#380 Four Hundred Pages of Warren Buffett and Charlie Munger In Their Own Words

The transcript discusses the importance of assembling a top-tier team, as exemplified by successful figures like Jeff Bezos, Steve Jobs, and companies like Ramp, which hires only a fraction of applicants to ensure excellence. It highlights the value of learning from business history, as seen in Warren Buffett and Charlie Munger's investment strategies and insights. The conversation touches on the significance of opportunity costs, the benefits of extreme focus, and the impact of technological shifts on industries, urging businesses to adapt and seize new opportunities. The text also emphasizes the enduring value of brands and customer loyalty, citing examples like Coca-Cola and Costco.

• Successful leaders like Jeff Bezos, Charlie Munger, and Warren Buffett emphasize the importance of assembling a team of the highest quality.
• Bezos highlighted that setting a high bar for hiring is crucial for Amazon's success, echoing Steve Jobs' sentiment on surrounding oneself with smart individuals.
• The dynamic range in talent can be vast, making it essential to pursue top-tier talent for achieving exceptional results.

"In his very first shareholder letter, Jeff Bezos emphasized the importance of having the very best team."

• Bezos's focus on team quality is central to Amazon's success.

"Steve said, I think that I've consistently figured out who the really smart people are to hang around with. You must find extraordinary people."

• Steve Jobs's approach to finding and working with smart individuals is crucial for success.

• Curiosity and intense interest are key components in creating one's own luck and achieving success.
• Munger and Buffett attribute their success to a combination of luck and their proactive pursuit of wisdom and knowledge.

"Warren says he was lucky to find Geico, but not every 21-year-old was going to go down to Washington D.C. start knocking on the doors of empty buildings to try to find something out that he was curious about."

• Buffett's discovery of Geico was a result of his curiosity and initiative.

"Munger said, intense interest in any subject is indispensable if you're going to excel in it."

• Passion and deep interest in a subject are essential for excelling in it.

• Having admirable role models within and outside the family can significantly influence one's values and success.
• Buffett and Munger both had family members they admired and emulated, which shaped their personal and professional lives.

"Munger says, I think we're helped because we came from families where there were some admirable people and we tended to identify other admirable people outside of the family."

• The influence of admirable family members and role models is crucial for personal development.

"Buffett talks about the importance of picking the right heroes."

• Choosing the right heroes can guide one's values and actions.

• Studying business history and biographies provides valuable insights and lessons.
• Munger and Buffett emphasize the importance of understanding why some businesses succeed and others fail.

"You should pick an extreme example and ask what the hell happened here?"

• Analyzing extreme examples in business history can provide valuable lessons.

"Warren says, I owe a great deal to Charlie in terms of learning a lot about businesses. I've also spent a lifetime looking at businesses, seeing why some work and why some don't."

• Observing and analyzing businesses over time is key to understanding success and failure.

• Envy is a powerful negative force, and one should strive to deserve their success.
• Building a reputation for winning fairly and using success wisely is important.

"Charlie says, I had a great grandfather. When he died, the preacher gave the talk and he said, none envied this man's success. So fairly won and wisely used."

• Success should be earned fairly and used wisely.

"We want to have people think of us as having won fairly and used wisely."

• The perception of fairness and wise use of success is important.

• Opportunities often exist in industries parallel to one's own, and being observant can lead to significant discoveries.
• Munger and Buffett discuss missed opportunities, such as Google, due to not recognizing the potential in parallel industries.

"Munger says, I feel like a horse's ass for not identifying Google better."

• Missing opportunities in parallel industries can be a significant oversight.

"Warren adds, we had some insights because we were using Google Ads at Geico and we were seeing the results produced."

• Observing the effectiveness of services in one's industry can highlight potential investment opportunities.

• The world tends to focus on the short term, but maintaining a long-term focus can provide a competitive edge.
• Successful individuals like Andy Taylor attribute their achievements to sustained focus over long periods.

"The world is overwhelmingly short term focus."

• A long-term focus is a valuable differentiator in a short-term focused world.

"Andy Taylor replied with one word, focus. He continues, I'm not the smartest person in the room, but I have the ability to focus at a level that most people can't."

• Sustained focus is a key factor in achieving long-term success.

