#78 Charlie Munger (the Tao of Charlie Munger)

Podcast: Founders
Source: whisper-base
Language: en
Duration: 3537s
URL: https://afp-922710-injected.calisto.simplecastaudio.com/57933a1d-c5a9-4040-9aca-e766ae2ec0eb/episodes/1d4435e3-23e3-4c62-a2d5-14bbda5c2b72/audio/128/default.mp3?aid=rss_feed&awCollectionId=57933a1d-c5a9-4040-9aca-e766ae2ec0eb&awEpisodeId=1d4435e3-23e3-4c62-a2d5-14bbda5c2b72&feed=3hnxp7yk
Fetched: 2026-03-03 09:35:04

In the Chronicles of American Financial History, Charlie Munger will be seen as the proverbial enigma wrapped in a paradox. He is both a mystery and a contradiction at the same time. Warren Buffett said, Charlie's most important architectural feat was the design of today's Berkshire. The blueprint he gave me was simple. Forget what you know about buying fair businesses at wonderful prices. Instead, buy wonderful businesses at fair prices. Consequently, Berkshire has been built to Charlie's blueprint. How is it that Charlie, who trained as a meteorologist and a lawyer, and never took a single college course in economics, marketing, finance, or accounting, became one of the greatest business and investing geniuses of the 20th and 21st centuries? Therein lies the mystery. Okay, so that's from the introduction of the book I'm going to talk to you about today, the one I read this week, which is the Tao of Charlie Munger, a compilation of quotes from Berkshire Hathaway's vice chairman on life, business, and their pursuit of wealth. So I wasn't expecting to do this book this week, but I saw this random tweet. And let me just read this tweet to you, and it says, The Tao of Charlie Munger by David Clark is easily the most impactful book I've read over the past five years. I've read it probably 20 times just to drill all of Munger's lessons into my head better than any MBA. So any time I see a tweet like that with such a high recommendation, I've talked about this before. I think it's foolish to like, I think you should economize and be frugal about with most of your resources and most things in life, but I don't think books is one of the things you should economize on or anything that teaches you something. I think it's silly. I think that's what you should be. That's the purpose of money. That's what you should be spending your money on. So once I saw a tweet, I immediately downloaded the Kindle version and read the Kindle sample, couldn't put it down immediately about the book. And normally I like to read paperback books or physical books, but I didn't want to wait. So I just downloaded the entire book and just couldn't stop reading. And before I jump into the book, I just want to talk about, especially if you're new to the world of Charlie Munger, now there's two other books that I'm going to be doing in future episodes of Founders About Charlie, one of them being Poor Charlie's Almanac, which is huge. But this is a really good introduction because what David, let's see his name is David Clark, the author. What he did is he took, the book is not a normal chapter book. It's like 130 or 140, I would say 1 to 2 page essays. And so he takes a quote or an observation that he found him Charlie Munger and then kind of expounds on it in a few short paragraphs. So it's the kind of book where you could read it in a weekend, but I would recommend, and I bought, I'm waiting for the paperback version to arrive, just keeping it around your house and in a place where you see it all the time, pick it up, read one or two essays, put it down, and that's the way I would consume it after you read it. Because I think it is very much like what the person is treating this is who read it 20 times. It is very much like an easy digestible reference to the mind of Charlie Munger. Now, why you might be asking other than the fact that he's more in Buffett's right-hand man, and like they just said, never really took a class on economics or any kind of business yet, has already had one of the most successful careers in business history. And the reason I was introduced to Charlie is because he is, there's a lot of people that I respect the way they think. And so I try to follow what they read, what they write, if they're on podcasts, etc. like that. And when I notice the pattern is a lot of the people that I already respect, respect Charlie Munger. And I think that's a good way, I've always talked about this idea that I was exposed to a few years ago, that books are the original hyperlinks, they link us from one person or one idea to another. Well, same thing with people, where if there's somebody you really admire the way they think, you always go back and look who influenced them, because we're a very, we're a species that mimics, right? So inevitably, the people that you admire were heavily influenced by other people. And this podcast is kind of an example of that, because I started out being interested in people that, entrepreneurs like the basic people that a lot of people look up to now, let's say like the Steve Jobs and the Jeff Bezos and the Elon Musk's. But then the more you study them, and you read their biographies, you watch videos of them talking, you realize like they always reference who influenced them. So think about this, like Steve Jobs, he was influenced by Robert Noise, one of the founders of Intel. Robert Noise was, in turn, influenced by people like Bill Hewler and David Packer, founders of HP, who also influenced Steve Jobs. And I always talk about, you know, if you really want to understand Steve Jobs, you should really study the life of Edwin Land, who is, I think, one of the most, how would I say, not underrated? Like, he had a huge impact in the world, and yet not that many people know about him. So whatever term you want to, whatever term describes that, where, you know, when I discussed Edwin Land, I said, hey, you really should read his book or read the book, his biography on him, called Insisting on the Impossible. And you realize a lot of the ideas that we quote Steve Jobs, he's just quoting Edwin Land. And this happens all the time. So Jeff Bezos, who is the influence by, well, read everything's story. He talks about Sam Walton. He talks about life-changing meeting with the founder of Costco. James Senegal, I think, is how you pronounce his name. Same thing with Elon Musk. He talks openly about being influenced by people like Benjamin Franklin and Henry Ford. So this is a long-winded way to say, there's something, there's a lot of value to studying Charlie Munger, at least I found a lot of value in that, because by and large, almost every single person I look up to or that I enjoy the way they look at the world references the influence he's had. So we're going to see a lot of that today in this book. So this is not like a typical biography, but we are going to hear a little bit about, like the introduction covers a little bit about his early life. So let me just jump into that right now. And it says, Charlie spent much of his youth, he's 95 years old now. So he says, Charlie spent much of his youth reading the television and video games of his day. So that's what they're describing reading. Reading is a heavy, heavy theme in this book. Well, I'll just get it up. I won't step on my future points. And that is where he discovered a larger world. So Charlie and Warren both grew up in Omaha, and this is a little bit about his first job and an indirect way that he's going to wind up meeting Warren Buffett. So it says, Charlie was introduced to the world of business at the Buffett grocery store. So this is a grocery store that Warren Buffett's grandfather owned. He said he learned about, and this is really important. He said he learned about taking inventory, stocking shelves, pleasing customers, the importance of showing up on time for work, and how to get along with others while accomplishing a joint task. And of course, running the cash register, where money, the lifeblood of business flowed. The people