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CONTENTS

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SOURCENOTE

INTRODUCTION

PARTICharlie’sThoughtsonSuccessfulInvesting

PARTIICharlieonBusiness,Banking,andtheEconomy

PARTIIICharlie’sPhilosophyAppliedtoBusinessandInvesting

PARTIVCharlie’sAdviceonLife,Education,andthePursuitofHappiness

ACKNOWLEDGMENTS

SOURCES

ABOUTTHEAUTHOR

INDEX

ThisbookisdedicatedtoRichardSaundersandhismerrybandoftroublemakers.Neverhavesomanyowedsofewsomuch.

SOURCENOTE

TheCharlieMungerquotesIchosetoincludeinthisbookcomefromavarietyof sources that are available on the Internet, among them newspapers,magazines,journals,speeches,books,blogs,quotewebsites,andotherwebsites.Quotesfromcompanyannualmeetingscomefromtheonlinereportspostedbyattendees and do not necessarily represent a word-for-word recitation of thestatementsatthemeeting.Ihaveidentifiedthesourceswiththeircorrespondingwebsitesinthebackofthebookforthoseofyouwhowishtocontinuereadingabouttheveryfascinating,andeverinteresting,CharlieMunger.

INTRODUCTION

InthechroniclesofAmericanfinancialhistoryCharlieMungerwillbeseenasthe proverbial enigma wrapped in a paradox—he is both a mystery and acontradictionat thesame time.WarrenBuffett said,“Charlie’smost importantarchitecturalfeatwasthedesignoftoday’sBerkshire.Theblueprinthegavemewas simple: Forgetwhat you know about buying fair businesses atwonderfulprices; instead, buy wonderful businesses at fair prices. . . . Consequently,BerkshirehasbeenbuilttoCharlie’sblueprint.Myrolehasbeenthatofgeneralcontractor, with the CEOs of Berkshire’s subsidiaries doing the real work assubcontractors.”HowisitthatCharlie—whotrainedasameteorologistandalawyerandnever

tookasinglecollegecourseineconomics,marketing,finance,oraccounting—becameoneofthegreatestbusinessandinvestinggeniusesofthetwentiethandtwenty-firstcenturies?Thereinliesthemystery.CharliewasborninOmaha,Nebraska,onJanuary1,1924,inthemidstofthe

RoaringTwenties.Theradioandairplanewerethecutting-edgetechnologiesofthe day. The financier Bernard Baruch was the king of Wall Street. Andeveryone was getting rich investing in stocks. Charlie’s father was one ofOmaha’s leadingbusinessattorneys,andhis rosterofclients includedmanyofthe state’s business elite. Charlie spent much of his youth reading—thetelevisionandvideogamesofhisday—andthatiswherehediscoveredalargerworld than the idyllic, but very parochial, neighborhood of Dundee, whereWarrenBuffett’sfamilyalsolived.Thetwoboysattendedthesamegradeschoolandhighschool, thoughsevenyearsapart inage.Infact,oneofCharlie’sfirstjobswasworkingforWarren’sgrandfatherattheBuffettneighborhoodgrocerystore—whichisstillstandingintheheartofoldDundee.Charliewas introducedto theworldofbusinessat theBuffettgrocerystore.

He learned about taking inventory, stocking shelves, pleasing customers, theimportanceofshowingupontimeforwork,howtogetalongwithotherswhileaccomplishing a joint task, and, of course, running the cash register, wheremoney,thelifebloodofthebusiness,flowed.Omaha in the 1930s had distinct ethnic immigrant neighborhoods: Italian,

Greek, African American, Irish, French, Czech, Russian, and even Chinese.ManyimmigrantsworkedfortheUnionPacificRailroadandmeatpackingplants

whoseoperationswerecentered inOmaha.Charliewent topublic schoolwiththechildrenof those immigrantsandasa resultdevelopedanappreciationnotonly of their cultures but also of their commercial aptitude andwillingness toworkunbelievablyhardtogivetheirchildrenabetterlife.Charlie often brings up the horrors of the Great Depression at Berkshire

Hathaway annualmeetings as a reminder of just how bad things can get. ButOmaha didn’t suffer like other parts of the United States during the GreatDepression, in part because it was the crossroads of twomajor railroads, theUnionPacific and theBurlington, and also because itwas home to theUnionStockYards,thesecondlargestintheworld.Withthisconvergenceoflivestockand transportation, Omaha attracted the big meatpacking companies, whichestablished processing plants in South Omaha. America may have been in agreat depression, but it still had to eat, and asmany as twenty thousand pigs,sheep, and cattle arrived in Omaha every day. Those animals needed to beslaughtered, butchered, packed, and shipped to other parts of the country.Thestockyardgeneratedlotsofeconomicactivityevenduringhardtimes.The Kiewit construction company, today one of North America’s largest

building companies,was founded inOmaha.The company’s first big jobwasconstructingtheLivestockExchangebuildingfortheUnionStockYards.(PeterKiewithadahugeinfluenceonbothCharlieandWarren,andtodayBerkshire’shomeoffice is inKiewitPlaza.)Charlie learnedabout thebusinessdealingsofsomeofOmaha’smostprominentbusinessmenfromhisfather,whorepresentedboth theHitchcock family,whoowned the town’s leadingnewspaper, and theKountzefamily,whoownedthelargestbank.After high school, seventeen-year-old Charlie enrolled in the University of

Michigan to studymathematics.He turned nineteen a year after PearlHarbor,droppedoutofcollege,andjoinedtheUSArmyAirCorps.ThearmysenthimtoCaltech,inPasadena,California, tostudymeteorology.Therehelearnedthedifference between cumulus and cirrus clouds and fell in lovewith the sunnySouthernCaliforniaweather.While the teenage Warren Buffett was busy learning about odds and

probability at the Ak-Sar-Ben horse-racing track—a short bike ride from hisOmaha home—Charlie Munger was learning this important investment skillwhileplayingpokerwithhisarmybuddies.That’swherehelearnedtofoldhishandwhen theoddswereagainsthimandbetheavywhen theoddswerewithhim,astrategyhelateradaptedtoinvesting.After the war Charlie, who did not have an undergrad degree, applied to

HarvardLawSchool, his father’s almamater.Hewas rejected.After a phonecallfromHarvardLaw’sretireddean,whowasaNebraskanandfamilyfriend,

hewasadmitted.Charlieexcelledinhislawstudiesandgraduatedmagnacumlaudein1948.Hehasneverforgottentheimportanceofhavingfriendsinhighplaces.After law school Charlie moved back to Los Angeles, where he joined a

prestigiouscorporatelawfirm.HelearnedalotaboutbusinessfromhandlingtheaffairsofTwentiethCentury–Fox,aminingoperationintheMojaveDesert,andmany real estate deals. During that time he was also the director of anInternationalHarvesterdealership,wherehefirstlearnedhowharditistofixastrugglingbusiness.Thedealershipwasavolumebusinessthatrequiredalotofcapital topay for its costly inventory,mostof it financedwithabank loan.Acoupleofbadseasons,andthecarryingcostsontheinventorystarttodestroythebusiness. But if the company cut its inventory to lower the carrying costs, itwouldn’thavehadanythingtosell,whichmeantthatcustomerswouldseekoutacompetingdealershipthatdidhaveinventory.Itwasatoughbusinesswithlotsofproblemsandnoeasysolutions.Charlie thought a lot about business during that time. He made a habit of

askingpeoplewhatwas thebestbusiness theyknewof.He longed to join thericheliteclientelehissilk-stockinglawfirmserved.Hedecidedthateachdayhewoulddevoteonehourofhis timeat theoffice toworkonhisownrealestateprojects, andbydoing sohe completed five.Hehas said that the firstmilliondollarsheputtogetherwasthehardestmoneyheeverearned.Itwasalsoduringthat period that he realizedhewould never become really rich practicing law;he’dhavetofindsomethingelse.In the summerof1959,while inOmaha to settlehis father’s estate, hemet

twooldfriendsforlunchattheOmahaClub,awood-paneled,privatedowntownclubwherebusinessmenlunchedintheafternoonanddrankandsmokedcigarsintheevening.ThetwomenhaddecidedtobringalongafriendoftheirswhowasrunningapartnershiptheyhadinvestedinandwhomtheythoughtCharliewouldenjoymeeting,ayoungmanbythenameofWarrenBuffett.Byallaccounts itwasacaseof instantmutualattraction.Warrenstartedby

launching into his standard diatribe about the investment genius of BenjaminGraham.Charlie knew aboutGraham, and immediately the two began to talkabout businesses and stocks. The conversation became so intense that CharlieandWarrenbarelynoticedwhentheirtwofriendsgotuptoleave.Thatwasthebeginningofalongandveryprofitablerelationship—abromanceinthemaking—andoverthenextcoupleofdaystheycouldn’tseeenoughofeachother.Onenight over dinner Charlie asked if Warren thought it would be possible forCharlie toopen an investmentpartnership likeWarren’s inCalifornia.Warrensaidhecouldn’tseeanyreasonwhynot.

After Charlie returned to California, he andWarren talked several times aweekon thephoneover thenext coupleofyears.And in1962Charlie finallystartedaninvestmentpartnershipwithanoldpokerbuddywhowasalsoatraderonthePacificCoastStockExchange.Healsostartedanewlawfirm,Munger,Tolles,HillsandWoods.Withinthreeyearshestoppedpracticinglawtofocusoninvestingfull-time.Charlie’sinvestmentpartnershipwasdifferentfromWarren’s,inthathewas

willingtotakeonalotofdebttodosomeofhistrades.Hewasparticularlyfondof stock arbitrage. One arbitrage deal involved British Columbia Power, acompanythatwasbeingtakenoverbytheCanadiangovernment.Thetakeoverpricewas$22ashare.BCPwassellingfor$19ashare.Thinkingthatthedealwouldeventuallygothroughat$22ashare,CharlieboughtallthesharesofBCPhecouldgethishandsonandendedupputtingallofthepartnership’smoney,allofhisownmoney,andallthathecouldborrowintoBCP.Thetradeworkedout—BCPwastakenoverat$22ashare—andCharliemadeoutlikeabandit.Inthemid-1960sCharlieandWarrenwerebusyscouringoverthePinkSheets

(a pre-Internet daily publication of the prices of OTC stocks printed on pinkpaper) looking for a bargain price on a good company.One of the companiesthey found was Blue Chip Stamp. Blue Chip was a trading stamp company;otherbusinesseswouldbuytradingstampsfromBlueChiptogivethemtotheircustomers,whowouldthenredeemthemforprizesthatBlueChipwasoffering.Think of it as an early form of a rewards program.Whatmade the companyinteresting toCharliewas thatBlueChiphadapoolofmoneycalleda“float”that was created by the lag time between its selling the stamps and thecustomer’s redeeming them.Whatmade Blue Chip’s stock attractively pricedwas the fact that the US government had filed an antitrust action against thecompany.Charlie,asalawyer,thoughtthelawsuitwouldberesolvedinfavorofBlue Chip—which it was. Charlie—through his partnership—and Warren—throughBerkshire—eventuallytookcontrolofthecompany,andCharliebecameits chairman. By the late 1970s the float at Blue Chip had grown toapproximately$100million,moneythatCharlieandWarrencouldinvest.BlueChip’sbusinessmodeleventuallybecameobsolete,anditssalesslowly

declinedover theyears, from$126million in sales in 1970 to$1.5million in1990.But in its heyday, underCharlie’s direction,BlueChip used its surpluscapitaltopurchase100%ofSee’sCandiesand80%ofafinancecompanycalledWesco,whichownedasavingsandloan.JustasWarrenhadtakencapitaloutofBerkshire’s failing textile operation to buy a thriving insurance company,NationalIndemnity,CharlietooktheexcesscapitaloutofBlueChipStampandinvested it in profitable businesses. Eventually Blue Chip Stamp was merged

intoBerkshireHathaway.In1968CharlieteamedupwithWarrenandDavid“Sandy”Gottesman,who

rantheinvestmentfirmFirstManhattan,toformDiversifiedRetailingCompany.DRCacquired theBaltimore-baseddepartment storeHochschildKohn for$12million.Halfoftheacquisitionwasfinancedwithabankloan.HochschildKohnwas bought at a bargain price, but it had no competitive advantage and wasconstantly having to spend precious capital keeping up with the competition.Charlie and the others quickly learned how hard the retail clothing businessreally is. Unlike the jewelry or carpet business, where the inventory neverdepreciates, in retail clothing the entire inventory becomes obsolete with thechanging of every season. After three years of dismal results they soldHochschildKohn.During that timeCharlie started seeing theadvantagesof investing inbetter

businesses that didn’t have big capital requirements and did have lots of freecashthatcouldbereinvestedinexpandingoperationsorbuyingnewbusinesses.From 1961 to 1969 Charlie’s investment partnership showed an amazing

averageannualreturnof37.1%.Butthecrashin1973–74hurthim,andwhenheclosed the fund in 1975 it had $10 million in assets and showed an averageannualrateofreturnof24.3%forthefourteenyearsitwasinoperation.Whatisinteresting is that in the final years of the fund Charlie was running a highlyconcentrated portfolio, the holding in Blue Chip Stamp alone accounting for61%ofthefund’sinvestments.Hehasneverbeenafanofdiversificationasaninvestmentstrategy.OneoftheinvestmentdecisionsthatCharlie’spartnershipmadein1972was

to team up with the investor Rick Guerin and take a controlling interest in aclosed-endinvestmentfundcalledFundofLetters,whichtheyquicklyrenamedtheNewAmericaFund.When thepartnership liquidated thepartners receivedshares in the New America Fund, which Guerin ran and for which Charliepicked the investments. In 1977NewAmericaFund bought theDaily JournalCorporation for $2.5 million, and Charlie became its chairman. The DailyJournal Corporation is a California publishing company that publishesnewspapersandmagazines,includingtheLosAngelesDailyJournalandtheSanFranciscoDailyJournal.WhenGuerinandCharliedissolvedtheNewAmericaFund,itsshareholdersreceivedsharesintheDailyJournalCorporationandthecompanybecameapublicly tradedOTCstock.Manyof today’sDailyJournalshareholders have literally been with Charlie since the days of his originalinvestmentpartnership,morethanfortyyearsago.In 1979Charlie becameBerkshireHathaway’s first vice chairman. In 1983

Blue Chip Stampmerged with Berkshire Hathaway and Charlie took over as

chairman ofWesco. It was from those two positions that Charlie would helpWarren make the investment and management decisions that would takeBerkshire Hathaway from a net income of $148million and a stock price of$1,272asharein1984toanetincomeofapproximately$24billionandastockpriceof$210,000asharein2016.Today, at ninety-two, Charlie is vice chairman of Berkshire Hathaway, a

companywithamarketcapitalizationof$362billion,aswellasthechairmanoftheDailyJournalCorporation,andhispersonalfortunenowexceeds$2billion.Warren,insummingupCharlie’simpactonhisinvestmentstyleoverthelast

fifty-seven years, said, “Charlie shovedme in the direction of not just buyingbargains,asBenGrahamhadtaughtme.Thiswastherealimpactthathehadonme.IttookapowerfulforcetomovemeonfromGraham’slimitingview.ItwasthepowerofCharlie’smind.”

PARTI

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CHARLIE’STHOUGHTSONSUCCESSFULINVESTING

#1

FASTMONEY

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“Thedesiretogetrichfastisprettydangerous.”

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Tryingtogetrichfastisdangerousbecausewehavetogambleontheshort-termpricedirectionofsomestockorotherasset.Thereareahugenumberofpeopletrying todo thesame thing,manyofwhomaremuchbetter informed thanweare. The short-term price direction of any security or derivative contract issubject toallkindsofwildpriceswingsdue toevents thathavenothing todowiththeactuallong-termvalueoftheunderlyingbusinessorasset.Lastbutnotleast,thereistheproblemofleverage:togetrichquickly,oneoftenhastouseleverage/debttoamplifysmallpriceswingsintoreallyhugegains.If thingsgoagainst us, they can also turn into really large losses. Sowe take a leveragedposition ina stock, thinkingwearegoing tohit itbig; thensomething terriblelike 9/11 happens, the stockmarket tanks, andwe getwiped out. In his earlydays,Charliedidusealotofleverageonhisstockarbitrageinvestments,butashe got older he saw the grave danger he was putting himself in and nowpassionately avoids usingdebt andbets only on the long-termeconomics of abusiness,nottheshort-termpriceswingsofitsstockprice.

#2

CIRCLEOFCOMPETENCE

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“Knowing what you don’t know is more useful than beingbrilliant.”

–

What Charlie is saying here is that we should become conscious of what wedon’tknowanduse thatknowledge to stayaway from investing inbusinesseswedon’tunderstand.Attheheightofthebullmarketbubbleintechnologystocksinthelate1990s,

many very brilliant people were seduced into investing in Internet stocks.Charlie realized that he didn’t understand the new Internet businesses, whichwereoutsidewhathecallshiscircleofcompetence,soheandBerkshireavoidedthemcompletely.MostofWallStreet thoughthehad losthis touch.Butwhenthebubblefinallyburstandthecompanies’stockpricesfell,fortuneswerelost,anditwasCharliewhowasleftlookingbrilliant.

#3

AVOIDBEINGANIDIOT

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“Peoplearetryingtobesmart—allIamtryingtodoisnottobeidiotic,butit’sharderthanmostpeoplethink.”

–

Charlie’s investmentphilosophy ispredicatedon the theory thata shortsightedstockmarketwillsometimesunderpriceacompany’ssharesrelativetothelong-term economic value of the company. When that happens, he buys into thecompany, holds it for the long term, and lets the underlying economics of thebusinesseventuallyliftthestockprice.Theonlythinghehastobecarefulaboutisnotdoingsomethingstupid,whichinhiscasearemostlyerrorsofomission,suchasnotactingwhenheseesagoodinvestmentorbuyingtoolittleofitwhenthe opportunity presents itself.Which is actually harder to do than onemightthink.

#4

WALKINGAWAY

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“Life,inpart,islikeapokergame,whereinyouhavetolearntoquitsometimeswhenholdingamuch-lovedhand—youmustlearntohandlemistakesandnewfactsthatchangetheodds.”

–

Charlie experienced this with the home mortgage lender FreddieMac.WhenBerkshire bought shares in FreddieMac in the 1980s, itwas a verywell run,conservativelymanaged,profitableenterpriseinvolvedinthemortgagebusiness.As time went on, Freddie’s management branched out into a new line ofbusiness in which they were using their quasi-governmental status toaggressivelyborrowshort-termmoneyandthenlenditoutlongterm—thesamefinancialequationthateventuallyputLehmanBrothersintobankruptcy.Seeingthe dramatic increase in risk and the change in the attitude of FreddieMac’smanagement,Berkshiresold itsmuch-loved investmentataprofit in1999.By2008 Freddie Mac was in receivership (a kind of bankruptcy), the oldmanagementhadbeen fired, and the stockwasworth a tiny factionofwhat ithad been when Berkshire sold its shares. Charlie knows when to hold ’em,knowswhentofold’em,andknowswhentowalkaway.

#5

EASYSHOOTING

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“My idea of shooting a fish in a barrel is draining the barrelfirst.”

–

Sometimes the shortsighted stockmarket serves up an investment opportunitythatissoobviousitishardtoresist.Thisusuallyhappenswhenthereisastockmarket panic and investors are fleeing any and all investments, even the oneswithgreatlong-termeconomicsworkingintheirfavor.Thisfleeingofinvestorsisthedrainingofthebarrel—stockpricesdrop,whichmakesiteasierforCharlietoseethefish:underpricedgreatbusinesses.

#6

REVELATION

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“Once we’d gotten over the hurdle of recognizing that a thingcould be a bargain based on quantitative measures that wouldhave horrified Graham, we started thinking about betterbusinesses.”

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Benjamin Graham was the dean of value investing. He was also WarrenBuffett’s teacherandmentor, and inhisworldvalue investingmeantbuyingastockatbelowitsintrinsicvalue—whichtoGrahammeanthalfofbookvalueorataverylowprice-to-earningsratio.Onecouldreadilydothatintheperiodof1933to1965ifoneworkedhardenoughatfindingthosekindsofbargains.TheproblemwithGraham’s investmentphilosophywas that it requiredan investorto sell the stockonce it rose to its intrinsicvalue.Therewasno such thingasowning a company for twenty years or longer and letting the underlyingeconomicsofthebusinessgrowthecompanyandliftthestockprice.CharlieandWarrenrealizedthatsomebusinesseshaveexceptionaleconomics

workingintheirfavorthatwillcausetheirintrinsicvaluetoincreaseovertime.Thecommonstockoftheseamazingcompaniesreallyisakindofequitybondthat has an increasing rate of interest (earnings) attached to it. For example:WhenBerkshirestartedbuyingCoca-Colastockin1988(figuresareadjustedforsplits),thecompanyhadearningsof$0.18ashareandwasgrowingitspershareearnings at a rate of approximately 16%a year.Berkshire paid approximately$3.24ashare,whichequatestoaP/Eratioof18,waytoohighforthelikesofGraham. But Charlie andWarren could see something that Graham couldn’t:thatthelong-termeconomicsofthebusinessmadeitabargainataP/Eratioof18.TheysawCoca-Cola’sstockasakindofequitybond,whichwaspayinganinitial rate of return of 5.55% ($0.18 EPS divided by $3.24 = 5.55%), whichwouldcontinuetoincreaseasCoke’spershareearningscontinuedtogrow;andthat over the long term, themarket would advance Coke’s share price as thecompany’searningsgrew.So howdidBerkshire do? Its $1.299 billion original investment inCoke in

1988,over the last twenty-sevenyears,hasgrowntobeworth$17.184billion,

givingBerkshire anaverageannual compounding rateof returnof10.04%forthe twenty-seven years, which doesn’t even include all the dividends that itreceived in that timeperiod. In2015alone,Coca-Colapaid toBerkshire$528millionindividends,givingBerkshireacurrentannualdividendrateofreturnof40%on its initial investmentof$1.299billion.Over thenext fiveyearsCoca-ColawillpayBerkshireapproximately$2.64billionindividends.ThingsreallydogobetterwithaCoke,includingourmoney.

#7GRAHAM’SERROR

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“BenGrahamhadalottolearnasaninvestor.HisideasofhowtovaluecompanieswereallshapedbyhowtheGreatCrashandthe Depression almost destroyed him. . . . It left him with anaftermathoffearfortherestofhislife,andallhismethodsweredesignedtokeepthatatbay.”

–

ThecrashofOctober29,1929,washardonGraham,andtheensuingcrashin1932 was devastating. After the crash of 1929, stock prices started to rise,increasingby30%by1931.Thecrashof1932wascompletelyunexpectedandtheworstinthetwentiethcentury.Itdrovestockpricesdownby89%.Ifyouhad$1,000investedintheDowonSeptember3,1929,itwouldhavegonedownto$109byJuly8,1932.Toprotecthimselfinthefuture,Grahamdevelopedtheconceptofthemargin

of safety, a quantitative approach to valuation that he adapted out of bondanalysisandthefearofbankruptcy.Helookedforcompaniesthatweresellingon a per share basis for less than their book value. Thus he developed thebuying-the-whole-businessapproach.He’dvaluethewholebusinessat,say$10million,andthenhewouldfigureoutwhatthecompanywassellingforonthestockmarket.Ifithadamillionsharesoutstandingandwassellingat$6ashare,hecouldseethatthestockmarketwasvaluingtheentirecompanyat$6million.Butitsintrinsicvaluewas$10million,whichgavehimamarginofsafetyof$4million.Soevenifthestockmarketcrashed,thecompany’s$10millionintrinsicvaluewouldeventuallypullitsstockpricebackup.Where this hurt himwas that his system requiredhim to sell an investment

onceitreacheditsintrinsicvalue.Therewasnosuchthingasholdingastockforthirty or forty years, as Charlie and Warren do. If he had bought BerkshireHathawayin1974,whenitwassellingathalfitsbookvalue,hewouldhavesoldit in 1980,when itwas selling above book value. Therewould have been noridingitto$210,000asharein2016.Hisinvestmentphilosophywasdesignedto

makehimmoneyand toprotecthimfromlosses,but italsostoppedhimfromeverbenefitingfromthecompoundingeffectthatagreatbusinesscangenerateoveraperiodoften,twenty,ormoreyears.

#8

SITTINGONYOURASS

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“Sitonyourassinvesting.You’repayinglesstobrokers,you’relisteningtolessnonsense,andifitworks,thetaxsystemgivesyouanextraone,two,orthreepercentagepointsperannum.”

–

This important investment philosophy assumes that one is better off buying abusinesswithexceptionalbusinesseconomicsworkinginitsfavorandholdingitformanyyearsthanengaginginalotofbuyingandselling,tryingtoanticipatemarket trends.Constantly buying and sellingmeans constantly being taxed. Ifone holds an investment for twenty years there is only one tax to pay,which,accordingtoCharlie,equatestoanextra1to3extrapercentagepointsofprofitperyear.Thoughthe3extrapercentagepointsmaynotseemlikemuch,considerthis:a

million-dollar investment compounding at 4% a yearwill have grown in yeartwentyto$2,191,123.Addthreepercentagepoints(4%+3%=7%),sothatthemillion-dollarinvestmentiscompoundingfortwentyyearsat7%,andyouwillendupwithasumof$3,869,684inthetwentiethyear.Charlie knows that time is a good friend to a business that has exceptional

economicsworkinginitsfavor,butforamediocrebusinesstimecanbeacurse.

#9

THEDAWNINGOFWISDOM

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“Acknowledging what you don’t know is the dawning ofwisdom.”

–

The smarter we get, themorewe realize how little we actually do know. Byacknowledgingwhatwedon’tknow,weareputtingourselvesintoapositiontolearnmore;thus,thedawningofwisdom.InCharlie’sworldofinvestingthereiswhathecallsa“circleofcompetence,”

whichconsistsofallthecompaniesheiscapableofunderstandingandvaluing.But it also includes all the companies outside the circle that he doesn’tunderstandandisunabletovalue.Byacknowledgingwhathedoesn’tknow,hecaneitheravoidaninvestmentorlearnmoreaboutthebusinessandseeifhecanunderstand it to the point that he can value it, which would put it within hiscircleofcompetence.OverthecourseofCharlie’slifehehasincreasedhiscircleof competence to include the insurance business, banking, newspapers,television, candy companies, airlines, the toolmaking business, boot makers,underwearmanufacturers,powercompanies,andinvestmentbanking.Charlie’sroadtoallthiswisdombeganbyacknowledgingwhathedidn’tknowandthendoingsomethingaboutit.

#10

ANALYSTS

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“Inthecorporateworld,ifyouhaveanalysts,duediligence,andnohorsesense,you’vejustdescribedhell.”

–

IthinkwhatCharlieissayingisthatwhenanalystsfromaratingscompanysuchasMoody’sCorporationissueanewratingonabond,whilebeingpaidmillionsbytheWallStreetinvestmentbankthatrequestedtherating,weshouldprobablybe a little suspicious. The ratings companies have a very strong incentive toprovidetheinvestmentbankswiththehighestratingspossiblefortheirfinancialproducts—even if said products might not really deserve such a good rating.Which is exactlywhat helped create the housingbubble, the subsequent stockmarketcrash,andtheGreatRecessionof2007–09.Theproblemwefacetodayisthatthefinancialincentivefortheratingscompaniestopaintarosypictureforthe investmentbanks still exists.Foolmeonce, shameonyou; foolme twice,shameonme.

#11

AMISPRICEDGAMBLE

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“You’relookingforamispricedgamble.That’swhatinvestingis.And you have to know enough to know whether the gamble ismispriced.That’svalueinvesting.”

