Warren Buffett: Why It's Easy To Get Amazing Stock Market Returns

Summary

In this insightful discussion, Warren Buffet and Charlie Munger reflect on their investment strategies, emphasizing the importance of understanding a company's future and avoiding businesses outside their expertise. They highlight the value of reputation, learning from mistakes, and the significance of good business models during inflation. Buffet also shares personal advice on gaining popularity and making friends, suggesting that adopting admirable qualities and avoiding negative traits can significantly improve one's likability.

Takeaways

• 🔮 Invest in companies with a predictable future and stay within your circle of competence.
• 💡 Avoid businesses that require continuous capital investment due to inflation.
• 🏆 Prioritize businesses that have strong brands, as they tend to increase in value during inflation.
• 📚 Learn from past mistakes and appreciate good businesses more after experiencing bad ones.
• 💼 Work with people you admire and who constructively contribute to your success.
• 🤝 Build a good reputation over time, as it can lead to new opportunities.
• 🌟 Be curious and seek wisdom; it can lead to good fortune and better decision-making.
• 💼 Choose a career or business that you enjoy, as it will likely yield better results.
• 👨‍👩‍👧‍👦 Family background can influence your ability to identify and work with good people.
• 📈 The Wealth of Nations influenced Warren Buffett's understanding of economics and the power of capitalism.

Q & A

What was Warren Buffett's investment philosophy in the early days?

Warren Buffett focused on companies where he believed he could understand their future 5, 10, or 15 years ahead. He stayed away from businesses he didn't fully understand and preferred those where he was certain of a decent result rather than hoping for a brilliant outcome.

How did Buffett and Charlie Munger deal with limited capital in the past?

Due to limited capital, Buffett and Munger often had to sell something before buying a new investment. This created an interesting challenge of comparing opportunities and deciding which one was more attractive, often leaning toward certainty over potential brilliance.

How did curiosity and seeking wisdom help Warren Buffett in his career?

Buffett mentioned that he made some of his own luck by being curious and seeking wisdom. His curiosity led him to explore opportunities, such as visiting GEICO as a young man, which helped him make key investment decisions.

What role did family background play in Buffett and Munger’s success?

Both Buffett and Munger attribute part of their success to being raised in families with admirable people. This background helped them identify and work with other admirable individuals throughout their careers.

What is Warren Buffett's view on reputation?

Buffett believes that reputation is earned slowly over time. Opportunities often arise from the credibility built in the past, and maintaining a good reputation is crucial for long-term success.

Which types of businesses thrive during inflation, according to Warren Buffett?

According to Buffett, businesses that require minimal capital reinvestment after the initial purchase, such as branded goods and real estate, perform well during inflation. In contrast, capital-intensive businesses, like utilities and railroads, tend to suffer during inflation.

How does Charlie Munger view the dangers of inflation?

Charlie Munger emphasized that runaway inflation can have disastrous consequences, referencing historical events like the rise of Adolf Hitler, which followed the great German inflation and the Great Depression. He warned against underestimating the impact of uncontrolled inflation.

Why does Buffett admire Adam Smith’s 'The Wealth of Nations'?

While 'The Wealth of Nations' doesn't directly shape Buffett’s investment philosophy, it taught him important economic principles. He views the book as foundational in understanding the power of capitalism and economic productivity.

What advice does Warren Buffett give to a seventh-grader asking how to make friends and get people to like you?

Buffett advises observing the qualities in others that make them likable, such as generosity and humor, and then adopting those qualities. Similarly, he recommends eliminating behaviors that turn people off, like negativity or always being late.

How does Charlie Munger describe the importance of managing expectations in relationships?

Charlie Munger humorously suggests that the key to a successful marriage is not necessarily looking for intelligence or humor but finding someone with low expectations.

Outlines

00:00

😀 Investing with Vision and Self-Awareness

The speaker discusses their investment strategy, focusing on companies whose future they can envision over a long-term horizon. They emphasize the importance of understanding one's own limitations and avoiding areas outside of that knowledge. They also touch on the value of experience, the role of luck, and the significance of learning from mistakes. The narrative includes anecdotes about Warren Buffett's early career, the importance of family background, and the role of reputation in business success.

