#202 A Few Lessons From Warren Buffett

In the podcast, the host and guest discuss the profound insights of Peter Bevlin's book "A Few Lessons for Investors and Managers from Warren Buffett," which distills Warren Buffett's wisdom from his shareholder letters. They highlight the importance of learning from Buffett's approach to business and investment, focusing on the significance of maintaining liquidity, avoiding unnecessary risks, and the folly of mindlessly imitating others. They emphasize Buffett's preference for simple, competent management and his aversion to overstaffing and debt. The conversation also touches on Buffett's strategies during financial crises, his methodical decision-making, and the value of learning from mistakes. Notably, the host mentions Nassim Taleb's endorsement of Bevlin's work and Buffett's admiration for Charlie Munger's clear thinking, as well as the impact of Buffett's principles on the host's personal and professional perspectives.

• Peter Bevillen is recognized as a wise individual who extracted relevant wisdom from Conan Doyle's stories for modern readers.
• His book "A Few Lessons for Investors and Managers from Warren Buffett" is highly regarded and was discovered by the speaker through an Amazon review.
• Naseem Taleb, author of several influential books, praised Bevillen's work, prompting the speaker's interest in Bevillen's other writings.
• Taleb's books include "Fooled by Randomness," "The Black Swan," "Antifragile," "Skin in the Game," and "The Bed of Procrustes."

"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."

The quote emphasizes Bevillen's ability to distill wisdom from classic literature and make it applicable to contemporary life.

• Bevillen's book "Seeking Wisdom from Darwin to Munger" is influenced by Charlie Munger's philosophy.
• The book is recommended to be read incrementally to absorb its wisdom on decision-making.
• Michel de Montaigne, a historical figure admired by Taleb, is mentioned as a source of inspiration for Bevillen's approach to wisdom and business.
• The book is described as practical, written by a practitioner rather than an academic.

"A wonderful book on wisdom and decision making written by a wise decision maker. This is the kind of book you read first, then leave by your bedside and reread a bit every day."

This quote from Naseem Taleb's review suggests that Bevillen's book is a resource for continual learning and reflection on wisdom and decision-making.

• The book "A Few Lessons for Investors and Managers from Warren Buffett" is a compilation of Buffett's key quotes useful for managers, arranged in a concise format.
• Warren Buffett's annual letters and the "owner's manual" are primary sources for the book.
• Buffett's investment success is attributed to his dual perspective as both a businessman and an investor.
• The book is structured by topic, with quotes from various years of Buffett's shareholder letters, making the lessons more digestible.

"I am a better investor because I am a businessman, and a better businessman because I am an investor."

This quote from Warren Buffett encapsulates the interdependent relationship between his business acumen and investment success.

• A great business is defined by high returns on capital, a sustainable competitive advantage, and barriers to entry for competitors.
• Warren Buffett uses the metaphor of a moat to describe the protective qualities that ensure a business's enduring success.
• The moat concept is exemplified by businesses like Nebraska Furniture Mart, founded by Rose Blumkin.
• Capitalism encourages competition, which can erode a business's moat unless it has a durable competitive advantage.

"A truly great business must have an enduring moat that protects excellent returns on invested capital."

Buffett's definition of a great business emphasizes the necessity of having a competitive edge that is difficult for others to replicate.

• Businesses are categorized into three types: great, good, and gruesome.
• Great businesses generate high returns with little need for additional investment.
• Good businesses are not detailed in the transcript.
• Gruesome businesses grow rapidly but require significant capital for low returns, such as airlines.
• The importance of being the low-cost producer in a commodity-like market is emphasized, with John D. Rockefeller as a historical example.

"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."

Buffett's quote highlights the challenges of operating in industries where differentiation is difficult and capital requirements are high, leading to low profitability.

• John D. Rockefeller was obsessed with eliminating waste and became the lowest cost provider in the oil industry.
• His low costs enabled him to profit at prices that would cause competitors to lose money.
• Rockefeller would attempt to buy out competitors by showing them his cost books, which demonstrated his ability to make a profit at low prices.
• Competitors, realizing they couldn't compete, would often sell to Rockefeller, aiding his consolidation efforts.

Rockefeller would also say crazy shit to his competitors, like, I have ways of making money you knew nothing about.

This quote emphasizes Rockefeller's confidence in his unique methods for profitability, which intimidated competitors and contributed to his success in consolidating the industry.

• Warren Buffett emphasizes the importance of being the low-cost producer in a commodity-like market.
• He shares his personal experience with Berkshire Hathaway, originally a textile company, and how he made more money in 19 months with Rose's furniture store than in 15 years with textiles.
• Buffett advises against staying in unprofitable businesses and instead focuses on businesses with the potential for high returns.

Being the low-cost producer is all important.