–

Acompanyisamispricedgamblewhenthepriceofthestockisoutofsyncwiththe company’s long-term future economics. This mispricing can be on theupside, meaning that the stock price significantly overvalues the long-termprospectsofthebusiness.Oritmaybeonthedownside,meaningthatthestockpricegreatlyundervaluesthelong-termprospectsofthecompany.Asthestockpricestartstodrop,thebusinessbeginstobecomemispricedonthedownside,inrelationtothecompany’slong-termfutureprospects.Thelowerthesharepricegoes,themoremispriceditbecomes.Thisiswhentheoddsareinyourfavoranditistimetobuy.Yougetgreatvalueforyourmoneybybuyingintoacompanywith great long-term economics working in its favor whose share price ismispriced on the downside. Why does this mispricing phenomenon occur?Because of the shortsighted nature of the institutions—primarilymutual fundsandhedgefunds—thatarethedominantplayersinthestockmarketandthatareconcernedonlywith thedirection inwhicha company’s shareprice isheadedoverthenextsixmonths.Charlie,bycontrast,isconcernedonlyaboutwhereacompany’s underlying economics are headed over the next ten years. It is thediscrepancy between the two that creates his mispriced gamble—his buyingopportunity.

#12

DIVERSIFICATION

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“Thisworshipping at the altar of diversification, I think that isreallycrazy.”

–

Diversificationisawaytoprotectfinancialconsultantsandstockbrokersfromeverlookingreallybad,butitalsostopsthemfromlookingreallygoodaswell.What happenswith broad diversification—holding a portfolio of, say, fifty ormoredifferentstocks—isthatthewinnerswillbecanceledoutbythelosers,justas the losers will be canceled out by the winners. Diversification creates asituation that basically mimics the market or an index fund. An adviser whocounselsdiversificationneverlooksverygoodorverybad,justaverage.Charliediscovered that ifwe invest incompanies thathavegreateconomics

working in their favor, at a reasonable price, we can bring the number ofcompanies we own down to ten or fewer and still be protected against anunexpectedbusinessfailure,andhavegoodgrowthofourportfoliooveraten-totwenty-yearperiod.Asthesayinggoes,toomuchdiversification,andweendupwithazoo.It’smucheasiertokeepasharpeyeonourbasketifthereareonlyteneggsinit.

#13

WHENTOBETHEAVILY

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“Youshouldrememberthatgoodideasarerare—whentheoddsaregreatlyinyourfavor,betheavily.”

–

Evenwhenagreatinvestmentislyingrightinfrontofmostinvestors,theywillonlynibbleatit.Whichisnotthewaytomakethebigbucks.Whenaretheoddsinourfavor?Whensomemacroeconomiceventcausesstockpricestocollapse,Charliebuysasmuchaspossible.Remember,inCharlie’sworld,asstockpricesfall,theoddsbecomemoreinourfavor,providedweinvestincompanieswithgood long-termeconomicsworking in their favor.When thathappens,Charlierecommendsthatwebetbig!

#14

THEHERD

–

“Mimickingtheherdinvitesregressiontothemean.”

–

Charlieistellingusthatifweinvestinanindexfund,wewilldonobetterthantheaverageinvestor.Wewillneverexcelbeyondtheaverage,andaveragecanalsomeanlosing.Ifwebuyintoanindexfundattheheightofabullmarketandthemarket tanks, it ispossiblewemight losemoneyforanumberofyears.InCharlie’s world one buys as others are selling, which is hard to do if one isrunningwiththeherd.

#15

FORESIGHT

–

“I’veneverbeenabletopredictaccurately.Idon’tmakemoneypredicting accurately.We just tend to get into good businessesandstaythere.”

–

Charlie is no good at forecasting the future, be it the weather, elections, theeconomy,orthestockmarket—especiallythestockmarket.Allthatbanterinthefinancial press aboutwhat is going to happen in the stockmarket ismindlessnoise tohim.He’s justamanlookingforagoodbusinesshecanbuyatafairprice.However, theonethinghecanpredict is that thestockmarketwillhavemomentsofwildexuberanceandhighstockprices,usuallyfollowedbyboutsofsevere depression andmuch lower stock prices. Can he predictwith accuracywhentheseeventswillhappen?No.Buthedoesknowtheywillhappen—hejusthastohavethepatiencetoletthemhappen.

#16

FINANCIALCRISISEQUALSOPPORTUNITY

–

“If you, like me, lived through 1973–74 or even the early1990s...therewasawaitinglisttogetOUTofthecountryclub—that’swhenyouknowthingsaretough.Ifyoulivelongenough,you’llseeit.”

–

TheUnitedStatesexperiencedaneconomicrecessionin1973–74,andagainintheearly1990s,whichbroughtonunemploymentandcrashingstockprices.The1973–74 recession was caused by a rise in oil prices. It lasted twenty-fourmonthsandcausedtheDowJonesIndustrialAveragetolose45%ofitsvalue.The early ’90s recession was also caused by rising oil prices, but also byoverbuildinginthe1980s,whichcausedaslumpinofficebuildingconstruction.TherecessionlastedeightmonthsandcausedtheDowtolose18%ofitsvalue.In2001,sixyearsbeforetheGreatRecessionsetin,Charlieknewthatthere

wouldeventuallybeanothergreateconomicupheaval.Hewascorrect.In2007–09theeconomycollapsed,stockpricesfell,andtheDowlost54%ofitsvalue.Howdidheknowthatwouldhappen?Heknowsthatcyclicalfinancialcrisesarejustinthenatureofcapitalism.Thataheavilyleveragedbankingsystem,whenmixed with speculative frenzy, can create massively unstable investmentbubbles,whichinevitablyburstandbringtheentireeconomydown.I would be amiss if I didn’t point out that random recessions/crashes are

programedintoCharlie’sbuyingstrategy.BothCharlieandWarrenletcashpileup,waitingforarecession/crash,evenifitmeansgettinglowratesofreturnontheir cash holdings as they wait for the inevitable.When the crash hits, theymake theirpurchases. In the1990recession,bankstocks tookabighit,whichBerkshire used as a buying opportunity to acquire 5 million shares of WellsFargobankatacostof$289million.Today, those5millionshares, thanks tostocksplits,havegrownto40millionsharesthatarenowworthapproximately$1.9billion.WhichgivesBerkshire,excludingdividends,a7.5%compoundingannualrateofreturnforthetwenty-six-yearperiod.ButtheicingonthecakeisthatBerkshire’soriginal$289millioninvestmentisnowearningit$59.2millionayearindividends—whichequatestoanannualdividendpayoutof20.4%onits

originalinvestment.AsCharliehassaidmanytimes,itwasn’tbrainsthatmadehimsorich,itwastemperament.

#17

CASHISKEY

–

“The way to get rich is to keep $10 million in your checkingaccountincaseagooddealcomesalong.”

–

Charlieadvocateskeeping$10millionincash,andBerkshirekeeps$72billionsitting around in cash,waiting for the right deal to showup.The lousy returntheir cash balances are getting is a trade-off—poor initial rate of return inexchangeforyearsofhighreturnsfromfindingexcellentbusinessessellingatafairprice.This isanelementof theMunger investmentequationthat isalmostalwaysmisunderstood.Why?Becausemost investorscannot image that sittingona largepoolofcashyearafteryear,waiting for the right investment, couldpossiblybeawinninginvestmentstrategy,letaloneonethatwouldmakethemsuperrich.

#18

ADEMORALIZEDGENERATION

–

“Thankstotheearly1930sandthebehaviorofthecapitalistsinthe robber-baron days . . . stocks yielded dividends that weretwiceasmuchastheinterestratesonbonds.Itwasawonderfulperiod to be buying stocks. We profited from others’demoralizationfromthepreviousgeneration.”

–

Thecrashesof1929and1932decimatedstockpricessobadlythatittookuntil1954 for the Dow Jones Industrial Average to return to its 1929 high.Manypeople lost their entire fortunes. That soured the investing public on commonstocksforalmostthirtyyears.Manyofthecompanieswhosestockpricesweredevastated by the crash returned to profitability by the 1940s, but no onewasinterestedinowningtheirshares.Toattract investors,companieshad topaydividends thatwerealmost twice

what bonds were paying. Charlie and Warren cut their investment teeth onbuying those companies, which were paying a substantial dividend and oftensellingatpricesbelowtheirbookvalues.Asinvestingincommonstockscameback into vogue in the late 1950s and early ’60s, the companies’ stock pricesstartedtorise,makingCharlieandWarrenmultimillionaires.By the late 1960s the bargains started disappearing, andby 1972 theywere

prettymuchgone;thebullmarkethadoverpricedeverything.

#19

PATIENCE

–

“IsucceededbecauseIhavealongattentionspan.”

–

Patienceisavirtue,anditisalsoanassetintheinvestmentgame.Mostpeoplethink that means patiently sitting on some investment forever, waiting for itsvaluetogoup.InCharlie’sworlditalsomeanssittingpatientlyonapileofcashwaitingforsomegreatbusiness’sstockpricetogetbeatendown.Anditmeanshavingthepatiencetostayfocusedonlookingforagreatcompanysellingatafairprice.Theintensefocusingskillsittakestobecomealawyeroradoctorarethesameskillsittakestobecomeagreatinvestor.

#20

STOCKPRICES

–

“Itisanunfortunatefactthatgreatandfoolishexcesscancomeintopricesof common stocks in theaggregate.Theyare valuedpartly like bonds, based on roughly rational projections of usevalue in producing future cash. But they are also valued partlylikeRembrandtpaintings,purchasedmostlybecausetheirpriceshavegoneup,sofar.”

–

Thisisveryinteresting,anditbeliesseveraloftheunderlyingthoughtprocessesthathavemadeCharliesoincrediblywealthy.First, thebondpiece:Somecompanies—notall,but some—havebusinesses

that create fairly consistent earnings and earnings growth.Charlie andWarrenbelieve that the common stock in those special businesses can be valued likebonds.So ifacompany isearning$1a shareand the stock is sellingat$10ashare,onecanarguethatthestockislikeanequitybondthatisearning10%.Ifthecompany’searningsaregrowingat5%ayear,ourtwoboyscanarguethattheyjustboughtan“equitybond”thatisearning10%ayearandgrowingat5%ayear.They thinkof it as an “equitybond”with an expanding rateof return,which, over time, lifts theunderlyingvalueof the companyand thus its shareprice.The Rembrandt painting analogy refers to the fact that the market for old

masters’paintingsisdrivenbydemand,anddemandisoftendeterminedbyhowquicklysellingpricesarerisingorfalling.Thesamethingcanhappeninstocks;a fast-risingpricecanattractmorebuyers, justasa fast-fallingstockpricecanattract more sellers. When an asset bubble bursts and demand for equityinstruments evaporates, people sell their Rembrandts and stocks for whatevertheycangetforthembecausetheyaredesperatelyinneedofcash.ForCharlieandWarren,thetimetobuythe“equitybonds”ofawonderfulcompanyiswheneveryoneelseistryingtoselltheirRembrandts.

#21

EBITDA

–

“I think that, every time you see thewordEBITDA, you shouldsubstitutetheword‘bullshitearnings.’ ”

–

EBITDA stands for “earnings before interest, taxes, depreciation, andamortization.”Charlieconsidersinterest,depreciation,andtaxestobeveryrealexpenses thathavetobepaid.Interestandtaxeshavetobepaid in thecurrentyear.Depreciationisacostthathastobepaidatalaterdate—forexample,whenaplantandequipmenteventuallyneedreplacing.Thateventualreplacementisacapitalcost.Andcapitalcostscandestroywhatotherwiseappearstobeareallygreat business. According to Charlie, if we use EBITDA to determine theearnings of a company,wewill get an unrealistic viewof the company’s trueeconomicnature.

#22

DANGERSOFFINANCECOMPANIES

–

“Whereyouhavecomplexity,bynatureyoucanhave fraudandmistakes. . . . This will always be true of financial companies,includingonesrunbygovernments.Ifyouwantaccuratenumbersfromfinancialcompanies,you’reinthewrongworld.”

–

Howcomplexarefinancialcompanies?Charliesaysthatitisalmostimpossibletoknowifonehasgoneastrayuntil thedayacompanycollapses.Just lookatLehmanBrothers:oneyear it is tradingat$65ashareandis the toastofWallStreet;ayearlateritisinbankruptcy.ThesamefortheinsurancegiantAIGandthegreatinvestmentbankinghouseMerrillLynch:oneyeartheyareconsideredtwoofthesoundestfinancialfirmsintheworld,thenextyeartheyarebeggingformoneyfromthegovernment.Whatmakesfinancialcompaniessocomplex?Derivativesmakeitpossibleto

hideriskfromthepryingeyesofregulatorsandinvestmentanalysts.WithAIGitwas impossible to see all the credit default swaps it hadwritten on subprimemortgages,becauseitneversetasideanyreservestocoveritslosses.Thatmeantthecompany’s riskexposurewashidden from the investingpublic.Youcouldhave readLehmanBrothers’ annual report ahundred times andnever realizedthatitwasborrowinghundredsofbillionsofdollarsshorttermandlendingthemoutlongtermtofinancesubprimemortgagesthattheythenusedascollateraltoborrowevenmoremoney.Acommercialbankmightbeusingderivativestotakea massively speculative position in the currency markets, but accountingregulationsaresuchthatthepositionwouldbeimpossibletoascertain—untilthecompany loses several hundred million dollars and we read about it in thefinancial press. Charlie’s rule for financial firms is really simple: what looksgoodontheoutsidemaybeseriouslyrottenontheinside.

#23

OVERCONFIDENCE

–

“Smart people aren’t exempt from professional disasters fromoverconfidence.”

–

Here Charlie is referring to the collapse of Long-Term Capital Management,which was a hedge fund set up by the famed Wall Street bond trader JohnMeriwether in the late 1990s.Meriwether brought together some the smartestpeople from Wall Street and academia, including PhDs in mathematics andeconomics, several ofwhomwhowereNobel laureates. Those brilliantmindsdevised strategies for investing in bonds and derivatives using tremendousamounts of leverage, which, if things went their way, would earn outrageousreturns on their partners’ invested capital. The problemwith the strategywasthatthepotentialforlosseswascatastrophic.Meriwether thought that thecompanycouldprotect itselfbyusinga trading

strategy that employed bond spreads. It would measure the historical spreadbetween very similar bonds—such as the yield spread between two-yearTreasurybondstradinginJanuaryandMarch.IfthespreadbetweenJanuaryandMarch Treasuries greatly decreased or increased in relation to its historicalaverage,LTCMwouldbuyoneandsell theother,betting thatatsome time inthe future the spreadwould close back up—which it always did because theywereessentiallythesamebond.LTCMoftenmade1%orlessonatrade.Thatmightnotseemlikemuch,but

multiply1%bythe$124billionincapitalitwasworkingwith,anditamountstoaprofitof$1.24billion.Dothatacoupleoftimesayear,andyoustartshowingoutrageousreturnsoninvestors’equityinvestmentsof$4.7billion.InthesecondyearofoperationMeriwetherearnedhisinvestorsa43%returnontheirinvestedcapitalinLTCM,and41%thenextyear.Everything was going well until Russia surprised the world in 1998 by

defaultingonitsdomesticdebt,devaluingtherubleanddeclaringamoratoriumon payment to foreign creditors all in the same week. That caused the bondmarket topanic,andLTCM’sspreadsallwent in thewrongdirection,causingthecompany to showamassive loss.When thathappened, thebanks thathad

loaned LTCM a total of $120 billionwanted either (1)more collateral or (2)theirmoneyback,neitherofwhichwasforthcoming.Literallyovernight,LTCMbecame insolvent. The Federal Reserve Bank of New York went in andorganized a group of Wall Street banks to take control of LTCM, and itsinvestorslostthemajorityoftheirmoney.Charlie’s lesson here is that a combination of supersmart people and large

amountsofleverageoftenendsindisaster.Imightaddthatthecombinationofreally dumb people and large amounts of leverage usually ends in disaster aswell.

#24

INVESTMENTMANAGERS

–

“I know one guy, he’s extremely smart and a very capableinvestor.Iaskedhim,‘Whatreturnsdoyoutellyourinstitutionalclientsyouwillearnforthem?’Hesaid,‘20%.’Icouldn’tbelieveit,becauseheknowsthat’simpossible.Buthesaid,‘Charlie,ifIgavethemalowernumber, theywouldn’tgivemeanymoneytoinvest!’ ”

–

Charlie believes that the fee-driven investmentmanagementbusiness is insanebecause, as he says, “Everyonewants to be an investmentmanager, raise themaximum amount of money, trade like mad with one another, and then justscrapethefeesoffthetop.”Whyaretheysorecklesswithourmoney?Becauseitisnottheirmoney!Let’ssayImanageahedgefund;yougivemeyourmoneytoinvest,andIuseittohelpmeborrowmoremoney.Ithenuseyourmoneyandtheborrowedmoneytoplaceareallybigbet.Ifitworksout,youmakeatonofmoneyandImakeatonofmoneyinfees.It’sawin-win.ButifIloseit,youandthe bank will be crying, not me. That, for a hedge fund, is a great businessmodel.Butfirst itneedstogetyourmoney.Thesecondthingitneedstodoiskeep its hands on your money—it doesn’t want you pulling it out and goingsomewhereelse.Sohowdoesitdothat?Therearetwohedgefundrulesforraisingandkeepingmoney.Thefirstrule:

Promise investors the sky,because if thehedge funddoesn’t promise tomakeyoualotofmoney,youwon’tinvestyourmoney.Thesecondrule:Anyhedgefundthatinvestsyourmoneyconservativelywon’tkeepitforverylongbecausetheguysdownthestreetwholeveragedup,threwthedice,andwonwillshowmuchhigherreturns.Thatmeansthatinayearortwoyourgreedwillmotivateyou to leave my underperforming conservative fund for the winning, highlyleveragedgamblerdownthestreet.Sothereisnoeconomicadvantageforhedgefunds to be conservativewith yourmoney.Yes, theymight lose a lot of yourmoneyafterafewyears,butwhentheydo,youwill justgofindthenexthighflyerandthefundmanagerwholostyourmoneywill justgoandstartanother

fund.Don’tbelieveme?Considerthis:AfterthefamedWallStreetbondtraderJohnMeriwether crashedLong-TermCapitalManagement in 1998, he startedanotherfund,JWMPartners,in1999,whichhesuccessfullyranforeightyears,gettingassetsupto$3billion.Thenthefinancialcrisisof2007–09costhim44%ofthefund’sassetsandhehadtocloseit.Hethenwentontostartanotherfund,JMAdvisors,in2010.Theeconomicrealityofthehedgefundbusinessmodelmakesitmadnessfor

hedge funds to do anything but leverage up and throw the dice.Which is, ofcourse,whytheyalldoit.Butdespairnot,forthefollythatthesedicerollersgetthemselves into presents the likes ofCharliewithmanywonderful investmentopportunities.

#25

WAITING

–

“It’swaiting that helps you as an investor, and a lot of peoplejustcan’tstandtowait.”

–

Blaise Pascal, the seventeenth-century French mathematician, said, “All ofhumanity’sproblemsstemfromman’sinabilitytositquietlyinaroomalone.”Charlie agrees. You have to wait for the right company—one with a durablecompetitiveadvantage—thatissellingattherightprice.AndwhenCharliesayswait,hemeanswaitaslongasittakes,whichcanmeanyears.Warrengotoutofthe stockmarket in the late 1960s, and he waited five years before he foundanything he was interested in buying. In the late 1990s, during the Internetbubble, Charlie andWarren gave up on finding anything to buy in the stockmarket,anditwasn’tuntil2003thattheystartedtofindstocksattractiveagain.Butwaiting,formost investors, isnotaneasythingtodo.Thisalsoapplies tomutualandhedgefundmanagers;theyaredriventoproducequarterlyresults,sowaitingseveralyearstofindsomethinggoodtobuyisoutofthequestion.There ismore than just waiting to find something to buy.Once you buy a

stock, you have to wait for the business’s underlying economics to grow thecompanyandliftitsstockprice.WhenCharlieandWarrensaythattheyintendto hold an investment forever, theymean forever!Who onWall Streetwouldevermakesuchastatement?That’soneofthereasonsCharlieandWarrenhaveneverworriedaboutanyonemimickingtheirinvestmentstyle—becausenootherinstitutionorindividualhasthedisciplineorpatiencetowaitaslongastheycan.

#26

TAXSHELTERS

–

“IntermsofbusinessmistakesthatI’veseenoveralonglifetime,Iwouldsay that trying tominimize taxes toomuchisoneof thegreat standard causes of really dumb mistakes. . . . Anytimesomebodyoffersyouataxshelterfromhereoninlife,myadvicewouldbedon’tbuyit.”

–

Charlie has seen incredible mistakes in investment judgment because somepeople are more concerned with not paying taxes than they are with makingmoney. They invest in tax shelters thatmay be great at avoiding taxes but inrealityareterriblebusinessventures,manyofwhichenduplosingmoremoneythantheysavedtheirownersintaxes.CharlieandWarrenhaveengineeredtheirinvestmentinBerkshireHathawaysothatitisakindoflegaltaxshelter.Theyhave accomplished this by having the company never pay a dividend, thusavoidingthetaxonthedividendpayment,andbyholdingtheirBerkshirestockfor fiftyyears.Thathas allowed the earnings topileup insideBerkshire.Andthey used the accumulated profits to build the company by acquiring othercompanies.TheonlytimetheyhavetopaythetaxontheirBerkshireholdingsiswhen theysell their stock. InWarren’scase, sinceallhismoney isgoing toacharitablefoundation,hewillneverhavetopayadimeoftaxonit.WhywouldCharlieorWarreneverbuya taxshelterwhen theyhaveBerkshireHathaway,theultimatevehicleforavoidingordeferringthepaymentoftaxes?

#27

ENDURINGPROBLEMS

–

“An isolated example that’s very rare ismuch easier to endurethanaperfectseaofmiserythatneverceases.”

–

Charlie is talking about the difference between an excellent company, whichmightconfrontamajorproblemafewtimesinaspanoftwentyyears,comparedwithamediocrecompany,whichmightgofromproblemtoproblem,yearafteryear.Aperfectexampleofan“excellentcompany”istheCoca-ColaCompany.OverthelastfiftyyearsCoca-Colahasscreweduptwice—oncewhenitgotintothemoviebusinessandagainwhenitreformulateditsflagshipproductandcameoutwithNewCoke.Itsolvedbothproblemsbygettingridofthem.Theperfectexampleof amediocrebusiness thatgoes fromoneproblem to another is anyairline—which has union problems and fuel cost problems and is in a price-competitivebusiness.Thisbitofwisdomisalsoapplicable toourpersonal lives; it is fareasier to

endureabriefmomentofintensepainthanitistosufferamiserythatdragsonyearafteryear.

#28

SURPRISES

–

“Favorable surprises are easy to handle. It’s the unfavorablesurprisesthatcausethetrouble.”

–

Preparefortheworst,andhopeforthebest.Itisalwayswisetobepreparedfortheworst.BenjaminGraham’s“marginofsafety”wasdevisedtoprotectusfromtheworst.When it comes to stocks,Charlie thinks of themargin of safety intermsofpriceandquality—thelowertheprice,thehigherthemarginofsafety;thehigherthequalityofthebusiness,thehigherthemarginofsafety.Raisetheprice, and the margin of safety starts to evaporate. Lower the quality of thebusiness,andthemarginofsafetydrops.Ifwebuyahigh-qualitybusinessattheright price, the margin of safety will protect us against long-term losses, andlateronthehighqualityofthebusinesswillbringusmanyprofitablesurprisesasthebusinesscontinuestogroweitherinternallyorthroughacquisitions.

#29

UNDERSTANDINGTHEODDS

–

“Move only when you have the advantage—you have tounderstandtheoddsandhavethedisciplinetobetonlywhentheoddsareinyourfavor.”

–

Here iswhere it gets counterintuitive.Tounderstand this pieceof advice, youneedalittlebitof“Charliehistory.”Inthelate1960sbothCharlieandWarrenhad their own hedge fund. As the bull market of the late ’60s raged on,everythingbecameoverpriced, andWarren,whowas still followingaGrahamapproach of buying bargains, could no longer find anything cheap to buy. Soratherthanalterhisinvestmentstrategy,Warrenshutdownhishedgefundandreturnedthemoneytohispartners,puttingthevastmajorityofhisownmoneyintocashequivalentssuchasUStreasuries.Charlie kept on investing, and enjoyed great returns until the stockmarket

crashof1973–74,whenhelostnearlyhalfofhispartners’money.Hecalledittheworst time in his life.Warren,whowas sitting on a huge amount of cashbecauseeverythingrunninguptothecrashhadbeenoverpriced,suddenlyfoundhimselfsurroundedbydozensofwonderfulcompaniessellingatbargainprices.BecauseWarrenwasawashincash,hecouldbuythem.BecauseCharliedidn’thave any cash, he couldn’t buy them. When the stock market recovered,Charlie’s investments recovered and he regained his partners’ losses. But theexperiencesoshatteredhimthatheshutdownhisfund.WhatdidCharlielearnfromallthat?Helearnedthatasstockpricesrise,the

oddsstartgoingagainstinvestors.Andwhenpricesfall,theoddsstartturningininvestors’favor.Healsolearnedthatifhestaysfullyinvestedinthemarketasitrises,hewon’thaveanycashtoinvestwithwhenthemarketcrashes.Itdoesn’tmatterhowgoodtheoddsare; ifyoudon’thaveanycash tobetwith,youarenevergoingtomakeadime.

#30

AFEWGOODCOMPANIES

–

“Ifyoubuysomethingbecauseit’sundervalued,thenyouhavetothinkabout selling itwhen itapproachesyourcalculationof itsintrinsic value. That’s hard. But, if you can buy a few greatcompanies,thenyoucansitonyourass.That’sagoodthing.”

–

We touchedon thispoint earlier,but it is so important thatwewillgoover itagain.TheoldBenjaminGrahammethodofbuyingundervaluedstocksrequiredan

investor to setavaluationonacompanyand then,when thecompany reachesthatvaluation,sellit.Thisapproachfailsbecauseitrequiresustosellnotonlymediocrecompaniesas theyapproach theirvaluationbut alsogreatbusinessesthathaveadurablecompetitiveadvantage, thuskillingallopportunitytoprofitfromtheexpansionoftheunderlyingvalueofabusinessthatoccursovertime.Charlie andWarren’s theory is that a company with a durable competitive

advantagehasbusinesseconomicsthatwillexpandtheunderlyingvalueof thebusinessovertime,andthemoretimepasses,themorethecompany’svaluewillexpand.Thus,oncethepurchaseismade,itiswisesttositontheinvestmentaslongaspossible,becausethelongerweownthecompany,themoreitgrowsinvalue,andthemoreitgrowsinvalue,thericherwebecome.ThiscanbestbeseenwithBerkshireHathaway,whichoverthelastfiftyyears

hastradedanywherefrombelowbookvalueintheearly1970stoalmosttwicebookvalueinthelate1990s.Ifwehadboughtinatbelowbookvalueandsolditat twice book value, we would have made great money, but we would havemissedthegiantmovesBerkshiremadeintheperiodfrom2000to2016,whenitmorethantripledinvalue.Ifwepicktherightcompany,asCharliesays,sittingonourasscanreallypayoff.

#31

OWNERSHIPOFABUSINESS

–

“View a stock as an ownership of the business and judge thestaying quality of the business in terms of its competitiveadvantage.”

