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The original edition of

the Essays of Warren Buffett was the centerpiece of a 1996 symposium that I organized. This gathering brought together hundreds of students for a two-day dissection of all of the ideas in the letters, featuring a series of vibrant debates among some 30 distinguished scholars, investors, and managers, with Warren Buffett and Charlie Munger participating throughout from their seats in the front row. In the decades since its initial publication, I have often taught this book in my classes and at seminars at 4 different universities. The book is adopted by scores of professors at other schools for classes such as investment, finance and accounting. Investment firms have distributed copies to their professional employees and clients as part of training programs.

All the letters are woven together into a fabric that reads as a complete and coherent narrative of a sound business and investment philosophy. Experienced readers of Warren Buffett's letters to the shareholders of Berkshire Hathaway have gained an enormously valuable informal education. The letters distill in plain words all the basic principles of sound business practices. The writings are broad in scope and long on wisdom." And that is an excerpt from the book that we talked about today, which is the essays of Warren Buffett, Lessons for Corporate America, and it was put together by Lawrence Cunningham. And this is another recommendation that came from a listener.

If you have more book recommendations you'd like to see me cover on the podcast, please send them to me. The best way to, or probably the easiest way

to do that is just email me, david at founderspodcast.com. I have a ton of highlights for this book before I jump into it. I wanna tell you what it is. So back,

all the way back on Founders number 88, I read every single Warren Buffett shareholder letter in order, by year. And it's by far the largest book that I've ever read for the podcast. It's the longest episode. It's like the size of a textbook. And so I just worked my way through that book in order, in chronological order, starting at the very first shareholder letter, I think in like 1965, all the way up, I think it ends in 2020.

This book is an edited version of Warren Buffett's shareholder letters, but instead of putting organized by year, it's organized by topic. So 99% of what

I'm going to talk to you

about today is going to be just Warren Buffett's own words. I do have some highlights from the introduction. Lawrence wrote an introduction. It's about 30 pages long. It's like his own analysis and like an overview of the lessons he learned from reading and rereading Buffett's shareholder letters.

I'm going to jump into the introduction.

So He says, some of Berkshire's businesses are massive. 10 would be included in the Fortune 500 if they were standalone companies. Buffett and Charlie Munger built this sprawling enterprise by investing in businesses with excellent economic characteristics and run by outstanding managers. So just pause there, I'll tell you the note that came to mind when I got to this section. That is repeated over and over again.

We're looking for excellent businesses with excellent economic characteristics, so businesses that throw off a lot of cash, and are run by outstanding managers. And as Buffett and then Munger with less tact points out over and over again, most businesses are poorly run, most people are very average, so the supply, the note of myself, is the supply of companies that have these characteristics is really small. And that's so in in his shareholder letters Buffett will repeat that over and over again. We're looking for excellent economic characteristics, and we're looking for outstanding managers. And then he also talks about how difficult it is to find those businesses.

So you can go a very long time without buying another 1. And so I think the conclusion for founders is obvious, right? The supply of these companies are and have these characteristics of small, the demand is large. So teach yourself and make it so your own company can be described as such.

And if you're able to do that, then you're in control of your

own destiny. You can keep a wonderful business for your entire life. You could sell it for a high premium, whatever the case is. But again, it's a small supply and a large demand. So to me, the smarter thing, the more difficult thing definitely is teaching yourself and make it so that your own business and your own company can be described as such.

And so less than 5 paragraphs later, this theme is repeated. According to Buffett, these results, let's talk about his fantastic financial results or his long career. According to Buffett, these results follow Not from any master plan, but from focused investing. That means allocating capital by concentrating on businesses with outstanding economic characteristics and run by first rate managers. So I have the paperback version of this book.

I don't have the Kindle version. If I had the Kindle version, I'd like to search for that term. I've got to imagine that term appears 20 times in the book. And so that's the theme you and I talk about over and over again. You got to pay attention to what people repeat.

Repetition is persuasive. They're doing that on purpose. They're repeating things that are extremely important to them, things that they want to teach you. And then Lawrence gives us another overview of Buffett's approach to business. It's going to echo something that 1 of my heroes, Henry Singleton, I'm going to read some quotes from a book I read on him as well in a minute.

So it says, Virtually all of Buffett's net worth is in Berkshire stock. His economic goal is owning all or part of a diversified group of businesses that generate cash. And so I discovered Henry Singleton through Buffett because Buffett and Munger talk about him. I read the only 2 books I could find about Singleton. It just blew my mind.

He's 1 of the, I guess 1 of my heroes is the way I think about it. I'm trying to emulate the way he thinks in my own career. I mean, so much so that I just read an 800-page biography of Charles de Gaulle because Arthur Rock, who was 1 of the first venture capitalists and who worked with Henry Singleton, said in the book that Singleton reminded him of de Gaulle.

And I was like, okay, well, I don't know much about Charles the

goal let me read this time biography so I understand what Arthur rock was saying but in the so there's 2 fantastic books in the archive on Henry Singleton I did it was the at 1 the outsiders is 1 of them and disenforces the other And so I just want to pull out 2 quotes because this idea was like, it's a rather simple idea, right? The fact that we're just focused on cash flow. It is all about cash flow. I want to own businesses that generate cash. It's not a new idea, right?

And so These are 2 quotes from the outsiders about Singleton had the exact same approach. He said, Singleton believed that the key to long-term value creation was to optimize for free cash flow. And this emphasis on cash informed all aspects of how he ran the company. This and then there's another 1. This is repeated over and over again, both in his own words and people writing about him.

This single-minded cash focus was the foundation of their iconoclasm, and it invariably led to a laser-like focus on a few select variables that shaped the business's strategy. He's just focused, hey, I'm gonna put all my net worth in my company and my goal is I'm gonna own either the entire business or part of a business that generates cash.

So it says Buffett forgoes expansion for

the sake of expansion and forgoes divestment of businesses so long as they generate some cash and have good management. Then it gets into Buffett's teaching style. Buffett's annual report is not glossy. Buffett prepares its contents using words and numbers people of average intelligence can understand. Also not a new idea.

I just read this book on heroes. I learned that Julius Caesar, he purposely used simple words so the books that he was writing about his conquests and the empire building he was doing would be widely read. In fact he has, there's a great quote in that book where he says you should avoid unusual or uncommon words like a ship avoids a reef. And then it goes back into Buffett's insistence on having high quality, working with only high quality people. I'm gonna read this section.

There's a bunch of thoughts that popped to my mind that relate to how other entrepreneurs in the past thought exactly this exactly the same way. Having first rate people on the team is more important. Buffett instructs to take great care in identifying CEOs who will perform capably. Again, these are a very small supply of people like this. Outstanding CEOs do not need a lot of coaching from others.

So it's a fantastic quote from Steve Jobs. There is no shortcut around quality and quality starts with people. This also popped to mind because a long time ago, I think it's back in the archive, like founders number 34, 35, something like that, maybe 36. It's the autobiography of the founder of Pixar, Ed Catmull. Ed Catmull was the person that worked with Steve Jobs for the longest consecutive time.

I think they worked together for 26 years. Steve said he learned more about managing a group of talented people from Ed than anybody else. And Ed has a fantastic reason why the quality of people is so important. So he'd go around, Ed talks about in his autobiography, goes around and asks these questions to students, he's giving lectures and all this other stuff about what's more important, people or ideas. I'm just going to read 2 quotes for you because I just absolutely love this.

It just excites me terribly. It says, there's an important principle here that may seem obvious, yet in my experience, it's not obvious at all. Getting the right people and the right chemistry is more important than getting the right idea. People think so little about this. In all these years only 1 person in an audience has ever pointed out the false dichotomy about the entire question, right?

To me, the answer should be obvious. Ideas come from people. Therefore, people are more important than ideas. And then he summarizes this entire point later in the book, Ed that is, in Creativity Inc. And this is why it's so important for us to constantly focus on improvement, education, development.

If you give a good idea to a mediocre team, they will screw it up. If you give a mediocre idea to a brilliant team, they will either fix it or throw it away and come up with something better. I think that, especially saying, hey, the brilliant team, they'll figure it out on their own. Give them a bad idea, they're going to fix it. They'll come up with something better.

In this book, let's go back to the book that's in my hand, outstanding CEOs do not need a lot of coaching from owners. And so that's why I think Steve Jobs realized there's no shortcut around quality and quality starts with people. In that book I did a couple months ago in the company of giants, He's giving an interview in 1997. He's like, no, no, no, you don't understand. The founder's most important job is, and you would expect Steve saying, hey, the founder's most important job is to build a great product, right, with everything we know about him.

He's like, no, no, it's recruiting. All of your energy should be put in getting, building your team with the absolute most talented people. That takes a lot of time and energy. But that is where your focus should be. Which is exactly what I think Buffett would agree with that.

How many times does Ed bring up the same point in his book? The quality of the people you're working with is the most important thing. Start there. And then this is, I love this. I read it years ago, I've never forgotten it.

I think it is the best, like There's no formula in business, right? We talk about this all over and over again. It's just they're complex, adaptive systems, right? But this is the, like if you had like some simple operating system. I don't know if you can come up with a better 1 with this when you're building your company.

The CEOs at Berkshire's various operating companies are given a simple set of commands to run their business. And so there's 3 things here and it says run your business as if number 1, they are the sole owner. So run your businesses if you own 100% of it. Number 2, run your business as if it's the only asset that you hold. And number 3, run your business as if you can never sell, if you can never sell or merge it for 50 years.

And so as you can imagine, if you're giving those instructions to the people that you're working with. Buffett and Munger are, I would consider them anti-diversification with 1 caveat. They're anti-diversification for those people who know what they're doing. If you feel, they talk about constantly, if you don't feel you have the capability or the talent to invest in individual companies like they do. They're like, don't waste your time.

They repeat over and over again, just buy an index of like the S&P 500. Buffett even did this bet where he won, I think he bet like $500, 000 that it was like a number of hedge funds that wouldn't outperform that index over a 10 year period. He talks about that later in the book. But the reason I bring this to your attention here is because this is something that Andrew Carnegie says, Larry Ellison, a lot of people think this way. And they said, instead, and they're talking about the difference in the advice most people get to the advice that a lot of the founders and investors that we cover, they just, they think more like to each other than they do to like an average person.

And the advice for like, for an average person just, it doesn't make sense if you're building your own company. And this is 1 example. Instead of don't put all of your eggs in 1 basket, We say put all of your eggs in 1 basket and watch that basket. Here's an idea from 600 BC that still works. This is something Buffet repeats a few times in his sherlock letters and he says, this is still Lawrence actually, we're not into, we're almost done with this section, I'll get to Buffett in 1 second.

Aesop was to fables of the ancient world, while Buffett is to business essays in our own. The essayists invoke the fabulous to show that valuation has been the same across the millennia. Aesop said, a bird in the hand is worth 2 in the bush. And Buffett extends that principles to dollars. Valuation is counting cash, not hopes or dreams.

It is doubtful everyone learned the lesson however, for it has been taught repeatedly since Aesop's time, and yet, well, it has been taught repeatedly since Aesop's time." That's another thing that pops up over and over again in Warren's writing and Charlie's speeches is the fact that you must learn to learn from the experience of others. Charlie says over and over again, 1 way to guarantee failure in your life is to only be capable of learning from your own experience and not being able to learn from others. And so this wraps up this introduction and we'll get into Buffett's writing. Buffett's essays are sprinkled with historical reference points, especially economic history. It was wild.