05:01

💼 The Impact of Inflation on Business

In this section, the speaker explores how different types of businesses are affected by inflation. They argue that businesses that require minimal additional capital investment after the initial purchase tend to thrive in inflationary environments. They give examples such as real estate and established brands, which appreciate in value over time. Conversely, they discuss how capital-intensive industries like utilities and railroads suffer due to the continuous need for reinvestment, which inflation exacerbates. The speaker also reflects on the historical consequences of unchecked inflation.

10:01

📚 The Influence of 'The Wealth of Nations'

The speaker reflects on the impact of Adam Smith's 'The Wealth of Nations' on their understanding of economics, rather than their investment philosophy. They appreciate the book's insights on the division of labor and the power of the capitalist system. The speaker also humorously suggests that reading certain books, including 'Where Are the Customers' Yachts?', can provide wisdom and entertainment, and they share a personal anecdote about receiving a rare copy of 'The Wealth of Nations' from Bill Gates.

15:02

🤝 Building Relationships and Personal Growth

In this paragraph, the speaker offers advice on how to make friends and be likable, drawing from personal experiences and observations. They suggest that people should emulate the qualities they admire in others and avoid those they find unappealing. The speaker also discusses the importance of learning from role models and the transformative power of self-improvement, particularly in relationships. Charlie Munger adds a humorous note about selecting a marriage partner based on their low expectations.

Keywords

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the context of the video, it is discussed as a challenge for businesses, especially those requiring continuous capital investment. The script mentions that businesses that can be purchased once without further significant capital expenditure are better suited to thrive during inflation, as they do not face increasing costs over time.

💡Capital Constrained

Capital constrained means having limited funds available for investment. In the video, this concept is used to describe a situation where the decision to buy something new requires selling something else. This reflects a strategic approach to investment where one must choose wisely due to limited resources, as illustrated by the need to sell one investment to fund another.

💡Opportunity Cost

Opportunity cost is the potential benefit an individual, investor, or business misses out on when choosing one alternative over another. The video discusses comparing one investment opportunity against another to determine which is more attractive, which is a direct application of considering opportunity costs.

💡Brand Value

Brand value represents the worth of a brand name, and it is a measure of how much a company's branding contributes to its financial value. The script mentions that strongly branded goods, like See's Candy, increase in value during inflation because their brand recognition and loyalty are not eroded by price increases.

💡Reputation

Reputation is the beliefs or opinions that are generally held about someone or something. In the video, it is emphasized as a critical asset that is built over time and can influence future opportunities. The speakers suggest that maintaining a good reputation is a wise investment and is crucial for both individuals and companies.

💡Curiousity

Curiosity is the desire to know or learn something. The video highlights the importance of being curious and seeking wisdom, suggesting that this trait can lead to good fortune and better decision-making, as it was for Warren Buffett when he was young and curious about businesses.

💡Mistakes

Mistakes are errors in action, calculation, or judgment. The script acknowledges that making mistakes is a part of the learning process, and it is through these experiences that one gains wisdom and improves their decision-making abilities.

💡Enjoyment

Enjoyment is the state of taking pleasure in doing something. The video suggests that if you enjoy what you're doing, you are more likely to achieve better results. This concept is applied to work and investing, implying that passion and interest can lead to greater success.

💡Family Standards

Family standards refer to the moral or ethical principles that are upheld by a family. In the video, the speakers credit their family backgrounds for helping them identify good people and businesses, suggesting that these early influences shaped their values and decision-making.

💡Philanthropy

Philanthropy is the desire to promote the welfare of others, expressed especially by the generous donation of money to good causes. The video mentions philanthropy as an area where specialization of labor can be applied, allowing individuals to focus on what they do best to maximize their positive impact.

💡The Wealth of Nations

The Wealth of Nations is a book by Adam Smith, often considered the father of modern economics. In the video, it is mentioned as a book that influenced the speakers' understanding of economics, particularly the productive power of the capitalist system and the importance of specialization of labor.