–

Benjamin Graham, the dean of value investing, looked at owning a stock asowningpartofabusiness.Ifwelookatinvestingfromthestandpointofbuyingafractional interest inabusiness,wecanmakeadeterminationofwhetherwearegettingabargainorpayingtoomuch.Charliebeginsbyfiguringoutwhatanentirecompany is selling for,bymultiplying the sharepriceby thenumberofshares outstanding. For example, a $6-per-share stockmultiplied by 1millionshares outstanding equates to a market value for the whole company of $6million.Thenheaskshimselfwhatthecompanyisworthasaneconomicentityfromalong-termperspective.Ifthecompanyisworthalotmorethanitsmarketvaluation,itisapotentialbuy.Ifitisworthless,hegivesitapass,butifithasa“durable competitive advantage,”hewill keepaneyeon it in thehope that atsomefuturedateitwillbesellingatabargainpriceorevenafairprice.Findingabusinesswithadurablecompetitiveadvantagemeansdetermining

whether it has stayingpower. Ifwe are going to buy andhold a company fortwentyyears,wedon’twanttheproductitissellingtobecomeobsoleteinyearfive.A great number of Berkshire’s investments have been in companies thathavemanufactured the sameproduct or provided the same service for fifty ormoreyears. In fact,mostof thewonderfulbusinesses thatCharlieandWarrenown—suchas theCoca-ColaCompany,WellsFargoBank,AmericanExpress,SwissRe,Wrigley’sGum,KraftFoods,andevenAnheuserBuschbeforeitwasbought out—have been selling the same product or service for more than ahundred years! When it comes to the truly great businesses, time is almostalwaysontheinvestor’sside.

#32

RECOGNIZINGREALITY

–

“Ithinkthatoneshouldrecognizerealityevenwhenonedoesn’tlikeit;indeed,especiallywhenonedoesn’tlikeit.”

–

Thereality thatCharlie is talkingabouthere iswhenamuch-lovedinvestmententers a new realm of economic reality—which means that over time theunderlyingeconomicsofthecompanyhavechangedsomuchthattheoncegreatbusiness is no longer such awonderful enterprise. ForBerkshire this happensperiodically with its reinsurance businesses. Overcapacity in the reinsurancebusinessmeans that there is toomuchmoney chasing too little business.Thisresults in lower pricing, which means that Berkshire makes less money forreinsuringtherisk.Mostreinsurancecompaniesdon’tacceptthisrealityandjustkeepsellingreinsurancepolicies—evenwhenitmeanstheywillmakeverylittlemoney off them. Berkshire, on the other hand, just flat out stops sellingreinsurance,andwillwaittillpricesriseagainbeforegettingbackintothegame.As a result Berkshire has become one of the largest and most profitablereinsuranceoperationsintheworldtoday.

#33

NOTBEINGSTUPID

–

“It isremarkablehowmuch long-termadvantagepeople likeushave gotten by trying to be consistently not stupid, instead oftrying to be very intelligent.Theremust be somewisdom in thefolksaying:‘It’sthestrongswimmerswhodrown.’ ”

–

Strongswimmersaretheoneswhoswimwayoutandpotentiallygetthemselvesin trouble. Weaker swimmers stay close to shore, where it is safe. In theinvestinggameitisthehighIQmath/quanttypeswhousethesupercomplicatedtrading models who get themselves into trouble. Charlie isn’t interested incomplexmathematicalmodelsand tradingstrategies thatWallStreetPhDsusetoexploittheshort-termfluctuationsofthestockmarket.Justtheopposite:heisinterestedinasimpleinvestmentstrategythatallowshimtopostsuperiorresultsoverthelongterm,thefoundationofwhichistryingnottodoanythingstupid.ToCharlie, being stupidmeans spendingmore for a business than you get invalue.

#34

OPPORTUNITY

–

“You do get an occasional opportunity to get into a wonderfulbusiness that’s being run by a wonderful manager. And, ofcourse,that’shogheavenday.”

–

Charlie believes that if you aren’t buying like crazy when you have theopportunitytobuyabusinessthathasahugepotential,itisabigmistake.Thekeyhere is tobuyaggressivelywhenwehave theopportunity.Theproblemisthat to do so, one is usually buying into a tanking stockmarket and formostpeoplethatisaverydifficultthingtodo.Why?Becausetheyseeotherinvestorslosingmoney and it frightens them, so they become timid.The opportunity isrightinfrontofthem,buttheyaretooscaredtoinvest.Also, people might not have cash at the right time to make a buy. Most

investment fundsare fully invested; theyaren’t sittingonanycash, the reasonbeing that if the market goes up and they aren’t fully invested, the cashcomponentwillpulldowntheirrateofreturn,whichwillcauseclientstoleavethem.Sothemarkettanks,thefundmanagerpanics,andevenifhedidwanttobuy,

hedoesn’thavethecashtodoit.Everyoneelseisonthesamesinkingship,sothe fundmanager looksnoworse than the rest of the crowd.Everyone exceptCharlieandWarren,whohavefiguredoutthattheshipisn’treallygoingtosinkandnowisthetimetobuy.

#35

THEFUTUREOFBERKSHIREHATHAWAY

–

“When I cameout toCalifornia, therewas this playboyandhespentallhis timedrinkingheavilyandchasingmovie stars.Hisbankercalledhiminandsaidthathewasverynervousabouthisbehavior. He told his banker, ‘Let me tell you something: mymunicipalbondsdon’tdrink.’ ”

–

Charlie is using this story to remind us that Berkshire Hathaway owns acollection of exceptional businesses, hand selected by Charlie and Warrenbecauseof their superior underlying economics and runbybrilliantmanagers.TheywillkeeponearningBerkshiregoodmoneylongafterheandWarrengetoffthewagonandsailontothatgreatbullmarketinthesky.

#36

FINANCIALDEMENTIA

–

“Thereismoredementiaaboutfinancethanthereisaboutsex.”

–

Very true; the financialdisastersof todayarealmostcompletely forgotten inayear or two. This is probably due to the fact that in the investment businessmoneyismadebybankingonthefuture,notlamentingthepast.Becauseofthis,mostfinancialinstitutionsaredoomedtorepeatthefolliesofyesteryear.Charlieunderstandsthisandusesacompany’sstockpriceaswaytoposition

himself in late bull markets with large cash reserves in anticipation of thecomingimplosionandthebuyingopportunitiesitwillpresent.Hedoesn’thaveto predictwhen the implosionwill happen; he just has to be prepared towaitseveral years for stock prices to fall. The pricing component stops him frombuying stocks aspricesget higher andhigher,whichmeans that cash starts tobuildupatBerkshire.Hehasgivenupprofitingfromthefinalstagesofabullmarket in order to be able to position himself to buy bigwhen the bust doescome.Thegiantinvestmentfundscan’tdothat;iftheymissoutontheprofitsinthelatterstagesofabullmarket,theirclientswilltaketheirmoneyelsewhere.IremembersittingattheBerkshireHathaway1998AnnualMeetinglistening

to shareholder after shareholder question why Charlie and Warren weren’tinvestinginanything—everythingwasgoingup—andtheyjustsattheresayingoverandoveragainthatstockpricesweretoohigh.Andwhenthebustoccurredin2000,andeveryonewasrunningforcover,theywereinapositiontobuyandbuy big. They did the exact same thing in 2008.How dowe knowwhen thestockmarket is toohigh?When thefinancialpressstartswritingarticlesabouthowCharlieandWarrenhavelosttheirMidastouch.

#37

BUSINESSVALUATIONS

–

“Ifpeopleweren’twrongsooften,wewouldn’tbesorich.”

–

Investorsareoftenwrongaboutbusinessvaluations;mostofthetimetheythinka company isworth farmore than itwill ever earn. But that doesn’t help us;whathelpsusiswhentheydojusttheopposite,whentheythinkthatabusinessisworthfarlessthanitslong-termeconomicsindicateandthereforemispriceiton the downside. It’s the mispricing on the downside that gives Charlie hisbuyingopportunities.Andthatissomethingtheinvestingherdmanagestodoinabigwayaboutonceeveryeighttotenyears.Ifyouwant to lookatwhere themarketwasgrosslywrongin itsvaluations

and Charlie and Warren took advantage of the situation, look at the majorrecessionsandstockmarketcrashesoverthelastfifty-fiveyears.TherewastheKennedystockmarketslideof1962,whichgaveWarrenhisbuyingopportunityinBerkshireHathaway.Therewasthe1973–74stockmarketcrash,whichgaveWarrenhisbuyingopportunity in theWashingtonPost.WhenFederalReserveChairmanPaulVolckerraisedinterestratesto14%in1978–80,killingthestockmarket, Berkshire was busy buying General Foods, R. J. Reynolds, and theTimesMirrorCompany.ThestockmarketcrashinOctober1987gaveBerkshiretheopportunitytostartbuyingCokestock,whichitcontinuedbuyingwellinto1988. The banking recession of 1990 gave Berkshire its opportunity to startbuyingWellsFargo.Inthelate1990stheInternetbubblecausedstockpricestosoar,butnobodywanted theold-schoolbrick-and-mortarbusinesses.BerkshireboughtStarFurniture,DairyQueen,GeneralRe,andNetJets.WhentheInternetbubbleburstand9/11beatthestockmarketdownin2001,Berkshireboughtitspositions in H&R Block andMoody’s Corporation. The subprime blowup in2007–09 and the ensuing stock market crash set the stage for Berkshire toacquirethepreferredequityordebtofGE,Harley-Davidson,BankofAmerica,and Goldman Sachs; and in 2010, as the stock market started to recover,BerkshireacquiredstockinBurlingtonNorthernRailroad,whosesharepricehadbeen beaten down in the 2007–09 crash. Why were all the other investorswrong?Theywereshortsightedandpanicked,whereasCharlieandWarrenwere

playingthelong-termgameandknewexactlywhattheywerelookingfor.

#38

WAITINGISTHEHARDESTPART

–

“You have to be very patient, you have towait until somethingcomes along, which, at the price you’re paying, is easy. That’scontrary to human nature, just to sit there all day long doingnothing,waiting.It’seasyforus,wehavealotofotherthingstodo.But foranordinaryperson, canyou imagine just sitting forfive years doing nothing? You don’t feel active, you don’t feeluseful,soyoudosomethingstupid.”

–

We’vetalkedaboutCharlie’sviewofpatienceearlieron.ButjustincasethereareanydoubtingThomasesamongyou,IwantedyoutoreadCharlie’sstatementon the subject at the 2014 Daily Journal Annual Meeting. This importantstatementhelpsexplainoneofthelastgreatmysteriesofCharlie’sequationforcreating fantasticwealth.Andbelievemewhen I tellyou thatoutof the fortythousand people who attend the Berkshire Hathaway annual meeting, whichincludesthousandsofinvestmentprofessionals,theremightbetenpeopletherewhoactuallyunderstandthispieceofadviceandareabletoputitintopractice.SoIwanttowalkthroughitlinebyline—toexploreallofitsnuances.Becauseifyougetanythingoutofthisbook,youwilllearntheimportancethatCharlieputsonpatience.Most investors are impatient.Becauseof this they fail rightoutof thegate.

Why? Because stocks are almost always selling at prices that are way abovetheirlong-termintrinsicvalue.Itisthenatureofthebeast.Ifyouwakeuponemorning determined to invest your money, your chances of finding aninvestmentthatwouldmeetCharlie’sstandardsisalmostzero.Soyousettleforsomething less, when you could have gotten something more if you had justwaited.WhichCharliesaysiseasytodobecauseyoudon’thavetopayanyonetowait.Charlie’sapproach iscontrary tohumannature,but right there it should tell

youthatitisawinninginvestmentstrategy.Foroneofthemostsuccessfulofallinvestment strategies is to be a contrarian investor—to go in the opposite

direction—tobuywhenothersareselling.Andnotbeinginahurryiscontrarytoeveryonewhoisinahurry,whichisjustabouteveryoneelseintheworld.Thinkofitthisway:Charlieisn’toutlookingforaninvestment,heiswaiting

fortherightlong-terminvestment—attherightprice—tocometohim.Yes,hekeepshiseyeswideopentomakesureheseesitwhenitarrives,whichiswhyhereadsalot,tomakesureheseesitwhenitshowsup.Butifitdoesn’tshowup, he just keeps on reading. Is that hard to do? Imagine that you go see aninvestment adviser and he tells you it might take five years to find the rightinvestment. Most people would stand up and leave and go find anotherinvestment adviser. It truly is not in people’s nature to wait, which is theadvantageCharliehasoverallofus.Becausemostpeopleareinarush,becausetheycan’tbelikeCharlieandwait

five years for the right long-term investment—at the right price—to showup,andsincemostofthetimestockssellatpricesinexcessoftheirintrinsicvalue,mostinvestorsendupoverpayingforthestockstheyarebuying.Somyquestiontoyouisthis:Areyouoneofthe99%ofinvestorswhoareinarushandendupoverpayingforyourinvestments?OrareyoupartofCharlie’s1%clubwhohavethe patience to wait five years, if necessary, to find the right long-terminvestmentsellingattherightprice?

#39

WADINGIN

–

“Wehaveahistorywhenthingsarereallyhorribleofwadinginwhennooneelsewill.”

–

Aswehavesaidrepeatedlythroughoutthisbook,theonlywaythatCharliecandothatisifheissittingonapileofcashinwaitingtotakeadvantageofsomefinancialcalamity.Thereasonthatotherinvestorsdon’tstepinisthattheydon’thavethecashtobuyanythingwith.Mostinvestmentfundsare100%investedinthemarket.Whyarethey100%invested?Becausecashoffersalowreturnandhavingalotofcashcanseverelyhurtafund’sperformance.Also, therearefundsthatborrowmoney,meaningtheyaremorethan100%

invested.Theyborrowmoneytoincreasethereturnoninvestors’capital,whichalsogenerateslargerfeesforthefundmanager.Sowhenthemarketgoesdown,fullyinvestedfundslosemoney—lotsofmoney—especiallyleveragedfunds.Ina market crash, open-ended funds, where investors are putting in money andpulling itoutonadailybasis,notonlysee theirportfolios shrink invaluebutalsohave investors yankingmoneyout of the fund to the tuneof hundredsofmillions.The bottom line is that in a bear market such institutions—mutual funds,

hedgefunds,andthelike—areinnopositiontobuyanything.Whichleavesallthelow-hangingfruitforthelikesofCharlieandWarren.

#40

ACADEMICSORCERY

–

“ByandlargeIdon’tthinktoomuchoffinanceprofessors.Itisafieldwithwitchcraft.”

–

The big problem with finance professors—besides being addicted to themediocrity of diversification—is that they preach the efficient market theory.Basicallythistheorysaysthatthemarketisefficient,sonoonecanbeatitandwe are all doomed to average results.What the finance professors completelymissisthatfromalong-termperspectiveindividualcompanieshavemomentsofinefficiency when the shortsighted “efficient” stock market misprices themrelativetotheirunderlyinglong-termeconomics.Thefinanceprofessors,havingnever studied population biology as Charlie has, have a difficult timeunderstanding that multiple strategies of exploitation can interact with oneanothertothepointthatefficiencyinonecancreateaninefficiencyinanother.Letmegiveyouanexample:The stockmarketpanics, asdoomandgloom

loomon the horizon, the vastmajority of investors flee, seeking the safety ofcash,drivingstockpricesdownward.Fromashortsightedperspectivethemarketisbeingefficientinitsreactiontotheinformationathand.Where“inefficiency”canappear iswhen investors rush for theexit,drivingstockpricesdownward,whichcancauseamispricingonthedownsiderelativetoacompany’slong-termeconomic value.Why does themarketmisprice stocks? Either it doesn’t careaboutthelong-termvalueofbusinessesinitsmomentofpanicand/oritsimplycan’tseetheirlong-termeconomicvalue.WhichiswhathappenedtoCoca-ColaandWellsFargowhenCharlieandWarrenwerebuyingthem.Over the years Charlie and Warren have refined their strategy to include

holding large reservesof ready cash and targetingonly companies that have adurable competitive advantage. But their long-term strategy of exploitation iswhollydependentontheshortsightedstockmarketactinginanefficientmannerandcreatingbriefmomentsofinefficiencyfromalong-termperspective.Thatishow Charlie beats the law of averages and proves the finance professors andtheirfinancialincantationswrong.

#41

GREEDYBANKERS

–

“Mortgagelendingbecameadirtywaytomakemoney.Youtakepeoplethatcan’thandlecreditandtrytomakeveryhighreturnsbyabusingandencouragingtheirstupidity—that’snotthewayIwanttomakemoneyinbanking.Youshouldtrytomakemoneybysellingpeoplethingsthataregoodforthecustomer.”

–

In theolddaysbankskepthomemortgageson theirownbooks, so theywereverycarefulwhomtheyloanedmoneyto.Butthenthebusinessmodelchangedand banks started selling the mortgages they wrote to other companies. It nolongermatteredwhomtheyloanedmoneyto,becausetheyweregoingtoselloffthemortgageas soonas theywrote it.Thegame thenbecame themorehomemortgagesthebankwrote,themoremoneythebankmade.Andifahomeownerdefaulted,who cared?The bankwas out of the equation.That’s howbankingwent from being a boring business with boring salaries, to being an excitingbusinesswithoutrageoussalaries.

#42

INVESTINGINBANKS

–

“Idon’tthinkanyoneshouldbuyabankiftheydon’thaveafeelfor the bankers.Banking is a business that is a very dangerousplaceforaninvestor.Withoutdeepinsight,stayaway.”

–

OneofthehallmarksofCharlieandWarren’sinvestmentsinbanksisthattheyalwayspraise themanagementof thebanks they invest in.What theypraise ismanagement’s beingobsessedwith operating efficiency—it keeps costs low—and risk management—it avoids taking large derivative positions and writingshakymortgages.BeitWellsFargoorU.S.BankorBankofAmerica,it isallaboutthequalityandintegrityofthemanagement.And why management? Because the quality of management is something

tangible thatCharlieandWarrencanget theirheadsaround,whereasabank’sfinancial statements are often so convoluted that not even the best financialanalystscanunderstandthem.

#43

NOSINGLEFORMULA

–

“There isn’t a single formula. You need to know a lot aboutbusiness and human nature and the numbers. . . . It isunreasonabletoexpectthatthereisamagicsystemthatwilldoitforyou.”

–

Peopleare looking for a simplemethod theycan learn from readingonebookthatwillmakethemrich.Itdoesn’thappenthatway—unlesstheygetreallucky.Oneisactuallybetteroffreadingahundredbusinessbiographiesthanahundredbooksoninvesting.Why?Becauseifwelearnthehistoryofahundreddifferentbusinessmodels,we learnwhen thebusinesseshad tough times andhow theygot throughthem;wealso learnwhatmadethemgreat,ornotsogreat.Whichallowsus togeta feel forwhetherornotabusinesshassomekindofdurablecompetitive advantageworking in its favor, which is key in figuring out if itwouldmakeagreatlong-terminvestment.Justreadingbooksonbusinessisn’tenough;oneshouldalsoaddinacouple

of semesters of accounting (which is the language of business), a couple ofsemesters of economics, and a good course on central banking so oneunderstands the power of the Federal Reserve Bank to come to the market’srescue(mostMBAcoursesaresorelylackinginthis).Thenonewillbeinagoodpositiontostartlookingforawinninginvestment.Butthenthesearchforagoodinvestmenttakesevenmorereading—socountonreadingtwoorthreehundredannualreportsayearandtheWallStreetJournaleveryday.Now do you understand why most people are looking for a simple, easy

systemforthemtouse.Thefunnypartofthisequationisthattheyaretheoneswho often do stupid things in the stockmarket that people in the know—likeCharlie—endupprofitingfrom.AsWarrensays,ifyougetintoacardgameandyoucan’tfigureoutwhoisthepatsy,thenyou’rethepatsy.

#44

ONTECHNOLOGY

–

“Thegreat lesson inmicroeconomics is todiscriminatebetweenwhentechnologyisgoingtohelpyouandwhenit’sgoingtokillyou.”

–

New technology can either damage an existing business or increase itsprofitability.Thefirstquestionweshouldaskis:Willthenewtechnologybeathreattothe

existing business model? Cars replaced buggies and horses. The telephonereplacedthetelegraph.Computersandprintersreplacedthetypewriter.Thenextquestionis:Willthenewtechnologyenhancethebusiness?Herethe

question gets a bitmore complicated.Whether or not a companywill benefitfromachangeintechnologyisdependentonthetypeofbusinessitis.Ifyou’reacommodity-typebusiness,whichsellsaproductorservice thata

numberofothercompaniesalsosupply,any technologybreakthrough thatwilllower costs and improve margins will probably also be picked up by yourcompetitors—whichmeans youwill lose any competitive edge the technologyprovides. But worse than that is when one of your competitors uses the costsavingsthenewtechnologyprovidestocutpricesandincreaseitsmarketshare.Asanexample:NewtechnologyXYwilldelivera10%costsavingstoourfirm—which is a good thing.Our competitor also buysNewTechnologyXY andachieves a 10%cost savings.Nowboth companies are ahead; both are saving10%.Butifourcompetitorwakesuponemorninganddecidestousethat10%cost savings to cut pricesby10% to add tohismarket share,wearegoing tohavetoalsocutourpricesby10%orwearegoingtolosemarketshare.Soattheendoftheday,inacommodity-typebusinesswithlotsofcompetitors,itisonlythecustomerwhoprofitsfromthenewtechnology.Whenacompanyhasadurablecompetitiveadvantageinaparticularmarket

niche,therearenocompetitors.Withsuchbusinessesthe10%costsavingsthatthe new technology provides is not eroded by price-cutting by competitorsseekingtotakemarketshare.Asanexample:IfCokedevelopsanewtechnologythatcanreduceitsproductioncostsby10centsabottle,itcanbringthatsavings

downtoitsbottomline,becauseevenifPepsidevelopsthesametechnologyandcutsthepriceofitsproduct,historyhasshownpeoplewillstillbuytheslightlymoreexpensiveCokebecauseCokeownsapieceof theconsumers’mindandhas their trust and buyer loyalty. The ability of a company with a durablecompetitive advantage to utilize a new technology to actually cut costs andincrease its profit margins is one of the advantages that it has over thecommodity-typebusiness.

#45

SUCCESSFULINVESTING

–

“Successful investing requires this crazy combination ofgumptionandpatience,andthenbeingreadytopouncewhentheopportunity presents itself, because in this world opportunitiesjustdon’tlastverylong.”

–

InMarch2009,inthemiddleofthegreatcrash(wheneveryonethoughttheUSgovernment was going to have to nationalize all the big US banks), Charlieboughtforhiscompany,DailyJournal,1.6millionsharesofWellsFargoBank,at an average costhe estimates at $8.58per share.TodayWellsFargo’s stocktradesataround$47ashare.Hewasabletodosobecause(1)hewasfocusedonlookingforagoodinvestment,and(2)hewassittingonapileofcash,patientlywaiting until an opportunity presented itself. And last but not least, heunderstoodWellsFargowellenoughthatheknewthattherewaslittlechanceofthebankeverbecominginsolventorthegovernmenttakingitover.Thatbuyingopportunitylastedbutacoupleofweeks,andwhenitwasavailable,Charliehadthegumptiontopounceonit.

#46

BEATINGTHEAVERAGE

–

“Itisinthenatureofstockmarketsthattheygodown.Sopeoplesuffer then. Conservative investing and steady saving withoutexpectingmiraclesisthewaytogo.Somepeopleinthisroomcanfigureouthowtoaverage twice therateofreturn. Ican’t teacheveryoneelsetodoit.Itisprettydifficult.”

–

Itisdifficultbutnotimpossibletodobetterthanthestockmarketaverage.Butittakesalotofreadingtogetthere.Formostpeopleitiseasierandsaferiftheyjustsavetheirmoney,buyintoanindexfundanytimethereisabearmarket,andthen justhold it forever.Thenwhen they retire, theycan sell itoff asneeded.Butforthosewhowanttoinvesttimeandenergyinstudy,thestockmarketisaseaofendlessopportunitythatcanproduceunimaginablewealth.

#47

COMMISSIONS

–

“Everywhere there is a large commission, there is a highprobabilityofarip-off.”

–

Commissionequalsincentives.InCharlie’sworldincentivesdrivemotivationonboththeconsciousandsubconsciouslevels.Financialplannersandstockbrokersworkingoncommissionaremotivatedtotakeusoutofoneinvestmentandputus into another investment because they make money in doing so. The moreactivity in our account, themoremoney theymake. So they find reasons forbuying and selling on our accounts, and most of the time they are the onesgetting rich,whilewe are the oneswho are getting poor.Or as the comedianWoodyAllenoncesaid,“Astockbrokerissomeonewhoinvestsotherpeople’smoneyuntilit’sallgone.”

PARTII

–

CHARLIEONBUSINESS,BANKING,ANDTHEECONOMY

#48

THEGREATDEPRESSION

–

“You don’t ever want to do anything to push an economy tocollapse.Terriblethingsresult.”

–

The Great Depression of the 1930s, which Charlie lived through, is now, formostAmericans,butadistantmemoryandacoupleofpagesinahistorybook.Forgotten are the millions of people out of work all over the world and thedevastating impact that tookmany nations decades to fully recover from. Justhow bad was it? Consider this: During the Great Recession of 2007–09,worldwideGDPfell1%;during theGreatDepression,worldwideGDPfellby15%.DuringtheGreatDepression,theUnitedStatesexperienceda50%dropinforeigntradeanda60%dropincropprices,andunemploymentrosetoahighof25%.TheEuropeaneconomiesweredecimatedtothepointthatitcausedentirenationstolosefaithintheirdemocraticinstitutions,whichgavebirthtotheriseoffascisminadesperateattempttofixtheseeminglyunfixable.Theendresultwas a world war that caused Europe and the rest of the world to sufferunimaginable horrors of death and destruction. Charlie lived through that ageandknowsalltoowellthatanation’sdescentintohellbeginswiththecollapsingof its economy. That if a democracy can’t find the strength to control itsfinancialinstitutions,eventuallythepeoplewillempoweradespotwhowill.

#49

REGULATINGBANKS

–

“Bankswill not rein themselves in voluntarily. They need adultsupervision.”

–

CharliehasalwaysseenthederegulationofthebankingindustryaspurefollyonthepartofCongress.HesawtheusheringinoftheGlass-SteagallActof1933,which separated speculative investment banks from conservative commercialbanks,as thebeginningofaperiodofgreatprosperity inAmerica.Hethoughtthe repealing of Glass-Steagall in 1999 was an invitation to banking follybecause it allowed commercial banks to function as investment banks andspeculatewithdepositors’money.The2007–09collapseofWallStreetprovedto the world that Charlie was right: repealing Glass-Steagall was one of thedumbestthingsCongresshaseverdone.

#50

TOOBIGTOFAIL

–

“Capitalismwithoutfailureislikereligionwithouthell.”

–

When the Federal Reserve chairman, Ben Bernanke, and the head of the USTreasury,HankPaulson,decidedthatGoldmanSachs,Citicorp,MerrillLynch,andAIGwere toobig to fail, theywere telling theworld that thegovernmentwouldn’t let those financial institutionsgounder. IfaWallStreetbankhasnofearofgoingbankrupt, itsmanagershavenofearwhen itcomes to leveragingtheir businesses andgamblingwith their depositors’ and shareholders’money.Bycreatingagovernment-financedsafetynetforthoseinstitutions, theFedsetthestageforanothercycleoffinancialinstitutionfollyanddestruction.Butsuchadarkcloudcanhaveasilverlining,becauseasitcreatesgreatupheavalinthestockmarket, therewill bemomentswhen investors rush for the door, and inthose moments of panic, stocks of wonderful businesses will sell for bargainprices in relation to their underlying long-term economics.Aswe said earlier,the 2007–09 bank failures created a buying opportunity inWells FargoBank,whichCharliejumpedon.Oneman’sideaofhellcanbeanotherman’sideaofparadise,especiallyifitmeanscheapstockpricesongreatbusinesses.

#51

BORROWEDMONEY

–

“Wehavemonetizedhousesinthiscountryinawaythat’sneveroccurred before. Ask Joe how he bought a newCadillac—fromborrowing on his house. . . . We have financial institutions,includingthosewithbignames,extendinghigh-costcredittotheleastablepeople. I finda lotof it revolting. Justbecause it’safreemarketdoesn’tmeanit’shonorable.”