that are already on my email list will already know this because I just took notes on, it's like a 30 minute talk Charlie Munger gave in 2005. It was given a commencement address. I think it was at the University of Southern California School of Law. And so he references history constantly. He's very much a student of history. And so the author, David Clark, is picking up on that here in the introduction. He says, Charlie often brings up the horrors of the Great Depression, at Berkshire Hathaway Annual Meetings, as a reminder of just how bad things can get. And that's one thing you're going to notice about Charlie is like a very, almost like a stoic philosophy on understanding the, hey, most of what happens to us in life, we can't control, but we can control how we react to it. And he references like, how studying history will put things into your perspective. Like you may be suffering, but people have suffered way worse than you, and they've survived through it. So that when I read that part about, constantly reminding yourself about the Great Depression and how things can get, there's a book that I read. So it says, well, first let me read the note out of myself. It says, there's a value in studying these time periods. I'd recommend reading the last Highlander. It teaches you what humans are able to adapt and overcome. And the audiobook is like a long podcast. And so then I went back and looked for my notes on that book. And I'm just going to read them to you. Let me pull it up right now. Okay, it says, these are notes I wrote. It says, I just finished it for Gotten Highlander. My incredible story of survival during the war in the Far East by Alistar Irkord. So I was posting something that said, highly recommend. But let me just tell you the basic plot here. And I'm just going to read my notes directly to you, okay? This is really important. So the guy that wrote the book is, it's just like self first hand account. So it says, Alistar Irkord was conscripted into the British military to fight during World War II. He was 19 years old. He was sent to Singapore. The Japanese invaded and he was taken hostage. He survived 750 days in the jungle, working as a slave on the death railway and the bridge on the river Quai. Most of the time, he was forced to work completely naked. So imagine your slave of the Japanese, Imperial Army, your butt naked, and you're in the jungle. What do you think is going to happen? He contracted dysentery, malaria, and tropical ulcers a lot. If you want to gross yourself out, Google what a tropical ulcer looks like. He was then transferred after 750 days in the slave. He was transferred to what's called a Japanese hellship. The ship was torpedoed by the Allies. Almost everyone on the ship died. He did not. He spent five days adrift at sea until he was picked up by a Japanese whaling ship. His life has been so far, right? It gets about to get worse. He was sent to Nagasaki and forced to work in a mine. Two months later, he was struck by the blast from the atomic bomb. He was freed by the US Navy shortly thereafter. He returns home to Scotland and finds out his best friend died in the war, and the girl he loved got married and moved to Canada. At 90 years of age, he wrote the book, The Last Highlander, to inspire others to persevere when they are faced with hardships in their life. I think it's a great book for entrepreneurs. The story demonstrates the adaptability of humans are fierce desire to survive and puts the stress of building companies into the proper perspective. The entire story only takes three hours and 14 minutes. If you happen to subscribe to Audible like I do, I recommend using one of your credits on that because I think it's fantastic. Let's go back to more of his early adulthood. After high school, 17-year-old Charlie and World University of Michigan to study mathematics. He turned 19 a year after Pearl Harbor, dropped out of college, and joined the US Army Air Corps. The Army sent him to Caltech in Pasadena, California to study meteorology. There he learned a difference between cumulus and serious crowds and fell in love with the sunny Southern California weather. While the teenage Warren Buffett was busy learning about odds and probability at the horse racing track, Charlie Munger was learning important investment skill while playing poker with his army buddies. That's where he learned to fold his hand when the odds were against him and to bet heavy when the odds were with him. So betting heavy when you know when you have an opportunity, he talks about constantly a strategy he later developed to investing. Or he later adapted to investing. So when I'm going to law school, then he joins a prestigious corporate law firm. He doesn't last long as an attorney. And then he also becomes a director of an international harvester dealership, which I think just sells like farm equipment. But he talks about some of the lessons he learned from the dealership. It was a volume business for quite a lot of capital to pay. It's costing inventory. Most of it is finance. Paying loans is a lot of stuff. So after a couple of bad seasons, the care and cost of the inventory starts to destroy the business. So he learns like what's a bad business, which I think is very valuable to learn. So I'm sorry, at this point in the book, he's still an attorney. So he says, Charlie thought a lot about business during that time. He made a habit of asking people what the best business they knew of. He longed to join the rich elite clientele that his silk stocking law firm served. He decided, this is really important. He decided that each day he would devote one hour of time at the office to work on his own real estate projects. He wanted to develop real estate. And by doing so, he completed five projects. He said that the first million dollars he put together was the hardest money he ever earned. It was also during that period that he realized he would never become rich. Or never become really rich practicing law. He'd have to find something else. So I think that's obviously really important. Listen, there's nothing wrong with having a normal job. It's just you're not going to become wealthy being an employee. I mean, go look at how the great thing that I was exposed to by accident, which is really good idea, was you can pull IRS data. And let's say you want to know, okay, what are the people that make over, say, ten million dollars a year? What's their occupation? And so a lot of it comes from financial services. So if you're making ten million plus a year, and this is data is like a couple years old. It might be a decade old. But the time is like 45% of the people reporting ten million dollars a year income. It comes from interest dividends, capital gains and stuff like that. The next category is business income. So entrepreneur is something like 30%. And then it goes from there. So that's one way to do it. Charlie just realized, hey, I want to be on the other side of this transaction. I want to be the people hiring the attorney, not the one actually doing the work. So he drops out and goes leaves California. Actually, I don't know if he leaves permanently. I think he's just back in Omaha. But he winds up meeting Warren Buffett. He meets Warren at a lunch through mutual friends. And they instantly hit it off. Like the first time they talked, they went up talking for hours. The rest of their friends leave lunch. And they just wind up building just relationships they still have today. So it says, after Charlie returned to California, he and Warren talked several times a week on the phone over the next couple years. And in 1962, Charlie finally started an investment partnership with an old poker buddy, who was also a trader at the Pacific Coast Stock Exchange. He also started a new law firm. So he started his own law firm called Munger Tolls Hills and Woods. And within three years, he stopped practicing law to focus on investing