In 1 case, he's writing, he's like, oh, I was just reading the

1896

annual report of Coca-Cola. So He's got this obviously deep historical knowledge that maybe no 1 else on the planet possesses. Buffett essays are sprinkled with historical reference points, especially economic history. He reflects the importance of understanding the past to handle the present and navigate the future. And that is the entire thesis of founders.

We are learning from great founders of the past. There was this great interview I heard with Kobe Bryant's trainer 1 time, and he said that all players in the NBA watch tape of players currently playing. But he says Kobe would go back and watch tape from like the 1960s. He'd call up Jerry West and be like, hey, how did you and Elgin Baylor, when you were playing together, both averaged 30 points a game, so I understand how I can play with a prolific scorer, Shaq. And so Kobe would constantly be harassing his teammates.

He's like, that's nice. Watch the tape of players in the league now. Everybody does that. But do the things that most people aren't doing. Go back and watch the tapes.

And I just came across Kevin Durant, still plays in NBA now, he does this as well. I came across 1 of the best, like the best tweets I've ever seen it came from Kevin tweeted this because they were talking all yeah Kevin Durant's better than Michael Jordan and he saw this video and he responds he goes MJ Michael Jordan is 1 of 1 God level unmatched unparalleled a pure master at this shit I'm still watching his games to learn. And I love that analogy. Think about what we're doing here, like what you and I are doing together as founders. We're watching tape of history's greatest entrepreneurs.

We just have to find them in books. Okay, I've had a lot of espresso this morning. So let's get into Buffett's. I'm going

to need it. There's so many highlights here. Okay, let's get into Buffett's own writing. And this is about owner-related business principles.

I'm going to read the highlights from

a few paragraphs here and then I'll

tell you the note. I have a long note. I left myself as well. So it says at the end of each year, about 98% of the shares outstanding are held by people who were shareholders at the beginning of the year. That's insane.

90%

of our shares are owned by investors for whom Berkshire is their largest security holding. Very often far and away the largest. So that's the main theme of Buffett, he's saying identify good ideas and then concentrate your resources around them. He says this in many different ways. Many of these owners are willing to spend a significant amount of time with the annual report.

So He's talking about why his approach to and again you think of him he's the greatest investor has ever lived but really he thinks of himself as a teacher and you can think of reading his shareholder letters as taking a course taught by Warren Buffett. In fact I went through as I was reading this and I think I even have a note left to myself. I was like a couple hundred pages into the book at this point, and I was like, this is so stupid. Like, I went to business school. I was like, you know, what about, the last 2 years of business school should literally just be somebody teaching Buffett's shareholder letters line by line.

You should cover it once in your third year and then cover it again in your fourth year. And I think, I really think, and this

is something that's simple, you can pick up

the Kindle. Think about how crazy this is. And I recommend you doing this. Right now, you can go to Amazon and buy the Kindle version of Warren Buffett's shareholder letters, right? It's $2.99, and why would you want to do that?

Because then it could sit... It's just an app on your phone. Like, the iOS app, the Kindle app I use all the time. And so when I have a thought about, hey, what does Warren think about this? Like, what does Warren think about diversification?

What does he think about focus? Whatever comes to mind, type it into the Kindle app and then you pull up, here's the 25 times over 60 years that he mentioned that. You can just read it, it's a huge resource. And think about how expensive textbooks were when you were in college. Compared to $2.99, It's just wild.

All right, so let's go back to this. Many of these owners are willing to spend a significant amount of time with the annual report and we attempt to provide them with

the same information we would find useful if the roles were reversed. When you receive a communication from us, it will Come from the fellow that you are paying to run the business. He's talking about himself your chairman himself Has a firm belief that owners are entire Entitled to hear directly from the CEO as to what is going on and how he evaluates the business Okay, so I'm gonna I just lied to you I'm not gonna finish reading this. I need to get to my note. Because what he just said there, I feel that you're entitled to hear directly from the CEO what's going on and how he evaluates the business.

I really feel this is another echo of this theme that you and I talked about over in Iran, that you have to lead from the front. No 1 cares about your business the way you do, and therefore, you're in the best position to teach other people about it. So that's not only your employees. Let me give you that same quote that I repeat over and over again that the founder of Costco said, his advice to CEOs and founders, if you're not spending 90% of your time teaching, you're not doing your job. And I think that applies to external customer communication.

You've spent the most time, more time than anybody else, thinking about your product, investing time, energy, money into your product. Just explain why you built the product. That's the best sales pitch to potential customers. All right, so let

me go back to this.

We feel you're entitled to hear how I evaluate the business. You would demand that in a private company. You should

expect no less in

a public company. A once a year report of stewardship should not be turned over to a staff specialist or a public relations consultant who is unlikely to be in a position to talk frankly on a manager to owner basis. So he's telling us do it yourself. Okay, so that's the end of that page. There's 1 other thing, 1 other note I did not read to you and it has to do with the fact that, hey, 98% of our shares outstanding, they're held by the same people who were here last year.

90% of our shares are owned by people where it's by far their largest concentration of resources. Again, the advice there, if we're reading between the lines, once you have a good thing going, don't stop and then concentrate your resources. So a great thing about reading Warren Shareholder letters is not only it's really simple language, but he's got these great maxims and sayings that really, it's just a way to hook these lessons into your brain. So he says, as 1 of the Indianapolis 500 winners said, to finish first, you must first finish. So Warren's talking about don't take risks, any risk, where you have a risk of ruins.

He talks about the dangers of trading on margin or taking on too much debt. And he says, the financial calculus that Charlie and I employ would never permit our trading a good night's sleep for a shot at a few extra percentage points of return. I've never believed in risking what my family and friends have and need in order to pursue what they don't have and don't need." And so this echoes something that I learned when I read that Charles de Gaulle biography. He has a fantastic quote. Remember He's going through 1 of the most difficult experiences that a human has ever had in in human history And he said all that matters is to survive the rest is just words So he also talks about not all of his decisions are purely financial decisions They're more of a life philosophy like I have to you know he's famous for saying he tap dances to work.

Like you're, if you find work that feels like play, work that you love, you'll do it all the time. And if you do something all

the time, you become a master at it. And if you

do it over a long period of time, then you have the magic of compounding, working to your advantage, right? So he's saying, I'm not selling any of the businesses that we own completely, assuming that they generate some cash. Even if I could sell it, take that money and switch it to something else. And he says that it's actually, he feels that it penalizes, like they're willing to take a hit on the money aspect. I'm gonna provide an alternative view on that and I'll give you that in 1 second.

He said, you should be fully aware of 1 attitude Charlie and I share that hurts our financial performance. Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell subpar businesses as long as we expect them to generate at least some cash. Gin rummy managerial behavior is not our style. We emphasize that the comments here refer to businesses we control, not stocks.

And so he's saying, yeah, listen, you've got to be aware, because he's talking to people that are investing with him and people that may potentially invest in Berkshire, that we're going to do this even if

it hurts our financial performance. However,

when you realize this as time goes on, this might actually not hurt their financial performance because this policy probably provides opportunities to buy more businesses in the future. And so if you've spent your whole life building your business, are you, and it's a family business, you spent maybe 4 decades, and you wanna find a home, somebody actually cares about it, right? So this is a business that you absolutely love. You spent your whole life building this. You gave so much of your life energy to it.

Are you going to sell

it to someone who's going

to flip it? Or are you going to sell it to somebody who's demonstrated a track record like Buffett has of hey, I will buy, I'll let, I want your family to retain at least 20% ownership, something like that. I forgot what the number is now, it's changed. But you'll have some skin in the game, and then you keep running it and we just leave you the hell alone. But now you have the cash.

And so again, maybe on a short term, it hurts his financial performance. But in the long term, it opens up so many more opportunities that if he didn't have this policy may not be available to them. I think that's an interesting idea. Think about this another example of that fact that you know I'm what 230 something biographies into this project that we're doing. Founders and investors inevitably they want to help the next generation when they get close to the end of their life, they may not be sharing their secrets while they're in their prime, but when they get to the end, they say, hey, this is everything I learned.

I spent 5 decades building this business. I'm gonna put it in the book, read the book. I just talked, I just reread my highlights from, I think it's Founders Number 104. It's the biography of the founder of IKEA. He starts IKEA at 17 years old.

He dies 74 years later. He worked on it for 70 years. And over and over again throughout his life, he was approached by authors, hey, let's write a biography, let's collaborate. He said no. He finally agreed to do this 1 because they said your lessons will benefit future generations of entrepreneurs and his entrepreneurship was in his blood and that's why he agreed to do it.

So it says, though we continue to be unwilling to talk about specific stocks, we freely discuss our business and investment philosophy. Same situation here. I benefited enormously from the intellectual generosity of Ben Graham, the greatest teacher in the history of finance. And I believe it appropriate to pass along what I learned from him, even if that creates new and able investment competitors for Berkshire, just as Ben's teachings did for him. Something Warren talks about and kind of warns us for over multiple decades is the fact that there is a lot of fraud and lying and just deceit in business in general.

And this is gonna, in fact, I just reread my highlights from Ed Thorpe's autobiography and that's what he said. Let me read something from, this is from the book A Man of All Markets. There's actually 2 podcasts, I've read this twice in the archive if you haven't listened to it. Ed Thorpe's a genius by far. He's the person out of every single person I've studied, he's the closest that has come to mastering life.

So he says, the fraud, swindles, and hoaxes, a flood reported almost daily in the financial press have continued unabated during the more than 50 years of my investment career. So that tells you why you wanna read the book right there, is the fact that he worked at his careers over 50 years. And he writes an autobiography to distill the lessons of a 50 year career. Hoaxes, scams, and manias, and large scale financial irrationalities have been with us since the beginning of markets in the 17th century. So that's Ed telling us, hey, this has happened for hundreds of years, it will continue in the future.

He talks about, hey, good offense is playing games where you have

an edge, that's how you make money, but

you need a good defense too, or else people are gonna take that money from you. And so now we get to Buffett just talking about this. We're very suspicious of accounting methods that is vague or unclear. Since too often, that means management wishes to hide something. More money has been stolen with the point of a pen than at the point of a gun.

Charlie and I tend to be leery of companies run by CEOs who woo investors with fancy predictions. A few of these managers will prove prophetic, but others will turn out to be congenial optimists and even charlatans. Unfortunately, and here's why he's telling us this as a warning from him to us, unfortunately it's not easy for investors to know in advance which species they are dealing with. And so he gives us 3 ideas as a way to avoid getting ripped off. 3 suggestions for investors.

First, beware of companies displaying weak accounting. When management takes the low road in aspects that are visible, it is likely that they are following a similar path behind the scenes. There is seldom just 1 cockroach in the kitchen. Second, unintelligible footnotes usually indicate untrustworthy management. So it's talking about you should be able to speak clearly in simple language if you're using a lot of jargon, if you're trying to hide something essentially.

If you can't understand a footnote or other management explanation is usually because the CEO doesn't want you to. Enron's descriptions of certain transactions still baffle me. Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no surprise environment, and earnings simply don't advance smoothly. Charlie and I not only don't know today what our businesses will earn next year, we don't even know what they will earn next quarter.

We are suspicious of those CEOs who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to make the numbers will at some point be tempted to make up the numbers.

2 more highlights on separate pages talk about really about the

same thing. The fact that you have to have, you have to only, you have, There is no shortcut around quality

and quality starts with people.

So I echo that Steve Jobs quote, but you've got to identify and only work with high quality people. And the supply of high quality people, unfortunately, is extremely small. So he says, Charlie and I know that the right players will make almost any team manager look good. We subscribe to the philosophy of the founding genius of Ogilvy and Mather, David Ogilvy, another 1 of my personal heroes. If each of us hire, this is an Ogilvy quote that Warren subscribes to, if each of us hires people who are smaller than we are, we shall become a company of dwarfs.