Highlights

The importance of understanding the future of a company for 5 to 15 years.

Knowing one's limitations and staying away from areas of uncertainty.

The ease of making investment decisions in the past due to different price points.

The strategy of comparing opportunities A and B to determine attractiveness.

Capital constraints leading to the need to sell to buy and the resulting challenges.

Preferencing investments with a high probability of decent returns over those with a slim chance of brilliance.

The role of luck and the importance of creating your own luck through curiosity and wisdom.

Learning from mistakes as a path to wisdom.

The value of experience with bad businesses in appreciating good ones.

The impact of enjoying what you do on the quality of results.

The influence of family background on identifying and relating to admirable people.

The importance of reputation and how it is built over time.

The idea that businesses requiring minimal reinvestment are best during inflation.

Brands as a valuable asset during inflation due to their established value.

The potential downfall of businesses with heavy capital investment in times of inflation.

The historical impact of inflation, including the rise of Hitler and the lessons from it.

The influence of Adam Smith's 'The Wealth of Nations' on economic philosophy.

The application of Adam Smith's ideas on specialization of labor to philanthropy.

The advice on how to make friends and be likable by adopting admirable qualities.

The suggestion to focus on self-improvement rather than trying to change others, especially in marriage.

Transcripts

we

basically looked for companies where we

thought we could understand what the

future would look like five or 10 or 15

years hence and that didn't mean we have

had to do it to four decimal places or

anything of the sort but we we had to

have a feel for it and and uh and we had

to know our limitations so we stayed

away from a lot of things and at that

time uh prices were different so we in

terms of knowing we were getting enough

for our money it was a much easier

decision than it is currently but there

wasn't there weren't elaborate there no

planning sessions or anything of the

sort we just we kept reading and we kept

thinking and and we kept looking at

things that came along as Charlie

described it in the movie and you know

way comparing opportunity a with

opportunity B and in those days we were

Capital constrains so we usually had to

sell something if we were going to buy

something else and that always

makes for you know that's the an

interesting challenge always when you're

measuring something you hold against

something that has come along and to see

which is more attractive and we probably

leaned very much toward things where we

felt we were certain to get a decent

result than where we were hopeful of

getting a brilliant result that's went

with our our instincts and and kept

putting one foot in front of the other

Charlie what would you say well that's

exactly what we did and

and it worked wonderfully well and part

of it is because there were such

Splendid people and worked so

constructively and part of it is we were

a little

lucky we had some good fortune now

Warren says he was lucky to go to gico

but not every 20-year-old was going down

to Washington DC and knocking on the

doors of empty buildings to try and find

something out that he was curious about

so we made some of our luck by being

curious and seeking

wisdom and we certainly recommend that

to anybody else and there's nothing that

produces W

wisdom more thoroughly than really

getting your own nose whacked hard when

you make a mistake and we had a fair

amount of that didn't we we had plenty

of them if you'll read this book you'll

see about a few of them we we uh we

thought we knew the out the department

store business in Baltimore and we

thought we knew about the trading staff

business and we've we uh we've had a lot

of we've had a a lot of experience with

bad businesses and that makes you

appreciate a good one and to some extent

it sharpens your ability to make

distinctions between good and bad ones

so and we've had a lot of fun along the

way that helps too if you're enjoying

what you're doing you know you're likely

to get a better result than if you go to

work with your teeth clenched every

morning I think we were

helped because we came from families

where there were some admirable people

and we tended to identify other

admirable people better than we would

have coming from a different background

so my deceased wife used to say you

can't accomplish much in one generation

we owe a considerable amount both of us

to the families we were raised in I

think the family standards helped us to

identify the good people more easily

than we would have if we' had a more

disadvantage background you he that one

yeah yeah have you still got your

father's briefcase or I still got it but

I don't know where it

is I can't carry it anymore it's worn

out it's got holes in it yeah I've got

my dad's um I got my dad's desk from 75

years

ago this is pineapple juice in people

were questioning that that

