I read an article recently where Kokkie Kooyman, portfolio manager, shares his understandings on the thinking and wisdoms of Warren Buffett and the late Charlie Munger – exploring their philosophies on investing and life. Their success is attributed to life beyond just the numbers with an emphasis on shared values, aiming to continuously grow wisdom through humility and relentless curiosity. In the words of the late Munger, “You have to keep learning if you want to become a great investor. When the world changes, you must change.”
Below is an extract of Kooyman’s article regarding the insights of two remarkable gentlemen and how they have contributed to the wealth of the world. Whilst some of the lessons shared will resonate more than others, I believe we can all extract some level of exquisite awareness to use in our own lives.
In 1965, Charlie Munger offered Warren Buffett dramatic advice that would shape their investment philosophy and ultimately transform a failing textile mill into one of the largest corporations in the US: “Warren, forget about ever buying another company like Berkshire. But now that you control Berkshire, add to it wonderful businesses purchased at fair prices and give up buying fair businesses at wonderful prices. In other words, abandon everything you learned from your hero, Ben Graham. It works, but only when practiced at small scale.” This marked the start of an extraordinary journey for these two relatively young men – Buffett, aged 33 and Munger, aged 41 at the time. Buffett listened to Munger, and the results, as shown in the table below, speak for themselves:
Table 1: Berkshire Hathaway’s performance since 1965
| Compound annual growth rate | Value of $1m invested | |
| Berkshire Hathaway book value per share | 19.9% | $43,759m |
| S&P 500 Index (dividends re-invested) | 10.2% | $309m |
Source: Berkshire Hathaway annual shareholders letter 2023
Elon Musk recently said in an interview: “I’m not his biggest fan, Warren Buffett’s way of getting rich is pretty boring.” Yet, their approach, rooted in growth, understanding, rational decision making, and consistency, has proven timelessly effective.
As the late Munger used to say, “For compounding to work its magic, you must start early, live long, and invest wisely. Together, these elements can generate astonishing results.”
Ten of the lessons that stand out to me are covered below, in no particular order:
- Financial independence can be achieved through knowledge.
Both Buffett and Munger were very strong, independent thinkers with enquiring minds: aiming to gain their own understanding and form their own opinions, as opposed to accepting opinions derived from others; they believed in reading and listening as much as they could, but then making up their own minds; and remaining cognisant of the opinions of respected thinkers on each topic but being able to defend if, why and where they differed.
The yearning for financial independence was just as strong as their yearning for knowledge. They wanted to generate enough wealth for themselves so that, as soon as the return on their investments made it possible, they could work not because they needed the money, but because they enjoyed it. Note, however, that their maintaining simple lifestyles allowed them to re-invest sufficient savings towards becoming financially independent sooner. Interestingly, once they got past the inflection point, they never really changed their lifestyles.
- Enjoyment, strong values, a shared purpose, and simplicity can contribute to longevity.
A personal and corporate culture based on strong ethical shared values plays a significant role in lowering stress. For them the right culture meant easier decision making – especially when they surrounded themselves with like-minded executives and business owners. Buffett’s rationality meant he could avoid bureaucracy; he never interfered with the management teams of the companies they invested in, and in doing so he was able to keep his diary free. It is hence no surprise that Berkshire Hathaway has very low staff turnover levels. At the same time, Buffett values experience and the CEOs and board members of Berkshire rank amongst the oldest in the industry, totally eschewing popular pressure to fill board positions with independent directors or to replace CEOs simply because they are over 60.
Neither Buffett nor Munger were big on exercising (Munger couldn’t recall ever doing any exercise). They were known for the vast quantities of Coke consumed, and their McDonalds breakfasts. Their sheer enjoyment of building Berkshire Hathaway (Buffett called it ‘painting his canvas’) played a significant role in keeping their stress levels low.
