Well, I’m going to give you an answer that will be very helpful to you because you’re somewhat confused about what the exact future of American Express will be. I’m confused too. I think that if you think you understand exactly what’s going to happen to payment systems 10 years out, you’re probably under some state of delusion. It’s very hard to know. So if you’re confused, all I can say is welcome to the club. They’re doing the best they can, they’ve got some huge advantages that they’re...it’s a reasonable bet, but nobody knows.
I don’t know if IBM is going to sell that much of Watson. I always say I’m agnostic on the subject. You’re talking about a payment system 10 years out. I’m agnostic on that too. I think if you keep trying and do the right thing and you play the game hard, your chances are better, but I don’t think those things are knowable. Think of how fast they change.
I think you should spend 10 or 20 percent of your time in trying to know all the big ideas in all the other disciplines. Otherwise, I use the same phrase over and over again...otherwise, you’re like a one-legged man in an ass-kicking contest. It’s just not going to work very well. You have to know the big ideas in all the disciplines to be safe if you have a life lived outside a cave. But no, I think you don’t want to neglect your business as a dentist to think great thoughts about Proust.
Well, the minute I hear somebody that really wants to get rich at a rapid rate with specifics, that is not what we’re trying to do here. You want to leave some mystery so that you yourself can amuse yourself, finding your own way. You know, the ideas that I’ve had in my life are quite few, but the lesson I can give you is a few, is all you need and don’t be disappointed. When you find the few of course, you’ve got to act aggressively, that’s the Munger system, and I learned that indirectly from a man I never met, which was my mother’s maternal grandfather.
He was a pioneer when he came out to Iowa and fought in the Black Hawk War and so on, and eventually after enormous hardship...well, he was the richest man in town and he owned the bank and so on. As he sat there in his old age, my mother knew him because she’d go to Algona, Iowa, where he lived, had the big house in the middle of town, iron fence, capacious lawns, big barns. What Grandpa Ingham used to tell her is, there’s just a few opportunities you get in a whole life. This guy took over Iowa when the land was black topsoil in Iowa was cheap, but he didn’t get that many opportunities. It was just a few that enabled him to become prosperous.
He bought a few farms every time there was a panic, you know, and he’d lease them to thrifty Germans, you couldn’t lose money with leasing a farm to a German in Iowa, but he only did a few things, and I’m afraid that’s the case. You’re not going to find a million wonderful ideas.
If you’re going to be in this game for the long pull, which is the way to do it, you’d better be able to handle a 50 percent decline without fussing too much about it. And so, my lesson to all of you is conduct your life so that you can handle a 50 percent decline with aplomb and grace. Don’t try to avoid it. It will come. In fact, I would say if it doesn’t come, you’re not being aggressive enough.
There will be lots of... people will die that you love. You’ll have close breaks where it goes against you. There’s a lot of trouble that’s sure to come, and at the end you’ll know that it’s all over, and that’s the game. It’s a very funny game when you know when you start you have to lose. See, a dog doesn’t have to do that. We know from the start we can’t win.
If you’re advising other people, you ought to be pretty rich pretty soon. Why would I take a lot of advice from somebody who couldn’t himself get pretty rich pretty soon? And if you’re pretty rich, why shouldn’t you put your money alongside your investors and grow up and down with them. And if there’s a bad stretch, why should you scrape money off the top when they’re going down and up? So I like the Buffett system, but it’s like so many things I like, it’s not spreading very much. Why shouldn’t a man who has to manage your money whose 40 years of age be already rich? Why would you want to give your money to somebody who hasn’t accumulated anything by the time he was 40. If he has some money, why should he on the downside suffer right along with you the investor?
There’s a rule of fishing that’s a very good rule. The first rule of fishing is “fish where the fish are”, and the second rule of fishing is “don’t forget rule number one.” And in investing it’s the same thing. Some places have lots of fish and you don’t have to be that good a fisherman to do pretty well. Other places are so heavily fished that no matter how good a fisherman you are, you aren’t going to do very well. And in the world we’re living in now, an awful lot of places are in the second category.
