#178 Friday 5: Five Lessons on Investing from Warren Buffett and Charlie Munger

My favorite lessons on investing from Berkshire Hathaway's shareholder letters. All taken from "The Essays of Warren Buffett" by Lawrence Cunninghuman.
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January 6, 2024
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#178 Friday 5: Five Lessons on Investing from Warren Buffett and Charlie Munger

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Warren Buffett and Charlie Munger’s track record.

For those asking, "Why is it worth studying Warren Buffett and Charlie Munger's shareholder letters?" The answer lies in what Berkshire Hathaway has built over the last 50+ years.

In the introduction of The Essays of Warren Buffett, Lawrence Cunningham lays out the size and scale of Berkshire Hathaway’s operations and investments in just a few short paragraphs. It’s a staggering description given Berkshire Hathaway was built in just a few decades from the ashes of a failing textile business.

Buffett took the helm of Berkshire in 1965, when its book value per share was $19.46 and its intrinsic value per share far lower. Today, its book value per share exceeds $200,000 and its intrinsic value far higher. The growth rate in book value per share during that period is about 19% compounded annually.

Berkshire is now a holding company engaged in 80 distinct business lines. Berkshire's most important business is insurance, carried on through various companies including its 100% owned subsidiary, GEICO Corporation, among the largest auto insurers in the United States, and General Re Corporation, one of the largest reinsurers in the world. In 2010, Berkshire acquired Burlington Northern Santa Fe Railway Company, among the largest railroads in North America, and has long owned and operated large energy companies.

Some Berkshire subsidiaries are massive: 10 would be included in the Fortune 500 if they were stand-alone companies. Its other interests are so vast that, as Buffett writes: "when you are looking at Berkshire, you are looking across corporate America."

Buffett and Berkshire Vice Chairman Charlie Munger built this sprawling enterprise by investing in businesses with excellent economic characteristics and run by outstanding managers. While they prefer negotiated acquisitions of 100% of such a business at a fair price, they take a double-barreled approach of buying on the open market less than 100% of some businesses when they can do so at a pro-rata price well below what it would take to buy 100%.

By “on the open market,” Lawrence Cunningham means the stock market. A significant component of the magic behind Berkshire Hathaway’s success over the last 50 years has been the double-compounding of their acquired businesses alongside their portfolios of publicly traded companies. That strategy revolves around a single, profound insight: “Eventually, our economic fate will be determined by the economic fate of the businesses we own—regardless of whether our ownership is partial or total.”

The only thing that matters is that you buy quality, well run businesses affordably. And that you remove as many frictional costs as possible by embracing inactivity and holding for long periods of time.

Below are the 5 lessons pulled from Berkshire Hathaway’s shareholder letters about Warren Buffett’s and Charlie Munger’s investment philosophy.

#1: Seek to invest in businesses with excellent economics, able and honest management, at sensible prices. That’s the magic formula.

At the core of their philosophy is a simple, profound truth: That wonderful businesses with excellent economics and great management are rare. Extremely rare.

Which is why they work so hard to find just a few of these in their lifetime, acquire them in whole or in part at reasonable prices, and then hold them—come hell or high water—for decades.

Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading high-profitable subsidiaries because a small move in the Federal Reserve’s discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses?
The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simple want to acquire, as a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor these qualities are being preserved.

While the hard work is finding these businesses, once you find them “you need only monitor that these qualities are being preserved.” Your goal is to be a long-term owner of an incredible business.

#2: Don’t be afraid to let a few investments grow to represent a large portion of your portfolio. That’s inevitable if you do well.

If you do this well, a handful of investments you make will grow to represent a very large portion of your portfolio. Henry Singleton and Charlie Munger are well-known for letting their highest conviction investment grow to represent 60%+ of their portfolio. That’s a fantastic outcome, not a situation to be avoided.

When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of their portfolio. This investor would get a similar result if he followed a policy of purchasing an interest in, say 20% of the future earnings of a number of outstanding college basketball stars. A handful of those would go on to achieve NBA stardom, and the investor’s take from them would soon dominate his royalty stream. To suggest that this investors should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

I really like this analogy of “cutting the flowers and watering the weeds” from Peter Lynch, which is cited in the 1988 Shareholder Letter:

When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hand on to businesses that disappoint. Peter Lynch aptly likes such behavior to “cutting the flowers and watering the weeds.”

