Poor Charlie’s Almanac
Books · Investing · Source
Summary
A lot of wisdom in this book — though it’s often buried as a throwaway comment instead of being an in your face insight.
Some key takeaways were:
- Learn when a technological change benefits you and when it doesn't. “There are all kinds of wonderful inventions that give you as owners nothing except the opportunity to spend a lot more money on business that’s still lousy. Often, all the savings from a new technology will flow through to consumers because of industry dynamics”
- On the price of stocks. “Stocks are valued partly like bonds, based on roughly rational projections of producing future cash. But they are also valued partly like Rembrandt paintings, purchased because prices have gone up”
- On the ideas that kill you. "It’s not the bad ideas that do you in. It’s the good ones. If a thing is a bad idea, it’s hard to overdo. But if it’s a good idea with a core of essential and important truth, you can’t ignore it. Then it’s easy to overdo"
- On investing. "A few major opportunities, usually recognizable as such, will usually come to those who continually search and wait. Then, all that’s required is to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past ... When you invest, bet big. Don’t take 'initial positions' or make 'small, speculative investments' ... Be willing to 'prepay; with rigorous preparation"
- On changing your mind. "Be willing, even eager, to change your mind. Identify your mistakes and learn from them. Any year you don’t destroy one of your best loved ideas is a wasted year. When a better tool (idea or approach) comes along, swap it for your old, less useful tool"
- On persuasion and consensus building. “If you want to persuade – appeal to interest and not to reason ... You can cause enormous offense by being right in way that causes somebody else to lose face in his own discipline or hierarchy”
Approach to learning and decision making
Being prepared on a few occasions in a lifetime when opportunities arise, and then acting promptly and in scale, will often improve the financial results of your lifetime
A few major opportunities, usually recognizable as such, will usually come to those who continually search and wait – with a curious mind that loves diagnosing multiple variables. Then, all that’s required is to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past
To do this, you need preparation, patience, discipline, and objectivity
Business and the economy are like an ecosystem. Businesses that specialise in a narrow niche can do well. The winning business goes ridiculously far in maximising a few variables – the the discount warehouses of Costco
Multiple Mental Models Approach to Business Analysis and Investment
You must know the big ideas in the big disciplines and use them routinely. All of them, not just a few. Most people are trained in one model – and try to solve all problems that way. “To the man with a hammer, every thing looks like a nail”. That’s a dumb way of solving problems
Conduct a comprehensive analysis of both the inner workings of an investment candidate as well as the larger integrated “ecosystem” in which it operates
Just as multiple factors shape almost every system, multiple models from various disciplines are needed to understand that system
Be willing, even eager, to change your mind. Identify your mistakes and learn from them. Any year you don’t destroy one of your best loved ideas is a wasted year. When a better tool (idea or approach) comes along, swap it for your old, less useful tool
Sometimes, the signals coming out of your models reinforce each other. If a business seems at critical mass (positively or negatively), invest heavily
Most of the time, the signals will be conflicting. When this happens, weigh trade offs carefully
Accept reality and don’t delude yourself. Bad things happen to those that do
A successful investment career boils down to only a handful of decisions. Don’t buy or sell very often
A portfolio of 3 companies is plenty of diversification. Commit a high percentage of your capital to individual “focused” opportunities – specially when starting out
If your are convinced of your analysis, swim against the popular opinion. Indefinitely if necessary
Focus first on what you want to avoid. “All I want to know is where I’ll diet, so that I never go there”
Eliminate the unprofitable positions of the chess board, so you can free your time and attention on the more productive regions ⇒ circle of competence + what to avoid
Never be too confident. You’re dealing with highly complex systems where everything is interacting with everything else
It’s not the bad ideas that do you in. It’s the good ones. If a thing is a bad idea, it’s hard to overdo. But if it’s a good idea with a core of essential and important truth, you can’t ignore it. Then it’s easy to overdo
The psychological factors of human misjudgement are some of the most important mental models that can be applied to an investment opportunity. Always do a two-track analysis:
- What factors really govern the interest involved, rationally considered?
- What are the psychological influences when the brain is automatically forming conclusions in ways that can malfunction
Quickly eliminate the big universe of what not to do, follow up with a fluency, multidisciplinary attack on what remains, then act decisively when, and only when, the right circumstances appear
Munger’s investment evaluation process
Judge the staying quality of the business (competitive advantage)
Look for more value in discounted cashflow than what you’re paying for
Move only when you’re at an advantage. Have the discipline to bet only when the odds are in your favour
“I’m no genius. I’m smart in spots, and I stay around those spots” – circles of competence
Treat financial reports and accounting with skepticism. Added factors are:
- current and future regulatory climate
- state of labor, supplier, and customer relations
- potential impacts of changes in technology
- competitive strengths and vulnerabilities
- pricing power
- scalability
- environmental issues
- presence of hidden exposures
- quality of management
You ideally want the moat widened every year
Try to calculate the intrinsic value of the whole business, and compare it with the price
A great business at a fair price > a fair business at a great price
Margin of safety depends on the price paid. It is large at one price, small at another price, and non-existent at a high price. Always have a margin of safety
The evaluation of a business is not just mathematical. It’s philosophical. Ultimately, a “feel” should emerge from it
Once you identify a good business opportunity, apply a filter before pulling the trigger:
- What are the current price, volume, and momentum considerations?
- What disclose timing or other sensitivities exist?
- Do contingent exit opportunities exist?
- Are better uses of capital currently or potentially available?
- Is sufficient liquid capital currently on hand or must it be borrowed? What is the opportunity cost of that capital?
Cultivate a habit of far more time to learning and thinking than to doing
When you invest, bet big. Don’t take “initial positions” or make “small, speculative investments”
Be willing to “prepay” with rigorous preparation
Interesting tidbits
“We try to profit from always remembering the obvious than from grasping the esoteric. It’s remarkable how much long-term advantage people like us have gotten by consistently not being stupid, instead of trying to be very smart”
“If you can generate float (cash from insurance premiums that Berkshire can invest before claims are paid) at 3% and invest in businesses that generate 15%, that’s a hell of a business”
“Stocks are valued partly like bonds, based on roughly rational projections of producing future cash. But they are also valued partly like Rembrandt paintings, purchased because prices have gone up”
“Advantages of scale are ungodly important in many businesses, but the constant curse of scale is that it leads to big, dumb bureaucracies”
“Never allow anyone to get between you and your customers or suppliers. These relationships take forever to develop and are too valuable to lose”
“The great lesson in microeconomics is to discriminate between what technology will help you, won’t change things much (because consumers get all the benefit), and kill you”
“There are all kinds of wonderful inventions that give you as owners nothing except the opportunity to spend a lot more money on business that’s still lousy. Often, all the savings from a new technology will flow through to consumers because of industry dynamics”
“If there’s a new technological wave, you can surf on it. It’s the best distribution system. But finding the right wave to surf on is no easy task”
“How do you make a great return by investing in good companies? Buy them when they are little”
“It’s best to simplify problems by deciding bug “no-brainer” questions first”
“The really big lollapalooza effects often come from multiple effects acting in parallel – not from a single change”
“A competing product, if it’s never tried, can’t act as a reward creating a conflicting habit for your consumers”
“I have never tried to make a single dollar from foreseeing macroeconomic changes”
“Recognise reality even when you don’t like it – especially when you don’t like it”
“If you want to persuade – appeal to interest and not to reason”
“You can cause enormous offense by being right in way that causes somebody else to lose face in his own discipline or hierarchy”