There are...I might tell a story about a darling little girl, wispy blonde hair, beautiful curls, charming lisp. She goes into the pet store, and the pet store owner says, “Oh you little darling blonde haired girl, what can we do for you?” “Wabbits, I want Wabbits.” “Oh we’ve got wonderful ‘Wabbits’. Grey wabbits, white wabbits, brown wabbits. What kind of wabbits do you want?” And she said, “I don’t think my lovely big snake is going to give a shit.”
Well I do think that a very smart man who’s patient and aggressive in combination, is willing to work hard, to root around in untraveled places like thinly traded stocks and other odd places. I do think a person with a lot of shrewdness, working with a small amount of capital, can probably earn high returns on capital even today.
Well of course it’s dangerous when you have a margin account because the person whose giving you credit can wipe you out at the bottom tick just because he feels nervous. And therefore of course, people like Berkshire just totally avoid any position where anybody else would start selling our securities because he felt nervous. And of course there are a lot of people now that are pushing margin trading very, very hard.
We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. (laughter) We always realized that if we worked very hard we can find a few things where we were right. And that a few things were enough. And that that was a reasonable expectation. That is a very different way to approach the process. And if you had asked Warren Buffett the same thing that this investment counseling did, “Give me your best idea this year.”, and you had just followed Warren’s best idea, you would find it worked beautifully. But he wasn’t trying to know the whole...he would give you one or two stocks. He had more limited ambitions.
It’s perfectly possible to buy only one thing because the opportunity is so great and it’s such a cinch. There are only two or three. So the whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task. What fun is it to do an impossible task over and over again? I find it agony.
Then if you take the modern world where people are trying to teach you how to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin. It is really stupid. And when you’re already rich to make your money by encouraging people to get rich by trading?
It’s a game of being there all the time and recognizing the rare opportunity when it comes and recognizing that the normal human allotment is to not have very many. Now it’s a very competent bunch of people who sell securities who act as though they’ve got an endless supply of wonderful opportunities. It’s not a good way to live your life to pretend to know a lot of stuff you don’t know and pretend to furnish a lot of opportunities you’re not
furnishing. This business of controlling the costs and living simply, that was the secret. Warren and I had tiny little bits of money. We always underspent our incomes and invested. And if you live long enough you end up rich. It’s not very complicated.
There was a Greek philosopher that said, “No man steps in the same river twice.” You know the river is different the second time he comes in and so is the man. And that’s the way with economics. It’s not like physics where the same damn principles are going to apply. You do the same damn thing at a different time and you get a different result. It’s complicated.
In five minutes between trains a person managed to conceive an illegitimate child by somebody he met in the bar car. And my father was asked by the young man’s father, he had a nice wife and three children, “What the hell were you thinking about?” And you know what the young man said? “It seemed like a good idea at the time.” (laughter)
You know, if you have a misapprehension regarding your own competency that means you lack competence, you’re going to make terrible mistakes. I think you’ve got to constantly measure what you achieve against other people of achievement, and you have to keep being determinedly rational, and avoiding a lot of self-delusion.
It’s like Kipling’s: If you can keep your head when all round you are losing theirs, it’s a big advantage. Just think of all the dumb things that are done by our politicians and our business leaders, and the wretched excess you see in the system.
Basically, all investment is value investment in the sense that you’re always trying to get better prospects than you’re paying for. But you can’t look everywhere at once any more than you can run a marathon in twelve different states at once. So you have to have some system of picking some place to look which is your hunting ground - but you’re looking for value in every case.
I have a friend who’s a fisherman. He says: “I have a simple rule for success in fishing. Fish where the fish are.”
You want to fish where the bargains are. It’s that simple. If the fishing is really lousy where you are, you should probably look for another place to fish.
I want to think about things where I have an advantage over other people. I don’t want to play a game where the other people have an advantage over me. So if you have a pharmaceutical company and you’re trying to guess what new drug is going to be invented, I’ve got no advantage. Other people are better at that than I am.
I don’t play in a game where the other people are wise and I’m stupid. I look for a place where I’m wise and they’re stupid. And believe me, it works better. God bless our stupid competitors. They make us rich. That’s my philosophy. You have to know the edge of your own competency. You have to kind of know if it’s too tough for you. I’m very good at knowing when I can’t handle something.
I think you should try and make your money in this world by selling other people things that are good for them. And if you’re selling them gambling services where you make profits off of the top, like many of these new brokers who specialize in luring the amateurs in, I think it’s a dirty way to make money.