Your favorite holding period should be forever. To do that well, don’t cut the flowers to water the weeds. Hold onto those flowers instead.

#3: Invest in companies you expect to be as competitive 20 years from now. The best investments compound over decades.

To find wonderful businesses that you can hold forever, you have to be incredibly durability focused. You have to find companies in a dominant competitive position with the ability to compete and win in their spaces for decades.

In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase (majority acquisition or minor publicly traded position), we are searching for that we believe are virtually certain to possess enormous competitive strength 10 or 20 years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.
I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes, and the like cause our country’s standard of living to rise, and that’s clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude toward space explorations: We applaud the endeavor but prefer to skip the ride.

While I’m not sure you want to avoid all fast-changing industries, you certainly want to avoid industries with perfect competition where achieving and sustaining a competitive advantage is difficult or nearly impossible.

#4: Forgot the growth versus value debate—they’re two sides of one coin. Look for durable value and profitable growth in companies.

While Warren Buffett and Charlie Munger are typically thought of as “value investors,” they’re focused on acquiring great businesses at fair prices. What matters most to them is the total value of the business both today and decades into the future. With that orientation, they look for both value and growth in every investment that they make.

As they share in the 1992 Shareholder Letter, both value and growth are important components in great investments. They care more about what they’re getting in terms of value than what they’re paying; and only like growth when it’s profitable growth.

Our equity-investing strategy remains little changed from what it was when we said in the 1977 annual report: “We select marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the business to be one (a) that we can understand; (b) with favorable long-term prospects; (c) operated by honest and competent people; and (d) available at a very attractive price.” ✂️

But how, you will ask, does one decide what’s “attractive”? In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition: “value” and “growth.” Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing.

We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component of the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

In addition, we think the very term “value investing” is redundant. What is “investing” if not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value—in the hope that it can soon be sold for a still-higher price—should be labeled speculation (which is neither illegal, immoral, nor—in our view—financially fattening. ✂️

Similarly, business growth, per se, tells us little about value. It’s true that growth often has a positive impact on value, sometimes one of spectacular proportions. But such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. ✂️

Growth benefits investors only when the business in point can invest at incremental returns that are enticing—in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of low-return businesses requiring incremental funds, growth hurts the investor.

#5: Make Mr. Market your ally. Take advantage of his perpetual swings from euphoria to panic.

If you do all of the above well, the final trick is learning how to take advantage of the market’s wild swings from euphoria to panic. It’s making the market your ally, so you can be fearful when others are greedy and greedy when others are fearful.

Think of this skill like a multiplier on your investment returns over your lifetime. If you can find and hold onto great businesses, and you can snap up shares when the market is panicked, you will do incredibly well over time.

The best analogy of the market’s swings is “Mr. Market” from Ben Graham. Warren Buffett sums up Mr. Market perfectly in the 1987 Shareholder Letter:

Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these conditions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn to pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful.

All of these quotes and stories are from of The Essays of Warren Buffett. What Lawrence Cunningham has created with this book is remarkable. I'd argue that reading it in its entirety is more valuable than getting an MBA. If you want to study Warren Buffett and Charlie Munger, there’s no better way than by reading this book.

Read my full book summary for The Essays of Warren Buffett →

Buy the book →

Until next week,

Daniel Scrivner

Coach to Founders & Design Leaders

Founder of Ligature: The Design VC

Transcript

Daniel Scrivner (00:01.878)
In this week's Friday Five, I'm covering five lessons on investing from Warren Buffett and Charlie Munger. Now, all of the ideas, the quotes, the excerpts, everything that I'm going to share with you today comes from this book, which is the Essays of Warren Buffett, which is kind of collected, edited together by Lawrence Cunningham. It's an incredible book. It's incredibly thick. Probably took me three months to go through, really study and really distill.

If you're interested, you can listen to my full, I think it's nearly three hour, you know, summary book breakdown of this book. And these are episodes 165 and episode 166. You can find that by going out to outlieracademy.com slash 165 outlieracademy.com slash 166. And then you can get the full treat. We'll go through the full book together. But today, I just want to focus on actually the ideas in the book that are around investing.