–

IguessthismeansthatCharlieisnotinthe“letthebuyerbeware”club.ButweliveinacountrywhoseFederalReserveBankhastakenituponitselftoridusofunemployment.Partof its strategy fordoing thishasbeen tomakeconsumersfeelrichsotheyspendmoremoney,whichshouldstimulatetheeconomyandintheprocesscreatemorejobs.TheeasiestwayfortheFedtoputmoremoneyintothehandsofAmerican consumers is tomake it easy for consumers toborrowmoney on credit cards and the equity in their homes. The Fed encouragesborrowing by lowering interest rates and by turning a blind eye to banks andmortgagecompanies’looseningtheircreditrequirements.Theproblemwithallthis borrowed money and consumer spending is that it creates an economicbubble;eventuallythebubblebursts,andwhenitdoes,stockpricescollapse,theeconomytanks,peoplelosetheirjobs,andhomeownerscan’tpaybackall themoneytheyborrowed.Whichcreatesanevenbiggernightmare.

#52

FREE-MARKETFOLLY

–

“These crazybooms shouldbewatched.AlanGreenspandidn’tthink so.He’s a capableman but he’s an idiot. You should notmakehimthefatherofallbanking.HisheroisAynRand.It’sanunlikelyplacetolookforwisdom.Alotofpeoplethinkthatifanaxmurderergoesaroundkillingpeople ina freemarket it’sallright.”

–

Alan Greenspan, the head of the Federal Reserve Bank from 1987 to 2006,followingthefree-marketpreachingoftheRussian-bornwriter/philosopherAynRand,completelyignoredboththestockmarketInternetbubbleinthelate1990sandthehousingbubble in theearly2000s; those ledto thesubprimemortgagemeltdown in 2007–09 that almost destroyed the world’s economy. Greenspanbelieved that government shouldn’t interfere at all with the markets, whichmeantnotinterferingwithWallStreet’sexcesses.ThisseemsbizarregiventhatanytimethestockmarketstartedtocrashGreenspanaggressivelyusedtheFedtopumpmoneyintothemarketandstopthedecline.Greenspan’s successor,BenBernanke,becameheadof theFed in2006and

continued to let the housing bubble grow unabated. When it finally burst,Bernankedidwhathispredecessorhaddone:heprintedmoneyandpumped itinto the economy, not only to stop the crash but also to pull unemploymentdown.Duringhiseight-yeartenuretheFedprintedmorethan$3trillionandputit into circulation to stimulate the economy, which caused asset inflation andboth the stock and housing markets to once again bubble. Or as New YorkYankeeYogiBerraoncesaid,“It’sdéjàvualloveragain.”

#53

BANKINGDEREGULATION

–

“Peoplereallythoughtthatgivingapredatoryclassofpeopletheabilitytodowhatevertheywantedwasfree-marketenterprise.Itwasn’t. It was legalized armed robbery. And it was incrediblystupid.”

–

Ifwewere beingkind,wewould say thatCharlie is basically saying that ex–Federal Reserve Chairman Alan Greenspan and ex–US Treasury head RobertRubin,twoofthemajorarchitectsofthederegulationofthebankingindustryinthe late 1990s, got it completelywrong.Theyweremajor proponents of free-market enterprise, which led to the financial meltdown in 2008 and thebankruptcy or near bankruptcy of nearly every major Wall Street investmentbank.ButwhatCharlie is reallysayingis that itwas incrediblystupidon theirparttoderegulatethebanks.Why?Becausethemanagementofanunregulatedbank or insurance company has an incentive to leverage up—borrow moremoney—and make huge speculative bets. If the bets are successful, themanagement team gets tens ofmillions of dollars in bonuses, but if the banklosesthebets,itistheshareholdersanddepositorswhoareonthehookforthebillionsofdollarsinlosses.Ifacoupleoflargebankscrashatthesametime,itispossible tobringdownanentireeconomy.Historyhas repeatedly shownusthat government regulation is the only thing that stops banking professionalsfrom leveragingup andgamblingwith not only other people’smoneybut ournation’seconomicwell-beingaswell.

#54

WALLSTREETEXCESSES

–

“We have a higher percentage of the intelligentsia engaged inbuyingandsellingpiecesofpaperandpromotingtradingactivitythan in any past era. A lot of what I see now reminds me ofSodomandGomorrah.Yougetactivityfeedingonitself,envyandimitation. When it happened in the past, there were badconsequences.”

–

WallStreetintheyear2007resembledthekingdomsofSodomandGomorrah.Thesubprimemoneyflowed,thebonuseswerehuge,thepartieswerewild,andMcMansions and expensive sports cars were the perks of the day. But thegreatest sin of all was packaging up subprimemortgages and selling them asAAA-ratedpapertotheunsuspectinghungrymasses.Inthebiblicaltaleofold,GoddestroyedSodomandGomorrahfortheirwickedindiscretions.Butinourstory God, dressed as the Federal Reserve’s Ben Bernanke and the USTreasury’sHankPaulson, stepped in to save the infidels right before they fellintotheabyss.Sometimesitisbettertosavethesinnersthanitistotakedownanentirenationwiththem.Thisisespeciallytrueifyouhappentobeoneofthesinners.

#55

THEWEALTHEFFECT

–

“Thewealth effect is the extent to which consumer spending isgoosed upward due to increases in stock prices. Of course itexists,buttowhatextent?ImadeaspeechawhilebackinwhichIsaidthatthewealtheffectisgreaterthaneconomistsbelieve.Istillsaythis.”

–

If people believe that their house and investments are going up in value, theywillbemorewillingtospendmore,whichisgoodfortheeconomy.However,iftheybelievethattheirhouseandinvestmentsaregoingdowninvalue,theywillstopbuyingthings,whichisbadfortheeconomy.Thisisthewealtheffect.Ex–Federal Reserve Chairman Ben Bernanke, in his quest to revive the

economyandlowertheunemploymentrate,becameenamoredwiththistheory.Heusedthewealtheffecttojustifypumpingtrillionsofdollarsintotheeconomyvia lower interest ratesand theprintingofmoney to finance thegovernment’sdeficitspending.Anditworked;assetpriceswentupandpeoplefeltricher,sothey spentmore,which stimulated the economy,which caused unemploymentratestodrop.That,ofcourse,madeinvestorstheworldoververy,veryhappy.

#56

PRINTINGMONEY

–

“I think democracies are prone to inflation because politicianswillnaturallyspend—theyhavethepowertoprintmoneyandwillusemoneytogetvotes.”

–

Keep thoseprintingpressesrunning!Oneof thereasons theUnitedStateswillneverdefaultonitsdebtisthatithasthepowertoprintthedollarsitneeds.Howdoesitdothat?TheFederalReserveBankprintsthemoneyandthengoesintotheopenmarketandbuysUSgovernmentTreasurybondsoranyotherdebt itwants to buy. Say the US Treasury needs $100 billion to pay off some USgovernment debt coming due; it simply issues more debt, which the FederalReserve Bank buys on the openmarket. As a rule the Federal Reserve Bankdoesn’t like doing this; it would rather theUS government borrow itsmoneyfromplaceslikeChina—whichatpresentowns$1.2trillioninUSgovernmentbonds(whichmeanstheUSgovernmenthasborrowed$1.2trillionfromChina).ButChinadoesn’thavetoworryaboutthegoodoldUSAdefaultingonitsdebt,because the Federal Reserve Bank can always print an extra $1.2 trillion andloan it to theUSgovernment topayoff thebonds theUSgovernment sold toChina.Theproblem thatGreece, Italy, andSpain have is thatwhen theymade the

euro their currency, their respective central banks gave up the power to printmoneyandturnedthatpowerovertotheEuropeanCentralBank.SounlesstheECB is willing to print an extra couple of hundred billion euros for them,Greece,Italy,andSpainallhavethepotentialtodefaultontheirdebtandcauseasystemiccollapseoftheworld’sfinancialsystem.

#57

ASSETINFLATION

–

“I remember the $0.05 hamburger and a $0.40-per-hourminimumwage,soI’veseenatremendousamountofinflationinmylifetime.Diditruintheinvestmentclimate?Ithinknot.”

–

Asahamburgerrisesinprice,sodoesthepriceofthesharesofthecompanythatsells thehamburger. Inflationraises thepricesofbothcommoditiesandassets,andsharesinacompanyrepresentownershipinthecompany’sassets.Inflationisthefriendofpeoplewhoownassets.Inflationisalsotheenemyofthepeoplewho own cash or bonds.Why?When the Federal Reserve prints money andcirculatesitintotheeconomy,interestratesgodown.Thisdrivesupthepricesoffinancialassetssuchasstocksandrealestate.ButtheFed’sprintingofmoremoney alsomeans that our dollars buy less and less,whichmeans that thingscostmoreandmore.Fiftyyears agoahamburger cost$0.40,now it costs$7;andahousethatcost$50,000in1965nowcosts$500,000;andtheDowJonesIndustrialAverage,whichstoodat910pointsin1965,nowstandsat17,000.Ifyouhangontocash,itwillbuylessandlesseveryyear.Ifyouboughttwenty-yearbondsin1996andcashedthemin2016,thecashyougotbackboughtlessthanitdidwhenyouboughtthebonds.Inflationreallyhelpsthebankingandinsuranceindustries.Sincethat$50,000

houseisnowa$500,000house,peoplehavetoborrow$450,000morefromthebank.Andtherewillbeahellofalotmorebankfeesforaloanthatsizethanfora$50,000loan.Theproperty insurancecompanyisalsogoingtoearnawholelot more on insuring a $500,000 property than it ever earned insuring our$50,000property.Intheexampleabove,boththebankandtheinsurancecompanysawinflation

cause a 1,000% rise in business, but neither institution had to add any moreemployees or increase the size of its operating plant. Now you know whyCharlieandWarrenaresobigoninsurancecompaniesandbanks:notonlyaretheytheperfecthedgeagainstinflation,theyactuallybenefitfromit.Forbanksandinsurancecompanies,inflationtrulyisthegiftthatkeepsongiving.

#58

OILRESERVES

–

“IthinkthehydrocarbonreservesintheUnitedStatesareoneofthe most precious things we have, every bit as precious as thetopsoil of Iowa. Justas Idon’twant to exportall the topsoil inIowatoIranorsomeplace, justbecause theyarewilling togiveus somemoney, I love thehydrocarbon reserveswehave in theground.The fashion is tobe independentand touse themupasfastaswecan.Ithinkthat’sinsanityasanationalpolicy.”

–

HereCharlie is talking about our nation’s oil reserves.He believes they are aprecious resource and should be saved because oil is so necessary to oureconomy and national security. Our hydrocarbon reserves are the chemicalfeedstock that we use to propel our autos and power our jets, and to makefertilizer, synthetic clothing, plastic, and asphalt, lubricate machinery, andgenerateelectricity.Withoutoilourcountrywouldgrindtoahaltinaninstant.Charlie thinksanationalpolicy tobecomeoil independentandburnupallouroilsuppliesasfastaswecaniscrazy.Becausewhenouroiliscompletelygonewewillbeatthemercyofthecountriesthatarestilloilproducers.Headvocatesthat we should save our oil for a rainy day and burn up Saudi Arabia’s oilinstead.

#59

KOREA

–

“Koreans came up from nothing in the auto business. Theyworked84hoursaweekwithnoovertimeformorethanadecade.At the same time every Korean child came home from gradeschool, and worked with a tutor for four full hours in theafternoonandtheevening,drivenbytheseTigerMoms.Areyousurprisedwhenyoulosetopeoplelikethat?Onlyifyou’reatotalidiot.”

–

Charlie grew up during theGreat Depression, inwhich everyone, if he couldevenfindajob,workedtirelesslytoputfoodonthetable.Butastimewentonandthecountrybecamericherandricher,Americansstartedgettinglazy.Goneis thework ethic that drovepeople towork tenhours a day, sixdays aweek.Koreans,likeourgrandparents,arefarmoredriventosucceed.WhatCharlieissayingisthatintheglobaleconomywenowlivein,thenewwinnerswillbethehardworking Koreas of the world, not the now fat and sassy winners ofyesteryear.

#60CARROTS&STICKS

–

“If we’re going to prosper, we have to work.We have to havepeoplesubjecttocarrotsandsticks.Ifyoutakeawaythestickthewhole system won’t work. You can’t vote yourself rich. It’s anidioticidea.”

–

Charlie is a true “nose to thegrindstone” capitalist at heart.Herehe is sayingthatanationhastowork,ithastogrowfood,ithastobuildroads,buildings,andfactories,andithastomakeproductsthatitcansell.Ifpeopledon’twork,theywill be hungry and homeless; that is the stick. It wasn’t greed that drove ourgrandparentstoworksohard, itwasthefearthat theywouldn’tbeabletopaytherentandtheirfamilywouldgohungry.Todaythatfearisgone.Ithasbeenreplacedwithasenseofentitlementthatdemandsthathealthcarebefree,thatacollegeeducationbefree,thatfreefoodandhousingbeprovidedifoneisoutofwork.Ournationislosingitswilltowork,maybenotbecauseithasgrownlazybutbecauseithaslostitsfearofnotworking.

#61

OUT-OF-CONTROLBANKERS

–

“Idonotthinkyoucantrustbankerstocontrolthemselves.Theyarelikeheroinaddicts.”

–

Heroin addicts can destroy both an individual and his family. Bankers candestroythemselvesandanentirenation’seconomy.Bankersareentrustedwithan enormous amount of other people’s money and should be conservative ininvestingit,butwhatoftenhappens is that theyuse themoneytheyhavebeenentrustedwithtoleverageup—borrowmoremoney—andthenspeculatewithitundertheguiseof“investing.”Theydosobecauseiftheywinthebettheygettopaythemselvesmillionsofdollars insalariesandbonuses,allalongtellingtheAmerican public not to worry about the leverage because professional riskmanagers have it under control (the sameprofessional riskmanagerswho justhappen to be the oneswho destroyed theirWall Street banks in the subprimemortgage meltdown of 2007–09). The only thing that can stop banks frombecoming excessively leveraged is heavy regulation by the US government,whichbanksconstantlyfighttokeepfromhappening.In2014aloneJPMorganChase spent $6.2 million lobbying the US Congress. Collectively, in 2014,commercial banks spent $60million lobbyingCongress.What did they lobbyagainst?Governmentregulationofthebankingindustry.ThepointthatCharlieismaking is that a greatmanybankers have become addicted to leverage andspeculation;itisthelifebloodoftheirquesttobecomebothrichandpowerful.

#62

DERIVATIVEDANGER

–

“Ifyouintelligentlytradederivativesit’slikealicensetosteal,soyoucanunderstandwhytheyallwanttodoit...butwhatisthebigplusinhavingeveryonegamblewitheveryoneelse?IlivedinaworldwithlowgamblingfordecadeswhenIwasyoungerandIlikeditbetter.Ithinkitwasbetterforthecountry.It’slikehavingthousands of professional poker players. What damn good aretheydoingforanybody?”

–

Theproblemwithderivativestradingisthatitisveryhardforbankerstocontrolthemselveswhentheyareeasilymakingtonsofmoney.Theytendtogetcarriedawaywithexcessandintheprocessgetthemselvesintoserioustrouble.Ifitisreallybad,theycanblowupthefinancialsystem,tankthestockmarket,destroytheeconomy,andputmillionsofpeopleoutofwork.According to PaulWilmott, who holds a doctorate in applied mathematics

fromOxfordUniversity,thenotionalvalueoftheworld’sderivativesmarkethasreached $1.2 quadrillion (which is a humongous number, equal to $1,200trillion). This is approximately twenty times as large as the world economy,which isapproximately$60 trillion.Thederivativesmarket isnow20%largerthan in 2008, the last timewe had a financial crisis that involved derivatives.AndwhatisUSbankexposuretothisderivativerisk?Considerthis:JPMorganChasehas$2trillionintotalassetsandtotalriskexposuretoderivativesofmorethan $52.9 trillion; Citibank has total assets of $1.3 trillion and total riskexposure to derivatives of more than $52 trillion; Bank of America has totalassets of $1.6 trillion and total risk exposure to derivatives of $26.6 trillion;Goldman Sachs has total assets of $143 billion (that’s billion) and total riskexposuretoderivativeof$44.4trillion(that’strillion).Ifyouareabank,here is thesuperfunpart: that$1.2quadrillionderivatives

marketismind-numbinglycomplexandcompletelyunregulated,andthebanks’tradersruletheroost.AnytimetheUSgovernmentevenhintsthatitwillregulatederivativestrading,anarmyofbanklobbyistsswarmsdownuponWashington,

DC,andstopsitbyremindingourmembersofCongresswhoreallyownsthem(anditisn’tyouandme).Butitgetsevenbetter.Considerthis:thereisnoone—that’s right, no one—in government, in academia, or in the banks themselveswho has a real grasp of all the dangers that lurk inside the largest financialbubbletheworldhaseverseen.

#63

CARRY-TRADEFOLLY

–

“There’s a lot of leverage in those carry-trade games. OtherpeoplearemorecertainthanIamthattheaircraftcanalwaysbeleased.”

–

Thisisinsightful.Charliesaidthisbackin2005,threefullyearsbeforeacarrytrade blew up and destroyed Lehman Brothers and several other Wall Streetfirms.Acarrytradeistheborrowingoflargeamountsofmoneyatonerateandusingittobuyanassetthatearnsahigherrateofreturn.HereCharlieistalkingaboutborrowingmoneyandusingittobuyanairplane,whichcanbeleasedforahigheramountthantheloanpayment.Theprofitisthedifferencebetweentheinterestcostsoftheloanandtheleasepayments.Theonlycatchtothisequationisthatifthecompanythatleasestheairplanedefaultsonthelease,thereisaloanthatneedstoberepaidbutnoleasepaymentstopayitwith.WhereLehmanBrothers and theother investmentbanks screwedup is they

were borrowing billions of dollars in the short-term commercial papermarketandthenlendingitoutforsubprimemortgagesfortenandtwentyyears.WhenLehman’s short-termpaper camedue, the lending institutionsbuying its paperwould just roll the loansover.But thenanunexpected thinghappened:peoplestarted defaulting on their subprime mortgages, and suddenly Lehman didn’thavethoseinterestpaymentscominginthedoor,whichmeantthatitdidn’thavethemoneytopaytheinterestontheloansthebanksmadetoit.Whenthebanksfigured that out, they refused to roll the loans over, and Lehman filed forbankruptcywithinaweek.

#64

CORRUPTIONINASIA

–

“You cannot just go invest inChina, however. The firstmoverscan get killed. There’s a saying in Indonesia: ‘What you’recallingcorruptisAsianfamilyvalues.’ ”

–

In 2002 Charlie and Warren did finally invest in China; they bought $500millionworthofstockintheoilcompanyPetroChinaandlatersolditfor$3.5billion.AfterCharlie’swarningaboutcorruption,whydidtheytrustPetroChina?The

Chinesegovernmentowns88%of it; in fact, theChinesegovernmentcontrolstwenty-nineofthethirtylargestpubliclytradedcompaniesinChina.Ifweownshares in any one of them, we effectively have the Chinese government as apartner,andinsteadofbailingoutshadyCEOs,astheUSgovernmentdoes,theChinese government puts them into a cold, dark cell inwhich to contemplatetheirevilways.WhichiswhyCharlieandWarrencouldinvest$500millioninaChinesecompanyandstillgetplentyofbeautysleepatnight.

#65

THEMIRACLEOFCHINA

–

“IfyoutakewhatChinahasdonefromwhatChinawas,there’sbeen no achievement on this scale in the entire history of theworld.”

–

OnceuponatimeChinawasabackwardcommunistagriculturalsocietywithaSoviet-styledplannedeconomy.Itwasthekindofcountrythatwouldhavemadethefamedfree-marketeconomistMiltonFriedmanthrowuphishandsindisgust.Butbeginningin1979Chinastarteddownthepathoftransformingitselfontoadynamicmarket-orientedindustrial/high-techeconomythatembracedthetenetsofcapitalismwithacommunisttwist.InjustthirtyshortyearsChinahasbecomethe world’s second largest economy. It is the world’s largest consumer andproducer of textiles, cameras, cell phones, and computers and the largestproducerofsteelandautomobiles.In 2008 Berkshire Hathaway invested $230 million in BYD Company, a

ChineseversionoftheUnitedStates’TeslaMotors.BYDisthelargestChinesemanufacturer of autos in China and a major manufacturer of rechargeablebatteries.CharliehascalleditsfounderandCEO,WangChuanfu,acombinationof Thomas Edison and General Electric CEO Jack Welch. Who knew theChinesewouldturnouttobesogoodatbeingcapitalists?

#66

FREETRADE

–

“I don’t see howwe bring back that agewhere an uneducatedmancanmarchaheadrapidly.Aslongaswehavefreetradeandworldwidecompetition,andIdon’twanttostophavingfreetradewithabignuclearpowerlikeChina.ChinaandtheUnitedStateshave togetalong.Eachcountrywouldbeoutof itsmindnot togetalongwiththeother.Ithinktradehelpsustogetalong.”

–

TheshiftingofAmericanfactoryjobstoChinaprettymuchendedtheperiodinUSeconomichistoryinwhichanuneducatedmanorwomancouldgotoworkon a factory floor and get ahead. Why? The first reason is that goodmanufacturing jobs for the uneducated are simply no longer here; they are inplaces such asChina andMexico.The second is that good jobs in theUnitedStatesrequireeducationandtraining.Asfarasfree tradehelpingUS-Chineserelations, itactuallyhasmore todo

with the fact that China owns approximately $1.2 trillion in US governmentnotes and bonds—which means that it has loaned the US governmentapproximately$1.2trillion.Ifsomeoneowesyou$1.2trillionandyouwant tobe paid back, you get up every morning wishing them the best of economichealth.It’snotfreetradethathelpstheUnitedStatesgetalongwiththeChinese,it’sthe$1.2trilliontheChinesewanttobepaidback;andfortheUnitedStatesitis theother$1 trillion innewdebt itneeds tosell to finance thegovernment’sever-increasing deficit spending.Add in concerns about nuclearweapons, andCharlieisright:thetwocountriesareoutoftheirmindsiftheydon’tgetalongwitheachother.

#67

THEMISER

–

“Idon’tcareifsomebodymakesalotofmoneyandholdsitlikeamiser. Most people have a vast propensity to spend, helped byspousesandchildren.”

–

Oneofthegreatestmisconceptionsinlifeisthattherichsquirreltheirgoldawayinsomedeep,darkvault,where itdoesnooneanygood.Thatmayhavebeentruetwohundredyearsago.However,inthemodernagetherichkeeptheirlootinbanksandinvestmentfunds,whicheitherloanitouttopeopleandbusinessesinneedor invest it incommercialenterprises.Banksand investment fundsaredistributorsofcapitalinourcommunities.Iftheydon’tloanmoneyoutorinvestit,theydon’tmakeanymoney,sothereisaverystrongimpetustomakeloansandfindbusinessestoinvestin.Thisisgoodfortheeconomy,whichisgoodforeveryone. However, if there weren’t any rich people, there would be littlesurplus capital in the banks and investment funds to finance things such asbuying a home, constructing an office building, financing the development ofnew industry, making loans to local governments, and the like. The top 1%controls39%oftheworld’swealth,butwhatthatreallymeansisthat39%oftheworld’swealthistuckedawayintheworld’sbanksandinvestmentfunds,whichareverybusyinvestingthissurpluswealthintheworld’seconomy.Whichisaverygoodthingfortheother99%oftheworld.

#68

CORPORATETAXES

–

“If Iwere running theworld Iwouldhave lowcorporate taxes,and get at the yearning for equality some other way, likeconsumptiontaxes.”

–

In the free trade of the world today, corporations can move freely from onecountry to another. A high corporate tax rate in one country will drive acorporationout of that country into another that has a lower tax rate.And thecorporationsthatmigratetolower-taxvenues,whentheygetthere,willputtheirsurpluscapital intolocalbanks.WanttoknowhowSingaporeandHongKongbecame the two financial centers of Asia? Low corporate taxes attracted richcorporations to themandwith the richcorporationscame their surpluscapital,whichwastuckedawayinlocalbankssuchastheOCBCBankinSingaporeandtheBank ofChina inHongKong,where it has been used to help finance theeconomicmiracles of Singapore andHongKong.Charlie is in favor of usinglower taxratesasameans toattractandkeepmorecorporations in theUnitedStates.

#69

REDUCINGSTANDARDS

–

“Thewholeworld is better when you don’t reduce engineeringstandards in finance. We skipped a total disaster by a hair’sbreadth....I’mabigfanofthepeoplewhotookusthroughthecrisis.I’mnotabigfanofthepeoplewhocausedthecrisis.Someofthemdeservetobeinthelowestcircleofhell.”

–

Charlieistalkingaboutthenear-collapseofourfinancialsystemin2008.Whenabridgeisbuilt,engineeringstandardsrequireittobeabletosupporttonsmoreweightthanisexpectedevertobeonthebridge.Thiscreatesamarginofsafetyfor thebridge thatensures that itwillnevercollapse. In thebankingworld themargin of safety is measured by a bank’s debt-to-equity ratio. The lower theratio, the less likely thebankwill fail in a recession.Thehigher the ratio, themore likely thebankwill fail ina recession.Engineeringstandards inbankingwoulddictatethatbankskeepverylowdebt-to-equityratiostoensurethattheycanwithstandanydisruptions in the financialmarkets. In2007 the investmentbanksofWallStreetdidjusttheoppositeanddrovetheirdebt-to-equityratiostoall-timehighs.Somebankshad$38ofdebtforevery$1ofequitytheyheldontheir balance sheet. When the Great Recession hit, many of them literallycollapsedovernight.

PARTIII

–

CHARLIE’SPHILOSOPHYAPPLIEDTOBUSINESSANDINVESTING

#70

BUYANDHOLD

–

“We just keep our heads down and handle the headwinds andtailwinds as best we can, and take the result after a period ofyears.”

–

OnceCharliegetshishandsonanexcellentbusinessat a fairprice,heknowsthatthesmartthingtodoistoholdontoitandletthecompany’saccumulatedearningspileup.Thiswill increaseitsunderlyingintrinsicvalueandovertimewill cause the stock price to go up. Berkshire bought Coca-Cola in 1988 andtwenty-sevenyearslaterstillownsit.ItboughtitsfirstpositioninWellsFargobackin1990,andnotonlydoesitstillownit,itcontinuestoaddtoitsposition.In that time the underlying value ofCoke’s andWells Fargo’s businesses hasincreased, and even thoughwe have seen several bull and bearmarkets, theirstockpriceshavecontinuedaslowrise, reflecting the increasingvalueof theirunderlying businesses. As we said earlier, in the case of Coke, Berkshire’s$1.299 billion 1988 investment in Coke is nowworth $17.184 billion, givingBerkshire an average annual compounding rate of return of 10.04%, notincludingdividends. Itsoriginal investment in5millionsharesofWellsFargostock at a total price of $289million in 1990 has grown to 40million sharesbecauseofstocksplitsandisworthapproximately$1.9billion,givingBerkshirea7.5%annualcompoundingrateofreturn.

#71

CORPORATEMERGERS

–

“Whenyoumixraisinswithturds,youstillhaveturds.”

–

Here Charlie is talking about companies buying other companies. If a greatcompanybuysaturdofacompany,itendsupwithamixtureandtheturdofacompanydragsdowntheresultsofthegreatcompany.Aperfectexampleofthis“mixing raisinswith turds” phenomenonwaswhenCoca-Cola bought itswayinto themoviemakingbusiness.AnotherexamplewaswhenGulfandWesternIndustries bought its way into the moviemaking business. An even betterexample was whenMatsushita Electric bought its way into the moviemakingbusiness.AndthebestexampleofallwaswhenSeagram,theCanadiandistiller,boughtitswayintothemoviemakingbusiness.(Doyouseeapatterndevelopinghere?)Forthosegreatcompaniesthesolutiontotheirproblemofmixingagreatbusinesswithaturdofabusinesswastoflushtheturdofthebusiness—whichusually meant selling off the movie business to some other starstruck CEO.Charliemight have put it better if he had said thatwhenwemix caviarwithturds,allwearegoingtotasteistheturds.