thing they say it's good for your throat

if you're going to talk a long

time yes well of

course reputation you get over a long

period of time very few people are like

Charles Lindberg where you just suddenly

have a great reputation most of us have

to acquire one very slowly and that was

true in bur's case and any individual

you just have to get the best reputation

you can in the Years you're alloted and

the

time

available and it may work out well it

may work out poorly but it's a it's a

wise investment I see all the time

opportunities come to people where it's

their it's The credibility they've

gotten in the past that causes them to

have the new

opportunity so I think hardly anything

is more important than behaving well as

you go through life and uh

and I I I think we we actually try to

behave better as we got more prosperous

and I think you'd be crazy if you didn't

so I certainly recommend you follow

those old-fashioned

principles and I don't think there's any

way of guaranteeing a total Powerhouse

brand nor can if a result is a one and

50 million type result you're probably

not going to get

them Johnny anelli of

Fiat back in I think it was 1988 I was

at dinner with him one time and uh he

said something to me it stuck with me

said when you get old he says you'll

have the reputation you deserve he said

in the he said for a while you can you

can uh uh fool people fool people but he

says when he was talking about himself

at the time and but he said when you

when you get to be my age he says you

whatever reputation you have it's

probably the one you deserve and I think

the same is true of companies that U and

it's and and frankly you know it has

helped Burkshire a whole lot uh uh that

it has gotten a reputation to be a

somewhat different sort of company I

mean it uh uh I don't think we set out

to do that exactly but but it has worked

out that

way okay this is a

question oops that's not the question

hold

on ah here it is uh this is a question

from John Wells right here in Omaha uh

and he says you've described inflation

as a gigantic corporate tapeworm which

which of berkshire's businesses are best

suited to thrive during a period of high

inflation and why which will suffer and

suffer the most and why yeah well the

best businesses inflation during

inflation are usually the best they're

the businesses that you buy

once and then you don't have to keep

making Capital Investments subsequently

so you you you get you do not face the

problem of continuous reinvestment in

involving greater and greater dollars

because of inflation uh that's one

reason real estate in general is good

during inflation if you built your own

house 55 years ago like Charlie did or

bought one 55 years ago like I did uh

it's a

one-time outlay whereas if you're and

you get the you get an inflationary

expansion in replacement Capital without

having to replace yourself and if you

got something that's useful to someone

else it tends to be priced in terms of

replacement value over time so you

really get the inflationary kick uh now

if you're in a business such as the

utility business or the railroad

business it just keeps eating up more

and more money and your depreciation

charges are inadequate and you're

kidding yourself as to your real

economic profit so any business with

heavy capital investment tends to be a

poor business to be in in inflation and

often it's a poor business to be in

generally uh and the business where you

where you buy something once uh a brand

is a wonderful thing to own during

inflation you know C's candy built their

brand many years ago now we've had to

nourish it as we've gone along but the

value of that brand uh

increases uh during inflation just is

the value of of of really any any

strongly branded Goods uh

Gillette bought the

entire radio rights to the World Series

in

1939 and as I remember it cost them

$100,000 and for that they they got to

broadcast the Yankees I think versus the

Reds in

1939 and think of the number of

Impressions they made on mines in in $

1939 for

$100,000 and they were getting into the

minds of young guys like myself I was

eight or nine and millions of people and

they did it in those dollars then and of

course if you were going to go out and

try and do have a similar Impressions on

millions of Mines now it costs a fortune

and part of that's due to inflation part

of it's due to other things but it was a

great investment which could be

made in 19

$39 that paid off in terms of selling

selling razors and blades in 1960 and

1970 and $1

19980 uh so that's the kind of business

you want to own

Charlie well yeah

but if the inflation ever goes

completely out of control you have no

idea how it's going to end up if it

weren't for the Yar inflation we might

never have had 80 Hitler it was the Tome

of the great German inflation followed

by the Great Depression that brought us

Hitler and think of the price that the

world paid for that one we don't want

inflation because it's good for Seas

candy I didn't quite realize I was

proposing I'm not wasn't

criticizing what's good for C candy is

good for United

States