Delegating authority to where the responsibility lay, was a big part of how they worked. An example of a defining story for me dates to 1991. The Fed, in a joint decision with US Treasury and the US Securities and Exchange Commission (SEC), had decided to revoke the trading license of Salomon Brothers after it found evidence of significant unethical behaviour on its trading desk. This was expected to cause significant upheaval and possible panic in markets. Buffett, who was a large shareholder (via Berkshire Hathaway), was convinced on a hectic Sunday afternoon to step in as chairman to rescue and restore trust in the bank. During the Sunday he made the decision to appoint Deryck Maughan as CEO (whom he hadn’t met until 30 hours prior) to help restore the culture, image, and profitability of the bank. Buffett faced the press (which was important to do on the Sunday evening before the Japanese market opened) and managed to restore faith in the bank by being open, candid and calm. After the press session Maughan wanted direction from Buffett so asked him to stay for dinner, but Buffett hailed a taxi to take him to the airport to go back to Omaha. He said, “If you have to ask me questions like that, I picked the wrong guy.” He left leaving Maughan to make the decisions.
Also in their favour was the way they were set up to manage the growing business. Buffett lived in the same house since buying it in 1958, and Munger did the same but lived in Los Angeles. It is simplicity, and simplicity of decision making, that ensured a low-stress work life. Both men kept their diaries as free as possible to ensure enough time for reading and reflecting. Reflecting his view on bureaucracy Buffett once said, “My idea of a group decision is to look in the mirror.”
One more story illustrates the point on simplicity: After the death of her husband, Katharine (Kay) Graham became CEO of The Washington Post. For a while she lent extensively on Buffett for insights and advice. In doing so, she tried to pull him into her Washington circles. She once invited Buffett to a black-tie seven-course dinner at her private mansion, lined with top politicians and movie stars. Buffett just wanted a hamburger and chips. So, Katharine got the chef to do seven variations of a hamburger and chips for Buffett.
The bottom-line is: In whatever they did, they enjoyed what they did and avoided false pretences and high expectations.
- Learning and understanding are crucial when investing.
Munger famously said, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time – none, zero.” Munger loved reading biographies – both on people he admired and those he didn’t. Munger also said, “There are answers worth billions of dollars in a $30 book.”
The key to success for them was to understand what worked and what didn’t and, more importantly, why, or why not. The saying ’A bird in the hand is worth two in the bush’ was significant in their thinking about risk and return (how much risk you’re prepared to take for extra return). Benjamin Graham believed in reducing investment risk by seeking a large margin of safety in the size of the discount between the price paid and the value bought. Munger convinced Buffett that the margin of safety in investing must rather be derived from the quality of the business, the ethics of the management and their ownership mentality in cost control; and, very importantly, their track record of allocating capital. In other words, placing the focus on enhancing the certainty of the future earnings stream by investing in good businesses.
Was Benjamin Graham wrong? No, but his approach requires a continuous repetitive process. Munger believed in making few, but very good decisions – making sure they understood a business to be purchased, well enough to look far into its future.
- Define your circle of competence and stay within it.
One of Buffett’s famous quotes is: “Define your circle of competence and stay within it.”
That referred to their investing activities and not their search for insight. From a very young age they had an incredible zest for learning and knowledge. Munger tried to be as multidisciplinary as possible, believing in the benefit of learning from as many disciplines as he could and using the key insights of each across other disciplines. He criticized the balkanization in universities and businesses where one department wouldn’t consider learning from the other. In doing so, he built up his framework of mental models to test each business on as many levels as possible. Ultimately, however, they made sure their investment decisions were simple: Select low hurdles to jump over, not high walls.
- Mistakes are inevitable. Learn from them.
Their biases and their simplified way of approaching business inevitably led to them making some mistakes. Buffett regularly refers to his decision of buying Dexter Shoes: “No matter how good the staff at Dexter were and how hard they worked, I missed that they just couldn’t compete with cheaper Chinese labour.” He made the same mistake in his purchase of Berkshire Hathaway in 1965, by focusing on the valuation but ignoring the harsh competition from Asia.
