university of Berkshire Hathaway, By Daniel Pecault
Of all the works written on Warren Buffett and Berkshire Hathaway, this provides one of the more unique formats for communicating timely Buffett and Munger insights. The authors provide a compilation of notes that they took at Berkshire annual meetings since they started in 1986. While there is a lot of information here, I will share only some of the insights that stuck out for me in more of a note format.
In the first meeting, Buffett describes inflation more as a political phenomena than an economic one. As long as politicians lack self-control, they will continue to print money since the government has a quick fix attitude towards monetary policy. On learning, Warren describes that humility is the gateway to understanding. Regarding market cycles, it’s unwise to predict them based on forecasts. Berkshire is into “predicting how people will swing against the current. We’re not predicting the current itself.” Berkshire is less concerned about what markets are going to do and more focused on finding good companies at reasonable prices. Munger voraciously reads biographies and feels they are one of the best ways to learn about successful people, quipping that it’s a way to “make friends with the eminent dead.” Charlie boldly declares that the distinction between value and growth investing is nonsense as all investing is essentially value investing. Value should be the only concern for any economic commitment, labeling it “a mispriced gamble.” In terms of information and research, annual reports have remained Buffett’s main source of data for 40 years. On learning, Munger points out that no one has truly found a way to teach, so all are wise. Not sure I quite agree here, but an interesting point to ponder when thinking about accessibility of learning opportunities for all.
Float is one of the less known aspects of Berkshire’s business, fueled by collecting insurance premiums and reinvesting reserves. The best investment, Buffet argues, is in yourself. He says that he would pay any bright student $50,000 for 10% of their future earnings for the rest of their life - now that is certainly an interesting alternative investment! What a person should do with that $500,000 (over the 10 year horizon) is develop their mind and talent. I really love this perspective on utilizing cash!
A recurring fear in Berkshire meetings is the threat of nuclear terrorism and that there will always be a certain percentage of psychotic people. Insurance-wise, their entire book of business has been rewritten for NCB (nuclear, biological, chemical threats). After this, Buffett sees education as the nation’s second biggest problem. He describes it as a two-tiered system, where the wealthy go to private schools and the poor go to “armed camps.” Equal opportunity has been the cornerstone of American success and at roughly $40,000 per capita (now the figure is higher), the resources are available to level the playing field.
In terms of the future, Buffett has consistently been very optimistic, marveling over the country’s economic and technological progress since its formation. If the population grows at 1% a year and GDP grows at 2.5% a year, we would quadruple GDP per century, an unbelievable feat for a country that already has such a high standard of living. The biggest threat to American competitiveness is health care costs, comprising 17% of GDP, while rival countries are paying around 10%. Finally, Buffett provides his simple formula for happiness and a life well-lived, “I do what I like with the people I like.” Warren learned early in life that his favorite employer was himself and worked hard to realize his goals through his own initiative.
Forbes Book of Quotations, Edited by Ted Goodman
This encyclopedic work, published by Forbes, is composed entirely of quotes spanning 700 pages, overflowing with inspiring wisdom on a wide range of topics in business and life. While I have a variety of ideas to improve traditional education in this country and make it more pragmatic, I thought one worthwhile idea would be to discuss these quotes in a classroom setting. Wisdom serves as such inspiration that it’s a shame it’s not formally taught.
Topics are wide-ranging and alphabetized, starting with Ability, ending in Zeal, and covering many subjects in between - including marriage, reading, jobs, and, of course, death and taxes. There are so many quotes worth contemplating, but I’ve picked out a few shorter ones that stood out.
The first are in regards to frugality and spending. Seneca, the Roman philosopher writes: “With parsimony a little is sufficient; without it nothing is sufficient but frugality makes a poor man rich.” Calvin Coolidge echoes Seneca’s message, infusing it with moral significance, “There is no dignity quite so impressive and no independence quite so important as living within your means.” Learning to live on less can lead to riches! On honesty, Abraham Lincoln remarks that, “No man had a good enough memory to be a successful liar.” And on reading, Mary Montagu provides us with insight into keeping ourselves busy at low costs, “No entertainment is so cheap as reading, nor any pleasure so lasting.”
I love to learn about new thinkers and I’m always adding names to my spreadsheet. Perhaps no other book introduces so many thinkers in one punch. I highly recommend this compilation - take a few topics each day to read, reflect, and keep it on your coffee table to impress your friends!
The Intelligent Investor, by Benjamin Graham
While I don’t find the majority of material so relevant to my investment approach, the few ideas that stick out lay the foundation for solid value investing and behavioral finance. Buffett humbly discusses how Ben Graham’s ideas formed his own investing strategy.
Chapter 8 introduces Mr. Market and how to maintain the proper mental framework amidst market fluctuations. Mr. Market is a manic depressive fellow, who throws you wild market prices, depending on his mood and perception. Even though the underlying business can be stable, Mr. Market isn’t, and will quote you wide-ranging prices. If you check the 52 week high and low for a large and successful company, it’s remarkable to see the spread in prices (this is one of my favorite concepts to capitalize on!). In most cases, the underlying value of a company doesn’t actually fluctuate that much. Good investors should capitalize on the low prices that he’s offering rather than being scared into selling.