#72

GOINGTOEXTREMES

–

“In businesswe often find that thewinning system goes almostridiculously far in maximizing and or minimizing one or a fewvariables—likethediscountwarehousesofCostco.”

–

Costco is obsessed with keeping operating costs to a minimum. It does notprovide shopping bags—customers bring their own bags or use an emptypackingboxthestoresupplies—savingCostco2to5centseachonplasticbagsand 10 to 25 cents each on paper ones. That might not seem significant, butconsider this:Costcodoes $15billion in sales a year. If the average customerspends $100 per shopping trip, thatmeans thatCostco has approximately 150millioncustomercheckoutseveryyear. If threepaperbagsat10centsperbagwereusedpercheckout, thetotalbagcostpercheckoutof30cents,multipliedby150million,wouldcostCostcoapproximately$45millionayear.Bysimplybygettingridofpaperbagsatcheckout,Costcoarguablysavesitself$45millionayear.GEICO did something that seemed outrageous—early on it got rid of the

insurance agent and his commission by selling directly to the consumer—therebyreducingitscosts,whichallowedittobemorecompetitiveinthepricingofitsinsuranceproductsandstillmaintainitsprofitmargins.Bank of America made the extreme decision to focus in on the individual

depositor, who had been sorely neglected by larger banks. As the populationbase of California grew in size and wealth, Bank of America’s individualdepositorsalsogrewinsizeandwealth.Asaresult, todayBankofAmerica isoneofthelargestbanksinthenation.Unlike itscompetitors,BerkshireHathaway’sNebraskaFurnitureMartbuys

huge quantities of furniture from a single manufacturer, at a huge discount,which allows its stores to sell us a sofa cheaper than the competition and stillkeepitsmarginshigh.TheonethingthatallofBerkshire’sbusinesseshaveincommonisthatthey

aremanagedbypeoplewhoarewillingtogotogreatlengthstokeepcostslow.ThatgoesforBerkshire’shomeofficeaswell—itdoesn’thaveapublicrelations

or investor services department, and for many years the annual report wasprintedonthecheapestpaperpossibleandhadnoexpensivecolorphotos.(Note:Inrecentyearsthepaperqualityhasimprovedandtheannualreportnowsportsonecolorphoto—whichmaybeasignthatmanagementisstartingtoslip.)

#73

BIG-MONEYEQUATION

–

“Agreatbusinessatafairpriceissuperiortoafairbusinessatagreatprice.”

–

Okay,let’stakealookatthenumbersthatexplainwhatCharlieistalkingabouthere.Let’ssayyouhave$100,000toinvestandyouhavethechoiceofinvestingineitherCompanyAorCompanyB.CompanyAisearning$1ashare,growingitsearningsat15%peryear,and

sellingat20timesearnings,whichequatesto$20ashare(20×$1=$20).Thismeans that for $100,000 youwill be able to buy 5,000 shares ofCompanyA($100,000÷$20=5,000).Company B, on the other hand, also earns $1 a share but is growing its

earningsat8%peryearandissellingat10timesearnings,or$10ashare.Thismeansthatfor$100,000youcanbuy10,000sharesofCompanyB($100,000÷$10=10,000).At firstblush it looksas thoughCompanyB is thebetterbuy. It earns$1a

shareanditissellingfor$10ashare,whichequatestoaprice-to-earningsratioofonly10.CompanyA,whichisalsoearning$1ashare,issellingatapricy20timesearningsor$20ashare,whichistwicewhatCompanyBissellingfor.Butifwetakealookatitfromaten-yearperspective,theprojectedresultspresentacompletelydifferentstory.IntenyearsCompanyB’searnings,growingat8%ayear,willhavegrownto

$2.19ashare.Ifthecompany’ssharesarestilltradingat10timesearnings,thisequatestoapersharepriceof$21.90($2.19×10=$21.90),whichgivesusaprofitof$11.90ashare($21.90–$10persharecost=$11.90pershareprofit).Multiply$11.90ashareprofitbythe10,000sharesweown,andweshowatotalnetprofitof$119,000onouroriginal$100,000investmentinCompanyB.However,CompanyA’searnings,growingat15%ayear,willhavegrownto

$4.05asharebyyear ten. If thecompany’ssharesarestill tradingat20 timesearnings, this equates to a price of $81 per share (20 × $4.05 = $81), whichequatestoaprofitof$61ashare($81–$20asharecost=$61ashareprofit).Multiply the$61per shareprofitby the5,000sharesweown,andweshowa

totalnetprofitof$305,000onouroriginal$100,000investmentinCompanyA.CompanyA,thebetterbusiness,sellingatafairprice,willmakeus$186,000

morethananinvestmentinCompanyB,thefairbusinesssellingatwhatinitiallyappearstobeabargainprice($305,000–$119,000=$186,000).Intheolddays,beforeWarrenmetCharlie,hewouldhaveboughtCompanyB.ButafterWarrenmet Charlie he became a Company A man with all his heart and soul. Justremember: “A great business at a fair price is superior to a fair business at agreatprice.”ItworkedwellforCharlieandWarren,anditwillworkforyouaswell.

#74

TWOKINDSOFBUSINESSES

–

“Therearetwokindsofbusinesses:Thefirstearns12%,andyoucantakeitoutattheendoftheyear.Thesecondearns12%,butalltheexcesscashmustbereinvested—there’sneveranycash.Itremindsmeoftheguywholooksatallofhisequipmentandsays,‘There’sallofmyprofit.’Wehatethatkindofbusiness.”

–

EarlyinCharlie’scareerasaninvestorhegotinvolvedinahigh-techbusinessthat was manufacturing sophisticated measuring devices for science. Thecompanyhadgoodsales,buteverydollaritearnedhadtogorightbackintothebusiness.LuckilyforCharlie,hesold thecompanyrightbefore the technologychanged and rendered the company’s product obsolete. He had the sameexperiencewithBerkshire’stextilebusiness:ingoodtimesitmademoney,evencreated a small surplus, but as time went on the textile business became socompetitivethateverydollarthecompanymadehadtobespenttryingtokeepthebusinessafloat.Charliehad theexactoppositeexperiencewithSee’sCandies—thepots that

hold thechocolatewere fiftyyearsoldand still didn’tneed replacing, and theproductwasthesameyearafteryear.Thebusinessrequiredverylittleincapitalexpenditures,so itwaspossible to takemoneyoutof iteveryyear to invest inotherbusinesses.

#75

FEWCOMPANIESSURVIVE

–

“Overtheverylongterm,historyshowsthat thechancesofanybusinesssurvivinginamanneragreeabletoacompany’sownersareslimatbest.”

–

Most businesses eventually change andmany do die; that has been true for agreatmanyindustrial,transportation,andcommunicationbusinesses.BlueChipStampwasagreatbusinesswhenBerkshirefirstboughtitthe1960s,buttodayitis no longer in existence. When Berkshire bought Dexter Shoe Company in1993,Warrenwas singing to shareholders, “There’s no business like the shoebusiness.”ThatwastrueuntilDexterShoe,whichmanufactureditsshoesintheUnited States, could no longer compete with foreign manufacturers that hadaccess to cheaper labor. The Washington Post was once one of the mostinfluential and profitable newspapers in the United States, but in a mere tenyearstheInternetdecimateditsbusinessmodel.Since1960morethanfortycarmanufacturers alone have called it quits. Do you remember DeLorean? HowaboutEdsel?OrSaab?Allofthemhavegoneofftothatgreatbigused-carlotinthesky,nevertobeheardfromagain.

#76SEE’SCANDIES

–

“Whenwe bought See’sCandy,we didn’t know the power of agood brand. Over time, we just discovered that we could raiseprices 10% a year and no one cared. Learning that changedBerkshire.Itwasreallyimportant.”

–

Charlie learned that with certain products one can raise prices and demanddoesn’t drop. Most of the things we buy in life are commodities. They areinterchangeable:asteakfrombutcherXissimilartoasteakfrombutcherY.Thegaswebuy fromonestation is thesameas thegas fromanother station.Asaresultthecompetitionbetweenbutchersandgasstationsisbasedonprice.Thatmakesitveryhardtoraiseprices.Butsomebrand-nameproductsownapieceofconsumers’ minds and don’t have any direct competition. When Charlie andWarren first discovered such companies, they called them “consumermonopolies.” See’s Candies is one of those consumer monopolies. See’s hasmadecandyonthesamemachineryyearafteryear,whichhasmeantlowcapitalexpenditures,andbecauseitsproductbrandownsapieceofconsumers’minds,it can slowly raise prices without hurting demand. That equates to highermarginsonsales,whichmeansthatSee’smakesmoremoneyoneachpieceofcandy it sells.ThatmeansSee’s can keep its pricing in pacewith inflation; italsomeansthatthereturnonBerkshire’soriginalinvestmentkeepsgrowingyearafteryear.Considerthis:WhenBerkshireboughtSee’sin1972for$25million,thecompanyhadanetincomeof$4.2millionayear.In2007BerkshirereportedthatSee’searnedBerkshire$82million,whichmeansnetearningshaverisenatacompoundingannualrateof8.6%ayear. In2011,Berkshirereported that infortyyearsofownershipSee’shasearnedBerkshireastaggering$1.65billioninprofits.This littlebitofknowledgehashadagreat impactonBerkshireandwasan

integral part of the buying equation it used to buy Coca-Cola. Though Cokedoesn’t have quite the pricing freedom of See’s, it does own a piece of

consumers’minds and is able to raise prices to keep upwith inflation.WhenBerkshireboughtitsCoca-Colastockin1988,thecompanyhadanetincomeof$1.03 billion. Thirty years later, in 2015,Coca-Cola reported a net income of$7.3billion,givingita608%increaseinearnings,whichequatestoanaverageannual increase of 20.2% and an average annual compounding growth rate of6.75%.With See’s Charlie and Warren had finally found the Holy Grail of

investments: a company that has an ever-increasing underlying value. And tounlock that value all they had to do was hold the investment for as long aspossible.

#77EASYDECISIONS/PAINFULDECISIONS

–

“Thedifferencebetweena goodbusiness andabadbusiness isthat good businesses throw up one easy decision after another.Thebadbusinessesthrowuppainfuldecisionstimeaftertime.”

–

A lifetime of investing and owning companies has taughtCharlie andWarrenmany lessons. They have both owned a few bad businesses in their day: adepartmentstore,awindmillmanufacturer,atextilefactory,andanairline.Whyare those businesses bad? Because they are involved in intensely competitiveindustries thatbeateachotherupoverprice,whichbrings theirprofitmarginsdown, kills their cash flow, and diminishes their chances of long-termsurvivability.ButCharlieandWarren’seducationinmiseryhasbeenourgain.Nowweknowthatthesecretisalwaystogowiththebetterbusinessthathasadurablecompetitiveadvantageandcanraisepricesatwill.Thisallowsittokeepitsmarginshigh,whichcreateslotsoffreecashflowtospendonnewbusinessopportunities.

#78

MARKETDECLINES

–

“Ifyou’renotwillingtoreactwithequanimitytoamarketpricedeclineof50%twoorthreetimesacenturyyou’renotfittobeacommonshareholderandyoudeservethemediocreresultyou’regoing to get compared to the people who do have thetemperament,whocanbemorephilosophicalaboutthesemarketfluctuations.”

–

InthefiftyyearsthatCharliehasownedBerkshireHathawaystockhehasseenitsstockpricefallby50%threeseparatetimes.Ifhehadsoldhissharesduringanyoneofthosedeclineshisnetworthwouldbeafractionofwhatitistoday.Charliebelieves that it is thenatureof long-termstockholdingtooccasionallyexperience a steep decline in a share price, which in Berkshire’s case it hasalwaysfullyrecoveredfrom.Butthisphenomenonofdeclineandrecoveryhasmoretodowiththeeconomicnatureofthecompanythanthepricefluctuationofthestock.Letmeexplain:Thegreatstockmarketcrashesof1929and1932devastatedstockpricesdrastically,andtheDowJonesIndustrialAveragedidn’tfully recoveruntil1954. It took twenty-fiveyears for theDJIA to return to itsprecrashhighs.However,companieswithexcellenteconomicsworkingintheirfavor, the oneswith a durable competitive advantage, such as Coca-Cola andPhilip Morris, returned to their precrash highs by 1936. The mediocrecompanies,theoneswiththepoorbusinesseconomics,tookaslongastwenty-five years before things started to look bright again.Charlie has never had towait that long. Why? Because he invests only in companies with excellenteconomics working in their favor, such as the Coca-Cola Company andBerkshireHathaway,whichwillquicklyrecoverfromanystockmarketcrash.

#79

WHERETOPLACEOURBET

–

“Averagedout,bettingonthequalityofabusinessisbetterthanbetting on the quality ofmanagement . . . but, very rarely, youfindamanagerwho’ssogoodthatyou’rewisetofollowhimintowhatlookslikeamediocrebusiness.”

–

This reminds me of the story of Mrs. B’s Warehouse. Mrs. B started theNebraskaFurnitureMartinOmaha,Nebraska,in1937.Shegrewitintothemostsuccessful furniture store in the United States. Berkshire bought 90% of thecompany from her when she was eighty-nine years old, and she stayed on,managingitwithhersons.Fiveyearslatershegotintoafightwithhersons,leftinahuff,andstartedanewstoreacrossthestreet.Whatharmcananinety-four-year-oldwoman do to amultibillion-dollar conglomerate owned and run by acouple of business geniuses? In no time at all she had taken so much ofNebraskaFurnitureMart’sbusinessthatBerkshirewasforcedtospendmillionsofdollarsbuyingheroutasecondtime.Butthistimearoundtheyhadhersignanoncompeteclause,averywisethingtodogiventhatshewentontoworksevendays a week, open to close, till she passed away at the age of 104. But as ageneral rule, bet on the quality of the business, not on the quality of themanagement—unless,ofcourse,you’vegotaMrs.B.inyourhand.Ifthatisthecase,goallin.

#80

INCENTIVES

–

“From all business, my favorite case on incentives is FederalExpress. The heart and soul of their system—which creates theintegrityoftheproduct—ishavingalltheirairplanescometooneplace in themiddleof thenight and shift all thepackages fromplane to plane. If there are delays, the whole operation can’tdeliveraproduct fullof integrity toFederalExpresscustomers.And itwasalways screwedup.Theycouldneverget it doneontime.Theytriedeverything—moralsuasion,threats,younameit.And nothingworked. Finally, somebody got the idea to pay allthesepeoplenotsomuchanhour,butsomuchashift—andwhenit’salldone, theycangohome.Well, theirproblemsclearedupovernight.”

–

HereCharlie is talking about incentives.All of uswho have held hourly jobsknow that ifworkers arepaidby thehour theywillworkmore slowly than iftheyarepaidthembythejob.Why?Becauseiftheyarepaidbythehour,theyhaveanincentivetoworkmoreslowlyinordertoputmorehoursontheclockandmakemoremoney.Butif theyarepaidbythejob,thereisanincentivetoworkquicklysotheycangetontothenextjobandmakemoremoney.FederalExpressalignedmanagement’sgoalswithemployeeincentives.Withhourlypaytheir employeeswerenever in a hurry, butwhenpaywasgiven for a specifictask—gettingaplaneloaded—suddenlytheywereinarushtogetthejobdone.Thekeywasn’tpayingworkersbythetaskorshift;thekeywaslettingthemgohome if they finishedearly,whichwas akindof financial reward in that theyweregettingpaidforthefullshifteveniftheyleftearly.

#81

AIGANDGE

–

“AIG is a lot like GE. It is a fabulously successful insuranceoperator, and with success it morphed into a massive carrybusiness—borrowingalotofmoneyatonepriceandinvestingitatanotherprice.AIGwasabigoperatorthatwasalot likeGECredit.Weneverownedeitherbecauseeven thebestandwisestpeople make us nervous in great big credit operations withswollen balance sheets. It just makes me nervous, that manypeopleborrowingsomanybillions.”

–

Well,itturnedoutthatCharliewasright,thecarrytradenearlybankruptedbothAIGandGE in2007–09.And in2015GEbegan theprocessof sellingoff itsfinancialdivision.Borrowing short termat cheap rates and lending itout longtermathigher rates isaneasyway tomake tonsofmoneyas longasonecankeep rollingover the short-term loansat cheap rates.But if short-term interestratesclimbabovewhatthemoneywasborrowedatorthebankersdecidenottorollover the short-term loans, thewhole thingcollapses likeahouseof cards.GE found this out the hard way, which is why it is wishing its financialoperationsafondbonvoyage.

#82

LESSLEVERAGE

–

“As you can tell in Berkshire’s operations, we are much moreconservative. We borrow less, on more favorable terms. We’rehappier with less leverage. You could argue that we’ve beenwrong,andthatit’scostusafortune,butthatdoesn’tbotherus.Missingoutonsomeopportunityneverbothersus.What’swrongwithsomeonegettingalittlericherthanyou?It’scrazytoworryaboutthis.”

–

Charliehaslearnedthatleverageandenvyarealethalcombination.Leverageisjust another name for debt. The attraction of using leverage (debt) is that itallowsonetoleverageequitycapitaltomakeevenmoremoney.However,usingleveragenotonlyincreasesyourgainwhenthingsgoyourway;italsoincreasesyour losses if things don’t. Managers of investment banks love using lots ofleverage. As we said earlier, if their leverage bets go as expected, they canjustifypayingthemselvestensofmillionsofdollarsinbonuses.Iftheylosethebets,theyblamethemarketandhopetheirtradinglossescanbecoveredupbythe bank’s other operations.However, occasionally the use of leverage causestradinglossessosteepthattheybankruptthefirm.Howdobanksgetthemselvesintothismess?Envy.Theyseetheguysatthe

other banksmakingmillions, and they want tomake big bucks, too. So theykeepaddingmoreandmorelayersofleveragetoincreasetheirwinnings.Howmuchdo theygoose them?Withanormalcommercialbank theFDIC likes toseeadebt-to-equityratioof10to1.WhenLehmanBrotherswentbust,ithadadebt-to-equityratiointheneighborhoodof30to1.Thathadearneditatonofmoney,untilitsfortunesreversed,andthenitdroveitintobankruptcy.CharlieandWarrenhavealwaysavoidedusinglargeamountsofleverage/debt

withBerkshire.Theyhavealsotriedtoavoidinvestingincompanies thathavehighdebt-to-equityratios.ThenetresultisthatBerkshirehasbeenabletoprofitoffthefinancialdebt-ladenfollyofotherswhilenotpartakinginititself.

#83

MASTERPLANS

–

“AtBerkshire therehasneverbeenamasterplan.Anyonewhowantedtodoit,wefiredbecauseittakesonalifeofitsownanddoesn’t cover new reality. We want people taking into accountnewinformation.”

–

The business world is a dynamic place. Much like a battlefield, it changesrapidly, andnoonehas thoughtmore about “masterplans”being applied to adynamic setting than thenineteenth-centuryPrussianmilitary thinkerCarl vonClausewitz,whowrote thatbattle “is a continuous interactionofopposites” inwhich“myopponent . . .dictates tomeasmuchas Idictate tohim.”Healsowrotethat“Nowarplanoutlaststhefirstencounterwiththeenemy.”Butmyall-timefavoritequoteonthissubjectisbynoneotherthanPrussianfieldmarshalCountHelmuthvonMoltke,whowrote,“Thematerialandmoralconsequencesof every major battle are so far-reaching that they usually bring about acompletelyalteredsituation,anewbasisfortheadoptionofnewmeasures.Onecannot be at all sure that any operational planwill survive the first encounterwith the main body of the enemy. Only a layman could suppose that thedevelopment of a campaign represents the strict applicationof a prior conceptthathasbeenworkedoutineverydetailandfollowedthroughtotheveryend.”Thatisn’ttosaythatoneshouldn’thaveplanstosolvespecificproblems;one

should, but one should followCharlie’s advice andmake plans that take intoaccountnewinformationas itdevelops.Andanoverallmasterplan toguideabusiness for the next ten years is unrealistic on the part of its author and isseldom worth the time and energy spent on it. It is far better to keep thingssimple and improvise as we go along.Whenever I think of “master plans,” IrememberNebraska FurnitureMart’s founder,Mrs. B., who, in response to aquestion about having a business plan, replied in her thick Russian accent,“Yeah,sellcheapandtellthetruth.”Shewasabusinessgenius.

#84

DECENTRALIZATION

–

“Howis[Berkshire]organized?Idon’t think in[the]historyofthe world has anything Berkshire’s size [been] organized in sodecentralizedafashion.”

–

The one thing that Charlie and Warren did that is unique in the world ofcorporate conglomerates was to dismiss the idea of synergy. What happens,happens,buttheheadsofeachofBerkshire’ssubsidiariesarefreetodobusinesswithwhomevertheywant,whenevertheywant,evenifitisacompetitorofoneofBerkshire’sothersubsidiaries.Unlikemostcorporateconglomerates,Berkshiredoesnothaveaquotasystem

imposed by headquarters requiring the subsidiaries tomeetHQ’s numbers.AtBerkshire the CEO running the subsidiary calls the shots and sets theprojections.Berkshire’scultureisalsouniqueinthatitwillletbusinessesrunout,which

means that instead of selling a subsidiary with declining revenue and futureprospects,itwillkeeponrunningthebusinessuntilit’stimetoshutthedoors,aswe did with Berkshire’s textile operations. There is no discarding a whollyownedBerkshire subsidiarycompanybecause it isdoingpoorly, asCEOJackWelchusedtodoatGeneralElectric.This strategy of decentralization almost to the point of abdication frees

Berkshire’ssubsidiarymanagers—thepeoplewiththebestknowledge—toadapttheir businesses to the economic environment as they see fit, without beingmeddledwithbya lessknowledgeablehomeoffice. ItalsoallowsCharlieandWarren to avoid the financial costs and inefficiencies of running a largecorporatebureaucracy.Sometimeslessreallyismore.

#85

ENRON

–

“The people who carry the torch in accounting are in a nobleprofession,yetthesepeoplealsogaveusEnron.”

–

Enron was an energy, commodities, and transmission company that postedrevenuesof$111billionintheyear2000.FortunemagazinehadnamedEnronthenation’smost innovative company sixyears in a row. In2001 it cameoutthat one of Enron’s greatest innovations was creatively planned accountingfraud. Essentially the company had been goosing its net earnings by shiftingmassive investment losses off Enron’s balance sheet by dumping them intooffshore partnerships. Enronwas insolvent and had been for a long time, butwith the help of its accounting firm, Arthur Andersen, it was able to foolinvestors, banks, and the general public formany years.When the fraudwasrevealed,therewerecriminalchargesagainsttheofficersofthecompany,Enronwasputintobankruptcy,andtherewerelawsuitsagainstboththecompanyanditsaccountingfirm.Asaresult,ArthurAndersenwasdissolved.Whatwasmost shockingwas thatArthurAndersen,oneof thenation’s top

accountingfirmsatthetime,hadbeencomplicitintheactsoffraud.Sometimesreallysmartpeoplecandoreallystupidthings.

#86

GM

–

“Berkshire is in GM because one of our young men likes it.Warren,whenhewasayoungman,gottodowhateverhewantedtodo,andthat’sthewayitis.ItistrueGMmaybeprotectedbythe federal government in the end, and it may be a goodinvestment in the end, but the industry is as competitive as I’veever seen. Everyone can make good cars, they have the samesuppliers,andcarslastforever.Itjusthasallthesecommoditizedfeatures.SoIdon’tthinktheautoindustryistheplacetobe.”

–

OneoftheBerkshireportfoliomysteriesinrecentyearshasbeen:WhydidthecompanybuyintoGM?Theautoindustryisahighlycompetitivebusinessthatproducesaproduct thathasa lotofpricecompetition—andalthough thereareyears whenGMmakes lots ofmoney, it also has a history of years with biglosses. When Buffettology was written back in 1996, I talked about GMmanufacturingacommodity-typeproductandhowithadneverreallymadeitsinvestorsanymoney;ithadahistoryofboomandbust.In2007abustcaughtupwithGM,anditlost$38billion.Inthefollowingyear,2008,itlost$30billion.WhenGMfiledforChapter11bankruptcyin2009,ithad$82billioninassetsand$172billion indebt,making it insolvent to the tuneof$90billion,whichcompletelywipedoutitsshareholders.Thefederalgovernmentinjected$50billionintoanewentity,whichbought

theoldGM’sassets.In2015thenewGMreportedearningsof$9.6billion,withtotal assets of $194 billion and total liabilities of $63 billion, giving it acomfortable cushion of $131 billion in assets. Today, GM seems like acompletely new being, except for one thing: it is still manufacturing acommodity-type product in a highly competitive industry. One of Berkshire’snewinvestmentmanagersmaythinkitisagoodlong-termbet,butCharliestilldoesn’tthinktheautobusinessistheplacetobe.

#87

ISCAR

–

“Wedidn’tknowwhenwewereyoungwhichthingstostretchfor,but by the time we reached Iscar, which we never would havebought when we were young, we knew to stretch for the rightpeople.It’sahellofabusiness.Everythingisrightthere.Isn’titgoodthatwekeeplearning?Betterlatethannever.”

–

Iscar is an Israel-based, worldwide maker of precision carbide metal-cuttingtoolsusedinindustry.Itisthedominantplayerinitsfield.Berkshirepurchased80%ofthecompanyin2006for$4billionandthenpurchasedthefinal20%in2013 for$2billion—whichshows that itwasabetterbusiness in2013 than itwasin2006.IscarwasthefirstwholecompanyBerkshirepurchasedoutsidetheUnitedStates.BenjaminGrahamwouldhaveneverboughtitbecauseitwasn’tselling below book value—his idea of a bargain. Charlie andWarren learnedwiththepurchaseofNebraskaFurnitureMartthatifthedominantplayerislargeenoughandwellenoughentrenchedwithitscustomerbase,thecostofentryintoits market is much too high for potential competitors. Size and marketdominationcancreatetheirownkindofdurablecompetitiveadvantage,whichiswhatIscarhasinspades.

#88

WELLSFARGO

–

“Eventhebestbanksdriftwiththetimesanddostupidthings,butIsuspectWellsFargowillfaceuptoitbetter.”

–

HereCharlieissayingthatWellsFargowilldostupidbankthingsaswell,justnotasmanyandhopefullynotasbigas,say,Citicorphasdoneinthepast.Butthisgoesback to theemphasison thequalityof themanagement, its integrity,and itsability tokeep itseyeon theball.EvenWellsFargo’s totalderivativesexposure of $5 trillion is tiny compared to JPMorgan Chase’s $63 trillion,Citicorp’s$60trillion,andGoldman’s$57trillion.Whichtellsusthatthenexttimethederivativesmarketimplodes,WellsFargomaybethelastbigbankleftstanding.

#89MCDONALD’S

–

“This is a nice college, but the really great educator isMcDonald’s....IthinkalotofwhatgoesonthereisbetterthanatHarvard.”

–

Achainisonlyasstrongasitsweakestlink,anditdoesn’tmatterhowstrongthestrongest links are if they are connected to theweakest ones.WhatCharlie issaying here is that McDonald’s is improving the strength of our culture’sweakestlinksbyhiringpeoplewithbadworkhabits,givingthemtraining,andteachingthemgoodworkhabitssuchascomingtoworkontimeandhowtodealwith customers in a pleasant manner. It can take credit for teaching literallymillionsofAmerica’syoungpeoplegoodworkhabitsoverthesixtyyearssinceitopeneditsdoors.AndsinceMcDonald’sisin118countriesandemploysmorethan1.7millionpeoplearoundtheglobe,wemightarguethatitisdoingsoforyoungpeopleallovertheworld.ThatisonehellofanaccomplishmentthatnotevenHarvardcanlayclaimto.

