Zerith

America once had 2,000 car companies. 3 survived. Warren Buffett skipped them all and put $1.3 billion into Coca-Cola instead. Today that stake is worth over $25 billion. “How do you pick three winners out of 2,000? It’s easy when you look back, but it’s not so easy looking forward.” His fix for 1905: forget the cars. “You should have gone short horses.” Over 400 airplane companies in the 1920s and ’30s alone. “If there had been a capitalist at Kitty Hawk, he should have shot Orville down, because it’s done nothing but cost investors money.” TV? 20 to 25 million sets sold a year in the U.S. “But nobody in the United States has made any real money making the sets.” Meanwhile, Coca-Cola started at a single pharmacy. More than a century later it sells about 1.1 billion servings a day. “Defining your circle of competence is the most important aspect of investing.” “If I don’t understand something, because my neighbors are talking about it, stocks are going up and everything, I start fooling around someplace else, and eventually I’ll get creamed. And I should.”

Charlie Munger was 98 and worth over $2 billion. He watched life get 600% better and people get more miserable. He explained it in one word. “If you wanted three children, you had to have six, because three died in infancy.” Then came the airplane, the automobile, the movies, air conditioning. “Now the principal problem of the poor people in the United States is that they’re too fat.” So why are people less happy than when things were way tougher? “The world is not driven by greed. It’s driven by envy.” “Everybody’s five times better off than they used to be. They take it for granted. All they think about is somebody else having more.” “Who in the hell needs a Rolex watch?” “I have conquered envy in my own life. I don’t give a damn what somebody else has.”

Warren Buffett is leaving his wife way less than 1% of his estate. And 90% of that money goes into an S&P 500 index fund. Not Berkshire. “There’s a fund for my then-widow, and 90% will go into an S&P 500 index fund and 10% in Treasury bills.” A shareholder asked: “Isn’t that a vote of no confidence to your managers?” “Well, no. I think Berkshire is a very good thing to hold. But for a given individual, particularly my wife, I just think that the best thing to do is buy 90% in an S&P 500 index fund.” He’s said it for years: “I’ve never recommended Berkshire to anybody.” “I do not think the average person can pick stocks.” “A person who doesn’t know anything about stocks at all, I think they ought to buy the S&P 500 index.” The other 99.7% of his estate goes to philanthropy or the federal government.

A famous NYU professor warned that Apple at 35% of Berkshire’s portfolio was “near a danger zone.” Charlie Munger’s reply: “I think he’s out of his mind.” Warren Buffett’s answer came down to a $1,500 iPhone. People pay $1,500 for a phone and $35,000 for a second car. “If they had to give up a second car or give up their iPhone, they’d give up their second car.” Berkshire owns about 5.6% of Apple. Every time Apple buys back stock, that share grows. Each tenth of a percent is like adding $100 million to Berkshire’s earnings. Buffett even admitted that selling some Apple shares a couple of years earlier “was a dumb decision.” Munger on the professor’s logic: “One of the inane things that’s taught in modern university education is that a vast diversification is absolutely mandatory.” “I’d rather be in my best ideas instead of my worst.”

Charlie Munger was worth $2.6 billion, and his family owned basically 3 things. “We have a block of Berkshire, we have a block of Costco, we have a block of Li Lu’s fund, and the rest is dribs and drabs.” When he started investing his little savings as a lawyer, he worked it out with high school algebra. With a 10 percentage point edge every year, he figured he’d be about 99% sure to be fine over 30 or 40 years owning no more than 3 stocks. “Diversification is a rule for those who don’t know anything.” If you can actually figure something out, you’re just hurting yourself looking for 50 stocks when 3 will suffice. “Hell, one will suffice if you do it right.” He called what business schools teach about it “balderdash.” How many stocks do you own right now?

Charlie Munger made $2.6 billion picking stocks. Then he said 95% of people have almost no chance of beating the S&P 500 over time. He said index funds have caused “absolute agony” among the intelligent investment professionals. Everyone with some money expects to hire someone who will beat the index. Sensible managers know they’re selling something they can’t quite deliver. “Most people handle that with denial.” Then he joked, “I don’t want to think of my own death either.” He reminded everyone of the Nifty 50. Wall Street herded investors into just 50 stocks, pushed them to 60 times earnings, and then everything fell by about two thirds. His bet on the future: managing big money will pay 20 basis points, not millions. Are you trying to beat the market, or just own it?

Warren Buffett said that with a 1% management fee, Berkshire shareholders would have paid $8 billion just for managing. Then he explained the real trick of Wall Street. “The trick in life is to get somebody else’s capital, and get an override on it.” Fund managers get paid whether you win or lose. And then they charge you a lot more if they do well. “That is capitalism.” He and Charlie did it themselves for about 12 years. The difference: they put all their own money in and shared the losses. Then he described America. A magnificent cathedral that built an economy like nothing the world has ever seen, with a massive casino attached. The temptation now is to go over to the casino, because that’s where the most money is promised to you. Are you building in the cathedral or playing in the casino?

Warren Buffett said that with $1 million, you could earn 50% a year. Then he explained how he’d do it. It starts with a 1,500 page railroad manual. At 20 or 21, he read the Moody’s Transportation Manual cover to cover. A couple of times. Hundreds of tiny railroads. One was the Green Bay and Western, nicknamed “Grab Baggage and Walk.” Its bond acted like a stock and its stock acted like a bond. That’s where the mispriced opportunities hide. His rule: “I would try and know everything about everything small.” That knowledge of tiny companies is part of what first impressed Charlie Munger about him. But he added one condition: “you have to be in love with the subject.” Would you read 1,500 pages for 50% a year?

Warren Buffett is sitting on $335 billion in Treasuries. A shareholder asked if he’s hoarding it so Greg Abel looks good after him. “I wouldn’t do anything nearly so noble.” And if Greg gets any edge from what he leaves, “I’ll resent it.” Then the real answer. Berkshire would spend $100 billion on a deal that makes sense. The problem is that great deals don’t come along in an orderly fashion. Charlie always thought he did too many things. About five big moves in a lifetime would beat 50. What if someone forced him to invest $50 billion a year until the pile was gone? “That would be the dumbest thing in the world.” “Things get extraordinarily attractive very occasionally.” Would you sit on cash and wait, or stay fully invested?

At 20, Warren Buffett put $2,000 into a gas station and lost all of it. Years later he calculated what that mistake really cost him: $6 billion. He bought half of a Sinclair filling station with a buddy from the National Guard. $2,000 was 20% of everything he had. “A big price to pay for wiping a few windshields.” He jokes that he actually likes it when Berkshire stock drops, because it reduces the cost of that mistake. But he says his biggest mistakes were the ones he never made. He could have bought all of Fannie Mae for practically nothing and passed. “I’ve probably cost Berkshire at least $5 billion by sucking my thumb.” What’s the deal you still regret not taking?