Her team had lost in the finals and he was having a conversation with her. He's like, have you watched the game? And she's like, no, no, no, no, it's way too painful. He's like, no, you have to. And so this is a quote that he said. He says, "You have to do the hard stuff and watch that game and study that game to not make those mistakes over and over again, just because you weren't brave enough to face it. You have to deal with it, face it and then learn from it." And he says, "I invited her to my office and we watched the game together and went through. There's a mismatch. This is what you should have done." And like you just learn a ton doing that. And so, again, Kobe's applying that to basketball. Warren's saying, saying for the decisions you're making in your career,

• 1:05:20David Senra?

  you've got to go back and actually figure it out so you don't do that mistake in the future. Learn from them, learn from your mistakes, but it's better to try to learn from other mistakes. The trick is to learn most lessons from the experience of others.

• 1:05:35David Senra?

  And then just two more things. Attack growing problems early. When a problem exists, whether in personnel or in business operations, the time to act is now. And then he closes with that quote from Confucius. In all things, success depends on previous preparation. And without such previous preparation, there is sure to be failure. I think the example of him talking about having a lot of liquidity and having the proper emotional temperament to be calm while others are panicked is a perfect description of what Confucius said many, many centuries ago. Success depends on previous preparation. He had that gigantic opportunity in 2008 based on stuff he did decades before.

• 1:06:17David Senra?

  And without such previous preparation, there is sure to be failure. And so that's where I'll leave it. No brainer to buy the book. I paid $19 for this thing. Are you kidding me? And you can keep it out and just pick it up and read one essay that probably takes five, 10 minutes at a time and then put it back down. I think it's a fantastic little reference. And I really like what Peter did and the way he organized, you know, multiple decades of shareholder letters into a book that's, you know, less than 100 pages. Just absolutely fantastic. So if you buy the book and you want to support the podcast at the same time, you can buy the book using the link that's in the show notes in your podcast player. That is 200, where am I at? 202? 202 books down, 1,000 to go. I'll talk to you again soon.