I caught up with Alex Morris of TSOH who recently published Buffett & Munger Unscripted, his selection of business and investing wisdom from Berkshire’s annual meetings.

I too once listened to the entire annual meeting archive and by the end, I heard Buffett and Munger’s voices in my head, cracking jokes at my expense! But I didn’t have the patience and focus to turn my notes into such a well-organized book. Kudos to Alex for making this available!

Questions I lobbed at Alex: how the research and writing process affected him, what surprised him, how he thinks about Buffett-like investors and executives (I gave my take on Buffett pitching his fund back in the days), what the media gets wrong, Buffett and Munger as guides and differences in their approaches to life, writing habits, quantity vs. quality in building a Substack — and of course whether he also heard their voices at the end.

Enjoy!

— Frederik

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• The Reading Obsession. (Also: Cranking The Learning Machine Up To 11)

Yes, Buffett wanted to get rich. But he did it in a way that was interesting and rewarding to him. It was his way of becoming the best version of himself.

• Picking Stocks like Buffett

The next Warren Buffett will not wait to be handed enlightenment. They will not be content to adopt their teachers’ methods and ideas.

• The Next Warren Buffet

Buffett did not care about appearances. He desired the freedom to live life on his own terms and to be surrounded by family and friends. His journey of accumulating wealth started with a fierce desire for independence.

• The Hustler: Lessons from a Young Warren Buffett

Buffett turned his company into a preferred home for businesses he wanted to invest in and leaders he enjoyed working with. He did this by becoming what he wanted to attract.

• The 'Berkshire System': Life Advice From a Shareholder Letter

It’s possible to study someone like Buffett, yet retain Graham’s degree of emotional detachment. Investing and business can remain an occupation and not turn into life-consuming passions.

• Enough: The Forgotten Lesson of Ben Graham's Life

What were the turning points in Buffett’s life? Could he have ended up a trader, a hedge fund manager, or a corporate raider?

• What if? Warren E. Buffett, An Alternate History

• Dark Buffett: More Alternate History

Even Buffett borrowed important ideas and timeless wisdom from those he admired.

• The Pritzkers: Buffett's Blueprint

Even though their relationship didn’t survive The Snowball, Schroeder offers an invaluable perspective on Buffett. Her Q&A’s are a must-read.

• Behind the Curtains with Alice Schroeder

Imagine if Charlie Munger’s ego had prevented him from becoming number two at the world’s most successful investment enterprise. A look at the partnership of two exceptional minds.

• How to find a Partner like Charlie Munger.

People were intrigued by the wealth, but they stuck around, and returned, for the wisdom and relationships.

• Farewell to Charlie Munger

Other pieces related to Buffett, Munger, Berkshire, and Ben Graham.

• Buffett Profile from 1979: "The investor's investor"

• Buffett's Lectures at the University of Notre Dame (1991)

• Between Rest and Overdrive: Are Great Investors Lazy?

• Great Investors See Things Differently (Are Mental Models Actually Pointless?)

• Filtering The Idea Funnel

• We're Not Mozart and Mentorship is Important

• The Price of Passion (Life is like a jar of marbles)

• Buffett's first major TV interview and 5,106 pages of wisdom you will never read

• Highlights from Charlie Munger's Conversation with Todd Combs (2022 Singleton Prize for CEO Excellence)

Ben Graham is known as the founder of the conservative value approach to investing, but in 1928, he was one of the first young hot-shot hedge fund managers. That year, he made 60% for his investors, and plans for another, much larger fund were in the works.

His family had struggled with money after his father’s early death. Now he was finally flying high and it was time to live the good life.

Graham and his wife picked a new home, a lavish duplex in a brand new “thirty-story apartment building of ultimate luxury” on Manhattan’s Upper West Side. The place had “ten rooms and Lord knows how many baths” on the 18th and 19th floors. Plus a terrace. This, Graham wrote in his memoirs, this was “what the high-flying Grahams wanted.”

The building was the Beresford whose distinctive shape is familiar to anyone strolling through Central Park.

Rent was $11,000 a year, “small figures” compared to the $600,000 Graham had earned that year before taxes. (Inflation adjusted by about 18x, that’s about ~$200,000 in rent.) Graham signed a ten-year lease before heading to Palm Beach for a Christmas vacation. “What a Wunderkind I was,” he quipped decades later.

The Grahams moved into their “regal duplex” in October 1929, “just when the holocaust in Wall Street was at its height.”

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On the day of the annual meeting, Buffett spent hours signing copies, including mine.

Pretty remarkable given that his relationship with Schroeder didn’t survive the book’s publication.

Buffett unceremoniously canceled their annual dinner and stopped speaking to her. Schroeder later acknowledged that Buffett had “made himself extremely vulnerable” and her book “did not perfectly match the narrative of his own life.”

It was courageous of him. The end result is that the book makes him feel uncomfortable.

Schroeder estimated he’d spent “2,000 hours of concentrated time” with her. That was an unprecedented amount of access to his life, a look behind the curtains unlikely to be matched by any other outsider.

It was an exhausting time for her. Schroeder recounted feeling “unbelievably wrecked” after spending 4-5 days a week in Omaha due to the intensity of Buffett’s intellect. His friends and colleagues likewise told her they “needed time to recuperate after seeing him. Or that they could only take him in doses of two hours at a time.”

It’s so intense to have someone racing ahead of you mentally and you are trying to keep up. This is clearly one reason for his bond with Bill Gates. They don’t have to wait for each other to catch up.

For example, Schroeder noted that Buffett remembered conversations “better than you do” and subtly used this ability to test people:

I don’t know if you’ve ever been in that situation, where you realize the other person has asked you the same question some time ago. When Buffett does that, it’s often a test.

He will ask very probing and penetrating questions and then 2 months later he will ask again and you know he remembers the exact words you said. It can feel a little like getting deposed, and it’s a bit spooky to have a human tape recorder sitting in front of you. And of course, he’s reading you emotionally at the same time, and you know it.

Something to keep in mind the next time you hear Buffett downplay his intelligence.

Schroeder has kept a low profile since then. Some of her post-financial crisis comments on Buffett were rather pessimistic, like in 2012, when she focused on his lagging performance and struggles to steer the Berkshire behemoth through a ZIRP world.

To appreciate how well she understands Buffett, we have to revisit the interviews she gave at the time of publication. They are, unfortunately, evidence that not everything on the internet is forever. Many of these gems are accessible only in the web’s archives.

The Art of Alchemy is a reader-supported publication. Become a paid subscriber to go deeper and read full posts.

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As many of you are gearing up for Berkshire’s annual meeting, I wanted to share a few more what ifs to chew on (What if? Warren E. Buffett, An Alternate History).

This weekend, Munger commented on Berkshire’s past bank investments: “some worked out very well for us. We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”

Berkshire once owned an entire bank, the Illinois National, but was forced to divest it to avoid becoming a bank holding company. This was at a time when Buffett and Munger were actively hunting for more bank acquisitions!

We bought all of a bank in 1969. We bought a bank in Rockford, Illinois. Charlie and I must have looked at a half a dozen banks at that in a two or three-year period. We trudged around and we found some very oddball banks that we liked. They were characterized by very little risk on the asset side and very cheap money on the deposit side. And even Charlie and I can understand that. And low prices, incidentally, too. And then they passed the Bank Holding Company Act in 1969, and they killed off our chances to do anything further in buying all of banks. — 2002 Annual Meeting

This resurfaced in 2011 during a discussion about currency risk. Believe it or not, Buffett and Munger nearly borrowed money in the Middle East to buy more banks.

Charlie and I, we were trying to buy that bank back in Chicago in the late 1960s, and this was a time of really tight money. And tight money was different then than tight money is today. I mean, tight money meant no money. The only place we could find some money was in Kuwait in dinars, wasn’t it?

Munger: Kuwaiti dinars. (Laughter)

Buffett: : And I thought to myself, and Charlie concurred, who the hell knew what they were going to say the value of the dinar was when we went to pay it back. It was not something over which we had a lot of control. So we decided not to borrow the money in dinars even though I kind of wish we’d bought the bank.

What if Buffett had gone all-in on banking instead of insurance?

Much like insurance, banking per se is not a great business, but individual banks can be. However, bank deposits are a much less flexible source of capital than insurance float. Could Buffett have become a kind of Andy Beal, an opportunistic banker oscillating between hibernation and investments in distressed assets (an excellent example of someone playing the industry’s capital cycle)? Buffett certainly has the patience and discipline. But it is difficult to imagine him giving up his flexibility.

He could have grown his banks through acquisitions like Jamie Dimon who just scooped up First Republic. This Dimon quote wouldn’t feel out of place at Berkshire’s annual meeting:

Don’t do anything stupid. And don’t waste money. Let everybody else waste money and do stupid things; then we’ll buy them.

Could Buffett have ended up building the nation’s largest bank through opportunistic deals and a portfolio of ‘oddball banks’? Perhaps. But I doubt he would have tap danced to work. Then again, what if the acquisition of National Indemnity had fallen through…

Thank you for reading and enjoy the annual meeting to all who are going or watching remotely.

Frederik

First part: Warren E. Buffett, An Alternate History.

• The GOAT of Float. What if the delicate deal for National Indemnity hadn’t happened?

• The Payout. What if Buffett had accepted Stanton’s offer and sold his Berkshire stock?

• The Business of Investing. What did Buffett really learn at Graham-Newman that was crucial to his success?

👉 The remainder of this post and the opportunity to reflect, share, and discuss with me in the comments are reserved for the community of subscribers who support my work. If you would like to join the conversation, consider subscribing.

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The Berkshire Hathaway annual meeting is around the corner (check out for some good questions, for comprehensive coverage of everything Berkshire, and if you attend, check out the emerging manager meeting hosted by my friend Tilman)

I’ve found past meetings to be a treasure trove of wisdom about investing, business, and life. You can find them all at CNBC, on Youtube, or listen to them as a podcast. Over the decades, Buffett and Munger have shared tons of laughs, stories, insights, and lessons.

I’ve listened to nearly all of them and have shared many excerpts on Twitter. Here are a few of my favorite quotes for the weekend. Might do a round 2 next week. Enjoy!

Warren and I know very successful businessmen who have not one true friend on earth. And that is no way to live a life. — Full quote

• “When you get to be my age, you will be successful if the people that you would hope to have love you, do love you.”

• “A public opinion poll will not get you rich on Wall Street.”

• “You can’t make a good deal with a bad person.”

• “We will never be dependent on the kindness of strangers.”

• “It's been our experience that envy is a bigger motivation than greed.”

• “Interest rates power everything in the economic universe.”

• “Anything times zero is zero. I don’t care how many wonderful figures are in between.”

• “I love focused management.”

• “People get fearful en masse. Confidence comes back one at a time.”

• “The stock market is the most obliging, money-making place in the world because you don’t have to do anything.”

• Advice to the young: “You will see plenty of inflation. The best protection is your own earning power. The second best is a wonderful business.”

