Warren Buffett: Why It's Easy To Get Amazing Stock Market Returns
Summary
TLDRIn 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
😀 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.
💼 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.
📚 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.
🤝 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.
Mindmap
Keywords
💡Inflation
💡Capital Constrained
💡Opportunity Cost
💡Brand Value
💡Reputation
💡Curiousity
💡Mistakes
💡Enjoyment
💡Family Standards
💡Philanthropy
💡The Wealth of Nations
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
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