(QUESTION)
WARREN BUFFETT: That was a very, very good question.
And in my own case,
you know, I started out without knowing anything about valuing companies.
And
Ben Graham
taught me a way
to
value a certain type of company
that would prove successful,
except the universe of those companies dried up.
But nevertheless — it was almost a guarantee against failure,
but it was not a guarantee that these things would continue to be available.
Charlie taught me a lot about the value of a durable competitive advantage,
and a really first-class business.
But
over time,
I’ve learned more about
various types of businesses.
But you’d be amazed how many businesses I don’t
feel that I understand well.
The biggest thing is not how big
your circle of competence is,
but knowing where the perimeter is.
If you
You don’t have to be an expert on
90 percent of the businesses, or 80 percent, or 70, or 50.
But
you do have to know something about the ones that you actually put your money into,
and if that’s a very small part of the universe,
that still is not a killer.
And
I think if you think about what you would pay for a McDonald’s sandwich,
you think you would pay for —
you know, think about the businesses in your own hometown of Olathe.
Which would you like
to buy into?
Which do you think you could understand their economics?
Which do you think will be around 10 or 20 years from now?
Which do you think it would be very tough to compete with?
Just keep asking yourself questions about businesses.
Talk with other people about them.
You will extend your knowledge over time.
And
always remember that margin of safety. And
I think you basically have the right attitude because you recognize your limitations,
and that’s enormously important in this business.
You will find things to do.
Six or seven years ago
— maybe not that long —
yeah, six or seven years ago,
when I was looking at Korean stocks, for example,
I never had any idea that Korean stocks
would be something that I would be buying.
But I looked over there, and
and I could see that there were a number of businesses that met
the margin of safety test.
And there I diversified,
because I didn’t know that much about any specific one,
but I knew that a package of 20 was going to work out very well,
even if a crook might run one of them,
and a couple might run into competition I didn’t anticipate,
because they were so cheap.
And that was sort of the old Graham approach.
You will find opportunities from time to time,
and the beauty of it is you don’t have to find very many of them.
Charlie?
CHARLIE MUNGER: Well obviously, if you want to get good at something
which is competitive,
you have to think about it a lot,
and learn a lot,
and practice doing it a lot.
And the way the world is constructed
in this field, you have to keep learning,
because the world keeps changing
and your competitors keep learning.
So,
you just have to get up each morning and
try and go to bed that night a little wiser than you were when you got up. And
if you keep doing that for a long time —and
accumulate some experience, good and bad,
as you try and master what you’re trying to do —
people who do that almost never fail utterly.
They may have a bad period
when luck goes against them or something. But
very few people have ever failed with that.
If you have the right temperament,
you may rise slowly but you
you’re sure to rise.
WARREN BUFFETT: Charlie, did you take any business courses in school?
CHARLIE MUNGER: None. I took accounting.
WARREN BUFFETT: And
when did you start valuing businesses and how did you go about it?
CHARLIE MUNGER: When I was a little boy. (Laughter)
I can remember, I
would come down to the Omaha Club,
and there was an old gentleman who hit
the Omaha Club about 10:30 every morning.
He obviously did almost no work,
and yet was quite prosperous.
WARREN BUFFETT: He became your ideal. (Laughter)
CHARLIE MUNGER: Yeah. But he made me very curious as a little boy.
I said to my father, “How in the hell does he do that?”
And he said, “Charlie,” he said,
“A business where he enjoys practically no competition.
He gathers up
and renders dead horses.”
That was an example of avoiding competition by one stratagem.
And
you keep asking questions like that of reality,
starting at a young age, you gradually learn.
And weren’t you doing the same thing?
WARREN BUFFETT: Yeah, thankfully he went beyond his original
insight there. (Laughs)
CHARLIE MUNGER: I noticed, it was rather interesting —
you take the rulers of the
businesses when I was a little boy,
an awful lot of those businesses, in Omaha,
a lot of those businesses went broke,
a lot of them sold out at modest prices under distress.
And some of the people who rose,
like Kiewit, from small beginnings,
nobody thought of as the great glories of that early time.
And I think that’s kind of the way life is.
It’s hard to get anywhere near the top,
and it’s hard to hold any position once you’ve attained it.
And
But
I think you could predict
that Kiewit was likely to win.
They cared more about doing it right.
They cared more about avoiding trouble.
They put more discipline on themselves.
I don’t think it’s that — but if you're
I was just automatically doing that.
What was working,
what was failing,
why was it working, why was it failing?
If you have that
temperament,
you are gradually going to learn.
And
if you don’t have that temperament,
I can’t help you.
(Laughter)
WARREN BUFFETT: If you’d followed Pete Kiewit around for 10 years,
you never would have seen him do anything dumb, right?
CHARLIE MUNGER: Oh yeah. It’s so —
WARREN BUFFETT: It’s avoiding the dumb thing.
You really don’t have to be brilliant, but,
you know, you have to avoid
just sort of what
almost seem the obvious mistakes.
But I would say that you’re on the right track back there,
in terms of
having the basic fundamentals,
knowing your limitations,
but still seeking to learn more about various kinds of businesses.
Charlie,
I think,
when he practiced law,
any client that came in
Charlie was thinking about that
business as if he owned the place.
And he probably generally thought he knew more about
the place than the guy that actually owned it,
who was his client. (Laughs)
who was his client.
But I remember talking to him,
you know, 50 years ago,
and he would start talking about Caterpillar
dealerships in Bakersfield or something of the sort.
He was incapable of looking at a business without
thinking about the fundamental economics of it.
How’d that guy do with the Caterpillar deal? (Laughs)
CHARLIE MUNGER: Well,
he sold it for a perfectly ridiculous price to a dumb oil company. (Laughter)
It wasn’t worth half what he got for it.
WARREN BUFFETT: But they had a concept and a strategy.
CHARLIE MUNGER: They had a concept and a strategy,
and turned out they had consultants.
(Laughter)
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