But if each of us hires people who are bigger than we are, we shall become a company of giants." And so later on he talks about the fantastic management that is in their insurance company Geico. And really what I thought about this is the idea here is a Bruce Lee quote, hack away the unessential. And so that's what they've done. They've removed any obstacle for Tony, the guy they're about to talk to you or talk about. They remove any obstacle, the unimportant things that other people have to focus on, and that's because Berkshire owns the company.

So it says, I believe the Geico story demonstrates the

benefits of Berkshire's approach. Charlie and I haven't taught Tony a thing, and never will, but we have created an environment that allows him to apply all of his talents to what's important. So maybe we should do that same thing in our own life. We should create an environment that allows us to apply all of our talents to what's important. Hack away the unessential stuff.

There's a bunch of busy work, bunch of unimportant things. In fact, there's a fantastic book I did, Tuxedo Park. It's the biography of Alfred Lee Loomis, who is known as like the most fascinating guy no one's ever heard of and

the main lesson I

took away from that book is something that was really interesting ditch the to-do list Alfred would only focus what is the single most important thing I need to work on? And he would work on that until that problem is solved at the exclusion to other maybe important but less important tasks. And this idea is like, if you're always just solving the most important problem, you're gonna make progress.

So anyways, there's a random thought. Let me go back to this. So it says, Charlie and I haven't talked

to anything and never will, but we have created an environment that allows him to apply all of his talents to what's important. He does not have to devote his time or energy to board meetings, press interviews, presentations by investment bankers, or talks with financial analysts. Furthermore, he need never spend a moment thinking about financing, credit ratings, or Wall Street expectations for earnings. Because of our ownership structure, he also knows that his operational framework will endure for decades to come. In this environment of freedom, both Tony and his company can convert their almost limitless potential into matching achievements and to go back to this idea where I said you should have an entire college level course of just analyzing the teachings in Warren's shareholder letters.

This is 2 paragraphs. And in 2 paragraphs, he gives us a great ideas. Like these are

the things you need to do if you wanna make

your business stronger. And this is how you can guarantee to make your business weaker. So I'm gonna give you

the overview first and read it

to you. How to make your business stronger. 1, delight customers. 2, eliminate unnecessary costs. 3, continuously improve your product.

Very simple. How to make your business weaker. Number 1, treat customers with indifference. Number 2, tolerate bloat and waste. Every day in countless ways, the competitive position of each of our businesses grows either weaker or stronger.

If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible. Cumulatively, though, their consequences are enormous. And I think anybody that's tried to get in shape or go to the gym, they realize, like, you go to the gym 1 day, you work out, you go home, look in the mirror, nothing changed.

But you do that every day. And then 6 months later, a year later, 2 years later, that's when you start to see the results, right? It's the same thing. What Warren's talking about here, every day, it's either withering or growing, getting stronger or weaker, but you're not going to see those consequences of those actions for quite some time. When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as Widening the moat.

And so that's 1 of his famous phrases. Widening the moat, he wants you to picture like your business is a castle, the moat is obviously the water that encircles it that makes it harder to lay siege to your castle. Really just think about it's your business's ability to maintain competitive advantage over your competitors. Ok so it says we describe this phenomenon as widening the moat. So your business is getting stronger, getting more durable and during and doing that is essential if we are to have the kind of businesses we want a decade or 2 from now.

When short-term, this is so good, when short-term and long-term conflict, widening the moat must and he emphasizes that word, must take precedence. So now he's writing the fact that Berkshire Hathaway literally started as a textile company in New England and he threw money at it for 20 years, eventually has to close it down. And so this is his takeaway after closing the actual textile firm where the company gets its name from after 20 years. My conclusion from my own experience and much observation of other businesses is that a good managerial record is far more a function of what business boat you get into than it is on how effectively you row. Though intelligence and effort help considerably, of course, in any business, good or bad.

Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. This reminded me, so I read Mark Andreessen, he has a blog archive, If you go back to Founders Number 50, you can see, I link to it, you can download the PDF for free. I think it's like 180 pages, something like that. It's amazing that it's free. You can, and essentially it's like, somebody that's really gifted at building startups and has analyzed business history, just saying these are the most important observations that I have that may help you on your journey.

And you can also listen to, I think it's episode number 50. But 1 of the things that pops out is Mark felt that he had a rather unique perspective where he would ask, you know, what's most important? What out of these 3 things, what is most predictive of businesses of a business's success? Is it the market that you operate in? Is it the team you have?

Is it the product? And so he says he and what he does in his blog archive, he makes the case for each 1. But he's like, if you have to pick 1, he's like, it's the market. A market will even, if there's strong demand in the market, it will pull product out of you. And so that is an echo of what Warren is saying.

Like, listen, if you're in a chronically leaking boat, If you're trying to build a textile business in the 1970s and 80s in America, you got to jump out of that boat. It doesn't matter how gifted you are, you're not gonna make a lot of money. And so he continues, when an industry's underlying economics are crumbling, which is a description of the textile industry, right, at that point in history, talented management may slow the rate of decline eventually though eroding fundamentals will overwhelm managerial brilliance

And so it's just 1 line.

I want to read to you. I want to give you some context What's happening? He's talking about like they're him and Charlie don't really like options like stock options businesses. They've bought some where that's like the compensation. And the larger point here is that you have to be pragmatic and flexible.

And his point is like, listen, this is the way we think about this, but we've even invested in businesses where they have it and it actually works. And so he says, he's like, our conclusion is like, we're not just going to sit there and be like, the business is working, but you're using a different, you're using a different philosophy than us, so let's just change it. He's like, that doesn't make any sense. So he says, if it ain't broke, don't fix it. It's preferable to purity at any price.

So he's like, I have these ideas and these philosophies, this is what I'm perfectly comfortable with. But again, if it's not broke, don't fix it. I'd rather choose that option than you have to purity, you have to follow exactly what I believe and what I think is right. Really the reason I brought this to your attention is because 1 of my favorite quotes I've ever come across It popped into my mind when I got to this section and it says business is like nature it doesn't care if you arrive at the right answer from the wrong reasoning And then this is just fantastic. This is 1 of my favorite ideas I've ever come across.

I think Naval Ravikant was the 1 that really put into words with me. But reading the books, he says, listen, you should find work that feels like play, right? That's a very simple way of describing it. And when you read these biographies, you realize, oh, a lot of people

that there's a high correlation between the most successful entrepreneurs

of all time and people that found work that felt like play. They don't feel like they're working. They're just playing. They're obsessed with it. And they do.

And they're doing something they're obsessed about for multiple decades. That's why they get these crazy results. Most people first don't find work that feel like play, and most people quit. They'll run a business for 2 years, sell it, start another 1, and then repeat over and over again. Some people are built that way.

You know, if you feel that's like, like I'm not, you know, you gotta be who you are. Follow your natural drift, I think, is what Charlie Munger would tell you but the greatest results undoubtedly come from people that stick with the same business over an extremely long period of time and Warren says like the only way to do that is to design something, a work environment that you actually enjoy. So it says, this arrangement embodies a few very simple ideas. Charlie and I have carefully designed both the company and our jobs so that we do things we enjoy with people we like. That's a very simple but powerful idea.

If we were not paid at all, Charlie and I would be delighted with the cushy jobs we hold. And so some of my highlights is the fact that Warren just has fantastic one-liners. I don't think I need to elaborate on them. If you're listening to this you're smart enough to do it yourself. And there's just, I mean it's amazing how many I come across.

These are 3 on, 3 different one-liners on 3 different pages. If you can't tell whose side someone is on, they're not on yours. We can afford to lose money, but we can't afford to lose even 1 shred of reputation. There's plenty of money to be made in the center of the court. He spends a great deal writing about corporate culture.

It's very interesting. There's actually an entire section at the end of the book where he goes into detail about Buffett's,

or excuse me, Berkshire's corporate culture,

and in that section, Charlie Munger gives the best overview of the Buffett system. I'll see if I can find it linked somewhere online. I do quote from it, so I'll see if I can find it, but reading the whole section is worth it. But this is just an example of that and he says, Culture self-propagate. Bureaucratic procedures beget more bureaucracy.

And really think about that. It's like you get more of what you do. And so culture self-propagate. This is going to remind me something I heard Charlie say at the Berkshire Hathaway shareholder meeting. He says listen I can't give you a formula because I don't use 1.

Business schools will give you a bunch of formulas that don't work. And so this is Buffett writing in 1985 about the fact that it's better to avoid theories that are clearly wrong but very popular. Most Institutional investors in the early 1970s regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly fashioned theory.

The stock market was totally efficient and therefore calculations of business value and even thought itself were of no importance in investment activities. We are enormously indebted to those academics. What could be more advantageous in an intellectual contest, whether it be bridge, chess, or stock selection, than to have opponents who have been taught that thinking is a waste of energy. And so Buffett's counterpoint in this section, he buys a farm with his son in Nebraska and he buys some commercial real estate by NYU in New York. And he just essentially what he's saying is like, listen, don't listen to them.

I'm going to give you 2 examples. This is not complicated. It's not easy to do, but it's not complicated. Don't overcomplicate it. So it's really he's giving us 2 stories of fundamentals.

I'm going to

tell you his takeaways. I don't have

to read through like the price he paid for the NYU or the farm or anything like that. And so he says, listen, I tell these tales to illustrate certain fundamentals of investing. Remember, he's talking about buying a farm and buying commercial real estate next to NYU. Number 1, you don't need to be an expert in order to achieve satisfactory investment returns. But if you aren't an expert, you must recognize your limitations and follow a course that's certain to work reasonably well.

Focus on the future productivity of the asset that you are considering. So in this case, it's a farm in Nebraska, and real estate in New York. If you don't feel comfortable making a rough estimate of the assets future earnings, then don't do it, just forget it and move on. And so he's like, listen, what is the cash that you think this thing's going to throw off in the future. Now he's going to say, some people don't do this.

Some people say, I bought it for a million dollars. I don't care what it makes. I know in 2 years from now, or I think in 2 years from now, I'll sell it for 2 millions. And so he's like, that's speculation. That's not investing.

If you instead focus on the perspective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so." So I don't know if,

I don't know, I can't remember if this

is a highlight in this book I read, or if it's something I heard him say but he talked about his the reason he prefers investing over speculation is because he feels speculating is like he feels there it's like dancing at a party and you have to leave by midnight but there's no clocks in the room And so his point is like you can't predict when what you're speculating on is gonna cease in increasing in value and is gonna go in the other direction and wipe you out. So he says, half of all coin flippers will win their first toss. None of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never, and he emphasizes this word, is never a reason to buy it. The fact that a given asset has appreciated in the recent past is never a reason to buy it.

With my 2 small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. And this is 1 of my favorite sentences. He repeats this over and over again. Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard. This is his fifth point I think.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed it is dangerous because it may blur your vision of the facts that are truly important. When I hear TV commentators opine on what the market will do next, I am reminded of Mickey Mantle's scathing comment, you don't know how easy this game is until you get into the broadcasting booth. And so he wraps up this section here, my 2 purchases were made in 1986 and 1993. What the economy, interest rates, or stock market might do in the years immediately following, so it would be 1987 and 1984, was of no importance to me in making those investments.