full time. So he goes through a couple of these investment partnerships. I think he even has what I guess you would call hedge fund at the time. It winds up closing down after this financial panic. I think of 1973 to 1974 from Namastegan. And in 1979, Charlie became Berkshire Hathaway's first vice chairman. It was from those two positions. So he was, oh, I skipped something. Charlie wind up buying a company called Blue Chip Stamp. And then that merged with Berkshire Hathaway. But he was running the company. So it was from those two positions that Charlie would help Warren make the investment and management decisions that would take Berkshire Hathaway from a net income of $148 million and a stock price of $1200 a share in 1984 to an income of approximately $24 billion and a stock price of $210,000 a share in 2016. Warren, in summing up Charlie's impact on his investment style over the last 57 years, he said, Charlie shoved me in the direction of, this is important. This is what Warren was referencing at the beginning of the podcast about how he credits Charlie with being like the architect behind the strategy of Berkshire. So he says, Charlie shoved me in the direction of not just buying bargains as Ben Graham had taught me. This is the real impact that he had on me. It took a powerful force to move me on from Graham's limiting view. It was the power of Charlie's mind. And that mind is what I was referencing earlier where people that I admire their mind tend to admire Charlie Munger's mind. All right, so now we're into the book where it's going to move a lot faster because he gets to his points really, really quickly. So start off, you know, Charlie Munger is very against this idea of fast money. He doesn't believe in it. And his quote is, the desire to get rich fast is pretty dangerous. And now we're going to hear the author expound, David Clark expound on that. And he says, trying to get rich fast is dangerous because we have to gamble on the short term price direction of some stock or other asset. There are a huge number of people trying to do the same thing, many of whom are much better informed than we are. The short term price direction of any security or derivative is subject to all kinds of wild price rings due to events that have nothing to do with the actual long term value of the underlying business. Last but not least, there is the problem of leverage. To get rich quick, one often has to use leverage or debt to amplify small price swings into a really huge gain. That's fine, but if things go against us, they can also turn into really large losses. In his early days, Charlie did use a lot of leverage on the start on his stock arbitrage investments. But as he got older, he saw the grave danger he was putting himself in and now passionately avoids using debt and only bets on the long term economics of a business. This is a short term price of its stock price. Okay, so that was fast money. He has this idea where he talks about a lot where you need to know your circle of competence. And so this is a direct quote from Charlie. This is knowing what you don't know is more useful than being brilliant. What Charlie is saying here is that we should become conscious of what we don't know and use that knowledge to stay away from investing in businesses. We don't understand. Another one of his famous axioms is avoid being an idiot. And this is, I don't really need to expound on this quote, it's pretty straightforward. People are trying to be smart. All I am trying to do is not be idiotic, but it's harder than most people think. Another one of my favorite quotes of his, he talks about getting rich by sitting on your ass. So it says, sit on your ass investing. You're paying less to brokers, you're listening to less nonsense. And if it works, the tax system gives you an extra one, two, or three percentage points per annual. So he talks about, you know, you should be buying and then never selling. Like, he's not really into this idea of day-training. The note of myself has the same applies to founding and running your business. Starts something to sell in the entrepreneurship world, starting something to sell fast is glorified. But the type of person who is able to build a business and sell it is probably not going to be content sitting on their ass with just money to show for it. They inevitably start again and most times they sold the best idea. So now they are working on their second or third best idea. So he's talking about Charlie saying, hey, you know, do your homework, read, research, then once you make your purchase decision, like, that's it, you're done. Don't do anything else. We'll now work on the next purchase decision. Don't go and be all frantic and live like this, this like hectic lifestyle. We're like, okay, now it's up, now I'm going to cash in on it. And I've always referenced this multiple times on the podcast. Go look at the, there's graphs just type in Warren Buffett's net worth. And you're going to see, I don't know what the percentage is, let's say 50% of it's happened less than like five years. Because all good things in life are from compounding. And you can't have things that compound if you don't invest the time. So it says the important investment philosophy assumes that one is better off buying a business with accept. One is off better buying a business with exceptional business economics, working in its favor and holding it for many years than engaging in a lot of buying and selling. Now for our purposes, let's change engaging a lot of buying and selling to engaging in a lot of starting and selling, starting and selling, so on and so forth. I love Jason Fried's opinion on this. He's like, I'm a proud non-seagull entrepreneur. He's like, I got a good idea and I'm going to stick with it. I'm trying to anticipate market trends constantly buying and selling means constantly being taxed. So that's what Charlie was talking about. You have a huge economic advantage over the people to do this. If one holds an investment for 20 years, there's only one tax to pay, which according Charlie equates to an extra one to three percentage points of profit per year over the entire time you hold it. Charlie knows that time is a good friend to a business that has exceptional economics working in its favor. But for a mediocre business, time can be a curse. That's a really good point. There's a short little video. It's taken from one of the Berkshire Hathaway shareholder meetings and it's just Charlie Munger and Warren Buffett talk about diversification. Because you know if you went to any kind of business school or from a friend in school, like they choose to diversify, diversify, Charlie calls diversification twaddle. And he says, this worshipping at the altar of diversification, I think that's really crazy. So he talks about his diversification only for people that don't know how to value businesses. But in that talk, he's like, listen, the idea where, like, first of all, he says there's only so many businesses that one human being can actually understand at like a fundamental level, right? And so this idea where you've identified one, two, or three really great businesses. But in the name of diverse, for the sake of diversification, instead of putting more money into the things that you think are sure winners, you're going to put into like the 35th business. He's like, this is stupid. Like the people teaching and he, he talked about this in the books somewhat. He has no respect for like for almost all of modern financial education. And I use education loosely because it's mostly bullshit. Okay. Charlie discovered that if we invest in companies that have great economics working in their favor at a reasonable price, we can bring the number of companies we still own down to 10 or fewer and still be protected against an unexpected business failure and have good growth on our portfolio over a 10 to 20 year period. As the saying