And again, Berkshire Hathaway does a lot. Investing is a core part of their strategy. So I just really quickly want to start with a, you know, a little bit of a track, an explainer of Warren Buffett and Charlie Munger's track record, which answers the question, why study them? You know, and I think the answer lies in the 50 plus years that they've spent building Berkshire Hathaway.

In the introduction to the essays of Warren Buffett, Lawrence Cunningham lays out the size and scale of Berkshire Hathaway's operations and investments in just a few short paragraphs. It's a staggering description, given Berkshire Hathaway was built in just a few decades from the ashes of a failing textile business. Buffett took the helm of Berkshire in 1965 when its book value per share was $19.46 and its intrinsic value per share far lower.

Today, its book value per share exceeds $200,000 and its intrinsic value far higher. The growth rate in book value per share during that period is about 19% compounded annually. Berkshire Hathaway is now a holding company engaged in 80 distinct business lines. Berkshire's most important business is insurance, carried on through various companies, including its 100% owned subsidiary, Geico. Among the largest auto insurers in the United States and General Re.

Daniel Scrivner (02:11.634)
one of the largest reinsurers in the world. In 2010, Berkshire acquired Burlington Northern Santa Fe Railway among the largest railroads in North America and has long owned and operated large energy companies. Some Berkshire subsidiaries are massive. 10 would be included in the Fortune 500 if they were standalone companies. Its other interests are so vast that as Buffett writes, when you're looking at Berkshire, you're looking across corporate America.

Buffett and Berkshire Vice Chairman Charlie Munger built the sprawling enterprise by investing in businesses with excellent economic characteristics and run by outstanding managers. While they prefer negotiated acquisitions of 100% means they want to fully acquire the business, they take what they call a double-barreled approach, which means they're both going to buy businesses, basically acquire them completely.

And then they're also actually going to do quite a bit of stock market investing. So they're going to go to the stock market and they're effectively going to buy less than 100% of businesses. But the approach that they take is almost identical, meaning the way that they vet the companies, the way that they decide what purchase price they're going to interact, the way that they decide whether this is a company that belongs within Berkshire Hathaway or not is basically identical, whether they're acquiring a business or they're acquiring shares of a company.

And buy on the open market, you know, Lawrence Cunningham means the stock market. A significant component of the magic behind Berkshire Hathaway's success over the last 50 years has been this double compounding of their acquired businesses alongside their portfolio of publicly traded companies. That strategy revolves around a single profound insight. And this is one of my favorite lines from the book. It's buried somewhere in the book.

Eventually our economic fate will be determined by the economic fate of the businesses we own regardless of whether our ownership is partial or total See that I'm gonna read this again because it's great Eventually our economic fate meaning Berkshire Hathaway's will be determined by the economic fate of our businesses The businesses that we own regardless of whether we own them 100% or we don't it doesn't matter if the businesses are

Daniel Scrivner (04:15.842)
thriving, if they're growing, if they're competing in continuing to dominate areas of their of their markets, they're going to do just fine. And I think it's a great, you know, one, it just immediately I think, you know, takes down any barriers around this idea that acquiring is acquiring 100% and owning it is better than acquiring say 10% or 5% or 100 shares of a given company. It's not any different. And I just think it's fascinating that for Warren and Charlie have almost the exact same thought process, almost the exact same approach.

Okay, so let's get into the five lessons on investing from Warren and Charlie. Let's start with number one. If you seek, you know, so what you want to do is you want to seek to invest in businesses with excellent economics, able and honest management at sensible prices. That is the magic formula. At the core of their philosophy is a simple, profound truth that wonderful businesses with excellent economics, that just means they actually make profit, can actually take money out of the business at the end of the year.

and great management, you know, probably 10%, 20% of the book and of all of Warren Buffett's writing is just around what great management looks like. So again, they're looking for wonderful businesses with excellent economics and great management. When you put those things together, it's rare, like extremely, extremely rare, which is why they work so hard to find just a few of these in their lifetime, acquire them in whole or in part at reasonable prices, and then hold them come hell or high water for decades.