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In 2022, Todd Combs asked Charlie Munger an interesting question:

If you hadn't met Warren, what do you think you would have been doing in life?

Munger answered he would have continued his law practice but would still have found his way into full-time investing. (Reginald Lewis went through the same transition from advisor to principal).

Asking ‘What if?’ can lead us down interesting paths. I find it particularly compelling for Buffett given his long and well-documented career involving countless decisions and characters. Remove just a few key elements and the arc of his life could have bent in a very different direction. Or, as Munger likes to say, all of life is just “one damn relatedness after another.”

With Berkshire’s annual meeting around the corner, I had some fun imagining how close Buffett came to living a different life. What else could have happened?

In The Undoing Project, Daniel Kahneman outlined biases of imagination, what he called the ‘rules of undoing’:

In undoing some event, the mind tended to remove whatever felt surprising or unexpected—which was different from saying that it was obeying the rules of probability. It was a tool for making sense of a world of infinite possibilities by reducing them.

The more items there were to undo in order to create some alternative reality, the less likely the mind was to undo them. People seemed less likely to undo someone being killed by a massive earthquake than they were to undo a person’s being killed by a bolt of lightning, because undoing the earthquake required them to undo all the earthquake had done.

Another, related, rule was that “an event becomes gradually less changeable as it recedes into the past.” With the passage of time, the consequences of any event accumulated, and left more to undo. And the more there is to undo, the less likely the mind is to even try. — The Undoing Project

I found this to be true when I kept gravitating to key turning points in his life. It’s much harder to imagine seemingly arbitrary alternate timelines. Buffett, who serves in the Korean War and returns with a different outlook on life, disinterested in markets; or with a mental health issue, unable to focus or stomach volatility as he had before. Buffett, who barely survives an accident, retires early, and devotes his time to family and charity. Buffett, whose marriage ends early and who leaves Omaha to escape the haunting memories.

It feels much easier to remove people or decisions from the story we know, than to add new elements which can open up an infinite number of new threads.

What if he had never met Charlie Munger? No acquisition See’s Candy for starters.

Charlie was the one that said, “For God’s sakes, Warren, write the check.”

And as a result perhaps no investment in Coca-Cola.

But Buffett also used to call Munger the “abominable no-man” for the latter one’s tendency to shoot down ideas. Would Buffett have made more mistakes without Munger? Probably. But which? This may have been just as important a factor in Berkshire’s success, but it doesn’t offer a narrative to attach to. Consistent with Kahneman’s rules, the mind strains against these open-ended scenarios. So just keep in mind that this little thought experiment is inevitably biased.

Take another missed connection: what if young Buffett showed up at GEICO’s offices only to find the doors locked? No revealing conversation with Lorimer Davidson. No in-depth understanding of GEICO. I think Buffett would have been determined enough to try again. But what if…

Or consider his first acquisition of an insurance operation, National Indemnity. The fact that it was purchased for Berkshire and not for his investment partnership has been framed as a kind of original sin. Buffett wrote about it in 2014:

Early in 1967, I had Berkshire pay $8.6 million to buy National Indemnity … a small but promising Omaha-based insurer. Why did I purchase NICO for Berkshire rather than for BPL [Buffett Partnership]? I’ve had 48 years to think about that question, and I’ve yet to come up with a good answer. I simply made a colossal mistake.

If BPL had been the purchaser, my partners and I would have owned 100% of a fine business, destined to form the base for building the company Berkshire has become. Moreover, our growth would not have been impeded for nearly two decades by the unproductive funds imprisoned in the textile operation. Finally, our subsequent acquisitions would have been owned in their entirety by my partners and me rather than being 39%-owned by the legacy shareholders of Berkshire, to whom we had no obligation.

Despite these facts staring me in the face, I opted to marry 100% of an excellent business (NICO) to a 61%-owned terrible business (Berkshire Hathaway), a decision that eventually diverted $100 billion or so from BPL partners to a collection of strangers.

In The Snowball, Munger commented that Buffett would have been a lot richer “if he hadn’t been carrying all those shareholders.” In the partnership he was paid a share of the profits compared to a modest salary at Berkshire. But, Munger reflected, Buffett “was never just rawly competitive with no ethics.”

Buffett “wanted to live life a certain way, and it gave him a public record and a public platform. And I would argue that Warren’s life has worked out better this way.”

I agree. But what if…

What if?

I have more ideas for a future post. If you have your own ideas on how Buffett and Munger’s lives could have played out differently, email me or ping me on Twitter.

• The Market Wizard. What if he’d never picked up Graham’s books?

• The Bostonian. What if he had gone to Harvard?

• The Family Office. What if the National Guard had allowed Buffett to move?

• The Successor. What if Buffett had remained in New York?

• The Dempster Dumpster. What if Buffett had never met Munger?

• Graham’s Final Lesson.

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Yesterday I found this amazing fireside chat between Charlie Munger and Todd Combs, recorded in April 2022 for the ‘Singleton Prize for CEO Excellence’. You can listen to the full conversation here or read a transcript.

Munger recounted one of his last conversations with legendary CEO Henry Singleton who tried to sell Teledyne to Berkshire — but he wanted stock. That was not going to fly with Buffett and Munger (“New subsidiaries would usually be bought with cash, not newly issued stock.”) Munger responded:

Henry, we're not going to issue stock or give away all our business that we know and like and understand to get in another business we don't know and don't understand. It can't happen.

Regardless, Munger is a huge fan of Singleton:

You could say that a life like Singleton's, what it demonstrates is the vast power in being remorselessly rational.

You can find my highlights from Munger’s conversation with Combs below.

Enjoy,

Frederik

What kind of a mind, in designing a dormitory, imitates a cruise ship? Well, that's what my mind does, and it's coolly logical. That's the kind of mind Singleton had, too. He was just coolly logical.

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• On the nature of capitalism (and a must-read book).

• On the chemistry of booms and busts.

• On inflation (“It won't be my problem, if I'm honest. It may be your problem.”)

• On investing: intelligence vs. temperament.

• You just need one or two great businesses (“The people who tend to get the best results are fanatics.”)

• Half the secret of life: obsession and a long attention span

• Charlie’s life changed at age 7, when he realized even smart people were not acting rationally all the time.

• “I almost worship reason.”

• Look for the Wooden system (“If you can find a mini-Singleton or a mini-Buffett, and play them when they have a hell of a run, that can be a very good way to invest.”)

• Look for people with the fiduciary gene.

• A little perspective on life.

• The secret behind the windowless dorms: Munger borrowed the idea from cruise ships.

• “There are people who will make you feel that you're born into the wrong species.”

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I recently re-read this excellent 48-page transcript of three lectures Warren Buffett gave at Notre Dame in 1991. As one would expect, the talks were wide-ranging and included lessons on investing, business, and life.

Buffett emphasized the importance of studying both success and failure among businesses and managers. He compared one of his favorite managers, Tom Murphy at Capital Cities, with CBS.

When my friend Tom Murphy took over Cap Cities … Cap Cities was selling for $5 million in the market, while CBS was selling for $500 million. Now, Cap Cities has a market value of about $7 billion and CBS has a market value of about $2 billion. They were both in the same business, broadcasting.

And you say “how can that happen?” And that’s what you ought to study in business school. You ought to study Tom Murphy at Cap Cities. And you also ought to study Bill Paley [who was the CEO] at CBS.

We really ought to have a library of value-destructive companies along with charts, financials, and analysis. A kind of inverse The Outsiders.

We have a saying around Berkshire that “all we ever want to know is where we’re going to die, so we’ll never go there.” It’s as important not to do what CBS did, and it is important to do what Cap Cities did. It’s really worth studying what two people in the same field did, and why one succeeded so much and one failed.

Buffett continued by comparing one of his favorite businesses, newspapers (which “raised prices and raised earnings every year without having to put more capital into the business”), with AT&T which had to reinvest capital at low rates of return.

The telephone company, with the patents, the MBAs, the stock options, and everything else, had one problem … And those figures show the plant investment in the telephone business.

The progress in earnings that the telephone company made was only achievable because they kept on shoving more money into the savings account and the truth was, under the conditions of the ‘70s, they were not getting paid commensurate with the amount of money that they had to shove into the pot.

He also discussed his investment in Disney whose content library he compared to “an oil well where all the oil seeps back in.” Wall Street disliked the earnings volatility that came with blockbuster movies like Mary Poppins (“they’re not going to have another Mary Poppins next year, so the earnings will be down”). Buffett on the other hand was not bothered by a near-term decline in earnings.

The whole company was selling for $80 million. Mary Poppins had just come out. Mary Poppins made about $30 million that year. Seven years later you’re going to show it to kids the same age. It’s like having an oil well where all the oil seeps back in.

… I went out to see Walt Disney. He told me the whole plan for the company – he couldn’t have been a nicer guy. It was a joke. If he’d privately gone to some huge venture capitalist, or some major American corporation, they would have bought in based on a valuation of $300 or $400 million dollars. [Wall Street] ignored it because it was so familiar. That happens periodically.

By 1991, Buffett was firmly focused on searching for wonderful businesses that would keep compounding and generate a lot of free cash flow. Explaining that “you need very few good ideas in your lifetime,” he shared his concept of the punch card with students:

I always tell the students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision they used up one of those punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five, or three, or seven. And you can get rich off five, or three, or seven. But what you can’t get rich doing is trying to get one every day.

You’re not going to get more than 20 investment ideas in a lifetime. I’m not going to get more than 20 great ideas. And the important thing is that you recognize them when you see them, and that you do something about them.

However, this idea contains a paradox. Moving to Omaha made it easier for Buffett to be disciplined and patient. At the same time, one needs to see enough pitches to develop pattern recognition and recognize the great ones in the first place.

One could argue that Buffett’s time in New York, or his time of active trading generally, was the prerequisite to using the punch card approach.

You have to be willing to have the discipline to say, “I’m not going to do something I don’t understand.” Why should I do something I don’t understand? That’s why I find it an advantage to be in Omaha instead of New York. I worked in New York for a few years, and people were coming up to me on the corner and whispering in my ear all the time. I was getting excited all the time. I was a wonderful customer for the brokers.

Buffett took it one step further and noted that liquidity could be a curse (“for most people” — not for him) because it tempted action.

The very fact that you have, in effect, an unlimited punch card, you can change your mind every hour or every minute in this business; that very availability, that huge liquidity which people prize so much is, for most people, a curse, because it tends to make them want to do more things than they can intelligently do.

Buffett also turned his emphasis on business quality to career advice:

If you have a choice between going to work for a wonderful business that is not capital intensive, and one that is capital intensive, I suggest that you look at the one that is not capital intensive. I took 25 years to figure that out, incidentally.

It seems that Buffett, were he to receive his MBA today, would choose to work for Google or Meta over Berkshire Hathaway. This idea can be combined with the punch card: 20 punches for investments may not seem like a lot. But the punch card for choosing employers is even more limited.

The transcript makes for great weekend reading. If you lack the time, I am sharing my favorite quotes with subscribers below.