goes, too much diversification and we end up with a zoo. It is much easier to keep a sharp eye on our basket if there are only 10 eggs in it. And now, you know, if you listen to the three parts series, I just did an Andrew Carnegie and Henry Frick. This comes up over and over again. He's just, what Charlie and Warren are saying, let's say in the 1980s, 1990s, 2000s, Andrew Carnegie said 150 years before that. He said, you know, this idea that you should put all your eggs in one basket and watch that basket. That's why Andrew Carnegie is most famous quote. And then Andrew says in his autobiography, maybe it was in one of the books with Frick, but he's like, listen, study how the great fortunes are made. It's not a scatter shot approach. They've identified the best business possible and they put all their energy and effort into it. That's certainly what Andrew Carnegie did. So another example of Charlie is going to talk about this a lot about when you bet heavily. You should remember that good ideas are rare when the odds are greatly in your favor bet heavily. Same thing applies to business. If you've identified a business that's worth something that there's clear demand, people are willing to pay you for it. You enjoy running it. Like, why are you going out and starting a side project? Very few people in the world in history, or even if you want to limit to the people who are alive today, find one great business. That is so rare. You found one great business. You already won. Just stick with it. But again, that kind of goes against human nature, which Charlie talks about a lot. The reason that him and Warren are successful is because they have patients. But why, you know, patients seem simple, right? Your parents taught you. Hey, be patient. But that's not in our nature to be patient. That's why it's so heavy. It's not that these ideas are even like rare unknown. It's the application of the idea that's so rare. You're going to talk about more about financial crisis equals opportunity. And he says, if you, like me, lived through 1973 to 1974, or even the early 1990s, there was a waiting list to get out of the country club. That's when you know things are tough. If you live long enough, you'll see it. So at the same time was reading that part. I was listening to Bill Gurley, another, another person that I respect the way he thinks. He just has a really interesting unique mind. And I was taking notes on him. And he was asked like, how has experiencing multiple booms and busts impacted your investing mentality? And he talks about, I've read, I have multiple views on the subject. And he says, I've read every book on the history of financial markets that I could. You can get a ton of exposure to it if you just look for it. Silicon Valley is an interesting place because I've never been around a group of people where risk is forgotten so quickly. And I think having that historical background is a huge advantage. And I think what Bill, Bill, Bill talks about this multiple times. Like if you're really interested in something, there's no reason. Like you have no excuse in the Asian Internet not to be well read on it. And I think if you're looking for other books or other things like to, just like I think obviously reading biographies is a good use of time, I think studying the history of financial markets is a really good use of time. Because it influences business and entrepreneurship. And that's basically what Charlie's telling us. He's like, listen, if you live long enough, you'll see this over and over and over again. So I always laugh when like you have these people like, oh no, we're going to control the business cycle. No, you're not. You're absolutely not. Like bubbles and busts are part of human nature. They're not going anywhere. Okay, so this is a description. Now he's going to talk about like what? What does Charlie do during a financial crisis? He said, I would be a miss if I didn't point out the random recession crashes that, that random recessions and crashes are programmed into Charlie's buying strategy. Both Charlie and Warren let cash pile up waiting for a recession and crash, even if it means getting low rates of return on their cash holding. So this is so funny to me. This is what I mean about like what you're told works and what actually works is usually two different things where people like, oh, you should, you should never have like an abundance of cash. That is the dumbest, because like, oh, it's going to be inflated away. Well, it's not going to be inflated away if asset prices decrease when you have these regular busts that decrease asset prices by 50%. What are you talking about? And so this is what Charlie and Warren are saying. Like they're arguably, Charlie makes the point that Berkshire probably has the most successful investment record in the history of humanity. That's a hell of a statement and he's probably right. And what are they doing? Like, they're letting cash pile up because they know what's going to happen. They've studied history. When a crash happens, everybody runs for the exit. And then asset prices drop and oh, shit, look, I have all the money. Guess what? I just bought up, you know, I bought up that thing that was for pennies on the dollar. That's how you get really, really wealthy. That's how they got really, really wealthy. And there's even some numbers in the book. I'm not going to share them with the podcast because it gets a little boring. Like, oh, they bought something for $280,000,000. And during a crash, five years later, it's worth two billion. Like, you see, like, those examples. So really, really do buy this book. I can't, there's no reason not to spend 15 bucks in the book. It's just not. Even if it means getting low rates of crash. Okay, so they'll sit on cash even if it means getting low rates. As they wait for the, what, listen to the word they use here. They wait for the inevitable. When the crash hits, they make their purchases. And then he's going to hit on this, cash is key. The way to get rich is to keep $10 million in your checking account in case of a good deal that comes along. So these, they hit on the same themes in different ways. So it really like seeps into, at least it's seeped into my brain. Probably will to you. So this is Charlie advocates keeping $10 million in cash. And Berkshire keeps 72 billion sitting around in cash, waiting for the right deal to show up. Obviously that number changes over time. The lousy return in their cash balances are getting is a trade-off. Poor initial rate of return in exchange for high, for years of high returns from finding excellent businesses selling at a fair price. This is an element of the monger investment equation that is almost always misunderstood. Why? Because most investors cannot imagine that sitting on a large pool of cash year after year, waiting for the right investment could possibly be a winning investment strategy, let alone one that makes them super rich. And why? Why is that so hard for other humans to understand? Because it goes against our nature. We think, oh, I have to do something. If I'm not doing anything, I'm not being productive. I'm wasting time. It's like, no, you just have to be patient, wait for the right opportunity. Oh, so I always love this because I talked about this last few weeks. This is a reminder that companies love to create made-up metrics. And I find it unbelievably, I cannot believe that I should, I mean, I don't know what I'm talking about. Why wouldn't the media, but the media amplifies fake numbers. It's like, who was writing these stories? Don't you know this is a made-up number? I talked about this last week with Steve Jobs lying about next phantom profitable quarter. And that was, you know, carried. It's like, they didn't do any kind of investigating. So I was like, oh, he said that. Okay, so let me just amplify that to other people. So it says, this is Charlie. He says, I think that