Okay, here's an excerpt from the book. Inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because a small move in the federal reserves discount rate was predicted. Or because some Wall Street pundit had reversed his views on the market. Why then should we behave differently with our minority positions in wonderful businesses? So they're saying, hey, you know, whether it's general pessimism about.

you know, about the markets or about where a given company could go, or whether it's the Federal Reserve moving interest rates around. It doesn't matter. We have a, you know, highly profitable subsidiary. We have a wonderful business that's thriving. We're going to hold it. It doesn't matter. The art of investing in public companies successfully is a little different from the art of successfully acquiring subsidiaries. In each case, you simply want to acquire at a sensible price a business with excellent economics and able, honest management.

Daniel Scrivner (06:35.422)
Thereafter, you need only monitor these qualities are being preserved. Well, the hard work is finding these businesses. Once you find them, you need only monitor that these qualities are being preserved. Now this is a line that I love. And the reason that I love it is, you know, what my read of it is, uh, you don't need to be checking every press release. You don't need to be looking at the stock chart daily. You need to know what you're looking for in a business and find that business, do all the hard prep work to find that business. The easy part should be owning it forever.

And all that you need to do is check in periodically and make sure that the qualities, meaning everything that you are looking for in this initial business has not materially changed. And as long as that's true, don't worry, hold the position. Okay. That's number one. Number two, don't be afraid to let a few investments grow to represent a large portion of your portfolio. That's inevitable. If you do well, if you do this well,

Meaning if you do that first piece, if you do a good job of finding and acquiring these companies, a handful of investments you make will grow to represent a very large portion of your portfolio. You can think about it like a fat tail. Fat tail shows up everywhere in life. You look at all high school athletes, a very small percentage of them are going to do extremely well. You know, you look at your portfolio of investments, a few of those, if you let them play out, are likely to do extremely well over time. So it's natural that you're going to have some of these balloon as a portion of your portfolio.

You know, Henry Singleton and Charlie Munger are well-known for letting their highest conviction investments grow to represent 60 plus percent of their portfolio. You know, Charlie Munger did this in his partnership before he joined with Warren. He made a really convicted bet, I believe it was on blue chip stamps, and it grew over 60 percent of the portfolio. Henry Singleton did this. Henry Singleton, when he was building Teledyne, and you know, this was a precursor to Berkshire Hathaway, he was building Teledyne, he had these insurance subsidiaries. He was the first person.

to basically take, well, he was the original Warren Buffett. He acquired insurance subsidiaries and then said, I am going to be the one to make investment allocation decisions as the CEO of Teledyne. And his approach to investing with the insurance subsidiaries portfolios was highly concentrated, highly concentrated. So again, there's a lot of precedent for this. A lot of the smartest people in the world have very high concentration.

Daniel Scrivner (08:51.614)
And so it's a fantastic outcome if you have a portfolio with a few very large positions. It's not a situation to be avoided. When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of their portfolio. This investor would get a similar result if he followed a policy of purchasing an interest in say 20% of the future earnings of a number of outstanding college basketball stars.

A handful of those would go on to achieve NBA stardom and the investors take from them would soon dominate his royalty stream, his royalty portfolio. To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is suggesting that the Bulls trade Michael Jordan because he has become so important to the team. Such a fantastic analogy.

Daniel Scrivner (09:47.146)
This comes from the 1988 shareholder letter. Warren Buffett basically cites, you know, this idea that he heard from Peter Lynch, which is that you want to, what you want to avoid is cutting your flowers and watering your weeds. Here's, here's, here's what that is. Here's the context. When we own portions of outstanding businesses with outstanding management, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well, but who tenaciously hang on to businesses that disappoint.

Peter Lynch aptly like such behavior to cutting the flowers and watering the weeds. Your favorite holding period. That means you're in my favorite holding period should be forever to do that. Well, don't cut the flowers and water the weeds. If you have a portfolio and you have a couple of Michael Jordan positions in it, do not cut them. Hold on to those flowers instead. Okay. Number three, invest in companies you expect to be as competitive 20 years from now. The best investments compound over decades.

To find wonderful businesses that you can hold on to forever, you have to be incredibly durability focused. You have to find companies in a dominant competitive position with the ability to compete and win in their spaces for decades. In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple.

Making either type of purchase, majority acquisition or minor publicly traded position, we are searching for what we believe are virtually certain to possess enormous competitive strengths 10 or 20 years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty that we seek. I should emphasize that as citizens, Charlie and I welcome change. Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise and that's a good thing.