I can't remember what the headlines or pundits were saying at that time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU. And so this is where the organization's benefit, or excuse me, the organization's book really benefits because over a decade later he revisits that same idea. And I'm just going to read 1 paragraph. It's really a summary of what he just, this is

a lesson he was just trying

to teach us. And my summary of the summary is don't be prisoners of the moment and do your own thinking. In the 54 years we have worked together, him and Charlie, we have never foregone an attractive purchase because of the macro or political environment or the views of other people. In fact, these subjects never come up when we make decisions. Okay, so this is an idea that's widely known, but I think is important in case some people don't know it.

And in case you do, it's important to revisit. And it's his introduction to his Mr. Market idea. This is the idea he learned from Ben Graham. So it says, when we're investing, we view ourselves as a business analyst, not as market analysts, not as macroeconomic analysts, and not even as security analysts.

Eventually, our economic fate will be determined by the economic fate of the businesses that we own, whether our ownership is partial or total. Ben Graham, my friend and teacher, long ago described the mental attitude towards market fluctuations that I believe to be the most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market, who is your partner in a private business. Without fail, Mr.

Market appears daily and names a price at which he will either buy your interest or sell you his. And really his main point here is I think the important of controlling your emotions. Even though the business that the 2 of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For sad to say, the poor fellow has incurable emotional problems.

At times he feels euphoric and can only see the favorable factors affecting the business. When in that mood, he names a very high price because he fears that you will snap up his interest. At other times, he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price since he is terrified. Mr.

Market has another endearing characteristic. He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new 1 tomorrow. Transactions are strictly at your option. Under these conditions, the more manic depressive his behavior, the better for you.

There's another important point he makes. Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up someday in a particularly foolish mood, you are free to either ignore him or take advantage of him.

But it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, You don't belong in the game. As they say in poker, if you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy. And then he continues on about this idea where some part of your business philosophy is not going to be financial and that's the way it should be.

And so we referenced this earlier. It's like, I don't care if I can get a couple more percentage points. I'm not selling a business that I own. A determination to have and to hold, which Charlie and I share, obviously involves a mixture of personal and financial considerations. To some, our stand might seem highly eccentric.

Charlie and I have long followed David Ogilvie's advice. Develop your eccentricities while you're young, that way when you get old people won't think that you're Gaga. Certainly our posture must seem odd. To many in that arena, both companies and stocks are seen only as raw material for trades. Our attitude however fits our personalities and the way we want to live our lives.

Winston Churchill once said, you shape your houses and then they shape you. We know the manner in which we wish to be shaped. So I just love that idea. Some part of your business philosophy will not be financial. And that's the way it's supposed to be.

Okay, so this might seem a little odd. Because it's just 1 sentence here. Really, what I

feel is my

obligation to you is like, I have to jot down, because I'm not just reading this book, right? Every book I read now is seen through the eyes of the hundreds of other books and stuff we've been studying for the last 4 years and so he's talking about like arbitrage and paying attention to like the active market and just he's not interested in that. And so I

just want to pull out 1 sentence and then I'll tell you

the idea that popped in my mind. It says, this is not how Charlie nor I wish to spend our lives. What is the sense in getting rich just to stare at a ticker tape all day? If you don't, And I want to add, if you don't like staring at a ticker tape all day, some people probably like doing that. And so the thought that pops to my mind

is I'm reading this whole section, which again, that's the only sentence I'm going

to pull out for you, is that you can do both. Meaning, 1, figure out how you want to

spend your life, because that's what he just said. What's the point in getting rich? First he said, that's not how we want

to spend our lives. What's the point in us getting rich if we're doing something we don't want to do? So the goal is to do both. 1, figure

out how you want to spend your life because that's what he just said what's the point getting rich that's the first he said that's not how we want to spend our lives what's the point of us getting rich if we're doing something we don't want to do

so the goal is to do both 1 figure out how you want to spend your life and to Find out how to get rich doing that. This is

a discussion I was having with

a friend the other day. It's not, it's usually not what you do, it's how you do it. If you look at almost any profession, you have like the example I used in this conversation that just came to mind is like, you know, you have realtors that make no money, and you have realtors that make millions. You have podcasters that make no money, you have podcasters that make hundreds of millions of dollars and eventually there'll be a billionaire off of podcasting. You have investors that don't make any money and investors that make a ton.

It's not what you do, it's how you do it. So to me, it's like, no, let's figure out how

to do both. Let's figure out how do I

want to spend my life and then figure out when then that's actually the hard question right and then from there what your focus on that how can I get rich at doing that and in this section to know that myself this is a reminder that good ideas are rare when you find 1 bet heavily and don't sell when we own portions of outstanding businesses with outstanding management our favorite holding period is forever we continue to think that is unusual that it is usually foolish to part with an interest in a business that is both understandable and durably wonderful? Business interests of that kind are simply too hard to replace. It's hard to find a business that you understand and it is durably wonderful.

Okay, so this is the idea that it's really important to focus on a few high quality decisions as opposed

to thinking that you're smart enough to make hundreds of good decisions. So he says, Charlie and I decided long ago that in an investment lifetime, it is too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart, and not too smart at that, only a very few times. We'll now settle for 1 good idea a year. And I'm gonna tell you why this is, Jeff Bezos arrived at the same conclusion that Warren's arriving at here.

This strategy we've adopted precludes our following standard diversification dogma. Many pundits would therefore say that our strategy must be riskier than that employed by more conventional investors. We disagree. Portfolio concentration, meaning most of your assets in a handful of small businesses, right, raises both the intensity with which an investor thinks about a business and the comfort level he must feel with its economic characteristics before buying into it. So, again, if all of your eggs are in 1 basket, you're damn sure are going to watch that basket.

This is the point that he's making here. So in the book, Invent and Wonder, Invent and Wonder, excuse me, I think it's founders number 155 it's all Jeff Bezos the shareholder letters combined the second section is the second section is like edited transcripts of some of his best talks this is what he says I need 8 hours of sleep I think better I have more energy my mood is better and think about it as a senior executive what do you really get paid to do You get paid to make a small number of high quality decisions. If I make like 3 good decisions a day, that's enough and they should be just as high quality as I can make them. Warren Buffett says he's good if he makes 3 good decisions a year and I really believe that. And so then Warren gets into when diversification is needed and when it is not because sometimes it's a smart strategy and so he's going to talk about like what kind of investment classes would fit into that.

Some investment strategies require wide diversification. If significant risks exist in a single transaction, overall risk should be reduced by making that purchase 1 of many mutually independent commitments. So he's going to say this is really the path of venture capitalists. You may consciously purchase a risky investment if you believe that your gain considerably exceeds your loss, and if you can commit to a number of similar but unrelated opportunities. Most venture capitalists employ this strategy.

Another situation requiring wide diversification occurs when an investor who does not understand the economics of specific businesses nevertheless believes it's in his interest to be a long-term owner of American industry. That investor should both own a large number of equities and space out his purchases." So he's saying that what's the widest form of diversification? You own the entire market to an index fund. And he says if the reason you want to do this is because no nothing investors can actually outperform most investment professionals. Paradoxically, and he's saying that, like, just because you don't know much about investing, right, that doesn't mean you're dumb.

And this is such a good summary or conclusion to that 1 section, paragraph further. Paradoxically, when dumb money acknowledges its limitations, it ceases to be dumb. So if you know, hey, I'm not, I'm not, I don't have some unique skill. I can't just pick a bunch of stocks and businesses like Warren can. So let me just buy the index.

And so then this is his now he's he just gave us 2 other examples right and now this is his chosen path and the note I jotted down right under this is that most founders fall into this category because if you just need 1 successful business the business that you own to make yourself wonderfully rich and successful right on the other hand if you are a know-something investor, able to understand business economics, and to find 5 to 10 sensibly priced companies, so he's still talking about from an investor's perspective, even for a founder, it could just be 1, right? If Jeff Bezos never made another investment, but Amazon, he's still fabulously wealthy, even though you know, he does, he invests in quite a few other things. So says, you just need 5 to 10 sensory price companies that possess important long term competitive advantages. Conventional diversification would make no sense to you. It is apt simply to hurt your results and increase your risk.

I cannot understand why an investor of that sort elects to put money into a business that is his 20th favorite rather than simply adding that money to his top choice. The businesses he understands best, this is the part that most founders fall into the businesses he understands best and that present the least risk along with the greatest profit potential that is should be your favorite the business you understand best In the words of the Prophet Mae West, too much of a good thing can be wonderful. And really the way I think about all these lessons that Warren is talking about, like he's essentially, his main lesson is focus. If you go through the history of entrepreneurship, the importance of concentrating and focus is obvious. It repeats over and over again.

And yet, this

is a mistake that's very common. I've just talked to,

I was just talking to a friend of mine. He just raised a bunch of money for a startup. And all he wanted to talk about was NFTs and crypto.

And so I asked him, I

was like, how much time were you like, he sounded rather to me sounded rather knowledgeable on this stuff. And I was like, how much time are you spending on this? And he's like, I don't know, like 1015 hours a week reading about it and learning about it. And personally, I think these subjects are interesting to talk about, they bring up unique visions of the potential future. But I just told him,

I was like, do you know how crazy that is? Like you essentially, don't think about it as

like I'm spending 10 hours a week on this. So in a month, you're spending 40 hours researching something that has nothing to do with your business. A business that's growing but not yet profitable. Like does that make any sense to you?

And so I told him, I was like, listen, I couldn't, for the life of

me, I could not imagine a Steve Jobs, Jeff Bezos, an Enzo Ferrari, an Edwin Land, a David Ogilvie spending 40 hours a month when they're at the early days of building their business on something not related to their business.

I was like, listen, if you

want to invest in those things, find the smart move is find somebody that's really into it and then just give them your money to invest. But you really think you're not paying any penalty for diverting 40 hours of your attention away from your business a month? You're insane if you believe that. But this inability to focus is endemic and especially in today I think it's been with humans forever but especially in like this where we're just served up multiple like millions of distractions every day but the place where

it's not endemic is the history of entrepreneurship. It's very clear you got to focus first. You want to do all this other stuff, do it after. Do it later.

You definitely can't do it at the beginning. That's just crazy to me. And so we're going to see this idea of concentrating, focusing, concentrating on your energy and your time but also your resources. He's going to quote something that happens almost 100 years ago. This is John Maynard Keynes.

Every time I read Warren's shareholder letters, he brings this guy up. And every time I bring up the fact that I have a biography of Keynes that I haven't gotten to, but I will eventually turn into a podcast in the future. Says, John Maynard Keynes, whose brilliance as a practicing investor matched his brilliance in thought, wrote a letter to

a business associate in 1934

that says it all. And this is what Warren wanted to bring to our attention. As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which 1 thinks 1 knows something about and in the management of which 1 thoroughly believes. So let's review that real quick because he's gonna continue on this quote. The right method in their opinion is put large sums into enterprises which 1 knows something about.

And in investing in managers and entrepreneurs and founders and hopefully yourself that 1 thoroughly believes. It is a mistake to think that 1 limits 1 risks by spreading too much between enterprises about which 1 knows little and has no reason for special confidence. So what they're saying is you know your business, whether you're building yourself or investing in it, you have some some unique specific set of knowledge about that business. So if you trust your

own judgment, put your resources into that.

It's not less, it's not less safe doing that than investing in 20 businesses that you know nothing about. One's knowledge and experience, and this is the whole point of like why bring up the focus so much and repeat myself over and over again. One's knowledge and experience are definitely limited and there are seldom more than 2 or 3 businesses at any given time in which I personally feel myself entitled to put full confidence. And again this whole important this whole point that is key that is repeated over and over again, the importance of focus, importance of concentration, you don't even have to, it's not even my opinion, let's go to who I feel is 1 of the greatest entrepreneurs to ever do it, Edwin Land, founder of Polaroid, Steve Jobs' hero. And he says, this is what Edwin Land said, what, probably 60 years ago.