Enjoy and thank you for reading,

Frederik

How can people who are bright, who work hard, who have their own money in the business, how can they get such a bad result? … If you had to pick one thing that did it more than anything else, it’s the mindless imitation of one’s peers.

Some of my favorite quotes:

Subscribers can find the full quotes about people, investing, and business below.

• Always invert. (“The big things are not what you do, they’re what you don’t do. ...”)

• Writing facilitates thinking. (“Some of the things I think I think, I find don’t make any sense when I start trying to write them down and explain them to people. …”)

About people:

• Study why smart people fail. (“Why smart people go astray is one of the most interesting things in business. I’ve seen all sorts of people with terrific IQs that end up flopping in Wall Street or business because they beat themselves...”)

• What kind of person would you bet on and why? (“Let’s say for $25,000 you could buy a 10% interest in the income of any one of your classmates that you wanted to. ... Think about why you picked him or her, and how much of that is transferable to you. And it usually won’t be anything you can’t attain yourself. …”)

• Life tends to snap you at your weakest link. (“It isn’t the strongest link you’re looking for. It isn’t even the average strength of the chain. It’s the weakest link that causes the problem.”)

About investing:

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Hello everyone,

When I wrote The Reading Obsession, it was about a good idea taken too far. Unfortunately, this easily happens in the age of social media, hijacked attention, and weaponized status games. Great ideas get warped, corrupted, and lose their potency.

Take an evergreen, Munger’s metaphor of the learning machine. It’s a great guiding principle for life and investing, which Yen Liow once called “the most extreme version of competitive learning.”

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy, does that help, particularly when you have a long run ahead of you. Develop into a lifelong self-learner through voracious reading. Cultivate curiosity and strive to become a little wiser every day.

Unfortunately, platforms like Twitter and LinkedIn condition us to become insight junkies. They serve quick bites that make us feel smarter but turn out to be empty calories. Book lists are a great example. They seem valuable (can’t afford to miss out on these sources of wisdom!) and trigger our curiosity without requiring any mental work. They make the creator look smart and match the audience’s flickering attention and restless desire to consume.

Take podcaster Lex Fridman’s hugely popular/controversial 2023 reading list. Imagine churning through one of these a week. Brave New World? Sure. But Dostoevsky? It makes a lot more sense once you see it as not a reading list but a tool of audience engagement.

I’m as guilty of engaging with this as anyone.

I used to relentlessly bookmark lists and articles in a futile quest to tackle the infinite conveyor belt of seemingly relevant content. My curiosity first went into overdrive, then degraded into a mindless and frantic motion. I’d put the learning machine into overdrive. But it didn’t make me any wiser.

In his book The Art of Playing Defense, Whitney Tilson, after invoking Munger’s learning machine, writes about how his reading “slowed to a trickle” amidst a barrage of emails and other commitments of a busy schedule. He found the solution in audiobooks. Rather than listen to his favorite music, he listens to books, podcasts, and YouTube at 2-3x speed.

In a typical day, I might go to the gym for 45 minutes and have a meeting or other event in Midtown, which is a 15-minute bike ride each way, so that’s one and a quarter hours every day, which is equal to nearly four hours of a book at regular speed—a third of a typical 12-hour audiobook. Thus, I’m cranking through two books every week, which has enriched my life in innumerable ways.

I’m not saying Tilson is wrong. I too listen to podcasts and audiobooks at accelerated speeds (I typically choose 1.5-1.8x depending on the speaker). But his comment reflects the idea that the quantity of input consumed is indicative of the learning that has taken place. It equates speed with progress. This strikes me as flawed and counterproductive.

It reminded me of the guitarist in This is Spinal Tap who proudly shows his amplifiers which, rather than stopping at ten, “go to 11.” They are not louder, it’s just their dial that goes one notch further. It’s a delusion born out of the blind quest for ‘more.’

Nigel: The numbers all go to eleven.

Marty: I see. And most amps go up to ten?

Nigel: Exactly.

Marty: Does that mean it's louder? Is it any louder?

Nigel: Well, it's one louder, isn't it? It's not ten.

…

Marty: Why don't you just make ten louder and make ten be the top number and make that a little louder?

Nigel: These go to eleven.

Spinal Tap: "These go to eleven”

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The skimpy book list of Charles T. Munger

Buffett and Munger regularly recommend books in Berkshire’s annual letter or, if prompted, at the annual meeting. You can find a list of Munger’s favorites in the appendix to Poor Charlie’s Almanack or on the ‘Munger bookshelf’ assembled by the prolific Kevin G. Munger is 99 years old and reads all the time. With that in mind, the list of books he mentioned seems surprisingly short. He might well crank through several books a week. But he won’t tell you about almost any of them. Why is that?

Presumably, most of what Munger and Buffett read is simply not notable. It’s not interesting or high quality enough to share. Much of it barely adds a small incremental piece of information to their existing mosaic.

But more importantly, they don’t read to signal. They don’t discuss their reading habits to grow a following and collect social media brownie points. They don’t read to tick off boxes on a list and feel accomplished. They read to learn. They read to change their minds, update their thinking, alter their behavior, and enhance their understanding of the world. They read to retain.

Asked about his reading habits in 2011, Buffett commented that he wasn’t “a fast reader.” He noted that Munger read at a higher speed and that this was an enormous advantage. If that was the case, why didn’t Buffett just learn to speed read?

There’s that old Woody Allen story about how he took the speed reading course, and he met somebody, he was telling him how wonderful it was, and the guy said, “Well, give me an example.”

And Woody Allen said, “Well,” he said. “I read ‘War and Peace’ last night in 20 minutes. It’s about Russia.”

That’s the problem I have when I try and read fast. I get all through reading the book, and I say, it’s about business.

Read it again. If Buffett churns through a book too quickly, nothing sticks.

Munger drove the point home:

I think speed is overestimated. I had a roommate at Caltech who had a very distinguished mind, and I could do problems faster than he could, but he never made a mistake, and I did.

So, I wouldn’t be too discouraged if you have to go a little slower. What the hell difference does it make?

Damn right. What the hell difference does it make if you go a little slower if it means you get it right?

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This man reads because he wants to, not because he feels anxious when he doesn’t.

The search for balance

I read a lot of books in parallel and that’s not everyone’s cup of tea. But sometimes it seems absolutely necessary. For example, when reading Rick Rubin’s new book The Creative Act, I can barely get through 2-3 of its short chapters before putting it down. I need some distance to process, to let it work on me. I expect to revisit much of the book when I’m done, perhaps multiple times.

Rubin recently explained his media consumption habits. He is one of the most prominent music producers who commented that he had “no technical ability”, that he was paid for his confidence in and ability to express how he felt. In other words, at least part of his success is based on his taste, his ability to find essence, resonance, and quality, and to bring this to the table when working with artists.

I’m a mass consumer of information and art all the time. So I’m always reading, listening, taking in stuff, but I’m not always taking in stuff. It’s what I enjoy. I’m not doing it like homework. I’m doing it because, the reason I am who I am is because that’s how I’ve always done it. That’s my default mechanism is I want to hear as much as I can. I want to understand more.

I don’t want to hear stuff I don’t want to hear, but I want to hear everything that I might want to hear, and I want to exhaust the list to make sure I’m not missing anything as best I can.

Rubin is not that different from Munger except that his learning machine is focused not on books and worldly or business wisdom but on art and culture, and primarily music.

Importantly, Rubin is not trying to ingest everything. He knows that’s impossible. For example, he mentions that he has barely had time to watch movies. But he is trying to take in everything that is relevant, everything he “might want to hear.” That’s the raw input in which he is trying to find the signal.

I’ve started to think of productive time as divided into three segments. There is a time for input, for output, and for putting it all down.

Input is the time for learning and feeding the mind. It’s time spent reading, exploring, listening, watching, asking questions, taking in whatever information is interesting or relevant. This creates the feedstock from which you draw for your work.

Output is when you actively transform what you’ve accumulated into, well, output. It’s time to write, analyze, code, design, record, coordinate, and manage.

But in between you need a filter. You need a time of disengagement during which your subconscious can sift through the pile. This could be sleep and naps during which a process of discernment and synthesis can run in the background. But it also applies to many other seemingly unimportant activities during which your mind is disengaged: walks and time spent in nature, family time, washing the dishes, playing games, listening to music. It’s the proverbial shower during which ideas suddenly bubble up.

Rubin writes that “distraction is one of the best tools available to the artist when used skillfully.”

When we reach an impasse at any point in the creative process, it can be helpful to step away from the project to create space and allow a solution to appear.

He advises to hold a problem “to be solved lightly in the back of our consciousness instead of the front of our mind.” This allows us to “remain present” with the problem while engaging in unrelated tasks such as “driving, walking, swimming, showering, washing dishes, performing any activity we accomplish on autopilot.”

When we feel pressure to be more productive, to get more done and move faster, this balance breaks down. We start to rush during the input phase and try to squeeze more into our brains. We start to grind during the output phase until we’re working with a depleted well.

And we cut down on what feels least productive: our time of disengagement. Why put things down when you can grind instead? After all, while we’re away from the desk, someone else is out there outworking us. We can open social media and see the evidence. The world has been turning while we were doing… nothing. So we run faster and upset the process that made our work outstanding.

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What does this mean for us?

Two recurring themes on David Senra’s Founders podcast are that great founders are obsessed with their work and that great athletes practice with an intimidating intensity. Senra, who basically reads biographies for a living, has adopted this mindset. He constantly revisits the books he’s already read. As he explained to Patrick O’Shaughnessy:

People are like, ‘It sounds like you have really good recall. You must have a really good memory.’ Absolutely not. The way I make the podcast, I read a book, make the highlight. That's the first time I read the highlight. The book is done. The night before I record ... I'll re-read all the highlights. That's the second time I've read the highlights. Now I record the podcast. That is the third time I've read the highlights. I edit the podcast. That is the fourth time I've heard the highlights. Then the fifth time is, I have to take pictures with the Readwise app and input them, one by one. It usually takes hours to do this. That's the fifth time.

I re-read my highlights every day, because I don't want to forget the lessons. There's a limited amount of stuff that you are actually going to remember.

Life is not a quest to read the most books and investing is not a race to out-read your competitor. Value is created by applying what you’ve learned through better judgment. This requires reading, repeated engagement to process and integrate, and even periods of disengagement to filter and surface what is important.

The next time you put down a book or article to jump to the next one, ask yourself first:

• Should I immediately move on or could I use some time without any input to let myself process? Does my ‘input’ box feel full?

• Did I fully grasp the key ideas? Am I leaving something on the table by moving on? Should I revisit this work in a week?

• Has my understanding of the outer and inner worlds changed? Did I experience a shift in perspective? Did this make me wiser? Did it enrich my mind?

• How should I change my behaviors and thinking based on what I learned? Is anything in my life going to change or did I just read this to tick a box?

Naval once commented that he’d rather read the best 100 books over and over again than open something new whose value was uncertain. That’s a step too far but it’s an interesting idea. What will make more of a difference: churning through another set of podcasts, books, and articles, or truly internalizing the lessons from one great work?