every time you see the word, let me just spell it out, E-B-I-T-D-A, you should substitute the word bullshit earnings. So this stands for earnings before interest taxes depreciation and hammerization. Charlie considers interest depreciation taxes to be very real expenses, because they are. They have to be paid. Insurance and taxes have to be paid in the current year. Depreciation does cost as to be paid at a later date. For example, when a plant and equipment eventually need replacing, that eventual replacement is a capital cost. And capital costs can destroy what otherwise appears to be a really great business. According to Charlie, if we use this E-B-I-T-D-A to determine the earnings of a company, we will get an unrealistic view of the company's true economic nature. Charlie is going to give us some lecture on overconfidence. So he says, smart people aren't exempt from professional disasters from overconfidence. Here, Charlie is referring to the collapse of long-term capital management, which was a hedge fund set up by the fame Wall Street bond trader, John Merryweather, and the late 1990s. Merryweather brought together some of the smartest people from Wall Street in academia, including PhDs in mathematics and economics, several of whom were Nobel laureates. Those brilliant minds devised strategies for investing in bonds and derivatives using tremendous amounts of leverage, which, if things went their way, were to earn outrageous returns on their partners invested capital. The problem with the strategy was the potential for losses was catastrophic. So you've probably heard about long-term capital management, winds up going under. Within a day, they become insolvent. Charlie's lesson here is that a combination of super smart people and large amounts of leverage often end in disaster. I might add that the combination of really dumb people in large amounts of leverage, UGNs, and disasters will. Okay, so this is Charlie on waiting. It's waiting that helps you as an investor, and a lot of people just can't stand to wait. So I don't know how to pronounce this guy's first name, but you've heard his last name. I'm pretty sure you've heard of this guy. Pascal. I'm not going to try to blase, maybe? I don't know. I'm just going to refer to him as I've heard him refer to. Pascal, the 17th century French mathematician, said all of humanity's problems stem from man's inability to sit quietly in a room alone. Charlie agrees. You have to wait for the right company, one with a durable competitive advantage that is selling at the right price. And when Charlie says wait, he means wait as long as it takes, which can mean many years. Now this is interesting. I didn't know about this. So, well, let me just read to you. Warren got out of the stock market in the late 1960s, and he waited five years before he found anything he was interested in buying. I know for sure I wouldn't have that kind of patience. That's amazing. There's more than just waiting to find something to buy. When you buy a stock, you have to wait for the businesses underlying economics to grow the company and lift its stock price. When Charlie and Warren say that they intend to hold an investment forever, they mean forever. Who on Wall Street would make such a statement? That's one of the reasons Charlie and Warren have never worried about mimicking. I love that word. It's very important mimicking their investment style, because no other institution or individual has the discipline or patience to wait as long as they can. So, the note I left myself is patience is a superpower, and this is where my own life I need to work on, because I'm probably the most impatient person that I've ever met. Okay. Enduring problems. This is what I meant about. He has kind of like this, this like a stoic nature about himself. So, it says an isolated example that's very rare is much easier to endure than a perfect sea of misery that never ceases. Charlie is talking about the difference between an excellent company which might confront a major problem a few times in the span of 20 years. I also think it applies to your personal life too, compared with a mediocre company which might go from problem to problem year after year. A perfect example of an excellent company is the Coca-Cola company. Over the last 50 years, Coca-Cola has screwed up twice. Once when it got in the movie business and again when it reformulated its flagship product and came out with new Coke, it solved both problems by getting rid of them. The perfect example of a mediocre business that goes from one problem to another is any airline which has union problems and fuel cost problems and is in a price competitive business. This bit of wisdom is also applicable to our personal lives. It is far easier to endure a brief moment of intense pain than it is to suffer a misery that drags on year after year. That made me think of that famous quote where most men live lives with quiet desperation. Don't be most people. We're all temporary beings. There's no reason to be miserable. Just fix whatever needs fixing. A few good companies. If you buy something, you've hit on this trend, he said it a couple of different ways already in the book, but you don't need to have 200 great opportunities. I think Warren says, if you can identify or one or two great, really truly fantastic businesses in your lifetime, that's enough to get fabulously wealthy. This is Charlie saying, if you buy something because it's undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. They're talking about Ben Graham's approach to value investing. That's hard, but if you can buy a few great companies, then you can just sit on your ass and that is a good thing. He doesn't mean when he says sit on your ass, sit around and do nothing. These guys have been sitting and read all day long. He says if you go around and follow, if somebody was to follow Warren Buffett around with a camera, he says it looks very academic. Half the time he's sitting on his ass reading. The other half of the time he's talking one on one with people that he respects that he can learn from. I just remember Charlie saying, he doesn't look like work. It looks like academia. This is more about him talking about a few good companies. Charlie Warren's theory is that a company with a durable competitive advantage, to say that over and over again, has business economics that will expand the underlying value of the business over time. The more time passes, the more companies value will expand. They're talking about in the case of public markets, but I say this applies to entrepreneurship too. The longer you're able to hold it in your company, the difference is if it's a private company, if you own it, the value will surely extend in time. It would mimic what it would do in the public market, where you see the compounding of these businesses over a long period of time. The difference is you as the entrepreneur reap all that benefits, instead of selling it off, selling equity, which is the most valuable part of the business to other people. So it says, thus, once the purchase is made or once the founding is made, it is wisest to sit on the investment as long as possible. What he's saying to entrepreneurs is, don't jump. I use that quote. Rabbit-eyed kid, quit jumping. Focus. Just stay with what you have. It's going to be hard to do because you just have to get against your nature. I'm speaking to myself more than anybody else too. So, thus, once the purchase is made, it is wisest to sit on the investment as long as possible. Because the longer we own the company, the more it grows in value, and the more it grows in value, the richer we become. And I always use your Von Chinard, founder of Patagonia Fizz. It's a multi-billion dollar company now. 40 years later, it wasn't at the beginning. What if he sold it five, and he had the opportunity to? What if he sold it five or 10 years in? He'd be a lot less wealthy than