My whole life has been spent trying to teach people that intense concentration for hour after hour can bring out in people resources they didn't know they had. Another main theme that Warren teaches to us in different ways is you always shoot for quality. Shoot for quality in people and shoot for quality in businesses. Our goal is to find outstanding businesses. It must be noted that your chairman, always a quick study, required only 20 years to recognize how important it was to buy good businesses.

So saying learn from my mistake. Took me 20 years and Charlie Munger pushing me in this direction to finally realize, oh, I'm making mistakes here. In the interim, I searched for bargains and had the misfortune to find some. My punishment was an education in the economics of short-line farm implement manufacturers, third-rate department stores, and New England textile manufacturers." Then he talks about the fact that even if you've developed the skills necessary to build a successful business, that successful business is going to throw off a lot of cash, you still have to teach yourself. You have to learn what is best to do with the cash that your company produces, and that's a different skill set, and it's 1 that's very hard to learn.

And he says, the heads of many companies are not skilled in capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they excelled in 1 area, such as marketing, production, engineering, etc. Etc. Once they become CEOs, they face new responsibilities.

They must now make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch this point, it is as if the final step for a highly talented musician was not to perform at Carnegie Hall but instead to be named chairman of the Federal Reserve. In the end, and what's the result, plenty of unintelligent capital allocation takes place in corporate America. And there's many instances where he's you know he's writing to shareholders so he's like don't they talk about the culture of Berkshire and then eventually him and Charlie won't be around but don't worry like we have you know things set in place so that your wealth should be preserved and so he says you need not worry if my personal participation in Berkshire's Affairs ends prematurely." And his definition of his it ending prematurely is, a term I define as any age short of 3 digits. And so I thought that was interesting.

There was a fantastic, I saw this fantastic meme. It was an Olympic gymnast and she was asked a question like what's an acceptable excuse for her not to go to the gym and practice every day and her response she said death and really we think about What she's saying and what Warren's saying is if you love what you do the only exit strategy is death I've skipped ahead many pages and look we're right back at this main idea You got to resist the inevitable temptations and the reason he repeats the importance of focus and concentration so much is because temptations are inevitable and smart people fall into them over and over again. Smart people make mistakes and they do that in a very predictable manner. The way I think about this is just it made me laugh out loud when I read it a few weeks ago I read that book Unstoppable about Ziggy the guy that winds up surviving Auschwitz and then building coming to it he's like a penniless immigrant and winds up dying with like a net worth in the hundreds of hundreds of millions in when he comes to America and builds a bank and an oil company and all this other stuff and he just said something he says in Yiddish and it's a aphorism but it translates into even smart chickens shit on their own feathers and I just how it laughter when I came across that part in the book but this idea that you just have to resist the inevitable temptations And so Warren demonstrates this point by going back and pulling an idea from history And he's like do you did you know would you believe that a few decades back?

They were growing shrimp at coke You sell sugar water. What the hell you growing shrimp for Why are you diversifying? And so his point is, loss of focus is what worries Charlie and me the most. And his point is, even great businesses are not immune for the inevitable temptations. Like, they will fall into that.

Somewhere in that very smart company, very successful company, someone had the idea, hey, you know what we need to do? Instead of selling more bottles of Coke, let's farm shrimp. And if you think about why this is inevitable, it's because the potential amount of distractions that the modern world serves up is infinite. Okay, so now we're 25 years. This is where Warren says, hey, I've been running Berkshire for 25 years.

Let's go and look back. Like, what are the mistakes that I've made? So he says, it's a good idea to review past mistakes before committing new ones. So let's take a quick look at the last 25 years. So I'm going to

pull out a couple here. These are the 4 that I

found most important. That would be number 1, good people operating in textile markets fail. Number 2, you will do better by avoiding problems than solving them. 3, institutional dynamics cause irrationality and that's predictable. Number 4, only work with people you trust and admire.

Number 1, good jockeys will do well on good horses but not on broken down nags. The same managers employed in a business with good economic characteristics would have achieved fine records but they were never going to make any progress while running in quicksand. So he's repeating that lesson he taught us earlier. Instead of fixing a leaky boat, jump into a new vessel. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems.

What we have learned is how to avoid them. We've done better by avoiding dragons than by slaying them. Number 3, my surprising discovery, the overwhelming importance in business of an unseen force that we might call the institutional imperative. So I got a pause there in the back of this book is a very helpful like cheat sheet is the way I would call it. If you're gonna read his shareholder letters there's a bunch of concepts that he repeats over and over again and then Lawrence defines them simply for us in the back.

So this is his definition of this institutional imperative before I pick up in this section. Okay. A pervasive force in an organization that leads to irrational business decisions from resistance to change, absorption of corporate funds in suboptimal projects or acquisitions, indulgence of the cravings of senior executives, and mindless imitations of peer companies. And so that was so fascinating. It's not in this book.

I guess it was edited out. But when you read Warren shareholder letters, that mindless imitation of peer companies, he goes through over and over again. He's like, did you know in the 1960s, everybody thought they needed oil to own an oil company, regardless of if, and I'm making this up, I don't know, like he did use this, I don't know the timeframe, I don't have it in front of me. But he would just use the example like, why did every bank own an oil company? Why did every this own this?

It's just like, why? Because 1 person did it, they saw this other company buy it so then that founder that CEO went to their board of directors like, hey, we need 1 too. And so he goes into this. He says, rationality frequently wilts when the institutional imperative comes into play. An institution will resist any change in its current direction.

So He's giving us 4 signs of the institutional imperative. Number 1, an institution will resist any change in its current direction. Number 2, just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds. Number 3, any business craving of the leader, however foolish, will quickly be supported by detailed rate of return and strategic studies prepared by his troops. Number 4, the behavior of peer companies, whether they are expanding, acquiring, setting executive compensation, or whatever, will be mindlessly imitated.

He makes up the points like, listen, these are institutional dynamics. These are not caused by individual intelligence or individual stupidity, right? Institutional dynamics set businesses on these course. It happens over and over again. We have to show that he's his point is like be aware that it's happening.

If you're aware it's happening that's how you avoid it. But you're just saying thing you're going to stop this behavior just not. It's going to reappear over and over again. And then 4, I learned to go into business only with people whom I like, trust, and admire. We have never succeeded in making a good deal with a bad person.

Okay, so this section is titled Life, Death, Debt, and Swoons. That's the title the author gave it. So this is very fascinating because he's going to give us an approach and he feels any other approach is dangerous. And he tells us what to aim for. And he's talking about in business terms, but I would say this applies to your personal life as well.

This is going to be really fascinating. So there's a bunch of notes I left on this page So his thing is like you got to aim for wealth cash, which is net worth cash flow Always about the cash flow right and then liquidity make sure that you like it you convert to cash really quickly he's gonna talk about the dangers of leverage and then the this part is really interesting the fact that most people won't heed history's warning and so that's why I think you and I understand like the people that study history have a massive advantage over people that don't so let's go through this this

is a I got quite a bit

of highlights in this section. I found it very... Well, not too many.

It goes over like 4 pages.

Okay. Whatever occurs, Berkshire will have the net worth, the earning streams, and the liquidity to handle the problems with ease. So he was just talking about the crash of 1987. Any other approach is dangerous. Over the years a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single 0 always equals 0.

That is not an equation whose effects I would like to experience personally. He's funny and he's gonna say something like he's obviously very gifted but he has got a line in here where it's like wow is like he's he's strutting his feathers and he should in this case I'll get to there I just wrote damn when I got to that point unquestionably some people have become very rich through the use of borrowed money however that's also been a way to get very poor when leverage works it magnifies your gains your spouse thinks you're clever your neighbors get envious but leverage is addictive once having profited from its wonders very few people retreat to more conservative practices. And, as we all learned in third grade, and some relearned in 2008, any series of positive numbers, however impressive that numbers may be, evaporates when multiplied by a single 0. History tells us that leverage all too often produces zeros, even when it is employed by very smart people. Leverage can be lethal to businesses as well.

Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. And so that's why he's talking about why this is so dangerous. It seems obvious to him, but the reason that it's not obvious to some people, because you see some people that actually succeed with that strategy. And his point is like, in the case of you have a large amount of debt for your company, and you're banking on the fact that you can just refinance them when it comes to do 9 times out of 10, or 99 out of 100, whatever it is, that's probably accurate.

But what you have to what you have to solve for is the part when it's not. And that can blow you up and destroy your entire business. A business that you probably spent your life dedicated to. Occasionally though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job.

And he has a great analogy here for us. Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that is all that is noticed. By being so cautious in respect to having leverage, excuse me, by being so cautious in respect to leverage, having loads of liquidity, we will be equipped, so he just laid out the, so see what he does this over and over again.

He lays out how other people think about business right lays out their their case first and then says but we don't do that and this is why and this is how we think about business and so now he's going to wrap this up why don't I why don't we do that. Workshops tons of credit. We could have inflated our returns through use of leverage. We chose not to. By being so cautious in respect to leverage and having loads of liquidity, we will be equipped both financially and emotionally to play offense while others scramble for survival.

That is the sentence I was like, damn. That is him saying, the path you're choosing, we've seen this path play out, it produces weaknesses, and so we take advantage of those weaknesses. And so when You turn from predator to prey and now you're running and now we have a good meal. And so what he's talking about here, we play offense while others scramble for survival. That is what allowed us to invest $15 billion in 25 days of panic following the Lehman bankruptcy in 2008.

And so he talks about this point all the time. Most successful businesses, they think cash is something like, oh, it's like it's a drag. You got to reinvest it into like instead of just sitting in your bank. Or I think they put him in Treasuries. I forgot where Buffett says he repeats it over and over again.

I should know that but um his point is like Yeah, okay. You can chase a couple extra points. Maybe get 5 percent 8 percent whatever it is He's like but the point is like there's these history has shown There's these huge drops where your asset prices almost overnight can drop by 50%. You're not getting a 50% return. But now that I have cash, I'm getting 50, 75, 100% returns on that cash instead of chasing a few extra percentage points.

Why are you doing that?

What if I had that $15 billion instead of,

I read an article, I can't remember what it was, I don't have it in front of me unfortunately, but it was like, the returns he got on these investments in 2008 was ridiculous. It was larger than doubling his money, if I'm not mistaken. And so his point being is like, I could have put that 15 billion, and maybe I'm making 10%, 10%, 15%, whatever the case is. Or I could leave it there as like dry powder and for it when the inevitable happens the inevitable and unpredictable is what he uses over and over again and so that's a way better thing just have tons and tons of cash and then everybody's running and panicking for survival and you're building lifetime wealth in 1 transaction and so he breaks this down so he's like listen for the last 53 years Berkshire has been built by by built value by reinvesting its earnings and letting compound interest work its magic year by year we have moved forward yet Berkshire shares have suffered for true major dips And so he gives this this this chart in the book. I'm just going to summarize for it.

It's essentially 50% drops 4 different times and sometimes that occurs from high to low, you know, in a couple months. Sometimes it's a year and a half period. Sometimes it's like 20 days. But this is why he puts that in the book. He's like, this table offers the strongest argument I can muster against ever using borrowed money to own stocks.

There is simply no telling how far stocks can fall in a short period. In the next 53 years, our shares and others will experience declines resembling

those on

the table. And this is his point. No 1 can tell you when these will happen. The light can turn... This is such a great way to think about it the light at any time can go from green to red without pausing at yellow when major declines occur they offer Extraordinary opportunities to those who are not handicapped by debt, which is what he just said.