The danger is to confuse the learning machine with a reading machine. Don’t let the information FOMO of platforms like Twitter, LinkedIn, or even your podcast feed fool you. The goal is not to beat the scoreboard of weekly consumption. The goal is to integrate and apply what wisdom we find. The goal is to change and to act. And that is hard and takes time. The risk is that you turn the dial to 11 without realizing that nothing is changing.

That said, with the right balance, reading remains one of the best ways to invest your time.

Thank you for reading,

Frederik

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I used to think I knew exactly what to make of Ben Graham’s life. The first level lesson was to understand the key tenets of value investing (treat a stock as ownership in a business; view ‘Mr. Market’ as a servant not a master; and the concept of ‘margin of safety’).

The second level was to recognize that Graham’s approach eventually became outdated and that much of his success rested on his ownership in GEICO, not on picking deep value stocks.

Charlie Munger, who lacked Warren Buffett’s close personal relationship with Graham, never shied away from pointing out the flaws in Graham’s approach. During this year’s Daily Journal Shareholder Q&A (transcript) he explained:

A lot of Ben Graham’s rise in life was during a period when there was plenty of low hanging fruit among mediocre businesses that were way too cheap. He was relatively rare in doing his hunting in that garden, and so he made a pretty good living.

That low hanging fruit eventually went away as the aftermath of the Great Depression went away. And Graham actually made more than half of all the money he made in his life out of one stock. That stock was Geico, which was a great business. So if you actually look at the great man’s own life, you’ll see that what he taught wasn’t the way he got rich himself.

Quite true. Without their shares in GEICO, partners in Graham-Newman would have underperformed the market (this despite GEICO’s troubles in the ‘70s):

Though to be fair, Graham-Newman’s returns were much less volatile than the market. In his paper on Ben Graham, Kahn wrote that “the fund did 7.7 percent per year better than would have been expected considering its low beta (sensitivity to market fluctuations).”

Why didn’t Graham alter his message to the public? Why didn’t he abandon deep value and recommend that investors dedicate themselves to finding wonderful companies like GEICO?

Munger explained:

Graham was looking to teach what any intelligent layman could do. If that’s the limitation, there’ll be a lot you won’t go into, because it’s too hard to figure out.

Scarred by 1929, Graham recommended that investors pick baskets of deeply undervalued securities and let mean reversion work its magic. Not only did this approach offer downside protection, it was available to any retail investor with access to basic financial information. Hence Munger compared Graham to someone playing a game of “pin the donkey” while “wearing dark glasses.” In his investment work, Graham held back. He refused to make use of all his resources. Buffett noted:

Ben sort of thought it was cheating if we talked to the management. He felt that the person who read his book could not go out and meet the management.

When I worked for Graham-Newman, I don’t think I ever visited management.

Graham never played the investment game as competitively as he could have. But an ambitious investor like Buffett was unlikely to adapt this reluctant attitude. Munger noted that instead of wearing dark glasses, “Warren would use the biggest search light he could find.”

Buffett added that he “found it fun to go out and talk about their businesses, or to check with competitors, or suppliers, or customers.”

Ben didn’t think there was anything wrong with that. He just felt that if you had to do that, then his book was not the complete answer. And he didn’t really want to do anything that the reader of his book couldn’t do.

Graham eventually retired from money management. He spent his time in the South of France and California and pursued his various other interests, including translating Greek and Latin classic texts. From his biography:

[Graham] was an avid reader of the great authors, many in their original languages … Always deeply interested in literature, the theater, the opera, and the concert hall, retirement gave Graham the leisure to immerse himself in these pleasures.

Not that he gave up the financial world entirely, but he watched it from an increasingly disinterested and lofty perspective. He felt no desire to make more money than he had and was relatively casual about his personal finances.

Buffett wrote in Graham’s obituary:

I have never met anyone with a mind of similar scope. Virtually total recall, un-ending fascination with new knowledge and an ability to recast it in a form applicable to seemingly unrelated problems.

Impressive. But does this strike anyone as a person who would enjoy meeting with management teams? Who would consider it fun to walk factories and warehouses and interrogate customers and suppliers? Graham was an intellectual and academic first, an investor second. Did he really aspire to spend his life talking shop with business owners and managers? I don’t think so. Buffett explained how his passion for business far surpassed that of his teacher:

I enjoyed making money more than Ben. I mean, candidly, the game did not interest him more than a dozen other things may have interested him. With me, I just find it interesting. And therefore, I’ve spent a way higher percentage of my time thinking about investing and thinking about businesses.

Graham’s approach to the market reflected his opportunity set (ample bargains), his ambition to practice his teachings, and his personality. Buffett on the other hand fully dedicated himself to the effort of compounding an increasingly large amount of capital.

A few weeks ago, I a note by Fernando del Pino and . In his retirement, a journalist asked Graham why he’d quit investing.

Graham smiled warmly and said: 'Why should I try to get any richer?'

It reminded me of the anecdote in Kurt Vonnegut’s obituary of Joseph Heller:

Joseph Heller and I were at a party given by a billionaire on Shelter Island.

I said, "Joe, how does it make you feel to know that our host only yesterday may have made more money than your novel 'Catch-22' has earned in its entire history?"

And Joe said, "I've got something he can never have."

I said, "What on earth could that be, Joe?"

And Joe said, "The knowledge that I've got enough."

Graham had enough money. What he didn’t have enough of was time. So he refused to invest more of his most valuable asset in the pursuit of riches. For Graham, investing was one interest among many. For Buffett, compounding capital for himself and his shareholders became his life’s mission. Which is why, unlike Graham, he never retired. Did he miss Graham’s message? Did he never find the meaning of ‘enough’?

At least today, he no longer plays the game for its own sake. He is giving his wealth away and, like Graham, puts himself in service to the community by being a teacher. But even before deciding to return all of his wealth to charity, I don’t think he misunderstood his own pursuit of wealth. While Graham found meaning in his engagement with philosophy and languages, Buffett was happy to uncover the essence of companies and industries. It was just more interesting to him.

But the rest of us must remember this distinction. It’s possible to study someone like Buffett, yet retain Graham’s degree of emotional detachment. Investing and business can remain an occupation and not turn into life-consuming passions (though someone with Buffett’s intensity will over time become better at pinning the tail on that particular donkey).

As it relates to Ben Graham’s life, I find his generous spirit as a teacher worth remembering most. In Graham’s obituary, Buffett recalled him as a “teacher, employer and friend” with “an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit.” Graham, he wrote, strived every day to do “something foolish, something creative and something generous.” Those are words to live by. Just avoid doing the foolish thing in your portfolio.

Thank you for reading,

Frederik

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Hello everyone,

Warren Buffett’s track record at Berkshire has been so remarkable that even Buffett himself, if he were young again, couldn’t repeat it. At least that’s what Charlie Munger believes.

Ordinarily, a casualty insurance business is a producer of mediocre results, even when very well managed. Berkshire’s better outcome was so astoundingly large that I believe that Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth.

Munger mused about this topic in 2014, when, in celebration of Buffett’s fiftieth anniversary at Berkshire, he and Buffett published a lengthy 42-page annual letter.

That year’s annual report contained some memorabilia in the appendix (like the 1964 annual report and the two-page purchase contract for National Indemnity). Most importantly though, both Buffett and Munger separately reflected on the factors behind Berkshire’s success. Munger’s analysis of what he calls the “Berkshire system” in particular is a must-read (and hey, it’s still shorter than the Snowball…).

After 50 years, Buffett’s track record at Berkshire was remarkable:

• Per share book value compounded at 19.4% and per share earnings at 20.6%

• Per share price compounded at 21.6% (for a nice cumulative 1,826,163% return)

Another remarkable statistic Buffett shared was the realized losses in Berkshire’s investment portfolio.

In the past 50 years, we have only once realized an investment loss that at the time of sale cost us 2% of our net worth. Twice, we experienced 1% losses. All three of these losses occurred in the 1974-1975 period, when we sold stocks that were very cheap in order to buy others we believed to be even cheaper.

(Presumably this excludes any wholly-owned assets such as Dexter Shoe and the original textile mills.)

Berkshire’s growing capital base required a constant evolution to sustain any chance of compounding at high rates. Munger divided the company’s history into two eras: at first, Berkshire was primarily a vehicle for Buffett the stock picker. Over time, it developed structural and cultural advantages that provided an edge at scale.

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Hello everyone,

I’m grateful to Turtle Bay for digging up this old Financial World article. This was an excerpt from John Train’s original Money Masters book. So if you’ve read that one, you’ll be familiar with the themes.

I loved seeing Buffett in his office munching on “a box of fudge on a table, made by a company he owns” surrounded by his precious reading materials.

It’s interesting that Train already considered Buffett one of the country’s most prominent investors:

Though he has written no textbooks, among investment professionals there is no more respected voice.

Perhaps not surprising given his singular performance.

If you had put $10,000 in Buffett's original investing partnership at inception in 1956, you would have collected about $300,000 by the time he dissolved it at the end of 1969. He has never had a down year, even in the severe bear markets of 1957, 1962, 1966 and 1969. That achievement stands alone in modern portfolio management.

Only the speed of delivery has changed:

He speaks with a wry earnestness and gives an impression of complete intellectual honesty. His delivery is so casual, rapid, allusive and clever that unless you pay attention a lot could slip by.

The article hones in on Buffett’s departure from Graham’s deep value approach. Interestingly, Buffett seems to have been a little guarded about his time at Graham-Newman, perhaps not wanting to disparage his mentor?

Buffett went to New York and was hired to work for Graham-Newman Corp., where he spent two instructive years. Today he finds it hard to describe what he did there, but it must have included analyzing hundreds of companies to see if they met Graham's investment criteria.

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Key Highlights

Buffett’s edge: a deep interest and understanding of businesses.

Buffett understands the companies he owns stock in as businesses: living organisms, with hearts, lungs, bones, muscles, arteries and nervous systems. It is madness, he would say, for an investor buying stock to have anything else in mind other than the operating realities of the underlying business.

Buffett believes that those on Wall Street who talk of the stock trend or institutional sponsorship are ridiculous, combining laziness with ignorance, and compares them with astronomers, setting aside their telescopes to consult the astrology page.

Buffett ran his money in an unconventional way:

The portfolio of Buffett's partnership was often too concentrated in a few issues-some not readily marketable- for an investment counselor or fund manager, but not out of line with what might be done by a conservative professional with his own money.

Few businesses are going to compound long-term:

The essence of Warren Buffett's thinking is that the business world is divided into a tiny number of wonderful businesses well worth investing in at a price and a huge number of bad or mediocre businesses that are not attractive as long-term investments.

He thinks of a stock only as a fractional interest in a business and always begins by asking himself, "How much would I pay for all of this company? And on that basis, what will I pay for 1% of it?" There are very few companies he considers interesting enough to buy at all, and even those he will look at only when they are very unpopular.