Buffett's quote underscores the critical significance of cost leadership in commodity markets, which can be a decisive factor in a company's success or failure.

• Warren Buffett reflects on his mistakes in the textile industry and uses anecdotes to simplify complex business issues.
• He uses the metaphor of Samuel Johnson's horse to illustrate that excellence within a weak industry does not equate to a great business.
• Buffett believes that in commodity markets, you cannot outsmart the least informed competitor, reinforcing the importance of being a low-cost producer.

This devastating outcome for shareholders indicates what can happen when much brain power and energy are applied to a faulty premise.

Buffett's quote is a cautionary tale about the dangers of investing significant effort into a fundamentally flawed business model.

• Marc Andreessen argues that the market is the most important predictor of business success, a view similar to Buffett's emphasis on choosing the right business "boat."
• Intelligence and effort are important, but they are not as critical as being in a good market.
• Avoiding businesses where you have to be smart every day is advised; instead, look for "have to be smart once" opportunities.

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.

Buffett's quote suggests that the industry or market a business operates in is more influential on success than managerial skill or effort.

• Buffett stresses the importance of delighting customers, eliminating unnecessary costs, and improving products and services to widen a business's competitive moat.
• He prioritizes long-term competitive position over short-term gains, asserting that actions that widen the moat should take precedence when short-term and long-term interests conflict.
• Peter Thiel supports the idea that most of a business's profits come from future growth, emphasizing the significance of long-term planning and moat widening.

The truly big investment idea can usually be explained in a short paragraph.

This quote by Buffett encapsulates the concept that the most impactful investment opportunities are often straightforward and can be succinctly described.

• Warren Buffett and Charlie Munger prioritize hiring individuals with brains, passion, and integrity over those with impressive resumes.
• They believe that a good business record is often a result of getting into a good business rather than individual brilliance.
• Personal commitment and business savvy are considered more valuable than academic achievements for long-term business success.

We've never succeeded in making a good deal with a bad person.

Buffett and Munger emphasize the importance of associating with people of good character in business dealings, suggesting that integrity is a key factor in successful partnerships.

• The selection of board members should be based on criteria that include being owner-oriented, business savvy, interested, and truly independent.
• Business savvy is identified as the rarest and most important quality in potential directors or managers.
• Buffett and Munger advise against removing experienced managers simply due to age, valuing their contributions over their tenure.

Does this person think like an intelligent owner?

This question posed by Buffett reflects the mindset he believes is crucial for individuals in leadership positions within a company, emphasizing the importance of an ownership mentality for effective corporate governance.

• Directors at Berkshire have a significant portion of their net worth invested in the company.
• The goal is to align the directors' decision-making with the impact on their family's net worth.
• Eating your own cooking is a metaphor for experiencing the consequences of your decisions.

"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."

This quote emphasizes the importance of directors having skin in the game, ensuring their decisions are made with personal stakes in mind.

• Warren Buffett and Charlie Munger have a sophisticated understanding of human nature.
• Human behavior is consistent across time when faced with similar stimuli.
• Financial incentives should be aligned with the interests of the company to influence behavior effectively.

"Have a sophisticated, advanced understanding of human nature."

The quote highlights Buffett and Munger's deep insight into what drives people's actions, particularly in a business context.

• Berkshire's management philosophy is "hire well, manage little".
• Managers are trusted to run their businesses without excessive oversight from headquarters.
• The philosophy emphasizes trust in people over processes.

"Hire well, manage little is the maximum. Here at Berkshire, managers can focus on running their businesses."

This quote summarizes Berkshire's approach to management, which prioritizes hiring competent people and then allowing them autonomy in their roles.

• Run the business as if you own 100% of it and it's the only asset you and your family will ever have.
• You cannot sell the business for at least a century.
• This perspective encourages prudent, long-term decision-making.

"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."

The quote outlines a framework for making business decisions that are meant to ensure the long-term success and sustainability of the business.

• Compensation should be tied to the value created for owners and the areas a manager can control.
• Avoid providing rewards unrelated to business performance.
• Large rewards should be offered, but they must be tied to results within the manager's control.

"We issue no lottery tickets that carry payoffs unrelated to business performance."

This quote criticizes compensation schemes that reward luck rather than merit, advocating for performance-based incentives.

• Berkshire's operating philosophy is to keep things simple.
• They do not have strategic master plans and are flexible in their approach.
• They consider the opportunity cost in all decisions.

"We keep it simple. We don't have strategic master plans."

The quote captures the essence of Berkshire's philosophy, which avoids complexity and focuses on simplicity and flexibility in operations.

• Berkshire's acquisition technique is straightforward: they answer the phone and have no strategic plan.
• Acquisitions are compared with other opportunities, emphasizing opportunity cost.
• Avoid high corporate costs, which can reduce capital values and encourage bureaucracy.