I put out $15 billion to work in 25 days because of my strategy, which is almost completely opposite of what business schools and other might teach you and other businesses choose to do with their actions. When major declines occur, which he just said they will happen and no 1 can tell you when they happen, they offer extraordinary opportunities to those who are not handicapped by debt. And think about that, we play offense while others scramble for survival. Wow. Another great one-liner for you, the roads of business are riddled with potholes.

A plan that requires dodging them all is a plan for disaster. So he's talking about the need for margin of safety, which is something he learned from Ben Graham, and he says 42 years after reading that, I still think those are the right 3 words. The beginning to that was, confronted with a challenge to distill the secret of sound investment into 3 words, he ventured a motto, margin of safety.

42 years after reading that, I still think

those are the right 3 words. The beginning to that was confronted with a challenge to distill the secret of sound investment into 3 words. He ventured a motto margin of safety.

42

years after reading that I still think those are the right 3 words and so that's the way to think about that it's the roads of business are filled with potholes, or riddled with potholes, excuse me, a plane that requires dodging them is a plan for disaster. It's impossible to dodge all the problems, problems you can't predict, problems you can't see right now so you gotta have a margin of safety. Another example of Warren writing that reminded me of something that ed dorp noticed and ed dorp in his autobiography You know, he realized this in the casinos. He realized this in being spending 50 years as a money manager Everything is corrupt and most people are not paying attention. And so he there's just 2 sentences here.

He's talking about the fact that all the stuff that happened with Fannie Mae and Freddie Mac. He's like, do you know that those are the most regulated companies in human history? And no 1 knew what the hell was going on. It's very similar to what at door at door discovered the fraud of Bernie Madoff, like 2 years, or should be 20 years before he Bernie Madoff got caught. And they're like, why didn't you do anything?

He's like, because this guy was the establishment, the SEC was rubber stamping everything he said. And like all his, his accounting was done by, I think, I wanna say Arthur Anderson, I might be wrong, but his accounting was signed off by 1 of the best accounting firms in the country. All his reports were rubber stamped by the SEC. He was on the, I think he was on the chairmanship of like the NASDAQ or some crazy stuff like that. He's like, he was the establishment, what are you talking about?

And so again, everything is corrupt, most people aren't paying attention. Fannie and Freddie Mac became the most intensely regulated companies of which I'm aware as measured by manpower assigned to the task we talked about this this congressional act in 1992 They had hundreds of regulators just watching them, right? And he says both enterprises, and even after that, both enterprises had engaged in massive accounting shenanigans for some time. So how do you have an entire firm, it's O-F-H-E-O, I think it was like 150 people or something like that.

Monitoring your entire job! You had 1 job! Monitor them and they committed massive amounts of fraud and accounting irregularities In front of your face! What were

you doing all day? Everything is corrupt. Most people aren't paying attention. And it's funny, right before...

He says... Warren's funny, man, because he says this just... I get to read between the lines, and

he's like, Listen, how stupid these people are. He's kind of talking outside his mouth and he talks about this this report from this regulatory body. He says the reports

127

pages included a self-congratulatory cover line celebrating 10 years of excellence. So they're saying they're excellent themselves. The transmittal letter and report were delivered 9 days after the CEO and CFO of Freddie had resigned in disgrace and the CEO had been fired. No mention of the departure was made in that letter. The letter was just saying we're celebrating 10 years of excellence by not doing our job.

Even when the report concluded, as it always did, that both enterprises were financially sound and well managed. So they make the report, but before they make it and before they publish it, in that time frame, The CEO, the CFO, and the CEO all resigned or had to be fired in disgrace. And then their report says both enterprises were financially sound and well managed. I love another Naval quote for you. My number 1 repeated in life is there's no such thing as adults.

Everything is corrupt and most people aren't paying attention. This was crazy to me. Another great thing about reading Warren's shareholder letters is that he has receipts. He just like Churchill and de Gaulle, we went over this, they're predicting what's about to happen with Hitler. They wrote it down.

They yelled it from the rooftops. No 1 paid attention. He does that over and over again. He talks about the dangers that are happening in like derivatives and everything else in the early 2000s that blew up in 2008. And he's talking about the dangers of what bull markets can do.

He's writing this in 1986, right? Right before the next year is going to be the mat 1 of the largest crashes in history and he says stocks can't outperform businesses indefinitely bull markets can obscure mathematical laws but they cannot repeal them another great one-liner here that he's talking about fees for invest like you can avoid fees invest firm from investment managers and the like. That's not really our focus though. So he says, performance comes, performance goes. Fees never falter.

And so when I got to that section 1 of my favorite like things I learned I didn't know this I learned it from Andrew Carnegie and then his partner Henry Clay Frick who also had the same philosophy and I did I think a three-part series on their partnership 1 on Andrew Carnegie's biography 1 on Henry Henry Clay Frick's biography and 1 on their partnership That dissolves called meet you in hell They want to try to fight each other and stuff as well rather wild But what I found very fascinating and I'm pretty sure that I'd never come across this idea before I started reading about Andrew Carnegie and Henry Clay Frick is the fact that they didn't focus on like their their revenue they focused on their costs so they had they said they have simple like formula cut the prices scoop the market watch the costs and the profits will take

care of themselves. So in those 3 books, over and

over again, there's like, gentlemen, watch your costs. That's how they're talking to their manager, their business, and everything else. And their point was that the savings that you get in costs, they compound forever, but your revenue is gonna jiggle. Like it's gonna go up and down and up. And so pay attention to your cost.

And those are some of the first books. Like I read that rather early on in the history of founders. And I realized like this is very common, something like these entrepreneurs preached and focused on that maybe other people don't. They always say, oh, we're going to focus on revenue. So they would talk about watching their costs.

And really, the difference between when you... It's like why history's greatest entrepreneurs watch their costs. It's the difference between like a James J. Hill and a Henry Villard. And I learned about James J.

Hill because Charlie Munger and Warren Buffett always talk about in their shareholder letters and the like, operators of businesses and founders who they they admire and I've learned I you know I've done I don't know quite 10 or 15 pot 10 podcasts on people they learned about from them and 1 of them was this guy named James J Hill you can find I did read his biography it's called Empire builder of the Northwest and so he got really rich building railroads. And so there's a quote from that book I want to bring into your attention because it compares and contrasts James J. Hill who was obsessed with watching his cost. He was on the front lines. He led from the front.

All the same ideas and traits that we talk about over and over again, this guy possessed, and then his competitor possessed none of them. And so he winds up kicking this guy's ass up and down the court. And he says, many observers would later compare Hill with Villard. Their comparison was inevitable. While Hill was building carefully and checking his costs minutely, Villard built in ignorance of costs.

Like other transcontinental plungers, Villard did in fact build rapidly and poorly. And like the pioneering Union Pacific Central Pacific, much of his main line, so much of Villard's main line, what he was working on, would later have to be torn up and rebuilt. He had rushed to get the massive land grants and to secure his West Coast investments. Amid mounting deficits and acrimony, Villard was then forced to resign from the presidency of his line. And if I remember correctly, I'm pretty sure James J.

Hill was the only 1, the only entrepreneur who was able to build a profitable railroad without subsidies. And so again, it just ties back to what Warren was saying. Performance goes, performance comes, performance goes. Fees never falter. Revenue comes, revenue goes, costs are forever.

It's the way

you think about that. History's greatest entrepreneurs watch their costs.

So then he brings up Ben Graham and reading The Intelligent Investor over and over again. Just 1 line here for you, and I wanna bring it to your attention because this is my goal for founders. It's why I work on it every single day. Warren says, picking up Ben's book was 1 of the luckiest moments of my life. I would like when people discover Founders and they start listening and applying these lessons

to say it was 1 of

the luckiest moments of their life. That's my goal. So it says, now we're moving on, there's 2 notes I left myself on this page. Never stop trying to widen your business's moat and then Larry Ellison's quote on deception of the mind. Alright, so it says, I asked the managers of our businesses to unendingly focus on moat widening opportunities.

And they find many that make economic sense. But sometimes our managers misfire. The usual cause of failure is that they start with the answer. So this is really about how we're prone to trick ourselves. This is the whole point of this section, okay?

The usual cause of failure is that they start with

the answer they want and then work backwards to find supporting rationale. Of course, the process is subconscious. That's what makes it so dangerous. Your chairman is not free of this sin. In Berkshire's 1986 report, I described how 20 years of management effort and capital improvements in our original textile business were an exercise in futility.

I wanted the business to succeed and wished my way into a series of bad decisions. I even bought another New England textile company. But wishing makes dreams come true only in Disney movies. It is poison in business." And So I like the fact that he says this this is a phenomenon. It's subconscious.

It's repeatable I am prone to it smart people are prone to it. And so this makes me think of this book I read the billionaire and the mechanic and Larry Ellison knew this and he says 1 of Larry's favorite Maxim's was the brains primary purpose is deception and the primary person to be deceived is the owner. Some more one-liners, some more Maxims here. We try to avoid small commitments. If something's not worth doing at all, it's not worth doing well.

So that's the opposite. It's the same idea, but I'm describing 1 end of the phenomenon. 1 of my favorite quotes that I've ever come across, again, go back to Edwin Land, and he says, there's a rule they don't teach you at Harvard Business School. It is, if anything is worth doing, it is worth doing to excess. And so think about this, there's 2 ideas that saves us time and effort.

If it's not worth doing, It's not worth doing well, but if it is worth doing, do it to excess. And then he talks about what he calls the Noah principle. Warren talks about the Noah principle. Predicting rain doesn't count, building arcs does. So in this section, he's talking about why, when he buys businesses, he really wants to use cash.

He does not like giving Berkshire stock. And so he's describing why that's the case. And really the note off myself is this is a worthy target for us to aim for. Right? He says our problem has been that we own a truly marvelous collection of businesses.

So for our sake, like maybe you want to build a conglomerate, maybe you want to

have a bunch of businesses, whatever the case is, but even if

you have 1, our problem has been that we own a true... What if that statement is we own a truly marvelous business? That's the holy grail for founders. Our problem has been that we own a truly marvelous collection of businesses which means that trading away a portion, which is what you do when you give stock, for them for something new almost never makes sense. We believe that is almost impossible.

Again, a worthy aim for us to or worthy a worthy target, excuse me, for us to aim for. We believe that it's almost impossible for us to trade up from our present businesses and managements. So the aim is to own a truly marvelous business and then 1 that's so good that it's almost impossible for us to trade it for something better. And again, I think that calculus, part of that calculus is going to be financial, but it's also personal. I think Warren would tell you, especially if you're already rich, doesn't make sense to sell your business that you love and that you know, just for more money, if you're already rich, because it's a lot easier to make more money than it is to build a marvelous business that you know and understand and actually like and enjoy.

He's also going

to continue on this idea

that you should optimize your flexibility. This is something we saw with Henry Singleton. He said, listen, I don't have this huge rigid strategic plan. He's like, I prefer to come to work every day and I like steering the boat each day. He trusts his own judgment and he'll look at the opportunities in front of him and pick the best path as opposed to saying no we have to follow this.

You can have like it be built rigid about what you want to accomplish but then be flexible on how the means to get there. So it says we do have a few advantages perhaps the greatest being that we don't have a strategic plan. Thus we feel no need to proceed in an ordained direction. We can instead simply decide what makes sense for our owners. In doing that we always mentally compare any move we are contemplating with dozens of other opportunities open to us, including the purchase of small pieces of the best businesses in the world via the stock market.