As investors, however, our reaction to a fermenting industry is much like our attitude towards space explorations. We applaud the endeavor, what we prefer to skip the ride. Now, you know, this one's interesting where I think I would describe this and I'm...

Daniel Scrivner (11:54.186)
I did not put in here what year, what would shareholder letter year this was from. My guess would be that it's probably the 80s, maybe even the early 80s. And that's because I think that, you know, Charlie and Munger's perspective on this have changed. Or I would like to offer maybe a slight nuance, which is to say, I think what they're saying here is basically avoid any industry that is fast changing. And I'll just say, there are many industries, if you study it, and I've actually run a company in one of these industries, that I would just describe as a competitive hellhole, meaning,

It's maybe an extreme term, but meaning that there are certain industries where competition is so high that it is very difficult for anyone to actually build shareholder value and to build business value over time. Now I would say UI, everyone should avoid those industries.

But I don't know if you want to avoid an industry that's changing. What you want to find is a player that is dominant in it and whose competitive advantages you think will persist. And I think a good example of this would be Apple. You could easily look at Apple and say, wow, Apple has an immense amount of competition and Apple does have an immense amount of competition.

but you can also see a very clearly demonstrated track record of how strategically they've been able to overcome that competition and win. And you could make the bet. And I think it would be a smart bet to make that Apple success there is likely to continue. And so my nuance on this is, well, I'm not sure you want to avoid all fast changing industries. You certainly want to avoid industries with perfect competition. Where achieving and sustaining a competitive advantage is difficult or nearly impossible.

And regardless of whatever industry you look in, you want to find the Michael Jordan. You want to find the player that will be just as good five or 10 years from now as they are today. Okay, number four, forget the growth versus value debate. There are two sides of one coin. Look for durable value and profitable growth in companies. Now, this is really interesting. This is a little bit of a weird one. It's less tactical. But I was just too good not to include because I think it's something that

Daniel Scrivner (13:52.066)
It's a perspective that I don't think we hear enough and I think it's a great one, which is basically saying, you know, well, let's I'll just get into it. Well, Charlie Buffett and you know, sorry, well, Warren Buffett and Charlie Munger are typically thought of as value investors. They're focused on acquiring great businesses at fair prices. What matters most to them is the total value of the business both today and decades into the future. With that orientation, they look for both value and growth in every investment that they make.

as they share in the 1992 shareholder letter, both value and growth are important components and great investments. They care more about what they're getting in terms of value than what they're paying. So they're not looking for something cheap, they're looking for a business that is like a crown jewel that they wanna hold onto for years and years and years. And they only like growth when it's profitable growth. And I think that's one of the best points that Warren makes in this next little excerpt.

Our equity investing strategy remains little changed from what it was when we said in the 1977 annual report, we select marketable equity securities and much the way we would evaluate a business for acquisition in its entirety. We want the business to be A, sorry, we want the business to be one that A, that we can understand, B has favorable long term prospects, C it's operated by honest and competent people, and D it's available at a very attractive price.

But how, you will ask, does one decide what's attractive? In answering this question, most analysts feel they must choose between two approaches customarily thought to be in opposition, value and growth. Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. It's a great term for Warren. We view that as fuzzy thinking, in which it must be confessed, I myself engaged some years ago. In our opinion, the two approaches are joined at the hip.

Growth is always a component of the calculation of value, constituting a variable whose importance can range from negligible, doesn't matter, to enormous and whose impact can be negative as well as positive. I'm gonna say that again. So growth and value are tied at the hip. Growth is always a component of the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative to positive.

Daniel Scrivner (16:04.222)
In addition, we think the very term value investing is redundant. What is investing? If, if not the act of seeking value at least sufficient to justify the amount paid. Consciously paying more for a stock than its calculated value in the hope that it can soon be sold for a still higher price should be labeled speculation, which is neither illegal or moral, nor in our view, financially flattering. Similarly, business growth per se tells us little about value.

It's true that growth often has a positive impact on value, sometimes one of spectacular proportions, but such an effect is far from certain. For example, investors have regularly poured money into the domestic airline business to finance profitless or worse, growth. Growth benefits investors only when the business in point can invest at incremental returns that are enticing. In other words, only when each dollar used to finance the growth creates at least a dollar of long-term market value.