His preference for trusting and deferring decisions to management teams after investing resulted in him sometimes missing changes in culture. A notable example being the investments in Salomon Brothers and later Wells Fargo. Despite his network, he missed the changes that the incentive system was causing and how management themselves weren’t reacting to what was happening. Importantly, when Buffett went against Munger’s advice, Munger never reminded him that he’d warned him beforehand.
- Don’t waste time trying to predict the future.
Some noteworthy quotes on forecasting:
“Warren and I don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.” – Charlie Munger
“Forecasts may tell you a great deal about the forecaster, they tell you nothing about the future.” – Warren Buffett
It’s about efficiency. Not only in terms of allocation of capital, but also in terms of allocation of time and effort. Buffett and Munger believed that:
- Macroeconomic forecasting is impossible. There are too many variables, and the relationships continuously change.
- It is much easier to spot good and winning companies than it is to try to predict the future.
- Investing should be about buying (at a rational price) a part interest in an easily understandable business, whose earnings are likely to be materially higher five, 10 and 20 years from now.
This sounds so easy, and it is. But when asked about why more people didn’t follow his investment approach, Buffett’s answer was, “Few people like getting rich slowly.” Investing in a few simple businesses and holding on to them, whilst everybody around you is trading and touting seemingly wonderful ideas, is emotionally very difficult for most. I suppose that is why few people get very wealthy from investing.
- Don’t tolerate bad ethics.
In the recently published edition of Poor Charlie’s Almanac, his insights into culture (particularly ethics and slop) are so descriptive that I’ve included an excerpt below:
“Take the issue of stealing. A very significant fraction of the people in the world will steal if a) it’s very easy to do and b) there’s practically no chance of being caught. And once they start stealing, the consistency principle, which is a big part of human psychology, will soon combine with operant conditioning to make stealing habitual. So, if you run a business where it’s easy to steal, you’re working a great moral injury on the people who work for you.
It’s very, very important to create systems that are hard to cheat. Otherwise, you’re ruining your civilization, because those big incentives will create incentive-caused bias and people will rationalize that bad behaviour is okay… if enough people are then profiting in a general social climate of doing wrong, then they’ll turn on you and become dangerous enemies if you try and blow the whistle.”
He goes on explaining how slop (information that lacks accuracy or depth), once tolerated, becomes persistent. Powerful stuff. This is simply human nature.
- When it comes to corporate governance, substance should trump rules.
As with many other points, they disagreed with the opinions generally accepted by the industry – such as the importance of having independent directors. They preferred directors who, through the size of personal shareholding, are prepared to challenge the CEO. To them, this held far more benefit than having directors whose fees tether them to their board seats, or individuals who merely serve as lapdogs on the CEO’s remuneration committee.
- Trust and integrity are crucial in business.
Buffett famously remarked, “I’ve never done a good deal with a bad person.” This underscores the importance of trust and integrity in business. If you don’t trust someone enough to be able to transact via a one-page contract, you shouldn’t want to do business with them. No amount of covering provisions can compensate for a lack of trust, as it may seem like you’ve addressed all eventualities, but you haven’t.
- It’s important to contribute to society along the way.
In Berkshire Hathaway’s 2022 letter to shareholders, it was noted that the corporate income tax contribution over the previous decade amounted to $32 bn, almost exactly one-tenth of a percent of all money collected by the US Treasury. Had there been roughly 1,000 taxpayers in the US matching Berkshire’s payments, no other businesses nor any of the country’s 131 million households would have had to pay any federal taxes. Not a single dime! They created ~400,000 jobs and provided capital to many successful businesses, which in themselves created jobs and paid taxes (think Coca Cola).
And now, as shareholders grow old, they’re generating significant taxes via their capital gains and donating to charitable foundations. Buffett has pledged more than 90% of his shareholding to the Bill and Melinda Gates Foundation. Ruth Gottesman (a retired 93-year-old professor) donated $1 bn to the Albert Einstein College of Medicine to cover the tuition of every medical student in perpetuity from the Berkshire Hathaway shares her late husband had left her.
As Munger used to say, “You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long time. Take your work seriously, but never yourself.”.