Our practice of making this comparison, meaning acquisitions against passive investments, okay, so we either buy a company or we take that money and invest in stocks, is a discipline that managers focus simply on expansion seldom use. And so that is another what he's describing there is he also references this double-barreled acquisition style. This comes from the glossary of the book as well. A sensible acquisition policy of either buying a hundred percent of businesses in negotiated acquisitions or less than a hundred percent in stock market purchases. Oh my god.

Okay. This is freaking crazy.

This is, okay, I'm going

to read my notes you first. An absolute masterclass in how to differentiate your product. I'm gonna copy this. I'm going to, okay, I'm gonna link to this in the show notes too. I found it.

It comes from, It's the appendix B from his 1990 shareholder letter. Okay. And it's a 4, it's a letter. So this is what Warren says. This is an edited version of a letter I sent some years ago to a man who had indicated that he might want to sell his family business, which is the business that Buffett is in, right?

He is a buyer of family businesses. I presented here because it's a message I would like to convey to other prospective sellers. Oh my God. Okay, I'm gonna pull out, I'm gonna link, I think you should read the whole thing.

So I'm gonna leave that link in the show notes, okay?

I'm going to pull out a couple of what he says here, a couple of highlights. And this goes over the whole thing. I actually went and did this before I started recording. So it's 1300 words. And I'm going to literally do the same thing for pitch for prospective customers of founders because it is perfect he's remember he he is the buyer of businesses so the person reading this it's like copywriting the person reading this is a potential customer so This is why I think you should read it because you're selling a product sensibly, so you should figure out how to differentiate the product you're selling.

Okay. It's really, really good. And you know, I just realized I should have did a paragraph by paragraph breakdown. All right, we're going to go with the notes I left when I read this because that's when I was in the moment That's I think the best Okay, so I'm just gonna go through again. He is talking to potential customers And so he talks about first he identifies with Like he knows his customer He starts off most business owners spend the better part of their lifetimes building their businesses.

By experience built upon endless repetition,

they sharpen their skills in merchandising, purchasing, personal selection.

It is a learning process and mistakes made in 1 year often contribute to competence and success in succeeding years." And then it talks about, listen, you get to sell your lifelong business 1 time but you're selling into a market where people buy businesses routinely.

And he says, mistakes made in a once in a lifetime sale of

a business are not reversible. So he's saying, this is why you have to think long and hard about who you want to sell to. And he's trying to differentiate why you should sell your business to me. And then he breaks down, he's like, listen, you have the upper hand here because your business is valuable and it's likely to become more valuable in the future. It's also a business that

is gonna get more valuable as the years

go by. So if you decide not to sell now, you're very likely to realize more money later on. With that knowledge, you can deal from strength and take the time required to select the buyer you want. So if I built this business, I'm near the end of my career, I want to find a safe home for it.

These first 3 paragraphs,

he's clearly saying, I'm on your side. I am 1 of you. I understand what the perspective is on your part. Okay. So he says, now he starts getting into his sales pitch even though it's more of like an education thing if you should decide to sell I think Berkshire Hathaway offers some advantages that most other buyers do not he's differentiating practically all of these buyers will fall into 1 of 2 categories And this is what Warren does so great and why reading his shareholder letters is the greatest education you can get, right?

He breaks down. First, he starts with, this is how other people approach this. And he's going to describe it and he's going to be rather charitable. And then he's going to go, this is why I'm different. So you have a lot of people that wanna buy your business, they're gonna fall, these buyers, there might be thousands of

them, but they're really in

2 categories. Number 1, it's a company that's located elsewhere, but operating in your business or in a business somewhat akin to yours. There's a potential acquire, right? Such a buyer, no, and then he brings up, brings up what they're likely to do because he's seen this happen over and over again. Such a buyer, no matter what promises are made, will usually have managers who feel that they know how to run your business operations and sooner or later will want to apply some hands-on quote-unquote help.

It says you and your family probably have friends who have sold their and he knows that investors and entrepreneurs they run in packs right? You and your family probably have friends who have sold their businesses to larger companies and I suspect that their experiences will confirm the tendency of these companies to take over the running of their businesses, particularly when that parent company knows the industry or thinks it does. So that's number 1.

You're going to sell to a competitor or somebody that's in an adjacent line and they're gonna come in and they're gonna say oh that's nice business you have let me change a bunch of

shit about it right number 2 a financial maneuverer it's funny to use the words who's invariably operating with large amounts of borrowed money who plans to resell either to the public or to another corporation as soon as the time is favorable. Frequently, this buyer's major contribution will be to change accounting methods so that earnings can be presented in the most favorable light just prior to them bailing out. If the sole motive of the present owner is to cash in their chips and put the business behind them and plenty of sellers fall into this category then either type of business that I've just described is satisfactory listen to what he did there he just he spent the first 3 paragraphs of this this letter right saying you loved your business you spent your whole life building it up like you learned it like the knowledge you learned from the mistakes you made compounded to get you even better at it right you're not that person He already you would not be talking to me if you were that person and he's saying listen a lot of people they build businesses They just want to forget about they want the money and forget about they want to move on That's fine Nothing wrong with that and there's plenty of people that do that and if you're that person then go pick option 1 or option 2 Right, he says you'll be completely satisfactory, but he knows that the person he writing this letter to is not that person so then he goes into his pitch but if the sellers business represents the creative work of a lifetime and forms an integral part of their personality and sense of being, buyers of either type have serious flaws.

This is a masterclass. What he's doing here, you've got to read this. It's insane. Birch now, he's like, okay, I just told you the other 2 options I told you who those options are good for but if you're this person you put your heart and soul into it it's creative work of your lifetime think about your so much of your life energy went into that you can't sell it to a flipper and to somebody else that's just going to take everything you did and dismantle it. Berkshire is another kind of buyer, a rather unusual 1.

More differentiation. We buy to keep. All of the businesses that we own are run autonomously to an extraordinary degree. He is now contrasting his approach to these other 2 most common approaches. This is genius.

I'm going to stop. I'm going to shut up, David. You're repeating yourself. I've already said it's good. You should read it.

It's really exciting when you get to this though. This is my favorite part in the entire book

by far. It's a book full of tons of wisdom I just love what he did here okay so this is all the businesses we own a run autonomously to an extraordinary

rate when we buy a business the sellers go on running it just as they did before the sale listen to this line we adapt to their methods rather than vice versa.

So he laid out what he's gonna do and now

he's saying hey listen you I have a track record so there's a complaint people are gonna buy your business they make all these promises and they they're they're liars you can go check go check with who you know people that sold their business to me before.

Go check with them. See if what I'm writing here to you is true. You know some of our past purchases.

I'm enclosing a list of everyone from whom we have ever bought a business. That's insane. And I invite you to check with them as to our performance Versus our promises. So even if you never check with him, the fact that he unsolicited, here's everybody's ever bought a business, I bought a business from, go call them, go talk to them. Like even like the action of doing that, right?

And maybe I'm stupid or sucker for doing this, the action that he did that, and the fact that he wrote like this, I already trust him. I already trust him. I'm going to skip over a couple things. It has to do with like wanting you to maintain a certain... This is where back when he used to...

He might still do this, but he wanted you

to have at least 20% of in the business, whatever the case is. But he says, and then keep it simple, this is something I jotted down in the margin, if you should decide to

do business with Berkshire, we would pay in cash. Your business would not be used as collateral for any loan by Berkshire. There would be no brokers involved. And then he's going to compare and contrast again. You know, there's a lot of dealmaking teams that they agree on terms and they send it

off to somebody else to finish

the deal. He's like, no, you deal with me. You know me. We're going to keep it simple and you're going to deal with me. And finally, You would know exactly with whom you were dealing.

You would not have 1 executive negotiate the deal only to have someone else in charge a few years later or have the president regretfully tell you that his board of directors required this change or that change. And then he's going to close him here. I will not pester you. If you have any possible interest in selling, I would appreciate your call. I would be extraordinarily proud to have Berkshire, along with the key members of your family, own and then he leaves the, because he wrote this letter to somebody, what the name of the business is blank.

So I don't know

what that is. He left it blank. So we'd be very proud. He's like, listen, I'm not gonna bother you. You wanna sell?

Let's get it done. Just give me

a call. And I'd be very proud to be partners with your family. Again, this is so good. I believe we would do very well financially. And I believe you would have just as much fun running the business over the next 20 years as you've had during the past 20.

Sincerely, Warren E. Buffett. I'm blown away. I am blown away by that. That was 1

of the most convincing sales pitches. And really, it's not laying it on thick. He's just communicating like you have

a business So I buy businesses Let's this is this is what I can offer you that other people can't and again Those are the very best like the best products in the world are differentiated. You cannot get them anywhere else So I will link that below it's available on Berkshire's website, and you can see all the letters individually. So you just go to berkshirehathaway.com forward slash letters and then forward slash whatever year. So that's 1990. You have to scroll all the way down to the very bottom but I'll leave the link in the show notes.

I think it's 13... Let's see... That's... Did I get that right? It is 1300 words, estimated reading time of less

than 5 minutes. Okay, this is 1 of my favorite Charlie Munger stories. I've told it

over and over again. I gotta tell it again, because

I love this guy. Here's 1 story

I can't resist relating. In 1985, a major investment banking house undertook to sell Scott Fetzer, which is this giant business they went to buying, offering it widely but with no success. Upon reading of the strikeout, I wrote Ralph Shea, Scott Fetzer's CEO, expressing an interest in buying the business. I had never met Ralph, but within a week we had a deal. Unfortunately, Scott Fetzer's letter of engagement with the banking firm provided it a $2.5 million fee upon sale, even if it had nothing to do with finding the buyer.

So they did this deal independent of the people he hired. Scott Fetzer still has to pay 2.5 million dollars even though they didn't find the buyer. I guess the lead baker felt he should do something for his money. So he graciously offered us a copy of the book on Scott Fetzer that his firm had prepared. With his customary tack, Charlie responded, I'll pay 2.5 million dollars not to read it another amazing testament to the teacher though absolutely amazing teacher that Warren Buffett is is the fact even in in sections that are rather boring to me like taxation he can still find interesting little paragraphs.

And this is why in

the future, I'm still going to reread, probably do it in like a year, maybe 6 months, I don't know when, but maybe I'll do it every 2 years, something like that. You just have to remind me

in the future. Like, I'm just going to go back and I'm going to reread Warren's shareholder letters. I'm going to take a lot more time. I'm not going to try to record that all in 1 sitting. That's not that was a bad idea on my part.

But I'm just going to pull out. It's not about the finances. Like I don't have to go about percentages or dollar invested now is this much now. You know that they have the greatest investment record in human civilization history. Right.

But it's these lessons about you like us as humans knowing It just he demonstrates a fundamental understanding of human nature is like this is an example. This is in taxation and really it's just about We know what what will increase human happiness and enjoyment of life and what won't and yet we chase things that we know don't and we make this mistake over and over again. We've got to learn from the experience of other people. We have to. Now we would rather stay put even if it means slightly lower returns.

1 reason is simple.

We have found splendid business relationships

to be so rare and so enjoyable that we want to retain all that we develop. This decision is particularly easy for us because we feel that these relationships will produce good though perhaps not optimal financial results. Considering that, we think it makes little sense for us to give up time with people we know to be interesting and admirable for time with others we do not know and who are likely to have human qualities far closer to average. So it's like we've already identified exceptional people. They're smart, they're driven, They're interesting.

These are people you want to talk to.