I think everybody is willing to hold stocks at higher price-earnings multiples when interest rates are as low as they are now. And so I don’t think it’s necessarily crazy that good companies sell at way higher multiples than they used to.
On the other hand, as you say, I didn’t get rich by buying stocks at high price-earnings multiples in the midst of crazy speculative booms. I’m not going to change. I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower. Everybody is.
Some people think that value investing is you chase companies that have a lot of cash and they’re in a lousy business or something. I don’t define that as value investing. I think all good investing is value investing. It’s just that some people look for values in strong companies and some look for values in weak companies. Every value investor tries to get more value than he pays for.
I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they’re way above average. I think it’s much easier to find five than it is to find a hundred.
The first rule of a happy life is low expectations. That’s one you can easily arrange. If you have unrealistic expectations, you’re going to be miserable all your life. I was good at having low expectations and that helped me.
Well, what -- if I had to name one factor that dominates human bad decisions, it would be what I call denial. If the truth is unpleasant enough, people kind of -- their mind plays tricks on them, and they think it isn't really happening. And of course, that causes enormous destruction of business where people will go on throwing money into -- the way they used to do things, isn't going to work at all well in the way the world is now having changed.
And if you want an example of how denial is affecting things, take the world of investment management. How many managers are going to beat the indexes? All cost considered, I would say maybe 5% could consistently meet the averages. Everybody else is living in the state of extreme denial. They're used to charging big fees and so forth for stuff that isn't doing their clients any good. It's a deep moral depravity. If some widow comes to you with $500,000 and you charge her 1 point a year for her, you could put her in the indexes, but you need the 1 point. And so people just charge somewhat a considerable fee for a worthless advice.
Yes, it's true. I operated with no leverage for long stretches of my old age and Warren is the same way. And recently, I did use a little bit of leverage here in another place because the opportunities were so ridiculously good. I thought it was desirable to do that.
So you're right, it's unusual for us, but we did find a few things. And by the way, if you go back early in my career, I used some leverage. I sometimes ask myself a mettle question, I say, "What is the appropriate percentage of your net worth you should put it in the stock if you think it's an absolute cinch?"
Well, if you're kind of fellow who's right when you think something is the cinch the answer is 100% or maybe 150%. But nobody teaches people to think that way in finance. But if the opportunity is great enough, the logical answer is 100% or maybe 200%
The Buffett partnership used leverage regularly every year of its life. What Warren would do is, he would buy a bunch of stocks and any borrower -- and so stocks need by end of these -- they used to call the bad arbitrage, liquidations, mergers and so forth.
I think most people should avoid leverage, but maybe not everybody need to play by those rules. I have a friend who says, the young man knows the rules, and the old man knows the exceptions.
Walton played the chain store game harder and better than anyone else. He invented practically nothing. But he copied everything anybody else ever did that was smart - and he did it with more fanaticism and better employee manipulation. So he just blew right by them all.
And the one thing that all those winning betters in the whole history of people who've beaten the pari-mutuel system have is quite simple. They bet very seldom. Winners bet big when they have the odds - otherwise, never. It's not given to human beings to have such talent that they can just know everything about everything all the time.
But it is given to human beings who work hard at it - who look and sift the world for a mispriced bet - that they can occasionally find one.
Graham didn't want to ever talk to management. And his reason was that, like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use. And he didn't feel that the man in the street could run around and talk to managements and learn things. He also had a concept that the management would often couch the information very shrewdly to mislead. Therefore, it was very difficult. And that is still true, of course - human nature being what it is.
But in terms of business mistakes that I've seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations.
Warren and I personally don't drill oil wells. We pay our taxes. And we've done pretty well, so far. Anytime somebody offers you a tax shelter from here on in life, my advice would be don't buy it.
In fact, any time anybody offers you anything with a big commission and a 200-page prospectus. don't buy it. Occasionally, you'll be wrong if you adopt "Munger's Rule". However, over a lifetime, you'll be a long way ahead - and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man.
Within the growth stock model, there's a sub-position: There are actually businesses. that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices - and yet they haven't done it. So they have huge untapped pricing power that they're not using. That is the ultimate no-brainer.