Buffett’s focus in an inflationary world: capital-light “toll bridge” type businesses:

The few businesses that Buffett thinks are worth owning often fall into the category he calls "gross profits royalty" companies, perhaps better called "gross revenues royalty" companies: TV stations, institutional advertising agencies, iron-ore landholding companies, newspapers. Benefiting directly from the large capital investments of the companies they serve, they require little working capital to operate and, in fact, pour off cash to their owners.

The unfortunate capital-intensive producer-Chrysler, Monsanto or International Harvester-can't bring its wares to its customers' notice without paying tribute to the "royalty" holder: The Wall Street Journal, J. Walter Thompson, the local TV station, or all three.

Three years after the partnership was liquidated the market went into the 1973-74 collapse. Buffett (directly or indirectly through Berkshire Hathaway) was able to buy big pieces of some of his favorite "gross profits royalty" companies at giveaway prices: 8% of Ogilvy & Mather at 8, 16% of Interpublic, 11% of the Washington Post at 3, the Boston Globe, Capital Cities (an independent chain of television stations that also owns newspapers), Knight-Ridder Newspapers, Affiliated Publications, Media General and Pinkertons.

Qualities of successful investors:

A successful investor, he says, must have several qualities: He must be motivated by controlled greed, have patience, think independently, be flexible as to types of investments and accept it when he doesn't know something.

Buy a franchise when it’s on sale:

The best investments, he says, are those that have strong business franchises-such as American Express.

He brought off perhaps his most spectacular transaction in 1964 when American Express collapsed in the market during the Tino de Angelis salad oil scandal. Studying the company carefully, he determined that the danger from those losses would be limited, while its basic strengths, the credit card operation and the traveler's checks, would be unaffected. He bought heavily, and saw the stock quintuple in the next five years.

Great investments require independent thinking:

After skimping to buy some shares, he discussed GEICO with two brokers who specialized in insurance issues; both pooh-poohed it, since the company didn't look cheap in their tables of insurance stock values. What the tables didn't show was that the company was making 20% on its underwriting activities as against a normal margin of 5%. At that time the entire company was selling for less than $7 million in the market; later it went to a billion and became a Wall Street favorite. Some 25 years after Buffett made his initial investment in the company, mismanagement brought GEICO to the edge of bankruptcy. During that crisis, Buffett bought 15% of the company and thinks that it again has a bright future.

Patience is crucial yet difficult to achieve for the professional investor. Notice the silver futures.

The enormous advantage the independent investor has, Buffett says, is that he can stand at the plate and wait forever for the perfect pitch.

He points out that if, for instance, he had reported to his partners that 40% of their money was in American Express, or that he was heavily long silver futures, his partners would have been concerned, asked questions, mailed him things to read. At best, he would have wasted a lot of time; at worst, he would have been influenced by their reactions. He says it would have been like a surgeon carrying on a running conversation with the patient during a major operation.

Buffett avoided industrial blue chips, here called the ‘smokestacks’, whose reinvestment needs left them without free cash flow for shareholders.

For me, Buffett's most important single message is his cry of alarm and recurring admonition to steer clear of the standard big American heavy industries requiring continuous massive investment. Most of these companies are in trouble.

The cause is competition, over-regulation, rising labor costs and the like. The symptom is that just to stay in business many of these big industries need more money than they can retain out of reported earnings after paying reasonable dividends. To stay in the same place they require endless infusions of net new cash…

Buffett regards investing in the "smokestack" companies, the heavy industries whose obsolescence is often more rapid than their allowable depreciation, as, in essence, participating in a series of constant mandatory rights offerings, where you have to put up more money to maintain your percentage interest. Instead of distributing their earnings to the shareholders in dividends, these companies have to retain them to build more capacity, either to replace rapidly-aging facilities or to meet competition. This increases output, which further lowers profit margins, so that the companies are even less able to make real money in their basic businesses.

Look for shareholder-focused management:

Buffett once met a leading executive of a capital-intensive business giant at a time when the company was selling in the market for one-quarter of its replacement value. Buffett asked the executive, "Why don't you buy back your own stock? If you like to buy new facilities at 100¢ on the dollar, why not buy the ones you know best and were responsible for creating at 25¢ on the dollar?"

Executive: "We should."

Buffett: "Well?"

Executive: "That's not what we're here to do."

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Warren Buffett: The investor's investor

His message today: Stay clear of heavy industries.

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Hello everyone,

It’s easy to look at Buffett today, at 92 years old and heading the world’s largest conglomerate, and see him as an abstraction of lessons about stock picking and business. It’s easy to forget this man was once young and hungry for success. Rummage around his biographies and it’s clear that he had tremendous energy.

And if we look past the specific actions, we find timeless ingredients for success that have lost none of their potency in the internet age.

Young Buffett hustled to build his initial capital stake.

Buffett was working, and mostly for himself, from an early age. That kid hustled. Nonstop. He sold packs of gum and bottles of Coca-Cola door to door. He delivered newspapers, traded in refurbished golf balls, and shipped sets of collectible stamps to buyers out of state. He struck partnerships with barber shops to operate pinball machines at their locations.

He was creative and always looked for ways to improve what he was doing. From The Snowball:

“He also sold calendars to his newspaper customers, and he developed another sideline too. He asked all his customers for their old magazines as scrap paper for the war effort. Then he would check the labels on the magazines to figure out when the subscriptions were expiring, using a code book he had gotten from Moore-Cottrell, the publishing powerhouse that had hired him as an agent to sell magazines. He made a card file of subscribers, and before their subscriptions expired, Warren would be knocking at their door, selling them a new magazine.”

Today’s side hustles will be different. But let’s just for a moment appreciate this relentless commercial energy.

Buffett ceaselessly worked to accumulate his initial capital stake.

“By July, he had sold 220 dozen golf balls and had reaped $1,200 from them. From all his ventures combined, he had saved $9,800. That trifling grubstake would be the source of every dollar that Buffett would earn. He had tracked every penny—the Cities Service stock, the paper route, the golf-ball sales, the pinball—in squiggly, uneven handwriting.” Making of an American Capitalist

Young Buffett invested.

A book called One Thousand Ways to Make $1,000 introduced Buffett to the idea of compounding in the form of coin-operated weighing machines.

“The weighing machine was easy to understand. I’d buy a weighing machine and use the profits to buy more weighing machines. Pretty soon I’d have twenty weighing machines, and everybody would weigh themselves fifty times a day. I thought—that’s where the money is. The compounding of it—what could be better than that?” The Snowball

Well, to start compounding capital you first need some capital.

“The hard part for most people is the first $100,000. If you have a standing start at zero, getting together $100,000 is a long struggle for most people.” Charlie Munger

Buffett worked for his money and quickly started experimenting with having his money work for him (he bought his first stock at 11, farmland at 15 etc.). Once he realized he didn’t have to break his back but could use his mind, his curiosity went into overdrive.

Young Buffett followed his curiosity and turned into a learning machine.

I previously poked fun at value investors’ obsession with Buffett’s reading habits. But it’s of course true that Buffett was obsessed with learning. And that meant a lot of reading. Buffett devoured everything he could find on the subjects that interested him.

“In terms of accounting and finance, what’s the best way to teach yourself? I was interested in it from a young age. My approach was to go to the Omaha Public Library and take out every book there was on the subject. And I learned a lot. I learned a lot that wasn’t true, too.

I did it by just a tremendous amount of reading. It was easy for me because it was like going to baseball games or something of the sort.” 1999 Annual Meeting

“When I started, I went through the pages of the manuals page by page. I probably went through 20,000 pages in the Moody’s industrial, transportation, banks and finance manuals. And I did it twice. And I actually, you know, looked at every business. I didn’t look very hard at some.” 2001 Annual Meeting

This included some pretty niche stuff.

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When I was a teenager, Peter Lynch’s book One Up On Wall Street triggered my interest in investing. Lynch promoted the idea that individual investors can succeed in markets by being observant of their personal surroundings. They can pick up on new trends and great companies by paying attention to what people buy, by observing new stores appear in the mall, or through firsthand knowledge from their work. He made investing sound like a fun scavenger hunt. The next famous investor I came across was Warren Buffett who displayed a similar excitement about his work, famously saying that he tap danced to his office.

Robert Hagstrom and other authors have outlined Buffett’s investing methods and principles in countless books. In The Warren Buffett Portfolio, Hagstrom coined Buffett’s style of stock picking “focus investing,” as in creating a focused portfolio with a small number of high conviction positions:

“The essence of focus investing can be stated quite simply: Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks, and have the fortitude to hold steady during any short-term market gyrations.”

This was music to my teenage ears. The billionaire stock picker’s method didn’t sound complicated at all. I could do this, too!

Today I read this quote with some consternation. All you have to do is find a small number of stocks that will outperform the market? Then hold them through the inevitable volatility? In other words: remain convinced that you’re right, and actually be right, when the stocks inevitably get cut in half.

Did Hagstrom realize the gravity of that statement?

I was immediately reminded of the midwit meme.

18-year-old me, on the left-hand side: “Yes, just find some great stocks, hold, and beat the market. Don’t overthink it.”

30+-year-old me, squarely in the middle of the bell curve: “Have you lost your mind? Do you have any idea how hard it is to beat the market? The greatest investors are obsessed with the game. They’re human aliens and the most competitive people you will meet. And you want to compete with them? Have you read Bessembinder’s research on how few stocks outperform? Did you know that the market is a complex adaptive system…”

And today? Well, I have returned to appreciating the wisdom inherent in the message’s simplicity. Berkshire itself is of course an example of holding a great company for a long time and letting the magic of compounding do the work.

In 1998, Forbes wrote about the Berkshire Bunch, people who had bet big on Buffett. One of them, Stewart Horejsi reinvested capital from his family business into Berkshire. He basically modeled Buffett who allocated capital away from Berkshire’s dying textile business into more promising fields like insurance. Michael Mauboussin did something similar by betting on Amazon, and holding it through the dotcom bust, because he connected with Bezos’s team over a shared admiration of Buffett and Munger.

“The great personal fortunes in this country weren’t built on a portfolio of fifty companies. They were built by someone who identified one wonderful business.” Warren Buffett

That said, we’re obviously looking at outliers and survivorship bias. Most investors are better served with what Buffett called “insurance against ignorance”: diversification. Low cost ETFs offering the stock market return are a better option for them. But despite this established wisdom, hands-on involvement in markets seems to be making a comeback:

“Emerging customers share a couple of key characteristics. They tend to be more self-directed and self-educated. Roughly 70% of households with a net worth of $500,000 and headed by a person under age 45 had an investing style that was strongly or mostly self-directed in 2019, up from 57% in 2010, according to research firm Aite-Novarica.” In a New World: Time for Wealth Management Firms to Shift Course

I don’t think this is necessarily a bad thing. Aside from the desire for financial security or wealth, there are multiple reasons, good and bad, that lead people to pick their own investments.

Bad reasons to pick stocks

The gambling instinct. This one can seem paradoxical. Keynes wrote that it was a necessary ingredient for great investors:

“[Investing is] intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll.”