#90

LIQUIDITY

–

“After the South Sea Bubble, Britain outlawed publiccorporations—onlyprivateonesallowed.Andtheyledtheworldfor 100 years. A modest amount of liquidity will serve thesituation. Too much liquidity will hurt human nature. I wouldneverbetenuredifIsaidthat.ButI’mrightandtheyarewrong.”

–

TheSouthSeaBubble is a reference to theSouthSeaCompany,whichwasaBritish joint-stock company formed in1711 tohelp reduceEngland’s nationaldebt. (Itwasn’t tillWorldWar I thatEnglanddiscovereddeficit financingviarunning the central bank’s printing presses.) The British government, afterpayoffs to many members of Parliament, granted South Sea a monopoly toconducttradewithSouthAmerica.Attheprospectoftherichesthatwouldcomefrom its tradingmonopoly and its dealings in government debt, the companybecamethemostpopularstockofitsday,withthesharepricesrisingfarabovewhatthecompanywasintrinsicallyworth.Whenearningsdidn’tmaterialize,thestockpricecollapsedandmanypeople, includingnobles, lost theirfortunes.InresponsetotheSouthSeaBubblebursting,EnglandenactedtheBubbleActof1720, which forbade the formation of a joint-stock company without a royalcharter,andthecharteredcompaniesweren’tallowedtobepubliclytraded.ForthenexthundredyearsEnglandledtheworldincommerce.Whichbringsustothequestionofliquidity.Liquidityisthemeasureofhow

easy it is to turn assets into cash, in this casehoweasy it is to sell shares forcash. The more active the market there is for certain shares, the more liquidthose shares are.Oneof the argumentsmadebyWallStreet for derivatives isthat they increase liquidity—butatwhatcost,and is thatcostultimatelyworthit?Charliethinksnot.

#91

SINGAPORE

–

“Inademocracy,everyone takes turns.But ifyoureallywantalotofwisdom,it’sbettertoconcentratedecisionsandprocessinone person. It’s no accident that Singapore has a much betterrecord, given where it started, than the United States. There,powerwas concentrated in an enormously talented person, LeeKuanYew,whowastheWarrenBuffettofSingapore.”

–

I think it isbest tostartwithaquote fromLeeKuanYewhimself:“With fewexceptions, democracy has not brought good government to new developingcountries. . . .What Asians valuemay not necessarily bewhat Americans orEuropeansvalue.Westernersvaluethefreedomsandlibertiesoftheindividual.As anAsian ofChinese cultural background,my values are for a governmentwhich is honest, effective, and efficient.”And as primeminister of Singaporefrom1959 to 1990 he did just that: he created a government thatwas honest,effective,andefficient.Tohelpkeepgovernmentemployeeshonest,Leepaid themwhat theycould

make in theprivatesector.Tospureconomicgrowth,hecourtedmultinationalcorporations to build manufacturing plants in Singapore by giving them taxbreaksandhelpingthemgetfinancing.Tohelpnewbusinessesraisecapital,heturned Singapore into an international financial center by creating favorablebankinglawsandprovidingastablecurrency.Tofacilitatedealingswiththetwomostpowerfulfinancialcentersoftheworldatthetime,NewYorkandLondon,heinstitutedEnglishasthenationallanguage.Inresponse,UScompaniessuchas Texas Instruments, Hewlett-Packard, and General Electric built their firstAsianmanufacturingplantsinSingapore.Thekeytoitallwasprovidinganhonest,effective,andefficientgovernment

to provide businesses with the stable, uncorrupt, working environment theyneededtogrowandprosper.IntheprocessSingaporewentfrombeingathird-worldcountrytobeingatwenty-first-centuryworldfinancialandmanufacturingcenter. Lee’s book From Third World to First: The Singapore Story is well

worth a read. Charlie became so enamored of Lee that he commissioned abronzebustofhimtokeeptheoneheownsofBenjaminFranklincompany.

PARTIV

–

CHARLIE’SADVICEONLIFE,EDUCATION,ANDTHEPURSUITOF

HAPPINESS

#92

ONESTEPATATIME

–

“Spendeachday trying tobea littlewiser thanyouwerewhenyouwokeup.Dischargeyourdutiesfaithfullyandwell.Slugitoutoneinchatatime,daybyday.Attheendoftheday—ifyoulivelongenough—mostpeoplegetwhattheydeserve.”

–

ThisisCharlie’sincrementalapproachtogettingaheadinlife,whichissimilartothechildhoodparableoftheracebetweenthetortoiseandthehare.Forthoseofuswhodon’tremember,thehare,whoisinfinitelyfaster,losestheracetothemuchslower,butmoreconsistenttortoise,whokeepspluggingalongoneinchata time. In Charlie’s own life, when hewas practicing law, he implemented aself-education regime for one hour a day to learn such things as real estatedevelopment and stock investing. It was slow going at first, but after a greatnumber of years and thousands of books read, he started to see howdifferentareasofknowledgeinterplaywitheachotherandhowknowledge, likemoney,cancompound,makingonemoreandmoreawareof theworld inwhichheorshe lives.Hehasoftensaid thathe isamuchbetter investoratninety thanhewasatfifty,afactheattributestothecompoundingeffectofknowledge.

#93

WHATWEDESERVE

–

“Thebestwaytogetagoodspouseistodeserveagoodspouse.”

–

WhatIthinkCharlieissayinghereisthatinmattersoftheheart,wetendtogetwhatwedeserve.Goodpeopletendtofindothergoodpeopletowalkdowntheaislewith, justasbadpeople tendtomarrypeopleequallyasnegative.HehasappliedthistheorytothebusinessworldbymakingBerkshireagoodandtrustedsteward of thewonderful companies it buys.He attracts business ownerswhowanttoselltheirmuch-lovedbusinessestohim.Qualityattractsquality,beitinbusinessorinmarriage.

#94

USINGBIGIDEAS

–

“Knowthebigideasinthebigdisciplinesandusethemroutinely—allofthem,notjustafew.”

–

Charlie is a graduate of Harvard Law School, studied meteorology at theCaliforniaInstituteofTechnology,andiswellreadintheareasofpsychology,science, economics, and history. How does he use this knowledge in theinvestmentworld?If you understand psychology, you can grasp how a product such asCoca-

Colacanownapieceofconsumers’minds—whichmakes itacandidate foralong-terminvestment.Ifyouhaveagraspofscience,youcanappreciatethatthefast-changingworld

of computer technologymight not be themost stable environment for a long-terminvestment.In the banking crisis of 2007–09, Charlie, having studied central banking,

knewthatiftheFednationalizedthebanks,ineffectbecomingtheirnewowner,itwould have essentiallywiped out all the shareholders’ equity,whichwouldhave caused investors to flee all the banks,making it impossible for even thebest of banks to raise new equity capital. He knew that the safest and mostrational course for theFed to takewas to infuse newcapital into the troubledbanksbybuyingtheirpreferredshares,whichisakindofdebtthatiscarriedonthe bank’s balance sheet as equity but that doesn’t dilute shareholders’ownership interests. So as we said earlier, in 2008, when banks’ stocks weregettinghammeredonfearsthattheFedwouldhavetonationalizethem,Charliewas loading up on Wells Fargo at $8.58 a share. Today Wells Fargo tradesaround$47ashare.But ifhehadneverstudiedhowcentralbankssuchas theFedwork,hewouldhavejoinedthegreatmassoffearfulinvestorsjumpingship,insteadofmakingthebuyofalifetime.

#95

CAREERADVICE

–

“Three rules foracareer: (1)Don’t sellanythingyouwouldn’tbuy yourself; (2)Don’t work for anyone you don’t respect andadmire;and(3)Workonlywithpeopleyouenjoy.”

–

CareeradvicefromCharlieisalwaysagift.Whydon’twesellthingswewouldneverbuy?Becauseeverybookeverwrittenonsellingsaysthatifwedon’tlike,understand,orbelieveinaproduct,wearegoingtobeadisasterwhenwetrytosell it.Greatsalespeoplebelieveintheirproducts.That isoneof thesecretsoftheirsuccess.Whydon’tweworkforpeoplewedon’trespect?Becausetheyhavenothing

toteachusandcannothelpusadvanceourintellectandlife.Why shouldn’tweworkwith peoplewe don’t enjoy?Becausework is our

life,andoneofthemeasuresoflivingarichlifeisenjoyingwhatwedoandwhowespendtimewith.Ifwearemiserableatwork,evenifwearemakingmillions,itisapoorlylivedlife.

#96

KNOW-IT-ALLS

–

“I try to get rid of people who always confidently answerquestionsaboutwhichtheydon’thaveanyrealknowledge.”

–

Theproblemhereisoneoftrust.Ifpeopledon’thavetheintegritytoadmitwhentheydon’tknowsomething,howcanoneever trust them?It ismuchbetter tojettison such a person and find someonewith a bitmore intellectual honesty.Again,Charlieshowsthatheisasinterestedinknowingwhatisunknownasinknowingwhatisknown.Theopinionofsomeonewhocan’ttellthedifferenceisuseless.

#97

AWASTEOFEDUCATION

–

“AbigpercentageofCaltechgradsaregoing into finance. . . .They’llmakealotofmoneybyclobberingcustomerswhoaren’tassmartasthem.It’samistake.I lookatthisintermsoflossesfrom the diversion of our best talent going into some money-grubbingexercise.”

–

Once upon a time Caltech was one of the greatest science and engineeringschools in the world. It is the home of NASA’s Jet Propulsion Laboratory.Charlie studied there back in the 1940s. In 2010 the big money being madegambling on Wall Street packaged derivatives was too enticing to Caltech’sprofessors and students, who began shifting their energies and focus fromsubjects such as space exploration and advanced computer technology todesigning sophisticatedmathematicalmodels tohelpWallStreet tradingdesksmake investmentbanksevenmoremoney.FromCharlie’sperspective thebestandbrightestyoungmindsshouldbeengineeringsolutionstosolvetheworld’sproblems,notsquanderingtheirintellectsonfindingbetterwaystowinagameofchanceinaWallStreetcasino.

#98

ADMITTINGSTUPIDITY

–

“Ilikepeopleadmittingtheywerecompletestupidhorses’asses.IknowI’llperformbetterifIrubmynoseinmymistakes.Thisisawonderfultricktolearn.”

–

Charlie believes that we can learn from our failures only if we acceptresponsibility for themand examine exactlywhywe failed.Blaming someoneelse and shirking responsibility is amissed learning opportunity. That is whyBerkshire’s annual report is always quick to point out Warren and Charlie’sscrew-ups and the lessons they learned—such as their investment in USAirways,whichtheythoughtgoinginwasagoodinvestmentbutprovedtobearealstinker.This“nose-rubbing”exerciseisonereasonwhytheynevermakethesamemistaketwice.

#99

MAKINGMISTAKES

–

“There’snowaythatyoucanliveanadequatelifewithoutmanymistakes. In fact, one trick in life is to get so you can handlemistakes. Failure to handle psychological denial is a commonwayforpeopletogobroke.”

–

It’s comforting to hear—that it’s okay to make a mistake. Charlie is a betterinvestortodaybecauseherodeabullmarketwaytoolongandgotslaughteredinthe crash of 1973–74. He is also a better investor because of the problemsBerkshire faced after it purchased Dexter Shoe. And let’s not forget thenightmareCharliehadwithSalomonBrothers,whichalmostcostBerkshire itsentire$700millioninvestmentinthecompany.ThentherewereproblemswiththeBaltimoredepartmentstoreHochschildKohnand,aswesaid,USAirlines.Those were huge mistakes in business judgment, often costing millions ofdollars. But they set the stage for a greatly improved investment strategy thatlaterpaidoffinbillions.

#100

SPECIALIZATION

–

“Extreme specialization is theway to succeed.Most people arewaybetteroffspecializingthantryingtounderstandtheworld.”

–

Specializationisthekeytosurvivalinanyspecies,anditisthekeytosuccessinany business. Specialization protects us from the competition.Why? Becausespecialization presents a barrier of entry to the competition—and the moredifficultitistobecomespecialized,thegreaterthebarrier.Ifallwedoiswhateveryoneelsedoes,wewill spendour livescompetingheadonwitheveryoneelse.Butifwespecializeinsomethingandexcelatit,thespecializationwillsetus apart from the rest of the crowd.Dowe take our Porsche to the local carmechanicwhoworksoneveryone’scar?Ofcoursenot.Wetakeit to theshopthatspecializesinPorsches.Itchargesustwicethenormalhourlyrateandgetsawaywith itbecause it isa“Porschespecialist.”Thesamephenomenonholdstrueformedicine,law,andeventhetrades,suchasplumbingandcarpentry.It’sspecialistswhomakethebigbucks—everyoneelse,thelittlebucks.

#101

NOTWORKING

–

“It’s been my experience in life, if you just keep thinking andreading,youdon’thavetowork.”

–

Tiredofthatdead-endWallStreetjob?Bossgettingyoudown?Yourderivativesbook about to blow up and end your lucrative career? Just keep thinking andreading, and you will be all right. Why? Because that is all there is to theinvestmentgamefromCharlie’spointofview:youthinka lot,andyoureadalot. It’ssaid thatCharlie readsup tosixhundredpagesaday—which includesthree newspapers a day and a weekly diet of several books. Oh yes, andoccasionallyhegoesouttotheLosAngelesCountryClubforaclubsandwichandaCoke.Thisisaguywhoknowshowtosplurgeinbetweenpowerreads.

#102

NOTLIVINGBEYONDOURMEANS

–

“Mozart is a good example of a life ruined by nuttiness. Hisachievementwasn’t diminished—hemaywell have had the bestinnate musical talent ever—but from the start, he was prettymiserable.Heoverspenthisincomehisentirelife—thatwillmakeyoumiserable.”

–

OneofthekeystoCharlie’saccumulationofwealthisthatinhisyouthhewasfanaticalaboutnotspendingmoney.Hedidn’tbuyhisfirstnewcaruntilhewasalmostsixty,andhelivedinanupper-middle-classhouselongafterhebecameamultimillionaire. Every dollar saved was a dollar that could be invested.Overspending canmake usmiserable, but underspending and investingwiselywillhelpspeedusalongtheroadtoriches.

#103

OUTWITHTHEOLD

–

“Anyyearthatpassesinwhichyoudon’tdestroyoneofyourbestlovedideasisawastedyear.”

–

Outwith theoldand inwith thenew.This showsanevolution inour thoughtprocess,whichmeansweareactuallythinking.WhatCharlieissayingisthatinanyyearwehaven’t tossedoutoneofourbest-loved ideas, itprobablymeanswe aren’t reading and thinking enough to evolve a little bit further in ourintellectual development. In the investment game, throwing out a well-lovedinvestment idea can happenwith some regularity. The world of business is adynamic environment that can experience radical change over a very shortperiod of time. In a mere seventy years the United States went from noelectricity to the entire country being electrified. That completely destroyedcandle making, gas lighting, and the kerosene lamp businesses, all greatenterprisesintheeighteenthandnineteenthcenturies.In1930thereweren’tanytelevisions in people’s homes. By 1960 just about every American home hadone,andthehomeradiobusiness,theInternetofthe1920s,prettymuchdied.In2000therewasn’tsuchathingasWikipedia.Todaywecan’tlivewithoutit,andWikipedia killed the 244-year-old encyclopedia business—which had been areally good business. In 1974 the digital camera didn’t exist. Today Kodakdoesn’texist—andforahundredyearspreviouslyKodakhadbeenanamazinglysuccessfulbusiness!Intheworldofbusinessandinvestingitisbesttokeepupwithnewdevelopmentsandreviewourbest-lovedideaseveryyear,justtomakesurethatinthinkingweareright,wedon’tgetitwrong.

#104

AMORALIMPERATIVE

–

“Being rational is a moral imperative. You should never bestupiderthanyouneedtobe.”

–

This is Charlie’s twist on Immanuel Kant, the eighteenth-century Germanphilosopher,whoarguedthatreasonisthesourceofallmorality.Beingrational,to Kant and Charlie, means ignoring our emotions, and following logic andreasoninmakingourdecisions(soundsalotlikeCharlietalkingaboutmakingastock purchase). A “moral imperative” is a strongly felt principle originatinginsideaperson’smindthatcompelsthatpersontoactornotact;andaccordingtoKantandCharlie,todootherwisewouldbeself-defeatingandthuscontrarytoreason.InCharlie’sworld,notbeingrationalisthesameasbeingstupid.

#105

SECRETOFSUCCESS

–

“I have never succeeded verymuch in anything inwhich Iwasnot very interested. If you can’t somehow find yourself veryinterested in something, I don’t think you’ll succeed verymuch,evenifyou’refairlysmart.”

–

Charlieoften says that thekey tobeing agreat businessmanager is tohave apassionforthebusiness.Forpeoplewhohavethat,thebusinessisn’tajob,it’sthe love of their lives. Theywould rather be atwork than at home. They areartistswhosepassionfortheirworkdrivesanddefinestheirlives.HereCharlieispointingoutthatthistheoryappliestoanythingwedoinlife:Tobesuccessfulinsomething,weneedtobepassionatelyinterestedinit.Andthatpassion,morethanrawintelligence,tendstodeterminewhetherornotwewillbesuccessfulatwhatwedo.AsSteveJobssaid,“Workisgoingtofillalargepartofyourlife,and theonlyway tobe trulysatisfied is todowhatyoubelieve isgreatwork.Andtheonlywaytodogreatworkistolovewhatyoudo.”

#106

BEINGFRUGAL

–

“Oneofthegreatdefenses—ifyou’reworriedaboutinflation—isnottohavealotofsillyneedsinyourlife—ifyoudon’tneedalotofmaterialgoods.”

–

Both Charlie andWarren have lived in upper-middle-class homes and drivenolder-modelcarsmostoftheirlives.Why?Tokeeptheirexpenseslow,sothattheycouldaccumulatelotsofcashtoinvest.Howdoesthisprotectthemagainstinflation?Ifyoudon’tneedsomething,youdon’thavetobuyit—sowhocaresif itgoesup inprice?Doyou really thinkCharliehasever lost sleepover theever-increasingpriceofanewFerrari?

#107

IDEOLOGY

–

“Another thing I think should be avoided is extremely intenseideologybecauseitcabbagesupone’smind.”

–

Charliebelievesthatyouthiseasilyinfluencedandoftenbecomesobsessedwithanideologytothepointthatit isimpossibletothinkofanythingelseortoseeanothersideofanargument.Passionblindsyoungpeopletoanykindofrationalthoughtprocess.From an investing perspective, it was onlywithCharlie’s help thatWarren

brokehischainsofhabitandideologyandfinallysetasidetheGrahamapproachofinvestinginmediocrecompaniesatbargainprices.Hebegantoinvestingreatcompanies at fair prices and holding them forever.Oldermen, like passionateyouths,canbecomesoweddedtoan ideologythat itstops themfromseeingabetterway.WhichiswhyitisagoodthingtohaveaguylikeCharlieMungerasyourfriendandbusinesspartner.

#108

IDEADESTRUCTION

–

“Weallarelearning,modifying,ordestroyingideasallthetime.Rapiddestructionof your ideaswhen the time is right isoneofthe most valuable qualities you can acquire. You must forceyourselftoconsiderargumentsontheotherside.”

–

Thissoundseasy,butitisverydifficulttoputintopractice.Peopledon’tliketogiveuplong-heldideas.Doingsomakesthemuncomfortableandfillsthemwithfear.And change usually requires an enormous amount ofwork. Probably thehardest “idea destruction” thought process that Charlie andWarren everwentthroughwastheclosingofBerkshireHathaway’stextilebusiness.Evenwhenitbecameapparent that thebusinessdidn’t have a future andwouldnevermakeanyrealmoney,theystillkeptitopen.Onlywhenthebusinessstartedtoreallylosemoneydidtheyfinallyfacethemusicandcloseit.Another example was Charlie and Warren’s investment in the Baltimore

department store HochschildKohn, which they bought at a bargain price andsoon realized was a lousy business. It took them nearly three years to findsomeone to take it off their hands. When it comes to selling an investment,companiesthataren’tpubliclytradedarethetoughesttogetridof.ThesimplelessonhereisthatCharlie’smindisneverstandingstill.Hedoes

notrestonhislaurels,andneithershouldwe.

#109

CATECHISM

–

“Oh, it’s just so useful dealing with people you can trust andgettingalltheothersthehelloutofyourlife.Itoughttobetaughtasacatechism. . . .Butwisepeoplewant toavoidotherpeoplewhoarejusttotalratpoison,andtherearealotofthem.”

–

Acatechismisthesummaryofadoctrinethatisusedtoteachyoungstudents,usually religious instruction.What Charlie is advocating here is a philosophythat says we need to jettison our least trustworthy friends and businessassociates.Thishaslotsofimplications.Firstonapersonallevel,let’sjustsaythatlargefamilygatheringsmightbecomeathingofthepastifoneweretonolongerassociatewithuntrustworthyfamilymembers.Inthebusinessworld,notbeingabletotrustyouremployeesoracounterpartyinatransactionmayresultina tremendousamountofanxietyand inefficiencybecause trust is thegreasethatkeepseverybusinessrunningsmoothly.Ifyouownatruckingcompanyoroperate a hospital, yourmanagersmust trust their employees to execute theirjobs effectively and trust that the products and materials they order will bedeliveredontime.Ifthisisnotpossible,thecompanyisindeeptrouble.

#110

COOKIE-CUTTERSOLUTIONS

–

“ ‘Onesolutionfitsall’isnotthewaytogo....Therightculturefor the Mayo Clinic is different from the right culture at aHollywood movie studio. You can’t run all these places with acookie-cuttersolution.”

–

Charlie is talking about organizational structures and the dynamics of howmanagement and employees interact among themselves and with theircustomers.Hisexperiencetellshimthatbusinessesareallunique,thatwecan’ttake one structure that works for one business and expect it to work withanother. When Berkshire Hathaway buys a business, it generally leaves theexisting culture intact and is very reluctant to change it.Berkshire’smanagersstay with the same division or company for life. The great managers on theinsurance side of Berkshire are never sent over to the railroad side and viceversa.CompaniessuchasGeneralElectric,ontheotherhand,willoftentakeagreatmanagerinonedivisionorcompanyandsendhimorhertoacompletelydifferent one. Charlie has attributed this reluctance to shifting Berkshire’smanagersaroundtobeoneofthereasonswhyBerkshirewentfrombeingatinytextilemanufacturertoeventuallyoutgrowingGeneralElectricinsize.

#111

LEARNINGMACHINES

–

“Warrenisoneof thebest learningmachineson thisearth. . . .Warren’s investing skills have markedly increased since heturned65.HavingwatchedthewholeprocesswithWarren,Icanreportthatifhehadstoppedwithwhatheknewatearlierpoints,therecordwouldbeapaleshadowofwhatitis.”

–

Warren got to be amuchbetter investor after turning sixty-five,whichmeansthatthereishopeforalmosteveryoneregardlessofage.Itpaysbigtokeeponlearningwellafterwehitretirement,especiallyintheinvestmentgame.Thereisanother point that I’ve noticedwithmen andwomenwho truly excel at theircraftorprofession: theykeepon learningand improving themselves longaftermost people would have retired. It’s like sharks. They have to swim to live;learningisjustsomethingthosepeoplehavetodo.

#112

SECRETTOWISDOM

–

“Look at this generation, with all of its electronic devices andmultitasking.IwillconfidentlypredictlesssuccessthanWarren,who just focused on reading. If you want wisdom, you’ll get itsittingonyourass.That’sthewayitcomes.”

–

Reading personal biographies allows one to experience multiple lives andsuccessesandfailures;readingbusinessbiographiesallowsonetoexperiencethevicissitudesofabusinessandlearnhowproblemsweresolved.BothCharlieandWarren are copious readers of personal and business biographies. Imight addthat ifCharlieeverwroteanautobiographyitwouldprobablybetitled“HowIReadMyWaytoFameandFortune—WhileSittingonMyAss.”

#113

LEGALBUSINESS

–

“ThebestlegalexperienceIevergotwaswhenIwasveryyoung.Iaskedmyfatherwhyhedidsomuchworkforabigblowhard,an overreaching jerk, rather than for his best friend GrantMcFadden.Hesaid,‘Thatmanyoucallablowhardisawalkingbonanzaof legal troubles,whereasGrantMcFadden,who fixesproblemspromptlyand isnice,hardlygeneratesany legalworkatall.’ ”

–

Twolessonshere:(1)Ifwefixproblemspromptlyandarenicetopeople,we’llhave fewer legalproblems. (2) In the trades andprofessions,whetherone is aplumber, a lawyer, a dentist, a roofer, or a surgeon, it is the people withproblemswhoaregoing tobring in thebusiness.Which is oneof the reasonsthatCharliegotoutofthelawbusiness.

#114

GETTINGOLDER

–

“I’m getting more experienced at aging. I’m like the man whojumpedoff theskyscraperandat the5th flooron thewaydownsays,‘Sofarthisisnotabadride.’ ”

–

CharliehasneverhadaprostateexamorPSAtest,becausehedoesn’twanttoknowifhehasprostatecancer.Hefiguresthatsincemostmeneventuallyhaveprostateproblems,whyworry?NordoesheworryaboutCaliforniaearthquakes.Allthethingsthatareinevitableherefusestoworryabout.That’smadeforanalmoststress-freelifeandmaybethereasonheisnowpushingninety-three.

#115

POSITIVEREINFORCEMENT

–

“Allhumanbeingsworkbetterwhentheygetwhatpsychologistscall reinforcement. If you get constant rewards, even if you’reWarrenBuffett,you’llrespond.. . .Learnfromthisandfindouthowtoprosperbyreinforcingthepeoplewhoareclosetoyou.”

–

Thesecrettogettingfriendsistobeafriend.Thesecrettogettinghelpwheninneedistogivehelptothoseinneed.Thesecrettolearningistoteach.Thesecrettogettingpeopletoexcelistoreinforcetheirpositivequalities.WhenthefamedrockmusicianBonoaskedWarrenforhelpingettingtheUSCongresstoassisthisAfricanaidproject,Warrenadvisedhimtoappealnottotheirsympathiesbuttotheirgreatness.

#116

INCENTIVE-CAUSEDBIAS

–

“You must have the confidence to override people with morecredentials than you whose cognition is impaired by incentive-causedbiasorsomesimilarpsychologicalforcethatisobviouslypresent. But there are also cases where you have to recognizethatyouhavenowisdomtoadd—andthatyourbestcourseistotrustsomeexpert.”

–

What is incentive-caused bias?Charlie likes to tell the story of theCEOwhocouldn’t understand why his company’s newer, cheaper, and better-designedproductwasn’toutsellingitsolder,moreexpensivemodeluntilherealizedthatthesalescommissionontheoldermodelwashigherthanonthenewerone.Hissalesmensimplymademoremoneysellingtheoldone.TheCEO’ssolutionwasto raise the commission on the new product. Charlie recognizes that mostsalesmen,whether a surgical centerpeddlinga surgery, a tire company sellingtires,arealestatecompanysellinghouses,oranengineeringfirmsellingaclientonaparticulardesign,haveamoneyincentivedrivingtheirdesiretomakethesaleandarepredisposedtopressureyouinto thesaleevenif it isnotreally inyourbestinterest.HereCharlierecommendsacertainamountofskepticismandself-education to protect ourselves from being taken advantage of. Or as theplaywrightGeorgeBernardShawonce said, “All professions are a conspiracyagainstthelaity.”However,therearetimeswhenwecanseetheunderlyingbiasesthatweneed

toconsultanexpert,inwhichcaseitisalwayswisetogetasecondopinionandsometimesevenathird,andjusttobeonthesafeside,maybeevenafourth.