• Independent thinking and trusting one's judgment are essential for making successful investments and decisions.
• Buffett emphasizes the importance of not relying on others' opinions and thinking for oneself.

"You can't expect anybody else to do this for you. People are not going to tell you about wonderful little investments you have to find them yourself."

• Independent thinking is crucial for discovering valuable opportunities.

"You can't look around for people to agree with you. You can't look around for people to even know what you're talking about. You have to think for yourself."

• Trusting one's judgment is essential for success.

• Many successful investments and opportunities are available to everyone but require action to capitalize on them.
• Buffett highlights that some of his best investments were based on publicly available information.

"What is complicated about Coca Cola? We're $3 billion pre-tax better off than a few years ago because of Coca Cola."

• Recognizing and acting on publicly available opportunities can lead to significant success.

"There's nothing I know about the product, its distribution system, its finances, or anything really that hundreds of thousands or millions of people don't already know."

• Many opportunities are accessible to all but require initiative to capitalize on them.

• Gaining in-depth knowledge about an industry can provide a significant advantage in identifying opportunities.
• Buffett's approach to learning about the coal industry involved direct interaction with industry leaders.

"When I was 23 years old, I got interested in the coal business. I would go out and see the CEOs of eight or 10 coal companies."

• Direct engagement with industry leaders can provide valuable insights.

"I would know more about the coal companies from an economic standpoint than any one of those managers probably would."

• Comprehensive knowledge of an industry can give a competitive edge.

• Maintaining a strong cash position provides flexibility and security in business operations.
• Buffett and Munger emphasize the importance of having a financial buffer to navigate uncertainties.

"We do like having a lot."

• A strong cash position is essential for financial stability and flexibility.

• Successful business operations require substantial cash reserves to capitalize on opportunities and withstand downturns.
• Quality of information is prioritized over the speed of information; the ability to focus on high-quality information is increasingly valuable in a world with diminishing attention spans.

"It is impossible to comprehend Rockefeller's breathtaking ascent without realizing that he was always... backed by abundant cash."

• Rockefeller's success was largely due to maintaining cash reserves, allowing him to outbid competitors and survive economic fluctuations.

"Warren says the speed of information really doesn't make any difference to us. It's the processing and finally coming to some judgment that has some utility."

• Warren Buffett emphasizes that the value lies in the quality and processing of information, not in its rapid acquisition.

• Designing a business that aligns with personal interests and natural inclinations can lead to sustained energy and success.
• Different approaches to business and investing can be equally successful; it's important to find a method that suits one's own style and philosophy.

"I designed a business that is completely natural to how I want to spend my time."

• Michael Dell's success is attributed to building a business that felt natural and energizing to him, allowing for sustained effort.

"I've said on investing, there's more than one way to get to heaven."

• Buffett acknowledges that multiple strategies can lead to success, and individuals should pursue the approach that suits them best.

• Long-term wealth is often built by identifying and investing in or building businesses with strong competitive advantages.
• Successful businesses are those that are resistant to competition and economic changes.

"If you look at how the fortunes were built in this country, they were built by someone who identified a wonderful business."

• Buffett and Munger highlight the importance of finding businesses with strong, sustainable competitive advantages.

"The greatest investors aren't investors at all. They're entrepreneurs who never sold."

• True wealth is often created by entrepreneurs who build and maintain ownership of valuable businesses over time.

• Intelligent decision-making involves evaluating choices based on opportunity costs, considering the best alternative use of resources.
• Concentrated investments in high-quality opportunities are preferred over diversification.

"All intelligent people should think primarily in terms of opportunity costs."

• Munger stresses the importance of evaluating decisions based on the best available alternatives.

"The whole secret of investment is to find places where it's safe and wise to not diversify."

• Successful investing involves concentrating on a few high-quality opportunities rather than spreading investments thinly.

• Avoiding excessive leverage is crucial to prevent financial ruin due to market volatility.
• Learning from others' mistakes and being cautious with financial structures can protect against significant losses.

"The big thing you want is to protect yourself against the insanity and market prices and volatility wiping you out."

• Buffett and Munger advise against using leverage that could lead to financial instability during market downturns.

"He kept selling naked puts... and in due time, he didn't have the $5 million of securities and he didn't have the house."

• A cautionary tale of how leverage can lead to financial ruin if not managed carefully.