he is today. Not that he even cares about that, but... Okay, what's this? Oh, here's Charlie talking about not being stupid again. It is remarkable how much long-term value... How much long-term advantage people like us, meaning him or her, have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying it's the strong swimmers who drown. So, again, people are trying to be really intelligent, really smart, really cutting-edge. Those are long-term capital management kind of people. He's saying, that's not what mean more and do it all. We just try to avoid being dumb. If you can avoid being dumb over a long period of time, you will get wealthy. I didn't understand this sentence, he said. It's the strong swimmers who drown. I guess the explanation was like stronger swimmers are the ones who actually... They become over-confident, so they'll assume further away from shore. And that gets them in trouble. Weakers swimmers are close to shore, because that's where it's most safe. That's what he means by that. If you get anything out of this book, this is just a random one sentence. If you get anything out of this book, you will learn the importance that Charlie puts on patience. I need to have that tattoo on me or something, because I need to work on that. Academic sorcery. By and large, I don't think too much of finance professors. It's a field of witchcraft. He also talked about when I took notes on that other talk he gave, that he firmly believed you can learn everything you need to know about finance in a week. And that the people that try to sell you other things, the problem is, if you can learn something that fast, there's no market for people to sell to you. So you can't have what are you doing in degree in finance for? If you can learn everything in a week, they have to fill your head with all this other nonsense. And he calls it trotto, sorcery, witchcraft, all kinds of ways to describe it, but it's the same thing. He's like, this is a bull crap. Don't pay attention to it. This is why I think you're better off reading a biography. Oh my god, I think he's actually going to, he talks about, yes, he does. Oh, okay. Let me just read it to you and then I'll, I guess I'll expel my own thoughts on it. So there's no single formula. There isn't a single formula. You need to know a lot about business and human nature and the numbers. It is unreasonable to expect that there's a magic system that will do it for you, meaning having a successful career as an investor and entrepreneur. He says, people are looking for a simple method. They can learn from reading one book that will make them rich. It doesn't happen that way unless they get really lucky. One, this is really interesting. One is actually better off reading 100 business biographies than 100 books on investing. Why? Because if we learn the history of 100 different business models, we learn when the businesses had tough times and how they got through them. We also learn what made them great or not so great. So in other words, he's telling you to listen to founder's podcast. And I obviously agree with that. I don't read it. When I was younger, I read a bunch of business books and then you realize, wait, this could have been a blog post or, oh, this actually doesn't even, like this idea doesn't even make sense anymore. Because their target market is people that want like a simple solution. There is no simple solution. It's a, it's a, what is the, what's the word? I just, I learned so the market reason calls it a complex adaptive system. That's what's starting companies is bill girly use something else. Because you're recommending a book to read. Hold on, let me look for this real quick because I think it's interesting. Okay, so he's talking about his one single favorite book is Complexity, the Emerging Science of the Edge of Order in Chaos by Mitchell Wardrop. And this is why says it's about multi variable nonlinear systems. Yeah, I read it when I was 25 or 26. I had a profound impact on high sea model systems, economies, businesses, opportunities, investments because most things in life are a multi variable nonlinear system. And that's what businesses. So you can't read just a business book that's going to give you the one answer and how to do it. Better off reading biographies. Okay, so that we covered that. I just love this quote. He's talking about this phenomenon, at least in America, in a country I live. I don't know where it is in the country you live in, but this idea of too big to fail, which I hate, and Munger is going to like very succinctly describe what's the problem with this. And he says capitalism without failure is like religion without hell. Another quick aphorism dealing with carrots and sticks. If we're going to prosper, we have to work. We have to have people subject to carrots and sticks. If you take away the stick, the whole system won't work. You can't vote yourself rich. It's an idiotic idea. This is very much sounds like one of my favorite writers and it seems to love. It says I do not think you could trust bankers to control themselves. They're like heroin addicts. This is another way for Munger to tell us to be patient. I says buy and hold. We just keep our heads down and handle the headwinds and tailwinds as best we can and take the result after a period of years. Once Charlie gets his hands on an excellent business at a fair price, he knows that the smart thing to do is to hold it, is to hold on to it, and let the company's accumulated earnings pile up. This will increase its underlying intrinsic value and over time, we'll cause a stock price to go up. Same thing when he's saying, hey, I got my hands on the next one of business. The smart thing to do is to hold on to it, and let the company's accumulated earnings pile up, I think that's French. And I guess it doesn't even matter what I think. I mean, Charlie's saying the way to get, like if you're trying to optimize for wealth, you should hold on to things that are valuable. All right, so going to extremes, this is really interesting. This may be one of my favorite points that he makes. I never really thought about. And he says, in business, we often find that winning system goes almost ridiculously far in maximizing or minimizing one or a few variables like the discount warehouses of Costco. Okay, so think about that. They're going ridiculous. This is absurd how far you're going and what you're focusing on, right? And you can only go that deep on a handful of things. He says, what do you say, one or two? Yeah, one or a few, right? So this is an example of Costco. Costco's obsessed with keeping operating costs to a minimum. It does not provide shopping bags. Customers bring their own bags, or use an empty packing box to store supplies. Saving Costco two to five cents on plastic bags and 10 to 25 cents on paper ones. That might not seem significant. Remember, they're going deep on costs. They want to keep their costs low, right? But consider this. Costco does $15 million a year in sales. If the average customer spends $100 per shopping trip, you spend way more than a Costco, by the way. And that means Costco has approximately 150 million customer checkouts every year. If three paper bags at 10 cents per bag were used per checkout, the total bag cost multiplied by 150 million, basically saying Costco would save approximately $45 million a year just on this one single decision. That's going to the extremes. It's also knowing what your customer's value. But you're going to Costco not for the experience you're going to want to save money. And this is something that this, this, this, this, like, almost like religious adherence to watching your costs is something that's very common in the, in the Berkshire O. portfolio. So this is the one thing that all of Berkshire's businesses have in common is that they're managed by people who are willing to go to great lengths to keep costs low. And of course, we see that over