Investing with a margin of safety, when market price is below intrinsic value, comprises chapter 20. It’s important to have an idea of what the business is worth and pay significantly less. While nobody has the secret formula for valuing the actual worth of a business, it’s important to think about investing in terms of purchasing at a discount, allowing for a margin of error, and leaving room for potential declines in price and errors in analysis. Buffett describes it as follows: "You don't try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.”
Finally, Graham introduces dollar cost averaging which is setting aside money to invest consistently regardless of what the market is doing. This strategy helps protect against short-term volatility and takes the trouble out of trying to predict market directions. Buffett emphasizes that attempting to predict market directions is an exercise in futility.
Poor Charlie's Almanack, By Peter Kaufman
Charlie Munger is one of my favorite role models in the investing world. His worldly wisdoms provide a unique framework for making investing decisions in addition to leading a well-informed and meaningful life. While expensive and rare, it’s a true souvenir for the Munger enthusiast (I would encourage those who are less interested in investing to check it out as well). Each page is filled with dense and rich material, including psychological insights, quotes, investment wisdoms, speeches, and cartoons. If you don’t read this, Munger would at least urge you to read something else! “In my whole life, I have known no wise people over a broad subject matter area who didn’t read all the time —none, zero. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
Munger introduces a novel interdisciplinary approach to assessing wonderful investments, building mental models, and becoming a more rational thinker. Charlie observed a pattern of irrationality so extreme that he created his own system to get through life, which he refers to as the psychology of human misjudgment.
He points out some common psychological traps that people fall into: Psychological denial: reality is too painful to bear so people distort it. Social proof: people are over-influenced by the thinking of others. Man with a hammer syndrome: people often use the wrong tools to go about solving problems. The prime example of this is using irrelevant information (such as politics, macroeconomics) to inform investment decisions. Buffett discusses how biases from envy are even more debilitating than greed. Bias from gambling compulsion: near jackpot misses fuel addictive behaviors. Liking distortion: one’s bias to like somebody prevents them from properly assessing reality.
Charlie humorously observes that if you pick a few companies right over the course of a lifetime, you can sit on your ass and get rich. “We insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.” The Munger almanac provides an entertaining and thorough overview of this wonderful man’s work, without sparing the “wiseassery” he is known for.
One Up On Wall Street, by Peter Lynch
Peter Lynch managed the Fidelity Magellan fund from 1977-1990, averaging a +29% return, which was the most successful mutual fund in that period. He provides lots of simple and effective insights (although he does include charts which are a bit more technical to inform his investments).
He was famous for explaining that anyone has what it takes to spot a great company (a potential multi-bagger). Lynch adds that you must do your homework, be able to articulate why something is a good business, and why you are buying a stock. Even people making small purchases do more homework than some people that invest hundreds of thousands of dollars in companies they don’t know much about! In a famous experiment, he asked elementary school students to pick their favorite companies and their portfolios actually outperformed the returns of many mutual fund managers. One of his investing golden rules is “Never invest in any idea you can’t illustrate with a crayon.”
He advises against listening to analysts on CNBC and believes the average investor actually has an edge over institutional investors. I also really like his unique categorization of companies The six company types include slow growers, stalwarts, fast growers, cyclicals, turnarounds, and asset plays. A dull and simple business with a perfectly boring name presents a great investing opportunity since it’s often overlooked. By contrast, he urges to stay far away from hot stocks or the “whisper stock.” Lynch trained his analysts to give him a succinct pitch on the merits of an investment in 30 seconds or less. There is a wealth of great material here, though he could have added to his pieces on behavioral finance and assessing the competitive qualities of a business.
The Little Book of Common Sense Investing, by John C. Bogle
John Bogle, founder of Vanguard, revolutionized the financial industry by introducing the index fund to the layman investor in 1975. His message was to hold onto the largest 500 companies, leave your money alone, ignore financial professionals, and keep transactions costs to a minimum. This straightforward idea arguably helped the average investor more than anything else. He’s written many books which demonstrate exhaustively in excruciating detail why indexing for the long run is a wonderful strategy (though I won’t bore you with all the numbers and statistics). I do find the other books quite redundant.
He distinguishes between investment and speculation. An investor is interested in capturing returns over the long run with lower risk, while the speculator is concerned with achieving returns over a short period of time. The miracle of compounding is the key to investment success. Over the past century, corporations have earned a 9.5% return on their capital. Compounded at that rate over a decade, each $1 invested grows to $2.48; over two decades, $6.14; over three decades, $15.22; over four decades, $37.72, and over five decades, $93.48 (These are nominal returns without adjustments for inflation, the real returns would be closer to 6.5%).
Occam’s razor explains that when there are multiple solutions to a problem, pick the simplest one. Investors are bombarded with many exotic investment products and influenced by fancy hedge managers and smooth salesmen. Stick to the S&P 500 index. The way to benefit from U.S. business is to own the index which represents roughly 80% of the total market value of all U.S. companies. Keep it simple.