In the case of low return businesses requiring incremental funds, growth hurts the investor. Okay, a little bit of context and aside here, this idea, this is one of Warren Buffett's tests, is his test for when you want to invest in a business. So say, come up with a make believe example here. Seize candy. You have $100 million that you can take out of the business at the end of the year. His test is he will allow you to retain capital in the business if for every dollar invested, you get at least $1 back.

So you're at least getting all of your money and you're likely getting, you know, you're getting hopefully an extra dollar in return over time. As long as you can do that, it's growth that's worth, it's growth that's worth funding because it's growth that actually will produce capital. But there are businesses where that's not the case. There are businesses where you will invest a dollar and you may get no additional returns out of the business ever. And so again, this is, you know, Warren Buffett's test.

But it's also, you know, I think their unique perspective on a great business is a business that has capital left over at the end of the year and you can take it out. A terrible business is a business that just eats up capital constantly and you're never able to get anything out of the business. And this also did a breakdown of this. Warren has a fantastic essay where he basically kind of recaps the decision on shutting down the textile mill, the original Berkshire Hathaway textile mill they had. And the decision is basically that they just there's no prospect.

Daniel Scrivner (18:19.19)
where they're actually going to earn anything on this business. It's just going to continue to consume very large amounts of capital and it's going to produce nothing. Okay. Number five. And this is the last point here. You want to make Mr. Market your ally take advantage of his perpetual swings from euphoria to panic. If you do all of the above, meaning everything we've just covered, the final trick is learning how to take advantage of the market's wild swings from euphoria to panic.

It's making the market your allies. You can be fearful when others are greedy and greedy when others are fearful. Think of the skill like a multiplier on your investment returns over your lifetime. If you can find and hold on to great businesses and you can snap up shares when the market is panicked, you will do incredibly well over time. The best analogy of the market swings is Mr. Market from Ben Graham. Warren Buffett sums up Mr. Market perfectly. It's one of my favorite excerpts from the book. It's just...

I would honestly reread this aloud to myself once a day. It was easy and I could remember. And this comes from the 1987 shareholder letter. Ben Graham, my friend and teacher, long ago described the mental attitude towards market fluctuations that I believe to be the most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market, who is your partner.

in a private business. Without fail, Mr. Market appears daily and names a price at which you will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, the business is doing perfectly well all the time. Mr. Market's quotations will be anything but. For sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric.

at other and can only see favorable factors affecting the business. When in that mood, he names a very high buy sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he's depressed and you can see nothing but trouble ahead for both the business and the world on these conditions. He will name a very low price since he is terrified that you will unload your interest on him. Mr. Market has another endearing characteristic. He doesn't mind being ignored. If his quotation is uninteresting to you today, he'll be back with a new one tomorrow.

Daniel Scrivner (20:27.85)
Transactions are strictly at your option. Under these conditions, the more manic depressive his behavior, the better for you. But like Cinderella at the ball, you must heed one warning or everything will turn to pumpkins and mice. Mr. Market is there to serve you, not guide you. It is his pocketbook, not his wisdom that you will find useful. Wow. Like what a perfect encapsulation of what the stock market actually feels like if you were to personify it as a person. And, you know, it's obviously a little bit dramatized for effect.

but it is not far off. If you pay attention to markets and if you've been through cycles, this is not far off if you zoom out and actually look with broad brushstrokes at how the market works. And so that was the five lessons on investing from Warren Buffett and Charlie Munger. I highly, highly recommend if you're interested.

that you purchase and read this book for yourself. It's the Essays of Warren Buffett. Again, you can listen to my full breakdown, my summary of the book. It's episode 165 and 166. It's nearly three hours in length, and I cover all of the best ideas in the book, all of my favorite ideas. And the approach I always take is, what if I could only spend 30 minutes an hour? Obviously in this case, I record it for three hours. I mean, the book is a beast.

But if I could only spend three hours a year, you know, rereading or sitting with some of the wisdom in the book, those are the ideas that I would want to basically imbibe again and again and again. If you're interested, you can subscribe and get Friday Five delivered in your inbox for free every single week. Just go to news and I will see you next week with a brand new Friday Five.

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