and over and over again in the books that we're studying. Andrew Carnegie, Henry Frick. They don't, don't tell me your revenue. I don't care about that. That's going to change. Going to go up and down and everything else, but your costs savings are forever. Two kinds of businesses, according to Charlie Munger. There are two kinds of businesses. The first earns 12% a year and you could take it out at the end of the year. The second earns 12% but all the excess cash must be reinvested. There's never any cash. It reminds me of the guy who looks at all his equipment and says, that's all of my profit. We hate that kind of business. Oh, so this is a, and this is a really good reminder that, you know, no matter what. So my opinion is like, you should take your craft seriously. It doesn't matter what you do. Whether you're an employee, a business owner, an athlete, whatever. Just whatever you're going to spend your time doing. Why are you doing it if you're not going to try to be really good at it, right? So you should take your craft seriously. You should take your craft seriously. But don't make yourself miserable. None of us are getting out of this alive. And so Charlie is kind of telling us that here with his quote on about you company surviving. Over the long term, history shows the chances of any business surviving in a manner agreeable to a company's owners are slim at best. This is some more lessons from a lifetime of owning businesses. And it's just the like to give it the dichotomy between like easy decisions and painful decisions. So it says, the difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time. So it says a lifetime investing in owning companies has taught Charlie and Warren many lessons. They both own very, they've both own a few bad businesses in their day. So they talk about the department store, a windmill manufacturer, a textile factory in an airline. Why are those businesses bad? So nobody can tell us because they're involved in an intensely competitive industries that beat each other up over price, which brings their profit margins down, kills their cash flow, and diminishes their chance of long term survivability. But Charlie and Warren, but Charlie and Warren's education and misery has been our gain. Now we know that the secret is always to go with the better business that has a durable competitive advantage. How many times are going to say this durable competitive advantage? Like if they repeat it over and over again, it's obviously trying to drill into our minds and can raise prices that will. This allows, meaning it's not commodity businesses, this allows this allows it to keep its margins high, which creates a lot of free cash flow to spend on new business opportunities. So kind of a simple formula there, but yeah, most people seem to be attracted to businesses with a lot of competition. This is probably true for life as well. It's a quote on market declines. If you're not willing to rack with equanimity to a market price decline of 50% two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations. Same thing, inevitably bad things are going to happen in your life. And he's talking about the words he uses there, react with equanimity, temperament, being philosophical. That's interesting. So another quote, one of my favorite quotes from the big short comes from the same guy Steve. Actually, it's not in the book, it's in a YouTube video I watched of an interview with him. And he says that the one sentence description of the financial crisis was they must took leverage for genius. So this is Charlie Munger lecturing us on, you know, being careful with leverage is specifically saying use less leverage. As you can tell in Berkshire's operations, we are much more conservative. We borrow less and on more favorable terms. We are happier with less leverage. You could argue that we've been wrong and that it's costing us a fortune or that it has cost us a fortune, but that doesn't bother us. Missing out on some opportunity never bothers us. What's wrong with someone getting a little richer than you? It's crazy to worry about this. I love this idea too, and this is really hard for me to internalize too, because you can't really plan it. Like if you, when I, when I, when I say like the world is more complex than we understand, right? If I've ever actually internalized that message, it also goes against my natural personality, so like you want to plan things. And it's something like it's not about planning. It's about being adaptable to a situation's change. That's much more important. So this is him Charlie saying the idea of having master plan is twaddle. At Berkshire, there's never been a master plan. Anyone who wanted to do it, we fired, because it takes on a life of its own and doesn't cover new reality. We want people taking into account new information. Now he's giving us advice on like life, education, the pursuit of happiness, which I think is, so there's four parts in the book we're in the last part now. The last part, I read the book in order, but I definitely wouldn't, like, I should have read, I should have looked ahead first, because I would have read this first. This section was, was fascinating to me. One step at a time. Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time day by day. At the end of the day, if you live long enough, most people get what they deserve. This is Charlie's incremental approach to getting ahead in life. And another way to frame this is like consistency is way more important than intensity. While when he was practicing law, he implement, this is going back to his early life. When he was practicing law, he implemented a self-education regime for one hour a day to learn such things as real estate development and stock investing. It was slow going at first, but after a great number of years and thousands of books read, he started to see how different areas of knowledge interplay with each other and how knowledge, like money, can compound, making one more and more aware of the world in which he or she lives. He is often said that he is a much better investor at 90 than he was at 50. That's interesting. A fact he attributes to the compounding effect of not. Here's just three rules of career advice. Three rules for a career. One, don't sell anything you wouldn't buy yourself. Two, don't work for anyone you don't respect and admire. And three, work only with people you enjoy. More life advice on know-it-alls. I try to get rid of people who are always, who always confidently answer questions about which they don't have any real knowledge. And I would argue that's most of human communication. Another one, admitting stupidity. I like people admitting that they were complete, stupid, horses, asses. I know I'll perform better if I rub my nose and my mistakes. This is a wonderful trick to learn. Charlie believes that we can learn from failures only if we accept responsibility for them and examine exactly why we failed. Blaming someone else and shirking responsibility is a mislearning opportunity. That is why Berkshire's annual report is always quick to point out, Warren and Charlie screw ups, and the lessons they learned, such as their investment in U.S. airways, which they thought was going to be a good investment but proved to be a real stinker. This nose rubbing exercise is one reason why they never make the same mistake twice. I've heard him talk about this a number of times. Being frugal, not living beyond our means. Mozart is a good example of a life ruined by nettiness. His achievement wasn't diminished, he may have had the best innate musical talent ever. But from the start, he was pretty miserable. He overspent his income, his entire life, and that will make you miserable. One of the keys to Charlie's accumulation of wealth is that in his youth he was fanatical about not spending money. He didn't buy his first new car until he was almost 60, and he lived in an upper middle