But what may be useful to the professional in measured doses can be deadly for the amateur. It’s so dangerous because it lends itself to self-deception. We all know that in Vegas the house always wins. But in financial markets you can gamble and chase dopamine hits for a long time while telling yourself that you’re really investing.

Another bad reason is the excitement of being part of the great game. George Goodman wrote about this mindset in The Money Game:

“They want to be a part of what’s going on. If you gave them a choice between making money, guaranteed, or staying in the game, every last one of them would pick staying in the game.

It doesn’t make sense, or the kind of sense you expect, but it makes a nutty kind of sense if you see it for the way it is.”

Yes, there are people who can make money trading global macro. But many traders delude themselves. They spend their days tracking the news (the new smoking) and staring at charts. They feel the rush of being part of great events unfolding. You can sometimes hear the satisfaction in people’s voices when they talk about market history, especially bubbles and financial crises. “Yep,” they proclaim, “I got that one right.” What other game allows us to place bets on world history? To become would-be Michael Burries who sniff out the next world-changing cataclysm? What other game allows us the satisfaction of feeling smarter than everyone else and getting paid for it? (Entrepreneurship is one example; as Peter Thiel: every great company is built around a secret.)

Buffett reminds us that investors “should remember that excitement and expenses are their enemies.” But what fun is that?

Good reasons to pick stocks

Hear me out: there may be rational reasons to pick stocks even if you underperform the market somewhat over time. How about:

• Community and friendship; and

• Learning.

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What do you see when you look at a picture of Berkshire Hathaway’s annual meeting?

Ok, I admit that it looks a bit cult-ish. It was an uncomfortable number of people when I went in 2009. But without a doubt, it is a tremendous community. People go to Omaha not just to listen to Warren and Charlie, maybe not even primarily. They go to see their friends and connect with strangers over a shared interest.

“Maybe the real returns were the friends we made along the way.”

I recently listened to a discussion of male loneliness on the Modern Wisdom podcast. The conversation introduced me to the idea that men are more likely to bond over shared activities as opposed to meeting just to converse. They prefer to be “side by side” rather than facing each other. There’s even a non-profit running so-called “Men’s Sheds” where men can hang out, build stuff, and get to talk as a byproduct.

Noah Smith posted a terrific thread about “how to have a friend group in your 30s” which is really about the difficulty of maintaining friend groups as you age and family and work take up most of your schedule. He touched on a similar concept, though not in a gendered way:

Well, not everyone enjoys working with their hands in sheds. Some people like puzzles and games. And investing can be exactly that. It doesn’t have to be an old-timey hobby, as Matt Levine called it. Quite the contrary, investing offers a vibrant global community with numerous tribes across a variety of social media platforms. One has to be a little careful as each community comes with its own principles and values, some of which may be harmful to your financial (or mental) health. Just complete the sentence in your head: as an investor, I am a…

• Value investor

• AMC ape

• Compounder bro

• Bitcoin maxi

• Boglehead

• Macro trader

It’s worth revisiting the ideas and assumptions you’ve picked up as part of your investing identity. Do they serve you well?

Nevertheless, the value of community may be under-appreciated. If we frame investing as a daily puzzle or multiplayer game to explore with friends from all over the world, it could have substantial benefits far beyond your portfolio (better relationships, better health and a longer life?).

In the land of learning machines

“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines.” Charlie Munger

One of my favorite trait across great investors is their boundless curiosity. Their mind is running all the time, looking to discover new information, reformat old concepts, and improve their understanding of the world. They are constantly looking to update their mental software. A question worth asking yourself as an investor is: are you learning?

I still remember Liberty talking about this to Jim O’Shaughnessy.

“I'm not trying to optimize for the best returns. I am trying to optimize for happiness. … If I figure that the best place to invest right now is mining companies but I'm not interested in thinking about those companies all day long and reading about them all day long, I'm not going to go invest there.

I'm trying to use investment as a kind of lifestyle design where I'm like, "Okay. I want to make good returns. I want to make this practical." I spend enough time on it that I want to beat the market, but I also want to spend my days thinking and reading about stuff that's interesting to me. I was very lucky that the kind of stuff that interests me happens to be very good businesses like software, and infrastructure for digital stuff, and payments, and aerospace. All these kinds of businesses are interesting to me, and they also happen to be very good businesses.”

In his book Supermoney, a sequel to The Money Game, Goodman recounted his visit to Omaha which sparked a legendary TV interview with Buffett.

“After a while, around Warren, you begin to get a feel for business, as opposed to stocks moving.

‘Whether the New York Stock Exchange is open or not has nothing to do with whether The Washington Post is getting more valuable. The New York Stock Exchange is closed on weekends, and I don’t break out in hives. When I look at a company, the last thing I look at is the price. You don’t ask what your house is worth three times a day, do you? Every stock is a business. You have to ask, what is its value as a business?’

We are driving down a street in Omaha; and we pass a large furniture store. I have to use letters in the story because I can’t remember the numbers.

“See that store?” Warren says. “That’s a really good business. It has a square feet of floor space, does an annual volume of b, has an inventory of only c, and turns over its capital at d.” “Why don’t you buy it?” I said. “It’s privately held,” Warren said. “Oh,” I said. “I might buy it anyway,” Warren said. “Someday.”

Berkshire acquired the Nebraska Furniture Mart more than a decade later in 1983.

We can look at this anecdote in terms of how Buffett invests (“Investment is most intelligent when it is most businesslike.”) or we can appreciate that Buffett followed his curiosity. He spent his days on what interested him. In his case it happened to be business and securities. All of Omaha, all of the American economy, really, turned into an opportunity for him to learn. Long before there was a deal to be done, Buffett was paying attention to the Furniture Mart. It was just innately interesting to him.

I don’t walk around thinking about the economics of the businesses around me. But if you do, if investing and business are inherently interesting to you, then the time spent learning is time well spent.

As Kurt Vonnegut told a student about writing poetry: “Practice... no matter how well or badly, not to get money and fame, but to experience becoming, to find out what's inside you.” Vonnegut’s advice was to write a poem and “make it as good as you possibly can,” then “tear it up into teeny-weeny pieces, and discard them widely.”

Why?

“You will find that you have already been gloriously rewarded for your poem. You have experienced becoming.”

Yes, Buffett wanted to get rich. But he did it in a way that was interesting and rewarding to him. He enjoyed the process. It was his way of becoming the best version of himself. At the end of his life he is tearing up his fortune into teeny-weeny pieces. And yet he’s still running Berkshire. He’s still investing. He simply enjoys doing the thing.

If on the other hand an investor lacks that deep intrinsic sense of motivation and curiosity, I doubt their learning machine will ever have the same drive.

My own journey with Buffett started with youthful enthusiasm and admiration before turning into frustration (“look at what he does compared to what he says”). This was followed by rejection after attending the annual meeting (“oh my god, this is a cult!”). I’ve now closed the circle and appreciate the many layers to his life and work. I am finally happy to embrace Buffett and Munger as teachers but not idols to be worshiped.

I’ve started re-reading all the shareholder letters and listening to the annual meetings in podcast format. I’m currently sharing my favorite excerpts on Twitter but will start to collect and write them up here as well.

Buffett said he wanted to be remembered as a teacher. I believe that due to the nature of his success and wealth he typically attracts those as students who want to succeed in investing and business. People, to call a spade a spade, who want to get rich. That’s a shame. Because even though he has talked about how he picks stocks countless times, it’s really not the information you’re looking for.

His principles are deceptively simple. Yet his investment success is arguably the most difficult aspect of his life to emulate. The image of Uncle Warren buying wonderful businesses to hold them forever obscures an astonishing depth. Remove the nuance and you’re left with a platitude that may still hold value but is insufficient to grasp the many drivers of his success. It hides a lifetime obsession with learning about business and with studying human nature. It masks a relentless drive to succeed and a rarely seen inner intensity.

However, as long as we see ourselves as perpetual students, as long as we use an interest in business and investing as an outlet for learning and building community, I believe it is a worthwhile effort. Even if one does not beat the market. And hey, if you happen to come across a wonderful business or an investor or founder of Buffett’s caliber, at least you know what to do. Make a sizable bet, let the magic of compounding and patience do their work, continue to learn, and have a great time with your friends.

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Hello everyone,

Yesterday, for the first time in two years, Berkshire shareholders returned to their annual pilgrimage to Omaha. I’ve only attended once in 2009. Something about joining tens of thousands of others triggers a contrarian instinct in me (though arguably the alpha of attending is in the connections and serendipity emerging from the meetings leading up to the main event).

Instead, I re-watched one of my favorite Buffett interviews. It is only seven minutes long and was conducted in 1985 by George Goodman, who helped start Institutional Investor magazine and wrote one of my favorite books about Wall Street, The Money Game, under the pseudonym Adam Smith.

In his book Supermoney Goodman wrote about his first encounters with Ben Graham and Buffett. This was in 1970, shortly after the publication of The Money Game. Goodman received a letter from Ben Graham’s summer home in France.

While Goodman had much respect for Graham...

There is only one Dean of our profession, if security analysis can be said to be a profession. The reason that Benjamin Graham is undisputed Dean is that before him there was no profession and after him they began to call it that.

… he also pointed out that Graham’s value investing philosophy seemed to belong to a bygone era of ample bargains. Among Goodman’s social circle of professional investors, Graham’s ideas were “trading at a discount.”

To Graham, a stock had Intrinsic Value. In the Dark Ages of the Thirties, it was not so hard to find Intrinsic Value.

Benj. Graham was studied with respect by generations of analysts, but not with affection. What was one to do all day, if the market was to be ignored? That would not get you rich. How could anybody ignore IBM? How smart could somebody be if he had missed IBM—not because he didn’t know about it, but because he had considered it, measured it and turned it down?

Graham was well aware that he was himself selling at a discount. Through a number of editions of Security Analysis, the final sentence to the “Summary of the Valuation of Common Stocks” warned that “our judgment on these matters is not necessarily shared by the majority of experienced investors or practicing security analysts.”

Graham asked Goodman to work on a new edition of The Intelligent Investor:

“There are really only two people I would want to work on this,” Graham said. “You’re one, and the other is Warren Buffett.”

“Who’s Warren Buffett?” I asked.

By that time, Buffett had just dissolved his partnership and Berkshire Hathaway stock was still traded on the pink sheets.

While Goodman was well connected among money managers in New York and Boston, Buffett was an unknown quantity to him.

All through the sixties, Warren stayed away from the stocks that dominated the financial headlines and provided the excitement in the board rooms. The partners bought an old textile company called Berkshire Hathaway because its net working capital was $19 a share and their cost was about $14; they ended up owning most of the company, and Warren put new management in.

Buffett had eschewed the growth stock craze of the 1960s, a central theme in The Money Game.

What was remarkable was that Buffett was easily the outstanding money manager of the generation, and what was more remarkable was that he did it with the philosophy of another generation.

Just pure Benj. Graham, applied with absolute consistency—quiet, simple stocks, easy to understand, with a lot of time left over for the kids, for handball, for listening to the tall corn grow.