No one has been as persistent about disseminating his message and combating the idiocy and inefficiency of the finance world. Amidst all the noise, Jack Bogle has been a voice of reason, model of ethical conduct, and revolutionary in the field.
The Little Book That Beats The Market, by Joel Greenblatt
Greenblatt’s Gotham Capital had one of the most impressive runs in history, averaging 40% over 20 years. His value investing approach is rooted in two fundamental criteria: choosing companies with a high return on capital (good companies) with high earnings yield (companies at bargain prices). A company with a high return on capital is able to reinvest its profits at good returns. Earnings yield is the reciprocal of P/E (price to earnings) and searches for companies that are cheap relative to price, using the previous year’s earnings.
The famous “magic formula” is a stock screener that searches for companies that have the best combination of these two factors. You might be wondering, “If Greenblatt indeed possesses the magic formula then why would he want to share it and why aren’t more people getting rich off of it?” The best answer is that most people don’t have the patience to hold for a long period of time to achieve results. The screener only claims to work by holding these companies in aggregate over a significant period of time.
Greenblatt suggests a 3-5 year holding period for these stocks to go up, selling, and then repeating the process. Since the screener works by holding as an index, it wouldn’t be effective to cherry pick a particular company you might feel comfortable with.
The author’s main motivation for writing this book was to describe to his children what he does for a living and he distills the qualities of profitable business in a humorous and entertaining way. Although magic formula investing doesn’t resonate with me, there’s still some good stuff in here to apply to another framework. You can check out companies that meet the magic formula criteria here: https://www.magicformulainvesting.com
To define Greenblatt's criteria more technically:
Return on Capital = EBIT/ (Net Fixed Assets+Net Working Capital)
Earnings Yield = EBIT/Enterprise Value
The Millionaire Next Door, by Thomas Stanley
Although the material is quite dry and driven primarily by research and statistics, a few personal finance insights in the book have really influenced my decision making. When the research was conducted in 1980, the authors uncovered that most millionaires actually lived in modest neighborhoods, drove average cars, and lived well below their means. They didn’t live in fancy neighborhoods!
Stanley refers to two groups of people. The first group are “prodigious accumulators of wealth” (PAWs). They spend under their means and have modest jobs. “Under accumulators of wealth” (UAWs), by contrast, are high income earners. They tend to practice poor financial management but have big incomes. Doctors, for example, are generally too consumed with their work to spend much time to save and plan. The author demonstrates how the PAWs surprisingly do better over the long haul because they underspend and have a careful financial plan through saving and investing.
One chapter, entitled “Frugal Frugal Frugal” describes why careful spending is the cornerstone of wealth building. I’ve found that spending under my means and scrupulously assessing my consumptions habits brings higher productivity, mindfulness, and gratitude. On the flip side, the abundance mentality suggests that earning more and spending freely yields a flow of positive outcomes. While there are benefits to the abundance mentality, I find more wisdom in the approach outlined in this book.
Lots of people appear wealthy, but they’re actually in debt and in poor financial condition. Don’t look towards others to gauge your own success. Stanley refers to being financially dependent on family members as Economic Outpatient Care (EOC). Often affluent parents, for example, mean well when they support their children, but in reality this prevents them from developing their own financial skills. Making a larger income can actually be very risky, enticing you to spend more on houses, vacations, and cars that you don’t need.
rich dad poor Dad, by robert kiyosaki
Kiyosaki paints the process of wealth creation too nonchalantly (although I enjoy the parables and simple language which make for a leisurely read), but there are a few gems that really stick out. Did the author really have a rich dad and poor dad? Fact or fiction, Kiyosaki uses the parable well to explain that his poor dad preached to live a stable and secure life but struggled, while his rich dad flourished by pursuing an entrepreneurial path, owning businesses, and investing.
His introduction to accounting principles is very useful. Assets bring cash flow into your pocket, whereas liabilities take money out of your pocket. The middle class and poor often view potential liabilities as assets. The rich, by contrast, leverage assets (building financial IQ, real estate, stocks, businesses) to increase their wealth. A house serves as a fundamental example in classifying something as an asset or liability. It’s an asset because it can increase in value and be invaluable from a sentimental standpoint, but most people falsely assume that it will inevitably appreciate. It can also be a liability if the property decreases in value, needs repairs, and ties you up with an expensive mortgage and property taxes. Rich dad insists that pursuing high levels of formal education and landing a secure job doesn’t automatically translate to financial success. The rich don’t work for money, he instructs, they work for assets.
While I love all education and am commitment to continual learning, a traditional job and formal education only get you so far in terms of financial independence. Improving one’s financial literacy, investing in one’s self, becoming an owner rather than employee, making savvy investments, and acquiring assets that increase cash flow are paths overlooked in traditional education. While Kiyosaki gives the false impression that this path is easy, he still provides some thought provoking preliminary ideas towards higher financial independence.