class house long after he became a multi-millionaire. A few dollars saved was a dollar that could be invested. Overspending can make us miserable, but understanding and investing wisely will help us speed along the road to riches, same thing when you're spending your company money. Out with the old, any year that passes in which you don't destroy one of your best love ideas is a wasted year. Out with the old and in with the new, this shows an evolution in our thought process, which means we are actually thinking. There's no really explanation needed for this. I have never succeeded very much in anything in which I was not very interested. If you can't somehow find yourself very interested in something, I don't think you'll succeed very much, even if you're fairly smart. This chapter, or this essay is called Being frugal. One of the great defenses, if you're worried about inflation, is not to have a lot of silly needs in your life. If you don't need a lot of material, good. I've never thought, this is such an interesting idea. I've never thought about frugality as a hedge against inflation. I would never put that together. It says both Charlie and Warren have lived in upper middle class homes and driven older motor cars, most older model cars, most of their lives. Why? To keep their expenses low, so that they could accumulate lots of cash to invest. How does this protect them against inflation? If you don't need something, you don't have to buy it. Who cares if it goes up in price? I've never heard this term before. He calls it a catch-ism. It's just so useful dealing with people you can trust in getting all the hell out of your life. It ought to be taught as a catch-ism, but why do people want to avoid other people who are just total rat poison? And there are a lot of them, meaning there's just a lot of low quality human beings. So he says, a catch-ism is the summary of a doctrine that is used to teach young students, usually religious instruction. So he's saying this should be taught to everybody. What Charlie's advocating here is a philosophy that says we need to jettison our least trustworthy friends and business associates. I try to practice this in my own life where I'd rather have a small handful of really deep friendships than a lot of really shallow ones. Learning machines. Something hugely important. Also something I've heard both Warren Buffett and Charlie Munger repeat a lot. Warren is one of the best learning machines on the earth. Warren's investing skills have marked an increase since he turned 65. Having watched the whole process with Warren, I can report that if he had stopped with what he knew at earlier points, the record would be a pale shadow of what it is. He talks about this idea where you ever stop learning is just silly nonsense. There's another point I've noticed with men and women who truly excelled their craft or profession. They keep on learning and improving themselves long after most people would have retired. So this is a secret to wisdom. Look at this generation with all of its electronic devices and multitasking. I will confidently predict less success than Warren who just focused on reading. If you want wisdom, you'll get it sitting on your ass. That's the way it comes. And again, he means sitting in your ass and reading. That's sitting in your ass and doing nothing. Reading personal biography allows one to experience multiple lives and successes and failures. Reading business biographies allows one to experience the visits of a business and learn how problems were solved. Both Charlie and Warren are copious readers of personal and business biographies. Somebody tell them about Founder's Podcast please. I might add that if Charlie ever wrote an autobiography, it would probably be titled, How I Read My Wame to Fame and Fortune while sitting on my ass. He's going to talk more about reading. It's interesting. He waited till like the life advice section of the book to talk about reading a lot. He says in my whole life, I have no wise people who did not read all the time. None, zero. You'll be amazed at how much Warren reads and how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out. Back to learning machines. I constantly see people rise in life who are not the smartest, sometimes not even the most diligent. But they are learning machines. They go to bed every night. A little wiser than they were when they got up and boy, does that help? Particularly when you have a long run ahead of you. This is something I need to work on. For sure, he's telling me to stop multitasking. I think people who multitask pay a huge price. Many people believe that when they multitask, they are being super productive. Charlie believes that if you don't have time, that if you don't have time to think about something deeply, you're giving your competitors who are thinking deeply, create advantage over you. Charlie's ability to focus intensely and really think about something has been his competitive edge. And this is just an idea I'm including in the podcast because I've never thought about this before. And he calls it a seamless web. The highest form that civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correcting, correctly trusting one another. In your own life, what you want is a seamless web of deserved trust. My question there is how they can't have that with the society, right? There's a limit to the amount of how large a group of people can get where you can have this seamless web. At least maybe with the invention of the internet, there is some kind of way to do this. I mean, you can have what? A seamless web of trust with family, maybe a small group of friends, maybe a small company. But at some point, the sheer number is going to overwhelm this. Okay, mischances. He talks about his respect for the former slave turn philosopher, epiquetus. So he says, I think the attitude of epiquet... Come on, man, why can't I not pronounce things? Epiquetus is the best. He thought that every mischance and life was an opportunity to behave well. Every mischance and life was an opportunity to learn something and that your duty was not to be submerged and self-pity. But that's what I meant about not being miserable in our one life's life. But to utilize the terrible blow in a constructive fashion, that's a very good idea. He talks about that. Most people don't know. Charlie lost a child, a little chemo. It's probably the most painful thing a person has to go through as a child. Perspective. It is bad to have an opinion you're proud of if you can't state the arguments for the other side better than your opponents. This is a great mental discipline. And very rare. Next time you see a bunch of people wasting time arguing on Twitter. Just remember that. How many of them are actually can say that they're proud to have an opinion if you can't state the arguments for the other side better than your opponents. Better than your opponents. This is a great mental discipline. And the last one. Never mind that nothing lasts forever. And it's called, this essay is called Civilization. Over the long term, the eclipse rate of great civilizations being overtaken is 100%. So you know how it's going to end. Plice to countries, plice to empires, plice to businesses, plice to individual lives. All right. So that's where I'm going to leave this story. If you want to, I'd recommend picking this book just as a reference. I paid $11.99 for the Kindle and I think $15 for the paperback. I don't even know if it's a paperback or hardcover. I haven't gotten it yet. But yeah, I buy whichever I'll leave a link in the show notes or you can just go to Amazon.com, forks.shop, forks.sh Founders podcast and you buy it there. Then the podcast gets a small percentage of the sale, notational cost to you. I would definitely recommend picking it up. Okay. So I guess that's it. Thank you very much for your support. I got to figure out what I'm reading next week.