Goodman was wrong about there being much time left for Buffett’s children. But he was rightly captivated by Buffett’s success:

His partnership began in 1956, with $105,000, largely supplied by uncles, aunts and other assorted relatives. It ended in 1969 with $105,000,000, and a compounded growth rate of 31 percent. Ten thousand dollars invested in the partnership in 1957 would have grown to $260,000.

He did not have a committee to deal with, and he did not have a boss. He kept himself out of the public eye, though for most of his career the public eye would not have been on him anyway. If he bought so much of a company that he controlled it, he was willing to step into the business. All of these factors freed him from more typical restraints.

Buffett also shut down his investment partnership at the top of the market. This was incredible to Goodman because it went against the instinct to maximize fee income.

He quoted from Buffett’s letters during the late stages of the ‘68 bull market:

“I am out of step with present conditions. When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on . . .

On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean forgoing large, and apparently easy, profits to embrace an approach which I don’t fully understand, have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital.”

“Philosophically, I am in the geriatric ward,” he wrote.

“We live in an investment world populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.”

After several lunches, Goodman visited Buffett in Omaha where they “went over the lessons of the Master to see what was still relevant, like two scholars over the Scripture.”

Goodman was fascinated by the fact that a money manager could succeed this far from Wall Street. He kept asking Buffett about his decision to live in Omaha. I highlighted a quote from this visit in The Reading Obsession:

“I can be anywhere in three hours,” Warren says, “New York or Los Angeles. Maybe a little longer, since they took the nonstop off. I get all the excitement I want on those visits.

I probably have more friends in New York and California than here, but this is a good place to bring up children and a good place to live. You can think here. You can think better about the market; you don’t hear so many stories, and you can just sit and look at the stock on the desk in front of you. You can think about a lot of things.”

During their tour, Buffett introduced Goodman to his philosophy. While Goodman was used to aggressive managers trading stocks, often at an aggressive pace, Buffett emphasized valuation and business analysis. And patience.

After a while, around Warren, you begin to get a feel for business, as opposed to stocks moving.

“Whether the New York Stock Exchange is open or not has nothing to do with whether The Washington Post is getting more valuable. The New York Stock Exchange is closed on weekends, and I don’t break out in hives. When I look at a company, the last thing I look at is the price. You don’t ask what your house is worth three times a day, do you? Every stock is a business. You have to ask, what is its value as a business?”

We are driving down a street in Omaha; and we pass a large furniture store. I have to use letters in the story because I can’t remember the numbers.

“See that store?” Warren says. “That’s a really good business. It has a square feet of floor space, does an annual volume of b, has an inventory of only c, and turns over its capital at d.” “Why don’t you buy it?” I said. “It’s privately held,” Warren said.

“Oh,” I said. “I might buy it anyway,” Warren said. “Someday.”

Berkshire acquired the Nebraska Furniture Mart more than a decade later in 1983.

Despite his track record, Buffett was still not widely followed among professional managers (though he was well known among fellow disciples of Graham). When he started buying shares in the undervalued Washington Post, Goodman paid attention. But the idea did not resonate among Goodman’s money manager friends.

I tried the Washington Post idea on my Wall Street friends. They couldn’t see it. “Big city newspapers are dead,” they said. “The trucks can’t get through the streets. Labor problems are terrible. People get their news from television.” And anyway, it wasn’t the next Xerox.

In the end, neither Goodman nor Buffett worked on a new edition of The Intelligent Investor. “We wrote a note to Ben,” Goodman wrote, “saying his book didn’t really need any improvements.”

But Goodman managed to interview Buffett more than a decade later, in 1985, for his show “Adam Smith’s Money World.”

“I don’t think Warren has ever been on television until this interview, and he is certainly never courted publicity, but recently he got a lot of it when he emerged as the key figure in the takeover of ABC by Capital Cities.”

(Goodman was wrong - Buffett had appeared on TV at least once before, in 1962.)

His lessons were short, simple, and timeless.

• Remember the first rule: don’t lose money

• It’s all about temperament

• Think for yourself

• Buy businesses, not stocks

• Reduce the noise

• Choose the game that’s right for you

• Patience and discipline: simple, not easy

• Data can be a distraction

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One reason I enjoy Goodman’s interview and his chapter in Supermoney (which you can find here as “Somebody Must Have Done Something Right: The Lessons of the Master”) is that he managed to extract just a handful of quotes that still capture Buffett’s essence. They don’t tell us very much about Buffett’s methods or how he became so successful. But they illustrate clearly how different he was from the portfolio managers that Goodman encountered in his daily work.

And they’re brief. Buffett has been a teacher for decades through his letters, annual meetings, and interviews. The accumulated scripture can be overwhelming. If you’re a junkie, you’ll enjoy this 5,106 page document compiled by @Austinvalue with letters, transcripts, writings, and interviews. I applaud and appreciate the effort of putting it together. I enjoy having it. But I doubt I will ever read it cover to cover.

Go ahead: Download the document. Feel good about having Buffett’s cumulative wisdom on your hard drive. Then watch him for 7 minutes in his prime, be reminded of just one good idea, and go about your day a little wiser.

I’ll share the key quotes below.

Remember the first rule

Warren Buffett: The first rule of an investment is: Don’t lose. And the second rule of investment is: Don’t forget the first rule. And that’s all the rules there are. I mean, if you buy things for far below what they’re worth, and you buy a group of them, you basically don’t lose money.

It’s all about temperament

Goodman: Warren, what do you consider the most important quality for an investment manager?

Buffett: It’s the temperamental quality, not an intellectual quality. You don’t need tons of IQ in this business. I mean, you have to have enough IQ to get from here to downtown Omaha, but you do not have to be able to play three-dimensional chess or be in the top leagues in terms of bridge playing or something of the sort. You need a stable personality. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd because this is not a business where you take polls, it’s a business where you think.

Think for yourself

And Ben Graham would say that you’re not right or wrong because a thousand people agree with you. And you’re not right or wrong because a thousand people disagree with you. You’re right because your facts and your reasoning are right.

Buy businesses, not stocks

Goodman: Warren, what do you do that’s different than ninety percent of the money managers who are in the market?

Buffett: Certainly most of the professional investors focus on what the stock is likely to do in the next year or two and they have all kinds of arcane methods of approaching that.

They do not really think of themselves as owning a piece of a business. The real test of whether you’re investing from a value standpoint or not, is whether you care whether the stock market is open tomorrow. If you’re making a good investment in a security, it shouldn’t bother if they closed down the stock market for five years.

All the ticker tells me is the price. And I can look at the price occasionally to see whether the price is outlandishly cheap or outlandishly high but prices don’t tell me anything about a business.

Business figures themselves tell me something about a business but the price of a stock doesn’t tell me anything about a business. I would rather value a stock or a business first, and not even know the price, so that I’m not influenced by the price in establishing my valuation and then look at the price later to see whether it’s way out of line with what my value is.

Reduce the noise

(But remember that Buffett balanced this with plenty of travel.)

Goodman: Don’t you find Omaha a little bit off the beaten track for the investment world?

Buffett: Well, believe it or not, we get mail here (😭) and we get periodicals and we get all the facts needed to make decisions. And, unlike Wall Street, you’ll notice we don’t have fifty people coming up and whispering in our ear that we should be doing this or that this afternoon.

Goodman: You appreciate the lack of stimulus here?

Buffett: I like the lack of stimulation. We get facts, not stimulation here.

Goodman: How can you stay away from Wall Street?

Buffett: Well, if I were on Wall Street, I’d probably be a lot poorer. You get overstimulated on Wall Street. And you hear lots of things. And you may shorten your focus and a short focus is not conducive to long profits.

And here I can just focus on what businesses are worth. And I don’t need to be in Washington to figure out what the Washington Post newspaper is worth. And I don’t need to be in New York to figure out what some other company is worth. It’s simple… It’s an intellectual process and the less static there is in an intellectual process, really, the better off you are.

Choose the game that’s right for you

In Buffett’s case, much of the game was about buying below intrinsic value. Which requires an ability to come up with a good estimate of value.

Goodman: What is the intellectual process?

Buffett: The intellectual process is defining your level…defining your area of competence in valuing businesses. And then, within that area of competence, finding whatever sells at the cheapest price in relation to value. And there are all kinds of things I’m not competent to value. There are a few that I am confident to value.

Goodman: Have you ever bought a technology company?

Buffett: No, I really haven’t.

Goodman: In thirty years of investing, not one?

Buffett: I haven’t understood any of ‘em.

Goodman: So you haven’t ever owned, for example, IBM?

Buffett: Never owned IBM. Marvelous company. I mean, a sensational company. But I haven’t owned IBM.

Goodman: And so, here is this technological revolution going on and you’re not gonna be a participant.

Buffett: Gone right past me.

Goodman: Is that alright with you?

Buffett: It’s okay with me. I don’t have to make money in every game. I mean, I don’t know what cocoa beans are gonna do. There are all kinds of things I don’t know about, and that may be too bad, but you know, why should I know all about it — haven’t worked that hard on it.

Patience and discipline: simple, not easy

Buffett: In securities business, you literally every day have thousands of the major American corporations offered you at a price that changes daily and you don’t have to make any decision. Nothing is forced upon you.

There are no called strikes in the business. The pitcher just stands there and throws balls at you. And if you’re playing real baseball, and it’s between the knees and the shoulders, you either swing or you got a strike called on you. If you get too many called on you, you’re out.

In the securities business, you sit there and they throw U.S. Steel at 25 and they throw General Motors at 16. You don’t have to swing at any of them. They may be wonderful pitches to swing at but if you don’t know enough, you don’t have to swing. And you can sit there and watch thousands of pitches and finally get one right there where you wanted something that you understand and then you swing.

Goodman: So you might not swing for six months?

Buffett: Might not swing for two years.

Goodman: Isn’t that boring?

Buffett: It will bore most people and certainly boredom is a problem with most professional money managers. If they sit out an inning or two, not only do they get somewhat antsy, but their clients start yelling, “Swing you bum,” from the stands. And that’s very tough for people to do.

Data can be a distraction

Goodman: Warren, your approach seems so simple, why doesn’t everybody do it?

Buffett: Well I think partly because it is so simple. The academics, for example, focus on all kinds of variables partly because… The data is there. So they focus on whether if you buy stocks on Tuesday and sell them on Friday, you’re better off. Or if you buy em in an election year and sell em in other years, you’re better off. Or if you buy small companies. There are all these variables because the data are there. And they learn how to manipulate data.

And as a friend of mine says, to a man with a hammer everything looks like a nail. And once you have these skills, you just are dying to utilize them in some way. But they aren’t important.

If I were being asked to participate in a business opportunity, would it make any difference to me whether I bought it on a Tuesday or a Saturday or an election year or something? It’s not what a businessman thinks about in buying businesses. So why think about it when buying stocks? Because stocks are just pieces of businesses.

Don’t get me wrong: I love to read. But what ticks me off is when a specific behavior gets taken out of context and fetishized.