#117

NARROW-MINDEDNESS

–

“Mostpeoplearetrainedinonemodel—economics,forexample—andtrytosolveallproblemsinoneway.Youknowthesaying:‘Tothemanwithahammer,theworldlookslikeanail.’Thisisadumbwayofhandlingproblems.”

–

This is particularly true in the field of economics, where one theory can becreatingtheproblemthatanothertheoryistryingtosolve.TakeDavidRicardo’seconomictheoryoffreetrade,whichhasledtomillionsofAmericanjobsbeingshippedoverseasandishelpingfuelunemployment.Keynesianeconomictheorysays that problems of unemployment can be solved by dropping interest ratesandprintingmoneytostimulatetheeconomy.Sowithonehandourgovernmentpursuesaneconomicpolicyof free trade, fuelingunemployment,whileon theotherhandtheFederalReserve ispursuingacourseof lower interestratesandprintingmoneyinanefforttofightunemployment.

#118

LIVINGWELL

–

“Thebestarmorofoldageisawell-spentlifeprecedingit.”

–

ThisremindsmeofsomethingWarrenoncesaidtoagroupofcollegestudents:“Weshouldtreatourbodylikeitistheonlycarwewilleverown.”CharlietookWarren’scaranalogytoheartandfiguredoutthatthelesshe“drovehisbody,”the less it would wear out and the longer it would last. Which is why he isfamousforavoidinganyandall formsofphysicalexercise,other thanplayingbridge at the club and turning the pages of a book.What I think he is reallysayingisthatalifespentinhonorablepursuits,withaninquisitivemind,actingaspartofacommunity,carriesoverintooldageandleadstoaveryinterestingandsatisfyinglifeinourlateryears.

#119

MARRIAGEADVICE

–

“In marriage, you shouldn’t look for someone with good looksandcharacter.Youlookforsomeonewithlowexpectations.”

–

Ahigh-expectationsspouseisneverpleased,andyouwillspendyourlifebeingmiserabletryingtojumpthroughhoopstopleasehimorher.Sounlessyouwanttospendyourlifelivingwithsomeonewhoisneverhappy,alow-expectationsspouse isprobably thewaytogo.However, theopposite is true inbusiness: ifyou have low expectations for an employee or amanagement team, theywillneverrisetotheoccasionorlearntoexcelattheircraftorprofession.Whyisn’tthistrueformarriage?Becausemarriageisn’tajob.

#120

THEWORRIEDRICH

–

“If you getWarrenBuffett for 40 years and the bastard finallydiesonyou,youdon’treallyhavearighttocomplain.”

–

This isCharlie talking about a fewBerkshireHathaway shareholderswho arepanickingbecauseCharlieandWarrenaregettingolderandthedaysofprofitingfrom their brilliance are drawing to a close. There are a huge number ofBerkshire shareholders who became multimillionaires under Charlie andWarren’s reign, and there are even a fair number who became billionaires.Berkshire’sresultshavebeenfarbetterthananyoneeverdreamed,yettherearethosewhoareneversatisfiedwithwhatlifebringsthem,evenifit’smillionsorbillions of dollars, and who will complain about it till the very end. FrancisBacon, thesixteenth-andseventeenth-centuryBritishphilosopher,scientist,andstatesman,noticedaverysimilarphenomenon:thatwithsomepeople,thericherthey got, the more miserable they became—that becoming rich, for some, ismoreofacursethanablessing.

#121

THECOCA-COLACOMPANY

–

“Cokeformanydecadeshasbeenabasicproduct fullofsugar,and it grew every year. Full-sugar Coke is now declining.Fortunately, the Coca-ColaCompany has a vast infrastructure.Coca-Cola is declining some, but the rest of the businesses arerising. I thinkCoke isa strongcompany,andwilldoverywell.It’sstilllikeshootingfishinabarrel.”

–

The decline of Coca-Cola’s full-sugar soft drinks is a favorite topic of thefinancialpressand is the first thing thatnaysayers focusonwhen they lookatBerkshire’sportfolio.And it is true that salesofCoca-Cola’s full-sugardrinksaren’tgrowingasfastas theyusedto.However, thecompanyownsmore thanfivehundreddifferent brandsof sparkling and still drinks and sells 1.9billionservingsadayinmorethantwohundredcountries.WhathappenedattheCoca-Cola Company is that in its early days, when it was awash in cash, it wentaroundtheworldbuyingupthemostpopularsoftdrinkbrandsinalmosteverycountry.Astheworld’spopulationincreases,sodoesthenumberofCoca-Colacustomers.Ittookforty-sixyearstodoubletheworld’spopulationfrom1970to2016, and if it takes another forty-six years to double it again, from 2016 to2062,Cokecouldeasilydoublethenumberofservingsthatitsellsofallitsfivehundredbrands.Doublethenumberofservingsthatitsells,doubletheprofititmakes.Itearned$1.67asharein2015,sowecanarguethatitwillmake$3.34ashare in 2062, which equates to a per-share earnings growth rate of 2.17% ayear.Astheper-shareearningsgrowsowillthestockprice.Addinthecurrentdividendpaymentof3.24%,andwehavea combinedannual rateof returnof5.41%.Thatdoesn’tevenconsiderstockbuybacksincreasingper-shareearnings,newacquisitions,andraisingthedividend,whichthecompanyhasconsistentlydoneover the last thirty-nineyears. Inaworldofnegative interest rates,Cokestillappearstobeatastyinvestment.

#122

ENVY

–

“Well, envy and jealousy made, what, two out of the TenCommandments? Those of you who have raised children youknowaboutenvy,ortriedtorunalawfirmorinvestmentbankorevenafaculty?I’veheardWarrensayahalfadozentimes,‘It’snotgreedthatdrivestheworld,butenvy.’”

–

Nostrangertothesevendeadlysins,Icanattestthatenvyandjealousyaretheleast enjoyable.Wrath, greed, sloth, gluttony, and lust—particularly lust—canallbegreatfunasonetravelstheself-indulgentroadtodisaster;however,envyandjealousy,eveninsmalldoses,willmakeoneutterlymiserable.ButifCharlieandWarrenarerightandenvyreallydoesdrivetheworld,itisnowondertherearesomanyunhappypeopleinit.

#123

READING

–

“Inmywholelife,Ihaveknownnowisepeoplewhodidn’treadall the time—none,zero.You’dbeamazedathowmuchWarrenreads—and how much I read. My children laugh at me. TheythinkI’mabookwithacoupleoflegsstickingout.”

–

Charliehasalwaysbeenavoraciousreader.AsachildhelivedinthedowntownOmaha public library, where, exploring the stacks, he met the toweringintellectuals of both the past and present in books; by age eight bothThomasJeffersonandBenjaminFranklinhadpermanentplacesonthebookshelfabovehisbed.Itisreadingthathelpedputhimaheadofthepack.

#124

TAKINGTHEBLOWS

–

“Lifeisalwaysgoingtohurtsomepeopleinsomewaysandhelpothers.Thereshouldbemorewillingnesstotaketheblowsoflifeas they fall. That’swhatmanhood is, taking life as it falls.Notwhiningallthetimeandtryingtofixitbywhining.”

–

AsthegreatAmericancowboyactorJohnWayneoncesaidinamovie,“Son,Idon’tcaremuchforquitters.”AndIexpectthatneitherdoesCharlie.

#125

USELESSWORRY

–

“I don’t think it’s terribly constructive to spend your timeworrying about things you can’t fix. As long as when you aremanagingyourmoneyyourecognizethataterriblethingisgoingtohappen,intherestofyourlifeyoucanbeafoolishoptimist.”

–

Aswesaidearlier, in theworldof financea terrible thinghappensonaverageabout once every eight to ten years. Why? Mostly because of the highlyleveragedbankingsystem.Leveragemakesforhugegainsasthingsmoveupbutcreatesequallyhuge losseswhenfortunesreverse.There isalsoamultitudeofothereventsthatcancausethestockmarkettocrash;theonlythinganyonecanbe certainof is that thepowerofpositive thinkinghasnoplace in investmentdecisions.AsforworryingaboutthecomingearthquakethatisgoingtodestroythecityofLosAngeles,accordingtoCharlie,thinkingaboutthat,too,isawasteoftime.

#126

LEARNINGMACHINES

–

“I constantly see people rise in life who are not the smartest,sometimes not even the most diligent, but they are learningmachines.Theygotobedeverynightalittlewiserthantheywerewhentheygotup,andboy,doesthathelp,particularlywhenyouhavealongrunaheadofyou.”

–

It is very important to be constantly learning, constantly improving ourselves.Thinkofitascompoundingourintellect;thelongerweworkatit,thericherwebecome.It isalsooneoftheodditiesoftheinvestmentgamethattheolderwegetandthemorewelearn,thebetterinvestorwebecome.Theinvestmentfieldis unique. If Charlie were a surgeon, there would come a time when he justwouldn’thavethephysicalstaminatostandfifteenhoursatanoperatingtable.The same if he were in a trade such as bricklaying. As an investor the onlyphysical attributes he needs are his eyesight, a clear mind, and the digitaldexteritytoturnthepagesofabook.Whichiswhy,atninety-two,hecanstillknocktheballoutoftheparkandruncirclesaroundthenewyoungTurks.

#127

TRAGEDY

–

“Youshouldnever,whenfacedwithoneunbelievabletragedy,letone tragedy increase into two or three because of a failure ofwill.”

–

ThisremindsmeofanearlyBerkshireshareholder,SamFried,whoasateenageboy inEurope survived thehorrorsofAuschwitzby sheerwillpower, came toOmaha after the war, created a beautiful family and an amazing business,becameoneoftheleadingeldersinthecommunity,andalongthewayenrichedagreatmanyliveswithhisloveandgenerosity.

#128

MULTITASKING

–

“Ithinkpeoplewhomultitaskpayahugeprice.”

–

Manypeoplebelievethatwhentheymultitask, theyarebeingsuperproductive.Charliebelievesthatifyoudon’thavetimetothinkaboutsomethingdeeply,youare giving your competitors, who are thinking deeply, a great advantage overyou. Charlie’s ability to focus intensely and really think about something hasbeenhiscompetitiveedgeinbeatingWallStreetatitsowngame.

#129

FELICITY

–

“Theyonceaskedmewhatonepersonaccountedformostofmypersonal felicity in life, and I said, ‘That’s easy—thatwouldbemywife’sfirsthusband.’”

–

Felicity—intense happiness—this is Charlie’s clever way of saying that hissecondwife,Nancy, brought him great happiness. I think it’s also hisway ofsayingthatherexpectationswerebroughtdownverylowbymannumberone.

#130

HEALTH

–

“IeatwhateverIwanttoeat.Ihaveneverpaidanyattentiontomyhealth.I’veneverdoneanyexerciseIdidn’twanttodo.Ifanysuccess has come tome, it came because I insisted on thinkingthings through . . .all thesepeoplewho think theyaregoing togetaheadbyjoggingorsomething,morepowertothem.”

–

SinceCharlieisninety-twoandingreatphysicalandmentalhealth,theremightbesomething to this“thinking” formofexercise.Hedoesbelong toacountryclub,but,aswesaid,hespendsmostofhistimeinthecardroomplayingbridge.Iguessshufflingcardscouldbecountedasaformofexercise.

#131

ASEAMLESSWEB

–

“Thehighestformthatcivilizationcanreachisaseamlesswebofdeserved trust—notmuch procedure, just totally reliable peoplecorrectlytrustingoneanother....Inyourownlifewhatyouwantis a seamless web of deserved trust. And if your proposedmarriage contract has forty-seven pages, I suggest you notenter.”

–

CharlieandWarrenoftenquotethetwentieth-centuryOmahaconstructiontitanPeter Kiewit, who once said that he wanted to hire people who were smart,hardworking,andhonest.Butoutofthethree,honestywasthemostimportant,becauseiftheyweren’thonest,thetwootherqualities,smartandhardworking,weregoingtostealhimblind.ThecorporatecultureatBerkshire is that ifyoucan’ttrustsomeone,youreallyshouldn’tbedoingbusinesswithhimorher.Onthetopicofmarriage,Charliehasalwayssaidthatweshouldn’tbetimidaboutgetting married when we find the right spouse. I guess a forty-seven-pagemarriagecontractmightindicatethatwestillhaven’tfoundtheloveofourlife.

#132

MISSEDCHANCES

–

“IthinktheattitudeofEpictetusisthebest.Hethoughtthateverymissed chance in life was an opportunity to behavewell, everymissedchanceinlifewasanopportunitytolearnsomething,andthatyourdutywasnottobesubmergedinself-pity,buttoutilizethe terrible blow in constructive fashion. That is a very goodidea.”

–

TheGreekStoicphilosopherEpictetus,wholivedA.D.55–135,startedlifeasaslavetothesecretaryofEmperorNeroinRome.HestudiedphilosophyandonNero’s death was made a freeman. He then taught philosophy in Rome tillEmperorDomitianbanished all philosophers from the city,whereuponhe fledbacktoGreeceandstartedhisownschoolofphilosophy.Epictetustaughtthatphilosophyisawayoflife—thatallexternaleventsare

determined by fate and are beyond our control. But as individuals we areresponsibleforourownactions.Thefinancialparallelto“Epictetus’sfate”isthemacro-and microeconomic events that affect individual companies and theircorrespondingrisingandfallingstockprices.Howwerespondtothoseevents,whetherornotwelearnfromthem,isourownresponsibility.InCharlie’sinvestmentlifeeachandeverylosshasbeenalearninglesson.If

hehadneverexperiencedtroubleswithabusinessinverycompetitiveindustries—textiles, shoes, retail clothing, andairlines—hemightneverhavegained theinsight into thewonders of owning a business that had a consumermonopolysuchasCoca-ColaorSee’sCandies.Hewouldneverhaveseenhowalow-costproducersuchasGEICOcanhaveacompetitiveadvantageoveritsmuchbiggercompetitors.Ifhehadneverexperiencedthepainofthemarketcrashof1973–74,heneverwouldhavehadtheforesighttostockpilethecashheusedtobuyWellsFargostock in2008–09.ThomasEdisononcesaid,“I failedmyway tosuccess.”ThoughCharlieneverexperiencedasmanyfailuresasEdisondid,hecanstillcredithisearlyfailuresasthesourceofmuchofhissuccess.

#133

LYINGTOONESELF

–

“DeanKendallof theUniversityofMichiganmusicschooloncetoldmeastory:‘WhenIwasalittleboy,Iwasputinchargeofalittleretailoperationthatincludedcandy.Myfathersawmetakea piece of candy and eat it. I said, “Don’t worry. I intend toreplaceit.”Myfathersaid,“Thatsortofthinkingwillruinyourmind.Itwillbemuchbetterforyouifyoutakeallyouwantandcallyourselfathiefeverytimeyoudoit.”’ ”

–

TheFrenchphilosopherJean-PaulSartrecalled lying tooneselfanactof“badfaith”becauseitnegated“truth,”whichwoulddestroynotonlythemoralfiberoftheindividualbutalsothesocietyinwhichwelive.Whysociety?Because,asSartre argued in the smoke-filled cafés of 1940s Paris, we can’t build asuccessfulcivilizationonabedofhalf-truthsandlies.HereCharlieissayingthatthelittleliesthatpeopletellthemselvestojustifytheirbadactscanoftengrowintobigger lies thatwilldestroynotonly their livesbutalso the livesofmanyothers—as in2007–09,when the “bad faith” acts of thenefariousdenizensofWallStreetnearlydestroyedmuchoftheworld’seconomy.

#134

TRUTH

–

“RememberLouisVincenti’srule:‘Tellthetruth,andyouwon’thavetorememberyourlies.’”

–

Louis Vincenti was an attorney and the much-respected chairman and chiefexecutiveofficerofWescoFinancialCorporationuntil retiringat age seventy-seven.Hewaswellknownforhavingabrilliantbusinessmindandbeingdirectandtothepoint.Hecalledit likeitwasandalwaystoldthetruth.It issaidhewas the embodiment of integrity and a huge influence on both Charlie andWarren.

#135

PERSPECTIVE

–

“It’sbadtohaveanopinionyou’reproudofifyoucan’tstatetheargumentsfortheothersidebetterthanyouropponents.Thisisagreatmentaldiscipline.”

–

ThismentalexercisecomesfromCharlie’searlytraininginlaw,whereit isanadvantage to be able to argue both sides of a case. Knowing the other side’sarguments, its possible points of attack, allows one to prepare counterattackslongbeforeacasegetsintothecourtroom.Themostinterestingthingaboutthismental exercise is that after learning the other side’s argumentswe justmightdiscoverthattheyarerightandwewerewrong.WhichisprobablywhysofewpeopletakeCharlie’sadviceonthis.

#136

MULTIDISCIPLINE

–

“Ifyouhaveenoughsensetobecomeamentaladultyourself,youcanrunringsaroundpeoplesmarter thanyou.Justpickupkeyideas from all the disciplines, not just a few, and you’reimmenselywiserthantheyare.”

–

Amanwhocanplayalltheinstrumentsinanorchestracanwriteasymphony,butamanwhocanplayonlytheviola,evenifheisthegreatestviolaplayeronearth, can play only the viola. Charlie is a man who can discuss CharlesDarwin’s thoughts on evolution, Stephen Jay Gould’s thoughts on Darwin’sthoughts,AlbertEinstein’sunifiedfield theory,WalterBagehot’s1873 treatiseoncentralbanking,IsaacNewtonandGottfriedWilhelmLeibniz’sdevelopmentofcalculus,MarciaStigum’svoluminousworkon themoneymarket,Marquisand Jessie R. James’s history of the Bank of America, the conflict betweenRobertOppenheimerandEdwardTellerover thedevelopmentof thehydrogenbomb,andE.O.Wilson’stheoriesofsociobiologyallinthesamebreath.Hecaneven quote Mark Twain and Immanuel Kant when the occasion calls for it.Though he is not as well versed in the areas of twentieth-century GermanExpressionisttheater,Dadaism,andDiaghilev’sBalletsRusses,hemakesupforitbyknowingahellofa lotabouthow tomakemoney in thestockmarket. Imight add that he is also knowledgeable about some of the more importantthingsinlife,suchasfishingforwalleyeinthelakesofMinnesota.

#137

CIVILIZATION

–

“Overthelongterm,theeclipserateofgreatcivilizationsbeingovertakenis100%.Soyouknowhowit’sgoingtoend.”

–

FromtheninthtotwelfthcenturiesVenicewasthefinancialandbusinesscenteroftheworld,andeventhoughthosedayshavelongsincepassed,Veniceisstilla verywealthy city andVenetians are still considered to be someof themostsuccessfulentrepreneursandbusinesspeopleinEurope.Justbecauseyouaren’tnumberoneanymoredoesn’tmeanyoucan’tmakea tonofmoneyasnumbertwo.Ifyoudon’tbelieveme,justlookatCharlie;hehasbeenthenumbertwomanatBerkshireHathawaysince1979,andhehasn’tdonetooshabbily.

#138

REFLECTION

–

“Ilikeyouallbecauseyouremindmeofmyself.Whodoesn’tlikehisownimagestaringbackathim?”

–

Themagicmirrorisalwaysatwork.Welikeyou,too!Andthankyou,Charlie,forall thewonderfulgiftsofknowledge thatyouhavesharedwithusover theyears!

ACKNOWLEDGMENTS

Iwish to thankKate,Dexter, andMiranda for their infinitepatienceand love.And a special thank-you to my amazing publisher and editor, Roz Lippel, atScribner for giving me the opportunity to think and write about interestingpeopleandsomeveryesotericsubjects.IwouldalsoliketothankmyverydearfriendandmentorWyomingattorneyGerrySpence,whotaughtmehowtofightforjustice.Andlastbutnotleast,I’dliketothankWarrenBuffettforbringingintomylifethewonderfulandfascinatingCharlieMunger.

SOURCES

1.DailyJournalAnnualMeeting,2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e2.http://blogs.wsj.com/moneybeat/2014/09/12/a-fireside-chat-with-charlie-munger/3.DailyJournalAnnualMeeting,2015,http://www.forbes.com/sites/phildemuth/2015/04/13/charlie-mungers-2015-daily-journal-annual-meeting-part-2/#4290492646734.http://www.gurufocus.com/news/144211/charlie-mungers-wisdom-poker-and-votes5.DailyJournalAnnualMeeting,2015,http://www.forbes.com/sites/phildemuth/2015/04/07/charlie-mungers-2015-daily-journal-annual-meeting-part-1/#39be30b31d626.https://old.ycombinator.com/munger.html7.http://blogs.wsj.com/moneybeat/2014/09/12/a-fireside-chat-with-charlie-munger/8.http://www.quoteswise.com/investing-quotes.html9.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/10.http://www.nexusinvestments.com/the-wit-and-wisdom-of-charlie-munger/11.TrenGriffin,CharlieMunger:TheComplete Investor (NewYork:ColumbiaUniversityPress,2015),p.129.12. Wesco Annual Meeting, 2006, http://www.valueplays.net/wp-content/uploads/The-Best-of-Charlie-Munger-1994-2011.pdf13.http://www.jameslau88.com/charlie_munger_on_checklist_investing.htm14.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/15.Daily JournalAnnualMeeting, 2016, http://thecharlieton.com/the-2016-daily-journal-meetings-notes-february-10-2016/16. Berkshire Hathaway Annual Meeting, 2001,http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf17.DailyJournalMeeting,2015,http://www.marketfolly.com/2015/03/notes-from-charlie-mungers-daily.html18. Wesco Annual Meeting, 2006, http://www.valueplays.net/wp-content/uploads/The-Best-of-Charlie-Munger-1994-2011.pdf19. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/07/charlie-mungers-2015-daily-journal-annual-meeting-part-1/#39be30b31d6220.Griffin,CharlieMunger,p.3921.BerkshireAnnualMeeting,2003,http://www.fool.com/news/2003/05/05/report-from-berkshires-meeting.aspx22.BerkshireAnnualMeeting,2005,http://www.tilsonfunds.com/brkmtg05notes.pdf23.http://www.philanthropyroundtable.org/topic/excellence_in_philanthropy/masters_class24.http://blogs.wsj.com/moneybeat/2014/09/12/a-fireside-chat-with-charlie-munger/25. http://blogs.wsj.com/moneybeat/2014/09/12/the-secrets-of-berkshire-hathaways-success-an-interview-with-charlie-munger/26.https://old.ycombinator.com/munger.html27. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e28. Daily Journal Annual Meeting, 2015,

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58. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e59. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/07/charlie-mungers-2015-daily-journal-annual-meeting-part-1/#39be30b31d6260. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/07/charlie-mungers-2015-daily-journal-annual-meeting-part-1/#39be30b31d6261.http://www.cnbc.com/id/10070582062.DailyJournalAnnualMeeting,2014,http://www.jianshu.com/p/4be97742ef5b63. Wesco Annual Meeting, 2005, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf64. Wesco Annual Meeting, 2009, http://docslide.us/documents/wesco-financial-meeting-notes-1999-2009.html65. Daily Journal Annual Meeting, 2014,http://www.forbes.com/sites/phildemuth/2014/09/25/charlie-munger-and-the-2014-daily-journal-annual-meeting-part-two/#77dc5b3f3b7166. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e67.DailyJournalAnnualMeeting,2014,http://www.jianshu.com/p/4be97742ef5b68.DailyJournalAnnualMeeting,2014,http://www.jianshu.com/p/4be97742ef5b69.DailyJournalAnnualMeeting,2014,http://www.jianshu.com/p/4be97742ef5b70.http://today.law.harvard.edu/feature/money/71.BerkshireHathawayAnnualMeeting,May2000,fromAliceSchroeder,TheSnowball:WarrenBuffettandtheBusinessofLife(NewYork:Bantam,2008),p.57972.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/73.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/74.http://theinvestmentsblog.blogspot.com/2011/06/munger-two-kinds-of-businesses-part-ii.html75.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/76.http://theinvestmentsblog.blogspot.com/2013/06/buffett-and-munger-on-sees-candy.html77.Lowe,DamnRight,p.15078. Interview with the BBC, 2009, http://www.psyfitec.com/2009/10/buffett-and-munger-on-bbc.html79.https://old.ycombinator.com/munger.html80.https://old.ycombinator.com/munger.html81.WescoAnnualMeeting,2005,http://www.tilsonfunds.com/wscmtg05notes.pdf82.WescoAnnualMeeting,2005,http://www.tilsonfunds.com/wscmtg05notes.pdf83.WescoAnnualMeeting,2003,https://variantperceptions.wordpress.com/category/munger/84. Wesco Annual Meeting, 2008, mungerisms.blogspot.com/2009/08/2008-annual-meeting-notes.html85.WescoAnnualMeeting,2007,http://www.valuewalk.com/wp-content/uploads/2014/05/Charlie-Munger-2005-2013-minus-Harvard-Westlake.pdf86.http://thecharlieton.com/category/hedgefundnotes/87. Wesco Annual Meeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf88. Wesco Annual Meeting, 2010, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf89.WescoAnnualMeeting,2005,http://www.tilsonfunds.com/wscmtg05notes.pdf

90. Wesco Annual Meeting, 2008, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf91. Wesco Annual Meeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf92.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/93.http://www.quoteswise.com/charlie-munger-quotes-4.html94.Griffin,CharlieMunger,p.4295.http://www.gurufocus.com/news/119820/30-of-charlie-mungers-best-quotes96.Griffin,CharlieMunger,p.8597. Wesco Annual Meeting, 2010, http://www.fool.com/investing/value/2010/05/07/charlie-mungers-thoughts-on-just-about-everything.aspx98. Berkshire Hathaway Annual Meeting, 2011,http://www.fool.com/investing/general/2011/07/05/charlie-mungers-thoughts-on-the-world-part-2.aspx99.http://boundedrationality.wordpress.com/quotes/charlie-munger/100. Daily Journal Annual Meeting, 2015, http://www.gurufocus.com/news/394902/seeking-wisdom-from-charlie-munger101.http://www.valueinvestingworld.com/2014/10/charlie-munger-on-how-heinvested-when.html102.WescoAnnualMeeting,2007,http://www.valuewalk.com/wp-content/uploads/2014/05/Charlie-Munger-2005-2013-minus-Harvard-Westlake.pdf103.http://www.thepracticalway.com/2010/12/20/quotes-charlie-munger/104. Berkshire Annual Meeting, 2015, http://www.businessinsider.com/warren-buffett-charlie-munger-quotes-at-berkshire-hathaway-annual-meeting-2015-5105. Daily Journal Annual Meeting, 2014,http://www.forbes.com/sites/phildemuth/2014/10/08/charlie-munger-and-the-2014-daily-journal-annual-meeting-part-four/#1bef4833644b106.http://www.talkativeman.com/mungerisms-charlie-mungers-100-best-zingers-of-all-time/107.http://genius.com/Charlie-munger-usc-law-commencement-speech-annotated108. Wesco Annual Meeting, 2006, Question and Answers,https://www.goodreads.com/quotes/12934-we-all-are-learning-modifying-or-destroying-ideas-all-the109. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e110.https://www.gsb.stanford.edu/sites/default/files/38_Munger_0.pdf111. Wesco Annual Meeting, 2007, http://www.fool.com/investing/general/2014/09/07/warren-buffetts-right-hand-man-reveals-his-secrets.aspx112.WescoAnnualMeeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf113.WescoAnnualMeeting, 2009, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf114.WescoAnnualMeeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf115.WescoAnnualMeeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf116.https://truinn.wordpress.com/2014/04/30/wisdom-from-charlie-munger-i/117.Griffin,CharlieMunger,p.42118. Charles T. Munger, Poor Charlie’s Almanac: The Wit and Wisdom of Charles T. Munger,https://www.goodreads.com/author/quotes/236437.Charles_T_Munger119.DailyJournalAnnualMeeting,2015,http://www.bedelfinancial.com/blog/elaines-blog/warren-buffett-and-charlie-munger-more-than-investing/289/

120.Wesco Annual Meeting, 2007, http://www.fool.com/investing/general/2009/05/04/roundtable-buffetts-biggest-berkshire-bomb.aspx121. http://latticeworkinvesting.com/2016/02/13/charlie-munger-transcript-of-daily-journal-annual-meeting-2016/122.http://www.rbcpa.com/mungerspeech_june_95.pdf123.http://www.quoteswise.com/charlie-munger-quotes-2.html124. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e125. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/20/charlie-mungers-2015-daily-journal-annual-meeting-part-3/#20f8719d6f0e126.http://genius.com/Charlie-munger-usc-law-commencement-speech-annotated127.Schroeder,Snowball,p.198128. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/07/charlie-mungers-2015-daily-journal-annual-meeting-part-1/#39be30b31d62129. Daily Journal Annual Meeting, 2014,http://www.forbes.com/sites/phildemuth/2014/09/19/charlie-munger-and-the-2014-daily-journal-annual-meeting-a-fans-notes/#478bb4387384130. Daily Journal Annual Meeting, 2015,http://www.forbes.com/sites/phildemuth/2015/04/07/charlie-mungers-2015-daily-journal-annual-meeting-part-1/#39be30b31d62131.https://www.gsb.stanford.edu/sites/default/files/38_Munger_0.pdf132.http://genius.com/Charlie-munger-usc-law-commencement-speech-annotated133.WescoAnnualMeeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf134.WescoAnnualMeeting, 2004, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf135.WescoAnnualMeeting, 2006, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf136.WescoAnnualMeeting, 2007, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf137.WescoAnnualMeeting, 2005, http://www.bengrahaminvesting.ca/Resources/Books/The-Best-of-Charlie-Munger-1994-2011.pdf138.DailyJournalAnnualMeeting,2014,http://www.jianshu.com/p/4be97742ef5b

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DAVID CLARK’s international bestselling investment books, coauthoredwith Mary Buffett—Buffettology, The Buffettology Workbook, The NewBuffettology,TheTaoofWarrenBuffett,WarrenBuffettand the InterpretationofFinancialStatements,WarrenBuffett’sManagementSecrets,WarrenBuffettand theArt of StockArbitrage, andTheWarrenBuffett StockPortfolio—havebeen translated into more than twenty foreign languages and are considered“investmentclassics”theworldover.ClarkholdsaBSdegreeinfinanceandalaw degree from the University of California, Hastings College of the Law.Whennotconsumedwithmattersoffinance,heisengagedinthesecondgreatpassionofhislife,whichistriallaw,andmaintainsanactivenationalpractice.