And I'm saying that from own personal experience because founders has acted like this magnet. I constantly get emails and messages from really smart, interesting people. The time it would take for me to find these people on my own just in random occurrences throughout life, it would be impossible, right? But really what he's saying here, like the reason

I said this demonstrates a fundamental understanding of human nature It's the like we know for

a fact the relationships you have with other people affect your happiness and your enjoyment of life That is a fact Even like I'm rather introverted and even for an introverted person the relationships I have like I have you know some friends I have like a group of maybe like let's say 10 so it's maybe like I'd have to count like 10 people that I've been friends with for over 20 years their relationships are extremely important to me. The relationships I have with my family, extremely important to me. I am not unique in that at all. We are inherently social creatures. The people we have around us, the people we live with, the relationships we have, the friendships, the people we have

to see at work or at school, or in any case, it's important to filter these people to make sure you're happy, because they're gonna affect your life. So the point is, so we know,

it's a fact that the relationships you have with other people affect your happiness and enjoyment of life. Chasing a few more dollars, which is what he just said, these relationships produce good, perhaps not optimal financial results, right? Chasing a few more dollars, especially after you're already rich, will not affect your happiness.

So this, to me, is so clearly the wise choice.

It makes little sense for us to give up time with people we know to be interesting and admirable for time with others we do not know who are likely to have human qualities far closer to average. We have found splendid business relationships to be so rare and so enjoyable that we want to retain all we develop. I feel that is true for me. I bet it's true for you if

you ask yourself, do I want to have splendid relationships that,

like really splendid relationships are rare, right? And that, so I know they're rare and I enjoy the ones I have. I want to keep the ones I have. We want to retain all we develop. And this is true for personal too, because if you go and see, like there's like people that interview people in nursing homes or right before they're gonna die, like 1 regret on, you know, deathbed regret, if you can think about it that way, that happens over and over again.

It's like, I wish I kept in touch with my friends.

And so there was something in 1 of

the books I read I can't remember this I did this like recently like a month ago or something done And so, you know, you get older you're busy with work You're busy, especially We have family of kids like you have a very limited time and in my case like you usually your friends are spread out Throughout the country sometimes the world and so I read something in 1 of

the books I can't remember what it was at

the top of the top of mine at the moment But I was like it just made me realize man relationship Importantly you can't like you got to make that a priority and so I literally went down and this group of friends the people I love and I did it for my family members to like my brother my sister my dad everybody like that and I literally like just called them and the ones that picked up

I was like hey I'm

just calling to tell you that you're important to me and that I love you and I know we're busy but that'll never change and Literally 30 seconds like I mean I gotta go and the ones I didn't didn't pick up I left voicemails and they like would listen to voicemails and I don't usually leave voicemails ever And they're just like doubt and you so 30 seconds to a minute on the phone Like I can't tell you the impact I was hearing about that days later like hey I really appreciate you doing that like you've taken the time or whatever the case is cuz like So many people have troubles even your closest friends and family members. They have troubles they're not telling you about. And just the fact that they know, hey, I'm thinking about you, you're an important person in my life, and I got your back no matter what. Try it, pick whoever it is. I promise you, you're gonna have responses.

They're like, I cannot believe you did that, thank you so much, whatever the case is. And it's not, I didn't do that for that, but I wanted the people to know. I'm sure it had something to do with the biography of somebody like regretting, so not doing that. You know, that's usually what I would imagine that's what spawned the thought. I can't remember, I can't believe I can't remember what made me think about this.

But The point is, it's just like, even for like introverted type A people that chase achievement, except for a small percentage that are sociopaths, like human relations are important to even those people. And I know because I'm 1 of those people. So like, it's just, I love the fact that Warren, like he's writing this in a letter to shareholders, the people that hire him to make him more money. And he's saying, I'm gonna make some decisions, and I hope you support me in this, that will not increase my returns, but will increase my enjoyment of life. And that works for me, and I wanna, instead of just writing about finances, I'm gonna try to teach you that so maybe you can use in your life.

I just love that. I love it.

So then he has an entire section on history

which I found interesting and he talks about the fact that we are all benefiting. In his case, Berkshire benefited because he's got this huge, he calls it the American miracle, which is like a tailwind that increases, has increased their, like basically if he started in another country, he would, him and Charlie together, same people, in a different country, he's not going to

get the results. He could do the exact same things, but

the fact is some of this had to do with events that happened way before us. And this is just a hell of

a way to put this. And he says, 1 word sums up

our country's achievements. Miraculous. From a standing start 240 years ago, a span of time less than triple my days on earth, Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants and the rule of law to deliver abundance beyond any dreams of our forefathers.

Just look around you. See the 75

million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it. They all represent a net gain for Americans from the barren lands, primitive structures, and meager output of

1776.

Starting from scratch, America has amassed wealth totaling 90 trillion dollars in

240

years And he brings that up another time and I'm just gonna reread this paragraph. I'm gonna read I'm gonna read the paragraph This is more on the American miracle. And he's talking about the beginning of George Washington, the year that he became president. So he says, In 1788, to go back to our starting point, There really wasn't much here except for a small band of ambitious people and an embryonic governing framework aimed at turning their dreams into reality. Today, the Federal Reserve estimates our household wealth at 108 trillion, an amount almost impossible to comprehend." So then he's got this section that's really interesting.

It talks about why you might want to build a conglomerate. He goes into that of course like he always does. He has this great historical understanding. He goes into why conglomerates in like the 1960s say for like what Henry Singleton was doing where you know usually a mass of like mediocre businesses but he's like there's you might want to actually build a conglomerate and so sometimes I like have you know these fantasies where You have these alternate futures and I see some people that are applying like Buffett and Munger's ideas to like the like software businesses or Like just you know technology in general like wow, that's kind of cool you have this a collection of high margin businesses that you keep adding to that throw off cash and you buy more and you're kind of like he's basically running Buffett's playbook but now and I hope first of all I hope I do founders for this my life but if I didn't this is another like this is a I don't know just an interesting path

Anyways, I'm just bringing this attention because he writes out he's like well Here's why you might want to conglomerate and this is from somebody that built 1 of them the most successful conglomerate of all time So, let's see what he has

to say about that, why he chose this structure.

So what do Charlie and I find so attractive about Berkshire's conglomerate structure?

To put the case simply, if you conglomerate, if the conglomerate form is used judiciously, it is an ideal structure for maximizing long-term capital growth. A conglomerate such as Berkshire is perfectly positioned to allocate capital rationally and at minimum cost. Our structural advantages are formidable. We can, without incurring taxes or much in

the way of other costs, move huge sums from businesses that have limited opportunities

for incremental investment to other sectors with great promise. So that's, again, his playbook is the same thing here. He's going to tell you why he chose this and what the advantages are over, like, if you just had your own business, like you just own 1 business and a business still has a lot of cash, that's a great idea. Maybe you don't want to reinvest it in other things. Maybe you just want to keep it for family wealth, whatever you want to do.

But his point is like, I have all these businesses that throw off cash and then I can just move that money to the next best opportunity. And he considers that a huge structural advantage of the conglomerate form. So he says, moreover we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. This is important. If horses had controlled investment decisions, there would have been no auto industry.

Another major advantage, we possess the ability to buy pieces of wonderful businesses, stocks, that's not a course of action open to most managements. Over our history, this strategic alternative has proved to be very helpful. A broad range of options sharpen decision making. The gains we've realized from marketable securities, so his point is like, this is really smart actually. The gains we've realized from marketable securities have helped us make certain large acquisitions that would otherwise have been beyond our financial capabilities.

So the fact that we can then choose to take our profit and buy pieces of other wonderful businesses, the returns from that decision created so much money, then We made so much money that we can then go out and buy either more stocks or more individual businesses that we could have not afforded if we hadn't pursued that first opportunity. Yes, in effect, the world is Berkshire's oyster, a world offering us a range of opportunities far beyond those realistically open to most companies. On top of that, and this is the ending of the section, on top of that we can profitably scale to a far larger size than many businesses that are constrained by the limited potential of the single industry in which they operate. And he repeats this, so I'm going to repeat this. He says, when bills come due, only cash is legal tender.

Don't leave home without it. He's telling us why we should always have lots and lots of cash. The reason for our conservatism, having a bunch of cash, which may impress some people as extreme is that it is entirely predictable that people will occasionally panic so panic future panic is predictable but it is not at all predictable when they will panic though practically all days are relatively uneventful tomorrow is always he italicizes it uncertain I felt no special apprehension on December 6, 1941, the day before Pearl Harbor, or September

10, 2001.

And if you can't predict what tomorrow will bring, you must be prepared for whatever it does. And then he revisits this idea of advice for life after Buffett but really it's advice to make sure how we can prevent the decay of our own business. My successor will need 1 particular strength The ability to fight off the ABCs of business decay, which are arrogance, bureaucracy, and complacency. When these corporate cancers metastasize, even the strongest of companies can falter. The examples available to prove the point are Legion.

But to maintain friendships, I will exhume only cases from the distant past and so he says in their glory days General Motors IBM Sears and US Steel sat atop huge industries I've done podcasts on General Motors IBM I don't think I'd haven't done Sears I mean and on actually US Steel okay so maybe I can add those to the list. Their strengths seemed unassailable, but the destructive behavior I deployed, I deployed above, eventually led to each of them to fall to depths that their CEOs and directors had not long thought impossible. Their one-time financial strength and their historical earning power proved no defense." So he says, they all became arrogant, bureaucratic, and complacent. Avoid arrogance, bureaucracy, and complacency. The 3 ABCs of business decay.

Now we get to Charlie Munger for the 50th anniversary of Berkshire Hathaway wrote, it's called Munger on Berkshire System. It goes on for 12345 and a half pages. It's worth reading the

whole thing because it's it's like essentially a 5 and

a half page summary of their their playbook But I just want

to pull out 2 things from here.

This is Munger on Buffett and really a worthy goal for us all. Gives us an advantage because most people are not doing this anymore. You should reserve much time for quiet reading and thinking, particularly that which might advance his determined learning no matter how old he became. So that's what he said. He said, Buffett reserved a lot of time for quiet reading and thinking, particularly that reading and thinking which might advance his determined learning, no matter how old he became.

And so this is Munger on Buffett's focus in the same section. Buffett's decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a Lollapalooza. Buffett was in effect using the winning method of the famous basketball coach John Wooden, who won most regularly after he learned to assign virtually all playing time to his 7 best players. That way opponents always faced his best players instead of his second best. And with the extra playing time, the best players improved more than normal.

I have a biography, there's been 2 books recommended to me by listeners from about John Wooden I'll get to in the future. Buffett much out-woodened Wooden because in his case the exercise of skill was concentrated in 1 person, not 7, and his skill improved and improved as he got older and older during 50 years, instead of deteriorating like the skill of a basketball player does. And then Munger gives us a simple idea to copy. Consider whether Berkshire's great results over the last 50 years have implications that may prove useful elsewhere. The answer is plainly yes.

Avoiding bureaucracy and relying much on 1 thoughtful leader for a long, long time as he kept improving and brought in more people like himself. And then he ends with the succession plan and he says, lest we end on a morbid note, I want, lest we end on a morbid note, I also want to assure you that I have never felt better. I love running Berkshire. And if enjoying life promotes longevity, Methuselah's record is in jeopardy. According to the Bible, Methuselah lived for 969 years.

And that is where I'll leave it. I highly encourage you to buy the book. Warren on the back says, Larry has done a great job of collating our philosophy. I will leave a link in

the show notes. If you buy the book using link you should be supporting the podcast at the same time.

I will also leave a link as always if you're interested in buying a gift subscription to founders for a friend, family, coworker, that link that is down below. That is

227

books down 1000 to go and I'll talk to you again soon.