• Keeping business operations simple and focused on core competencies can lead to greater efficiency and success.
• Avoid unnecessary complexities and maintain a lean organizational structure.

"We have no human relations department, no legal department, no investor relations, no public relations."

• Buffett and Munger emphasize a lean organizational structure, focusing on core business strengths.

"We didn't have any staffing papers, we didn't have any staff."

• The simplicity in operations is highlighted as a key factor in their business philosophy.

• Trusting one's own judgment and focusing on long-term business fundamentals are essential for success.
• External opinions and short-term market fluctuations should not dictate business decisions.

"Every day somebody sells a few shares of Berkshire... It really doesn't make any difference to us."

• Buffett emphasizes the importance of focusing on long-term value rather than short-term market opinions.

"I watched the stock fall from $113 to 6. But I was also watching all of our internal business metrics."

• Jeff Bezos illustrates the importance of focusing on internal metrics and fundamentals rather than stock price fluctuations.

• Collaborating with highly talented individuals and designing effective incentive structures can drive business success.
• Incentives should align with long-term business goals rather than short-term gains.

"Large sums don't bother me. I do not mind paying a lot for performance."

• Buffett values talent and is willing to invest significantly in individuals who can drive business success.

"You don't want to award on profits alone. You just quit advertising and then you'll start shrinking the business a little."

• Incentive structures should be designed to support sustainable business growth rather than short-term profit maximization.

• David Ogilvy views advertising as a production cost, not a selling cost, emphasizing its essential role in product success.
• Izzy Sharp leveraged advertising during economic downturns to gain market share, contrasting with competitors who cut back.

"I have come to regard advertising as part of the product to be treated as a production cost, not a selling cost."

• Ogilvy's perspective highlights advertising as integral to product development, not just sales.

"His competitors wind up cutting back their advertising costs when he realized it's the. He needed to do the exact opposite."

• Sharp's strategy of increasing advertising in downturns showcases the competitive advantage of consistent marketing efforts.

• Munger and Buffett stress the importance of great managers who prioritize long-term success over short-term results.
• There's a significant variance in talent among Fortune 500 CEOs, with many not meeting top-tier standards.

"I think almost all good businesses have occasions where their managers are willing to make today's results look a little worse than they would otherwise to help tomorrow."

• Munger underscores the need for managers to focus on future growth rather than immediate gains.

"The CEOs of the Fortune 500 are not selected like the members of the Olympic track and field team."

• This quote illustrates the inconsistency in managerial quality among top companies.

• Munger advocates for hiring individuals with proven track records rather than those with unproven potential.
• The emphasis is on simplicity and effectiveness in hiring practices.

"We find somebody that did a good job before and ask them to do the same job for us."

• Munger's straightforward hiring strategy focuses on past performance as a predictor of future success.

"We don't like banjo hitters who suddenly proclaim that they could become power hitters."

• This analogy highlights the preference for consistent performers over those with unverified capabilities.

• Buffett and Munger emphasize adaptability and responding to circumstances rather than rigid planning.
• Their business approach involves opportunistic growth and clear communication with partners.

"We just kept putting one foot in front of the other."

• This approach reflects a focus on steady progress and flexibility in business strategy.

"I wanted to be sure that we were on the same page. You don't have to read the partnership agreement."

• Buffett's emphasis on mutual understanding and trust simplifies business relationships.

• Extreme focus on specific strengths leads to success, as exemplified by Todd Graves and Raising Cane's.
• Specialization and dedication to a singular vision are key to long-term achievement.

"I believe in doing one thing and doing it better than anyone else."

• Graves' philosophy underscores the power of specialization and excellence in a niche market.

"Nobody wants to go to a doctor who's half proctologist and half dentist."

• This analogy illustrates the importance of focusing on a singular area of expertise.

• Technological advancements can render existing business models obsolete, necessitating adaptation.
• The Internet's impact on encyclopedias and newspapers serves as a cautionary example.

"All technology is, is a better way to do something."

• This statement encapsulates the essence of technological disruption as an opportunity for improvement.

"The Internet is going to destroy our newspaper business and our World Book Encyclopedia business."

• Buffett and Munger acknowledge the transformative power of technology on traditional industries.

• Billy Durant's transition from horse carriages to automobiles exemplifies proactive adaptation to technological change.
• Identifying and embracing new opportunities is crucial for business longevity.

