What I learned from reading The Essays of Warren Buffett by Warren Buffett and Lawrence Cunningham.

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.

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.

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.

about today is going to be just Warren Buffett's own words.

I do have some highlights from the introduction.

It's like his own analysis and like an overview of the lessons he learned from reading and rereading Buffett's shareholder letters.

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.

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

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.

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.

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.

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.

I want to own businesses that generate cash.

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 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.

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 prepares its contents using words and numbers people of average intelligence can understand.

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.

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 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.

In all these years only 1 person in an audience has ever pointed out the false dichotomy about the entire question, right?

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.

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.

All of your energy should be put in getting, building your team with the absolute most talented people.

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.

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 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.

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.

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.

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

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.

Watch the tape of players in the league now.

But do the things that most people aren't doing.

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.

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.

Okay, I've had a lot of espresso this morning.

Okay, let's get into Buffett's own writing.

And this is about owner-related business principles.

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.

of our shares are owned by investors for whom Berkshire is their largest security holding.

So that's the main theme of Buffett, he's saying identify good ideas and then concentrate your resources around them.

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.

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.

is something that's simple, you can pick up

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?

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?

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.

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.

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.

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.

That's the best sales pitch to potential customers.

We feel you're entitled to hear how I evaluate the business.

You would demand that in a private 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.

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.

See all Founders transcripts on Applepodcasts

#227 The Essays of Warren Buffett