this question um this question which is

a little bit offbeat comes from Jordan

shopoff of Melbourne

Australia uh Mr Buffett in the forward

to the sixth edition of Benjamin

Graham's Security analysis you

identified four books that you

particularly cherish three of these

books were authored by Graham himself

and their influence on you is well known

the contributions of the fourth book to

your thinking however that that book was

Adam Smith's The Wealth of Nations

published in

1776 what that book meant to you is

seldom discussed so my question is what

did you learn from The Wealth of Nations

and how did it shape your investment and

B business philosophy well it doesn't

shape my investment philosophy but it

certainly learned economics from it and

uh uh my um friend Bill Gates gave me a

original copy of it though I uh was able

to study it as Adam Smith wrote it in

1776 it's you know there's just if you

read Adam Smith and if you read

canes uh Ricardo uh and

then uh and if you also read that little

book we've got out there called where

are the customer Yachts you will you

will uh have a lot of wisdom it U uh I

forgot to mention I was supposed to

mention too we we didn't want to put it

on sale

earlier uh because it would have given

away the movie but we do have birkshire

bomber uh underwear out there or

sweatshirts or whatever it may be so

Fruit of Loom has those and we have

French sweats where the customer Yachts

book which contains an incredible amount

of wisdom in very few pages and very

entertaining but if you want to go for

if you want to uh not only get a lot

more wisdom but appear more area night

uh you you should read The Wealth of

Nations also

Charli well

yeah guys is really worn well I mean he

is rightly recognized as as one of the

wisest people that ever came

along and of

course the lessons that he taught way

back then were taught again when

communism failed so terribly and people

like Singapore and Taiwan and China and

so forth came up so fast uh uh the

productive power of the capitalist

system is simply

unbelievable and he understood that

fully and early and uh he's done a lot

of good I took an idea of his on the

specialization of laborhood you know and

he talked about people making pins or

something but I applied it actually to

philanthropy you know I mean the

idea that you let other people do what

they best at and stick with what your

best at I've carried from mowing my lawn

to philanthropy and it it's a wonderful

thing to just shove off everything and

saying somebody else is better than that

then I am at that and uh and then work

in the field that that's most productive

for you it's you didn't do your own

bowel surgery either

no I'm not sure I have any reply to

that buffet and Mr Mong my my name is

Neil gady wall from South Florida and

I'm currently in seventh grade my

question is how do you make lots of

friends and get people to like you and

work with you that's not a bad

question very good question well you

know I was pretty obnoxious when I was

your age and asked a lot of impertinent

questions and and not everybody liked me

and and so the only way I could get the

people to like me a little bit was to

get very rich and very

generous that will

work people will see all kinds of

Virtues in you if they think you'll Rite

a

check yeah the two is both Charlie and I

were on the obnoxious side early on but

you should you should get a little

smarter about human behavior as you get

older and and I turned out to have some

pretty good teachers as I went along in

terms of what worked I mean I I have

looked at other people and during my

lifetime and had these wonderful

teachers they weren't they weren't

teachers in the in in in in the standard

definition but they were people I

admired and I thought to myself why do I

admire these people and if I want to be

admired myself you know why shouldn't I

take on some of their qualities so it's

it's not a complicated proposition you

know if you if you look around you at

the people you like in your school write

down three or four things they do that

make you like them and then look around

at the three or four people that turn

you off and write down those qualities

and decide that you're going to be a

person you yourself would like that you

take on the qualities of the person on

the left you're generous you're friendly

you know you you accept things with Good

Humor you don't claim credit for things

you don't do all of these things and

they're all possible to do and if you

like that in other people people are

going to like it in you and if you find

things that are kind of obnoxious you're

always late and you're always claiming

credit for more than you do and you're

kind of negative on everything and you

don't like those in other people get rid

of them in yourself and you'll find out

it works pretty

well it really works in marriage if you

can change yourself instead of trying to

change your spouse that's a good idea

Charlie has said the most important

thing in selecting a marriage partner is

that you don't look for intelligence or

humor character says you look for

someone with low

expectations