"Our acquisition technique at Berkshire is simplicity itself. We answer the phone."

This quote describes the uncomplicated and opportunistic approach Berkshire takes towards acquisitions.

• High corporate expenses are not correlated with good corporate performance.
• Bureaucracy can lead to slow decision-making and resistance to change.
• It's better to make a bad decision quickly than to be paralyzed by bureaucracy.

"Charlie and I have observed no correlation between high corporate costs and good corporate performance."

The quote suggests that increasing corporate expenses does not necessarily lead to better results and can be counterproductive.

• Small risks are avoided unless there is adequate compensation.
• Risk control cannot be delegated; it is the CEO's responsibility.
• Simplicity in business and investments can minimize risk.

"Charlie and I believe that a CEO must not delegate risk control. It is simply too important."

The quote underscores the critical nature of risk management and the CEO's role in overseeing it directly.

• Simplicity and focus in goals are difficult but critical for success.
• It's important to remember and adhere to the original objectives set out.

"The most elusive of human goals, keeping things simple and remembering what you set out to do."

This quote emphasizes the challenge and importance of maintaining simplicity and clarity in one's goals, which is often more difficult than dealing with complex issues.

• Success often comes from mastering basic principles rather than complex strategies.
• Both in investing and business management, handling basics well is crucial.
• Repetition of basics is a common trait among masters of their craft, as seen in sports and business.

"This is about mastering the fundamentals."

The speaker highlights the importance of focusing on fundamental principles for achieving success in any field.

• Kobe Bryant and Michael Jordan focused on teaching their children the fundamentals of basketball.
• Mastering the basics is more beneficial than learning complex techniques at a young age.

"Kobe took the opposite approach. He's like, my kids, the basics. And then we do it over and over again."

Kobe Bryant's approach to teaching basketball by focusing on the basics and consistent practice is likened to Warren Buffett and Charlie Munger's approach to business.

• Simplifying decisions to focus on key variables increases the likelihood of success.
• The more variables involved, the lower the probability of a successful outcome.

"But if ten 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%."

This quote illustrates the concept that increasing the number of variables in a decision reduces the overall chance of success, emphasizing the need for simplicity.

• Charlie Munger advises against trying to be brilliant and instead suggests avoiding dumb decisions.
• Warren Buffett echoes this sentiment, stating that it's better to avoid dumb decisions than to make brilliant ones.

"Just avoid being doing dumb things over a long period of time and you'll come out way better than most people."

Charlie Munger's advice is to focus on avoiding mistakes rather than attempting to make exceptional decisions, which is a key to long-term success.

• Intelligent investing involves evaluating selected businesses within one's circle of competence.
• Knowing the boundaries of one's competence is vital.
• Great fortunes often come from deep knowledge of a single business or innovation.

"You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important. Knowing its boundaries, however, is vital."

Warren Buffett stresses the importance of understanding and staying within one's area of expertise when making investment decisions.

• Liquidity allows for seizing opportunities during financial chaos.
• Being prepared financially and emotionally is essential to capitalize on such situations.
• The example of Warren Buffett investing during the 2008 financial crisis illustrates the importance of preparation and liquidity.

"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."

Warren Buffett explains the strategic advantage of being well-prepared with liquidity to take action during financial turmoil when others are struggling.

• Mindlessly imitating peers' behavior can be detrimental.
• The managerial trap of the institutional imperative leads to unwise decisions.
• Executives should question their actions and avoid following trends blindly.

"The tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so."

Warren Buffett criticizes the common practice among executives of copying others without critical thinking, which can lead to poor business decisions.

• Acknowledging and analyzing mistakes can be beneficial.
• Corporate postmortems on failed decisions are rare but necessary.
• It's important to learn from both personal and others' mistakes.

"Mistakes are going to be made. You have to do postmortems on your dumb decisions."

Warren Buffett encourages a reflective approach to mistakes, suggesting that understanding and learning from errors is key to improvement.

• Success is dependent on prior preparation.
• Without preparation, failure is almost certain.
• Warren Buffett's investment strategies are based on long-term preparation and readiness to act.

"Success depends on previous preparation, and without such previous preparation, there is sure to be failure."

This quote, attributed to Confucius, encapsulates the principle that preparation is essential for success, a concept that Warren Buffett applies to investment.

• The speaker highly recommends the book that compiles decades of shareholder letters organized by topic.
• The book is praised for its concise format and valuable insights.

"I think it's a fantastic little reference, and I really like what Peter did, the way he organized least multiple decades of shareholder letters into a book that's less than 100 pages."

The speaker expresses appreciation for the way the book is organized, making it a useful reference for understanding Warren Buffett's investment philosophy.