"I'm getting out of the horse carriage business because this new technology has come around."

• Durant's foresight in adapting to the automobile industry highlights the importance of recognizing and responding to innovation.

"The move is to do what Billy Durant would do, which is to jump into the new technology."

• This advice encourages businesses to pivot towards emerging technologies to maintain relevance and competitiveness.

• Technological advancements, like the automobile, are unstoppable forces that can drastically change industries and business landscapes.
• Historical examples show how industries must adapt to survive and thrive amidst technological disruptions.

"It was impossible for any one person to stop the phenomenon of the automobile."

• The quote highlights the inevitability and unstoppable nature of significant technological advancements.

• True learning is reflected in behavioral change, not just the accumulation of knowledge.
• Buffett and Munger emphasize learning from mistakes to avoid future errors.

"Learning is not memorizing information. Learning is changing your behavior."

• This quote underscores the importance of applying knowledge to effect change, rather than merely acquiring facts.

• Buffett recognized the talents of industry leaders like Bob Noyce and Walt Disney but sold their stocks too early, missing substantial gains.
• Recognizing talent does not always translate into capitalizing on investment opportunities.

"Buffett knew Bob Noyce, founder of Intel, and met Walt Disney and knew without a doubt how talented these people were."

• The quote illustrates Buffett's ability to recognize talent but also his failure to capitalize on it through sustained investment.

• The importance of persistence in business is emphasized; staying in the game allows for the potential to capitalize on unforeseen technological advancements.
• Historical examples, such as Walt Disney and Coca Cola, demonstrate how external innovations can enhance business value.

"Stay in the game long enough to get lucky, someone else can invent a technology that drastically increases your market."

• This quote suggests that perseverance in business can lead to opportunities that arise from external technological advancements.

• Efficient business operations often involve downsizing to optimize productivity and reduce bloat.
• Overstaffing can lead to inefficiencies, while strategic downsizing can enhance business performance.

"Name a business that has been ruined because it was over downsized. I cannot think of a single one."

• The quote emphasizes the benefits of maintaining lean operations and the potential pitfalls of excessive staffing.

• Successful business strategies often involve focusing on key variables that determine success.
• Simplifying complex decisions to focus on core elements can lead to better outcomes.

"There's only one variable. And if you solve for that variable, the deal will work out."

• This quote highlights the importance of identifying and concentrating on the most critical factors in decision-making.

• Owning a strong brand can provide significant competitive advantages and long-term benefits.
• Brands like Coca Cola and See's Candy demonstrate the value of consumer loyalty and brand recognition.

"I understood brands to some degree, but there's nothing like owning one and seeing the possibilities to educate yourself about things you might do in the future."

• The quote illustrates the transformative understanding that comes from owning and managing a successful brand.

• Ideal business models include those that generate revenue through royalties, requiring minimal ongoing investment.
• Examples include licensing deals that provide consistent income without the need for capital reinvestment.

"The ideal asset is a royalty on somebody else's sales, where all you do is get a royalty check every month."

• This quote describes an optimal business model that generates passive income through royalties, minimizing operational complexities.

• Building strong customer loyalty can lead to unexpected and compounding benefits over time.
• Brands with strong mindshare, like Costco and Geico, benefit from loyal customer bases.

"Costco has created ferocious customer loyalty. And of course, strange things happen when you do that long enough."

• The quote highlights the long-term advantages of cultivating a loyal customer base and the resulting business benefits.

• Continuous learning through reading and exposure to diverse ideas is a recurring theme.
• Recommendations from Buffett and Munger include biographies and books on market psychology and investment strategies.

"If you went back in 1919, you could have bought a share of Coca Cola for 40 bucks... Are they going to be serving more Coke on a daily basis, you know, in the future?"

• This quote ties into the theme of long-term investment strategies based on fundamental business growth and market presence.

• The podcast encourages listeners to continue learning and exploring business concepts through recommended readings.
• Books mentioned provide insights into successful business strategies and the minds behind significant economic achievements.

"I certainly enjoyed learning it and if I enjoy learning it I regard it as important because I think that's what you're here for, to go to bed every night a little wiser than when you got up."

• This quote reinforces the value of continuous learning and intellectual growth as a lifelong pursuit.