Here is an entire collection of quotes about the importance of reading. Suffice it to say that value investors love to read and highly recommend you read a lot, too. The pinnacle of this obsession may have been Todd Combs’s recommendation to “read 500 pages every day.” (correction: 500 pages a week)

“That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”

I’m not going to argue with that statement. That is how you compound knowledge. And perhaps it is how Buffett spends most of his time today. But consider Dan McMurtrie’s framework of the ruler and the conqueror. Starting in the 1980s, Buffett became part of the business establishment. CEOs called to hear his advice, presidents invited him to dinner. Almost anyone in business and finance would make the trip to Omaha to see him if invited. Unless you’re also running one of the world’s largest conglomerates, you should probably learn about how Buffett got to the top, not how he rules his empire now.

Did a young Buffett read a lot? Yes, he certainly did. Did he spend all his time churning through annual reports, newspapers, books, and trade journals enough? No. Buffett understood how to balance his stack of reading materials with a solid travel schedule. He did not expect to solve the world’s investment puzzles solely from the comfort of his desk.

He built and maintained relationships that allowed him to source and discard ideas and evolve as an investor (not to mention enrich his life). Just think about the influence that Munger had on his pivot towards quality investing.

Buffett once told George Goodman during a visit to Omaha:

“You can think here. You can think better about the market; you don’t hear so many stories, and you can just sit and look at the stock on the desk in front of you.”

Guess what else he said:

“I can be anywhere in three hours. New York or Los Angeles. I get all the excitement I want on those visits. I probably have more friends in New York and California than here, but this is a good place to bring up children and a good place to live.”

Show me the evidence!

Don’t take it from me. In 2005, a doctoral student went through the effort of cataloging Buffett’s social ties in a dissertation with the cumbersome title: “How can Strategic People Networks (SPNs) be successful? An inquiry into the causes and nature of social networks striving toward a mutual goal.”

The link takes you to the appendix which contains an overwhelming collection of snippets showing Buffett with his friends, neighbors, investors, fellow board members, CEOs, golf and bridge players, and politicians. You get the impression that all he did was chat, play bridge, and visit the White House. Obviously, that’s not the case either. But allow me to pull out a few examples and demonstrate that Buffett the voracious reader also had an appetite for connecting with people and venture into the real world.

“Buffett’s huge network of knowledgeable and influential friends also has been a help along the way. Buffett has been an original thinker, but it cannot have hurt to discuss prospects for a television station with Tom Murphy, chat about a common investment with Laurence Tisch, or talk with Jack Byrne about insurance. ‘His network of mends has been very important,’ says broker Hayes.” Of Permanent Value, The Story of Warren Buffett

Snowball.

This is from Alice Schroeder’s The Snowball on the essence of Buffett’s lifelong journey and passion for accumulating money.

“That passion had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else’s eyes. He read every word of several newspapers each morning … Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. … He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head, which gave him insights nobody else had. He developed a network of people who—for the sake of his friendship as well as his sagacity—not only helped him but also stayed out of his way when he wanted them to. In hard times or easy, he never stopped thinking about ways to make money.”

GEICO.

Today, Berkshire owns all of GEICO. But how did Buffett first learn about the company? Ben Graham was the company’s chairman and Buffett was Graham’s student. Surely, Buffett must have figured it all out on his own by reading financial reports?

Not at all. Buffett was incredibly proactive and understood that solving the puzzle required, or could be vastly accelerated, by having an experienced teacher. Going out into the world to find one turned out to be an incredible shortcut.

One Saturday, Buffett boarded a train to Washington DC to visit the company. He asked the guard if there was anyone who could explain the business to him and was led to GEICO’s financial vice president, Lorimer Davidson.

“‘My name is Warren Buffett. I’m a student at Columbia. Ben Graham is going to be, probably, my professor. I read his book, and I think he’s wonderful. And I noticed that he’s the chairman of Government Employees Insurance. I don’t know anything about it, but I wanted to come here and learn.’” The Snowball

 “I just kept asking questions about insurance and GEICO. He didn’t go to lunch that day—he just sat there and talked to me for four hours like I was the most important person in the world. When he opened that door to me, he opened the door to the insurance world.” The Snowball

When Buffett returned, he sold three quarters of his personal account to buy GEICO shares. Alice Schroeder wrote that “A less Graham-like analysis could hardly be imagined.”

(This reminded me of the time Bill Miller visited Peter Lynch who explained to him the business model of Fannie Mae – which became a fifty bagger for Miller.)

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Travel.

Even though Buffett returned to Omaha, he kept in touch with his network in New York.

“Until 1958, his straightforward route was to buy a stock and wait for the cigar butt to light. … The days when Warren simply sat in his study at home, picking stocks out of Security Analysis or the Moody’s Manuals, were gone. Increasingly, he began to work on large-scale, lucrative projects that required time and planning to execute.” The Snowball

“When he was not traveling, he could be found wandering through the house, nose buried in an annual report.” The Snowball

“Between his duties at FMC, Vornado, Blue Chip, and Wesco, and regular trips to New York, Buffett was now traveling much of the time.” The Snowball

“Buffett grabbed Byrne and his wife, Dorothy, and immediately pulled them into his circle of friends. Now, between GEICO, Washington Post meetings, Pinkerton’s board meetings, West Coast trips for Blue Chip and Wesco, business trips to New York, board meetings for Munsingwear, a board that he had joined in 1974, and Kay Parties, he was traveling much of the time.” The Snowball

“In March 1959, Warren took one of his regular trips to New York, staying out on Long Island at Anne Gottschaldt’s little white colonial house. … On these journeys, he always set out with a list of between ten and thirty things he wanted to accomplish. He would go to the Standard & Poor’s library to look up some information. He would visit some companies, visit some brokers, and always spend time with Brandt, Cowin, Schloss, Knapp, and Ruane, his New York City network.” The Snowball

“Buffett met Murphy in the late 1960s when a former Harvard Business School classmate of Murphy’s seated them together at a lunch in New York. Murphy was so taken with Buffett that he invited him to be on the board of Cap Cities. Buffett declined but the two remained fast friends.” Of Permanent Value, The Story of Warren Buffett

Friends.

“His most important seminar, the Buffett Group meetings, took place only in odd-numbered years. Buffett enjoyed teaching so much that he actually went looking for an audience.” The Snowball

Buffett found a way to socialize that worked for his personality. He avoid formal dinners when he could and instead met for with small groups to talk or play bridge or golf.

“Rogers still has a letter dated March 5, 1987, from Buffett to Columbia University Graduate School of Business Dean John Burton which reads: ‘I appreciate the invitation to the Annual Dinner but will have to decline. My extended trip to New York always occurs in May - and even then I like to skip formal dinners as I find I can do a lot more catching up with friends in four- and six-people lunches and dinners.’” Of Permanent Value, The Story of Warren Buffett

Every two years, he gathered a group of friends which were originally dubbed the Graham Group or Grahamites and later became the Buffett Group. Their meetings took place at locations including Lyford Cay in the Bahamas, Dublin, Ireland, Williamsburg, Virginia, aboard the Queen Elizabeth II, in Arizona, and France.

“The group …  began in 1968 with 13 people and now has about 60, including Mrs. Graham, Munger, Murphy, Ruane, Tisch, Keough, Gates, Jack Byrne, and Lou Simpson. Sometimes Buffett refers to the group as ‘Our Gang’. During their retreats, the group holds seminars on public policy, investments, charitable giving (whether to do it early in life or late), life’s toughest and silliest moments.” Of Permanent Value, The Story of Warren Buffett

And while Buffett undoubtedly generated his own ideas, he frequently discussed stocks with friends.

“His network of business pals like Stanback, Knapp, Brandt, Cowin, Schloss, and Ruane had grown by the addition of Munger; the two of them ran up outrageous—by their standards—phone bills every month.” The Snowball

“It was one of his newer friends, David “Sandy” Gottesman, who brought him this latest idea. Gottesman was like Fred Stanback, Bill Ruane, Dan Cowin, Tom Knapp, Henry Brandt, Ed Anderson, and Charlie Munger: people who worked their own ideas and fed ideas to him. The ever-handy Ruane had connected them at a lunch in New York City.” The Snowball. The idea was Hochschild-Kohn

“From then on,” says Gottesman, “every time I had a good idea, I would call Warren. It was like vetting. If you could get Warren interested in something, you knew that you had the right idea.” The quintessential New Yorker, Gottesman valued his time with Buffett highly enough to be willing to travel to Omaha often. “We’d stay up till late at night talking about stocks,” he says, “and then I’d go back the next morning and go to work in New York. We also talked every Sunday night at around ten o’clock for maybe an hour and a half about stocks. I was looking forward to that conversation all week, thinking about what are the stocks I’m going to talk to him about. No matter what I talked to him about, he knew as much as I did about them, most of the time. After I hung up,” says Gottesman, “I used to go to bed around midnight or afterward, and I couldn’t go to sleep for a couple of hours, I was so charged up.” The Snowball

Unique insights.

In 1991, the Buffett Group met to discuss how the list of the ten most valuable companies had changed through the decades. Why didn’t the successful companies keep winning? What was a truly durable competitive advantage? This was the first year in which Bill Gates joined. According to The Snowball, while others pointed to “arrogance, complacency, and what Buffett called the “Institutional Imperative,” Gates could offer a unique perspective on technology and disruption.

“What about Kodak? asked Bill Ruane. He looked back at Gates to see what he would say.

“Kodak is toast,” said Gates.

Nobody else in the Buffett Group knew that the Internet and digital technology would make film cameras toast. In 1991, even Kodak didn’t know that it was toast.

“Bill probably thinks all the television networks are going to get killed,” said Larry Tisch, whose company, Loews Corp., owned a stake in the CBS network.

“No, it’s not that simple,” said Gates. “The way networks create and expose shows is different than camera film, and nothing is going to come in and fundamentally change that. You’ll see some falloff as people move toward variety, but the networks own the content and they can repurpose it. The networks face an interesting challenge as we move the transport of TV onto the Internet. But it’s not like photography, where you get rid of film so knowing how to make film becomes absolutely irrelevant.”

This was in 1991, two years before the Mosaic browser was created by Marc Andreessen. Gates displayed incredible foresight. I don’t know if anyone at that meeting used their access to his insights to make money. But they could have.

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Enough.

There are plenty of other examples but this should be enough for one day.

On Buffett’s visits to Allen & Co.’s Sun Valley conference: “Buffett’s friend Tom Murphy referred to this kind of event as “elephant-bumping.” “Anytime a bunch of big shots get together,” says Buffett, “you can get people to come, because it reassures them if they’re at an elephant-bumping that they’re an elephant too.” The Snowball

Today, Buffett is one of the elephants. He has no issue getting access. He doesn’t have to travel or call people unless he wants to. Ideas and opportunities flow to him. And yet, he still regularly takes part in events like the Sun Valley “summer camp for billionaires.”

I’m sure he spends a lot of time reading. But always remember that his wealth was built on the balance of compounding wisdom and relationships. In fact, the two reinforced each other. Go and do likewise.

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