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INDEX

Anoteabouttheindex:Thepagesreferencedinthisindexrefertothepagenumbersintheprintedition.Clickingonapagenumberwilltakeyoutotheebooklocationthatcorrespondstothebeginningofthatpageintheprintedition.Foracomprehensivelistoflocationsofanywordorphrase,useyourreadingsystem’ssearchfunction.

accounting,78accountingfirms,145accountingregulations,43aging,182,187,189AIG,42,89,138Allen,Woody,84arbitrage,Munger’searlyuseof,7,15arguments,perspectivementalexerciseon,206ArthurAndersen,145Asia

corporatetaxratesin,117corruptionin,111

autoindustry,103,112,128,146–47

Bacon,Francis,189Bagehot,Walter,207bankers,salariesof,76,105bankloans

carrytradesusing,109feesearnedfrom,101homemortgagesand,76incentivesformaking,115InternationalHarvesterdealershipsand,5LehmanBrothers’useof,109–10Long-TermCapitalManagement(LTCM)collapseand,45

BankofAmerica,68,77,108,124,207banks.Seealsoinvestmentbanks

debt-to-equityratiosof,118,140derivativestradingby,107–8individualdepositorsin,124inflationand,101investmentsin,77leverageusedby,105,106,139–40lobbyingby,105–6managementof,77marginofsafetyusedby,118regulationof,88,94–95,106too-big-to-failphilosophyon,89wealthcontrolledby,115,116

bankstocks,34Baruch,Bernard,2bearmarkets

beingreadytowadein,72–73buyingintoindexfundsin,83increasingvalueofunderlyingbusinessesin,121

BerkshireHathawayagingofMungerandBuffettat,189BlueChipStampmergedinto,8,10buy-and-holdphilosophyof,121consumermonopoliesand,129–30corporatecultureof,201decentralizedorganizationof,142–43FreddieMacinvestmentof,18holdingafewgoodcompaniesforthelongtermby,56Internetstockinvestmentsand,16investmentsduringrecessionsby,34keepingoperatingcostslowat,124largecashbalanceskeptreadyforinvestingby,35marketdeclinesandrecoveriesand,132–33masterplanat,141Munger’smoveto,10Munger’sroleat,1,10–11,209organizationalstructureof,178ownershipofexceptionalbusinessesin,64positioninginlatebullmarketsby,65–66qualityattractingqualityin,158rateofreturnof,21,34,35,121recognizingeconomicrealityofcompaniesin,60reinsurancebusinessof,60See’sCandiesand,8,127,129–30subsidiarycompaniesof,1,143–44taxesondividendsof,50–51textilebusinessof,8,127,131,143,175,178

timingofpurchasesfor,67–68Bernanke,Ben,89,92–93,96,97Berra,Yogi,93bias,incentive-caused,184–85biographies,180BlueChipStamp,7–8,9,10,128bondspreads,44–45Bono,183brand-nameproducts,andpricing,129–39BritishColumbiaPower(BCP),7bubbles.SeestockmarketbubblesBuffett,Warren

agingphilosophyof,187Berkshire’sdecentralizationand,142,143businessvaluationsand,68onCharlieMunger,1,11Chineseinvestmentsof,111consumermonopoliesand,129,130DiversifiedRetailingCompanyformedby,8–9familybackgroundof,2,4Graham’sinvestingphilosophyusedby,6,11,20–21,54,148,174“greatbusinessatafairprice”approachof,126holdinginvestmentsby,48–49investmentsinbanksby,77largecashbalanceskeptreadyforinvestingby,75lessonsfrombadbusinessesownedby,131Munger’sintroductionto,6over-the-counter(OTC)stockinvestmentsof,7–8ownershipofexceptionalbusinessesby,64seizingopportunitiesby,63stockssimilartoequitybondsinearningsand,39,40taxsheltersand,50–51Vincenti’sinfluenceon,205wadinginatrighttimeby,73workershiredby,201

bullmarketsoverpricedstocksavoidedin,54positioninginlate,65–66

BurlingtonNorthernRailroad,3,68business

investinginlong-termeconomicsof,15specializationforsuccessin,166trustingassociatesin,177

businessmodels,8,46,47,76,78,80,128businessplans,142BYDCompany,112

CaliforniaInstituteofTechnology(Caltech),4,159,163camerabusiness,169–70capitalcosts,41careeradvice,161carrytrades,109–10cashbalances,keepingforinvestments,35,38,55,62,65,72,75,82catechism,177centralbanks,99,159–60,207China

economicdevelopmentof,112freetradeand,113–14governmentbondsownedby,98,113–14PetroChinainvestmentand,111

circleofcompetence,16,25Citibank,108Citicorp,89,149Clausewitz,Carlvon,141clothingbusiness,9,203Coca-ColaCompany,190–91

annualgrowthof,asastrongcompany,190–91consistentproductsfrom,59consumers’trustandloyaltyin,81,130,159,203durablecompetitiveadvantageof,132–33asan“excellentcompany”withfewmistakes,52initialdecisiontobuy,21,68,75,130long-termholdingof,121moviemakingbusinessboughtby,122rateofreturnon,21

collegeeducation,focusof,163commercialbanks.Seealsobanks

deregulationof,88,94–95commissions,84

GEICO’seliminationof,123modelchangesandlevelof,184motivationand,84,184

competitiveadvantage,9,48,56,58–59,75,78,81,131,132–33,148,203Congress

Africanaidprojectand,183bankderegulationby,88banks’lobbyingof,105–6,108

consumermonopolies,129–30corporatetaxrate,117

corruption,inAsia,111Costco,123crashes.Seestockmarketcrashescredit

borrowedmoneyandconsumerspendingand,90–91mortgageloansand,76,90

creditcards,borrowingagainst,90creditdefaultswaps,42

DailyJournalCorporation,10,11,82DairyQueen,68Darwin,Charles,207debt

federal,98,114leverageusing,15,139,140stockarbitragewith,7wantingtogetrichfastusing,15

debt-to-equityratio,ofbanks,118,140decentralization,142–43depreciation,41derivatives,163

bankriskexposurein,108gamblingonshort-termpricedirectionin,15hiddenriskin,42liquidityand,152valueofmarketin,107–8WellsFargo’sexposurein,149

DexterShoeCompany,128,165diversification,9,29,74DiversifiedRetailingCompany(DRC),8–9dividends

buyingcompanieswhenhigh,36–37taxsheltersand,50–51

DowJonesIndustrialAverage(DJIA),33,36,100,132durablecompetitiveadvantage,48,56,58–59,75,78,81,131,132–33,148

EBITDA,41economy

banks’useofleverageand,105–6borrowedmoneyandconsumerspendingand,90–91corporatetaxrateand,117federaldebtand,98,114freetradeand,113–14,117,186governmentbondsownedbyChinaand,98,113–14GreatDepressionand,87housingbubble(2000s)and,92–93investmentofwealthand,115–16LehmanBrothers’failureand,109–10oilreservesand,102senseofentitlementand,104too-big-to-failbanksand,89WallStreetexcessesand,96wealtheffectand,97workethicand,103,104

Edison,Thomas,112,203education,focusof,163efficientmarkettheory,74–75Einstein,Albert,207employeeincentives,136–37encyclopediabusiness,169Enron,145entitlement,senseof,104envy,192Epictetus,202equitybonds,stockearningssimilarto,20–21,39,40EuropeanCentralBank(ECB),99exercise,philosophyof,187,200expectations

inmarriage,188ofworkers,188

failures,learningfrom,164,202–3federaldebt,98,114FederalDepositInsuranceCorporation(FDIC),140FederalExpress,136–37FederalReserveBank,78,90,92,98,159–60FederalReserveBankofNewYork,45felicity,199financeprofessors,74–75financialcompanies,42–43financialplanners,84FirstManhattan,8focusingskills,38,198forecasts,32Fortunemagazine,145Franklin,Benjamin,193FreddieMac(FederalHomeLoanMortgageCorporation),18free-marketphilosophy,92,94

freetrade,113–14,117,186Fried,Sam,197Friedman,Milton,112friendships,4,183FromThirdWorldtoFirst(Lee),154frugality,173FundofLetters,10

GEICO,123–24GeneralElectric(GE),68,112,138,143,154GeneralFoods,67GeneralMotors(GM),146–47GeneralRe,68Glass-SteagallActof1933,88globaleconomy

corporatetaxratesand,117freetradeand,113–14,117,186workethicandadvancementin,103

GoldmanSachs,68,89,108,149Gottesman,David“Sandy,”8Gould,StephenJay,207governmentbonds,Chineseownershipof,98,113–14Graham,Benjamin

Buffett’suseofinvestingphilosophyof,6,11,20–21,54,148,174buyingundervaluedstocksand,56errorinapproachof,23marginofsafetyconceptof,22–23,53onowningstockasowningpartofacompany,58valueinvestingphilosophyof,20,21

GreatDepression(1930s),3,87,103GreatRecession(2007–09),26,33,47,87,118Greece,debtof,98–99Greenspan,Alan,92,94Guerin,Rick,9–10GulfandWesternIndustries,122

H&RBlock,68happiness,199Harley-Davidson,68HarvardLawSchool,4,159health,200hedgefunds

beingreadyinbearmarketsand,73investmentmanagersand,46–47mispricedgamblesand,27MungerandBuffett’sownershipof,54

Hewlett-Packard,154highereducation,focusof,163high-techbusinesses,112,127Hitchcockfamily,4HochschildKohn,8–9,165,175honesty,201HongKong,117housingbubble(2000s),26,92–93

ideadestruction,175–76immigrants,asworkers,2–3incentive-causedbias,184–85incentives,employee,136–37indexfunds,29,31,83inflation,93,98,100–101,130,173insuranceagents,123insuranceindustry,8,25,42,94,101,123–24interest,andEBITDA,41interestrates

Fedloweringof,90inflationand,100short-termborrowingand,138unemploymentand,186wealtheffectand,97

InternationalHarvester,5Internet

newspaperbusinesschangesdueto,128Wikipediaon,169

Internetstocks,bullmarketbubble(1990s)in,16,48,68,92investing,13–84

beatingtheaveragein,83bettingonthequalityofthebusinessin,134–35bigideasin,159–60brand-nameproductsandpricingand,129–39bullmarketbubble(1990s)in,16,48,68,92businessvaluationsin,67–68buy-and-holdapproachto,121buyingafewgoodcompaniesforthelongtermin,56–57buyingasothersareselling(notfollowingtheherd),31circleofcompetencein,16Coca-Cola’sreturnsin,21–22commissionsand,84

companiesthatdon’tsurviveand,128companieswithhighdividends,36–37cyclicalfinancialcrisesand,33–34diversificationand,9,29durablecompetitiveadvantageand,48,56,58–59,75,78,81,131,132–33,148EBITDAtodetermineearningsand,41efficientmarkettheoryin,74–75enduringrareproblemsofcompaniesand,52evaluatingnewtechnologyin,81–82figuringoutworthofcompanybefore,22–23,39,58,67financialcompaniesin,42–43financialincentivesforratingscompaniesand,26findingunderpricedstocksafteramarketpanic,19fixingproblemspromptlyand,181focusingskillsin,38forecastsandpredictionsnotusefulin,32Graham’sphilosophyon,20,22–23“greatbusinessatafairprice”approachin,125–26holdinginvestmentsin,48–49,56–57ideadestructionthoughtprocessin,175–76ideologyin,174inflationand,100–101investmentmanagersand,46–47keepinglargecashbalancesreadyfor,35,38,62,65,72,75,82knowingwhatyoudon’tknowabout,16,25,162knowingwhentobuyheavilyin,30knowingwhentosellandwalkawayin,18learningcontinuallyaspartof,179,196learningfromfailuresin,164,202–3learningfrommistakesin,165lessonsfrombadbusinessesownedin,131forthelongterm.Seelong-terminvestingmakingmistakesin,165managementofbanksinvestedinand,77marginofsafetyin,22–23,53mergersand,122mispricedgamblesin,27–28nosimple,singleformulain,78–79notbeinganidiotin,17notbeingstupidin,61overconfidenceand,44–45asownershipoffractionalinterestinabusiness,58–59patiencein,32,38,69–71,82positioninginlatebullmarketsand,65–66preventingunfavorablesurprisesin,53psychologyand,159recognizingeconomicrealityofcompaniesin,60Rembrandtpricesanalogyin,39,40seizingopportunitiesin,62–63,82short-termversuslong-termviewin,15stockssimilartoequitybondsinearningsand,20–21,39,40successformulain,82taxadvantagesoflong-termholdingsin,24thinkingandreadingcontinuallyaspartof,167timingofpurchasesand,67–68tossingoutoldideasannuallyand,169tradingmodelsin,61,163underpricedstocksand,17understandingoddsin,4,54–55wadinginatrighttimein,72–73waitingaspartof,48–49wantingtogetrichfastin,15

investmentbankscarrytradesby,109–10debt-to-equityratiosof,118deregulationof,88,94–95financialincentivesforratingscompaniesfrom,26leverageusedby,105,106,139–40

investmentfunds,62,65,72,115–16investmentmanagers,46–47Iscar,148Italy,debtof,98–99

James,MarquisandJessieR.,207jealousy,192Jefferson,Thomas,193JMAdvisors,47Jobs,Steve,172joint-stockcompanies,151–52JPMorganChase,105,108,149JWMPartners,47

Kant,Immanuel,171,207Kendall,Dean,204Keynesianeconomictheory,186Kiewit,Peter,3,201Kiewitconstructioncompany,3knowingwhatyoudon’tknow,16,25,162

know-it-alls,162Kodak,170Kountzefamily,4

lawwork,181learning,lifelong,179,196LeeKuanYew,153–54LehmanBrothers,18,42–43,109–10,140Leibniz,GottfriedWilhelm,207leverage,195

banks’useof,105,106,139–40overconfidenceusing,44,45wantingtogetrichfastusing,15

lifeagingphilosophyin,182,187careeradvicefor,161exercisephilosophyin,187,200focusofeducationand,163friendshipsin,4,183handlingtragedyduring,197healthphilosophyin,200incrementalapproachtogettingaheadin,157know-it-allsand,162learningcontinuallyduring,179,196learningfromfailuresin,164,202–3marriageand,158moralimperativein,171notwhiningorquittingphilosophyof,194passionforsuccessin,172perspectivementalexerciseon,206savingandspendingwiselyand,168,173thinkingandreadingcontinuallyduring,167,180,193tossingoutoldideasannuallyduring,169–70truthandlyingtooneselfduring,204worryingand,182,195

liquidity,152loans.SeebankloansLong-TermCapitalManagement(LTCM),44–45,47long-terminvesting

buy-and-holdapproachto,121businessvaluationsand,68Coca-Cola’sreturnsasexampleof,21–22computertechnologystocksand,159durablecompetitiveadvantageofbusinessesand,58–59efficientmarkettheoryand,74frequentbuyingandsellingversus,24Graham’sinvestmentphilosophyon,20,23holdinginvestmentsaspartof,48–49,55–56marketdeclinesandrecoveriesand,132–33patienceneededfor,32,38,69–71,82short-termviewversus,15taxadvantagesof,24underpricedstocksand,17wantingtogetrichfastversus,15

LosAngelesCountryClub,167LosAngelesDailyJournal,10lyingtooneself,204

marginofsafetyinbankingindustry,118Grahamconceptof,22–23,53

marriage,158,188,199,201masterplans,141–42mathematicaltradingmodels,61,163MatsushitaElectric,122McDonald’s,150McFadden,Grant,181meatpackingcompanies,2,3mergers,122Meriwether,John,44,45,47MerrillLynch,42,89mispricing,27–28Moltke,Helmuthvon,141Moody’sCorporation,26,68moralimperative,171mortgages

bankers’greedinselling,76subprime,42–43,68,92,96,105,109–10

motivationcommissionsand,84,184investor’sgreedas,47

multitasking,198Munger,Charlie

Buffetton,1,11Buffett’sintroductionto,6childhoodintroductiontoworldofbusiness,2,3–4corporatelawworkof,5,8DailyJournalCorporationacquisitionby,10

DiversifiedRetailingCompanyformedby,8–9earlybusinessexperienceof,5earlyuseofarbitrageby,7,15educationandtrainingof,1,4familybackgroundandearlyyearsof,1–4firstinvestmentpartnershipof,6–7lawfirmof,6–7movetoBerkshireHathawayby,10over-the-counter(OTC)stockinvestmentsof,7–8,10roleatBerkshireHathawayheldby,1,10–11,209

Munger,Nancy,199Munger,Tolles,HillsandWoods,6–7mutualfunds

beingreadyinbearmarketsand,73mispricedgamblesand,27

NebraskaFurnitureMart,124,134–35,142,148NetJets,68NewAmericaFund,10newspaperindustry,10,25,128Newton,Isaac,207noncompeteclauses,134

odds,ininvesting,4,54–55oilreserves,102operatingcosts,123–24Oppenheimer,Robert,207organizationalstructure,178overconfidence,44–45overspending,168over-the-counter(OTC)stocks,7–8,10ownershipofbusiness,investingas,58–59

Pascal,Blaise,48passion,andsuccess,172patience,asinvestingstrategy,32,38,69–71,82Paulson,Hank,89,96perspectivementalexercise,206PetroChina,111PhilipMorris,133photographybusiness,169–70PinkSheets,7predictions,32problems,fixingpromptly,181psychology,159

R.J.Reynolds,67Rand,Ayn,92ratingscompanies,financialincentivesfor,26readinghabits,167,180,193recessions

cyclical,andinvestmentstrategies,33–34GreatRecession(2007–09),26,33,47,87,118

reinsurancecompanies,60Rembrandtpaintings,39,40retailclothingbusiness,9,203Ricardo,David,186richpeople

reactiontowealthby,189savingandspendingwiselyby,168wealthandinvestmentby,115–16

Rubin,Robert,94Russia,defaultingonrubleby,45

SalomonBrothers,165SanFranciscoDailyJournal,10Sartre,Jean-Paul,204SaudiArabia,102savingphilosophy,168,173Seagram,122See’sCandies,8,127,129–30,203senseofentitlement,104Shaw,GeorgeBernard,185shoebusiness,128,203short-terminvesting

long-termviewversus,15wantingtogetrichfastusing,15

Singapore,117,153–54SouthKorea,103SouthSeaBubble(1720s),151–52Spain,debtof,98–99specialization,166spendingphilosophy,168,173StarFurniture,68Stigum,Marcia,207stockbrokers,84stockmarket

beatingtheaveragein,83buyingasothersaresellingin,31cyclicalfinancialcrisesin,33–34financialincentivesforratingscompaniesand,26findingstocksafterapanicin,19forecastsandpredictionsin,32gamblingonshort-termpricedirectionin,15keepingstocksduringdeclinesandrecoveriesin,132–33knowingwhatyoudon’tknowaboutcompaniesin,16,25knowingwhentobuyheavilyin,30knowingwhentosellandwalkawayin,18over-the-counter(OTC)stocksin,7–8,10underpricedstocksin,17,19wantingtogetrichfastin,15

stockmarketbubblesborrowedmoneyandconsumerspendingcreating,90–91buyingandstockpricesafterendof,40cyclicalfinancialcriseswith,34derivativestradingand,108housing(2000s),26,92–93SouthSea(1720s),151–52technologystocks(1990s),16,48,68,92

stockmarketcrashesof1929and1932,22,36,132of1962,67of1973–74,9,33,54,67,165,203of1987,67–68of2007–09,68,82

stockpricesbuyingheavilyduringfallsin,30dropin,aftermarketpanics,19efficientmarkettheoryand,74–75gamblingonshort-termpricechangesin,15mispricedgambleswith,27–28positioninginlatebullmarketsusing,65–66Rembrandtpaintingpricessimilarto,39,40underpriced,17,19waitingforrightprice,71

stocks,assimilartoequitybondsinearnings,20–21,39,40subprimemortgages,42–43,68,92,96,105,109–10subsidiarycompanies,1,143–44success,andpassion,172

taxescorporate,117EBITDAand,41long-terminvestingadvantagesfor,24

taxshelters,50–51technologystocks,127,159

bullmarketbubble(1990s)in,16,48,68,92Teller,Edward,207TeslaMotors,112TexasInstruments,154textilebusinesses,8,112,127,131,143,175,178,203TimesMirrorCompany,67tradingmodels,61,163Treasurybonds,44,98trustingassociates,177truth,204,205Twain,Mark,207TwentiethCentury–Fox,5

underpricedstocksfindingafterastockmarketpanic,19investingforthelong-termin,17,56–57

unemployment,33,87,90,93,97,186UnionPacificRailroad,2,3USAirways,164U.S.Bank,77USAirlines,165universityeducation,focusof,163UniversityofMichigan,4,204

Vincenti,Louis,205Volcker,Paul,67

waiting,69–71.SeealsopatienceWangChuanfu,112WashingtonPost,67,128Wayne,John,194wealth

controlof,115–16reactiontohaving,189savingandspendingwiselyand,168

wealtheffect,97Welch,Jack,112,143WellsFargoBank,34,59,68,75,77,82,89,121,149,160,203

WescoFinancialCorporation,8,10,205Wilmott,Paul,107Wilson,E.O.,207workersandworklife

careeradvicefor,161expectationsand,188fixingproblemspromptlyand,181honestyand,201immigrantsas,2–3incentivesfor,136–37organizationalstructureand,178passionforsuccessand,172thinkingandreadingcontinuallyby,167

workethic,103,104workhabits,atMcDonald’s,150worrying,182,195

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TableofContentsCoverDedicationSourceNoteIntroductionPartI:Charlie’sThoughtsonSuccessfulInvesting

#1.FastMoney#2.CircleofCompetence#3.AvoidBeinganIdiot#4.WalkingAway#5.EasyShooting#6.Revelation#7.Graham’sError#8.SittingonyourAss#9.TheDawningofWisdom#10.Analysts#11.AMispricedGamble#12.Diversification#13.WhentobetHeavily#14.TheHerd#15.Foresight#16.FinancialCrisisEqualsOpportunity#17.CashisKey#18.ADemoralizedGeneration#19.Patience#20.StockPrices#21.Ebitda#22.DangersofFinanceCompanies#23.Overconfidence#24.InvestmentManagers#25.Waiting#26.TaxShelters#27.EnduringProblems#28.Surprises#29.UnderstandingtheOdds#30.AfewGoodCompanies

#31.OwnershipofaBusiness#32.RecognizingReality#33.NotbeingStupid#34.Opportunity#35.TheFutureofBerkshireHathaway#36.FinancialDementia#37.BusinessValuations#38.WaitingistheHardestPart#39.Wadingin#40.AcademicSorcery#41.GreedyBankers#42.InvestinginBanks#43.NoSingleFormula#44.OnTechnology#45.SuccessfulInvesting#46.BeatingtheAverage#47.Commissions

PartII:CharlieonBusiness,Banking,andtheEconomy#48.TheGreatDepression#49.RegulatingBanks#50.TooBigtoFail#51.BorrowedMoney#52.Free-MarketFolly#53.BankingDeregulation#54.WallStreetExcesses#55.TheWealthEffect#56.PrintingMoney#57.AssetInflation#58.OilReserves#59.Korea#60.Carrots&Sticks#61.Out-of-ControlBankers#62.DerivativeDanger#63.Carry-TradeFolly#64.CorruptioninAsia#65.TheMiracleofChina#66.FreeTrade#67.TheMiser#68.CorporateTaxes

#69.ReducingStandardsPartIII:Charlie’sPhilosophyAppliedtoBusinessandInvesting

#70.BuyandHold#71.CorporateMergers#72.GoingtoExtremes#73.Big-MoneyEquation#74.TwoKindsofBusinesses#75.FewCompaniesSurvive#76.See’sCandies#77.EasyDecisions/PainfulDecisions#78.MarketDeclines#79.WheretoPlaceourBet#80.Incentives#81.AIGandGE#82.LessLeverage#83.MasterPlans#84.Decentralization#85.Enron#86.GM#87.Iscar#88.WellsFargo#89.McDonald’s#90.Liquidity#91.Singapore

PartIV:Charlie’sAdviceonLife,Education,andthePursuitofHappiness#92.OneStepataTime#93.WhatweDeserve#94.UsingBigIdeas#95.CareerAdvice#96.Know-it-Alls#97.AWasteofEducation#98.AdmittingStupidity#99.MakingMistakes#100.Specialization#101.NotWorking#102.NotLivingBeyondourMeans#103.OutwiththeOld#104.AMoralImperative#105.SecretofSuccess

#106.BeingFrugal#107.Ideology#108.IdeaDestruction#109.Catechism#110.Cookie-CutterSolutions#111.LearningMachines#112.SecrettoWisdom#113.LegalBusiness#114.GettingOlder#115.PositiveReinforcement#116.Incentive-CausedBias#117.Narrow-Mindedness#118.LivingWell#119.MarriageAdvice#120.TheWorriedRich#121.TheCoca-ColaCompany#122.Envy#123.Reading#124.TakingtheBlows#125.UselessWorry#126.LearningMachines#127.Tragedy#128.Multitasking#129.Felicity#130.Health#131.ASeamlessWeb#132.MissedChances#133.LyingtoOneself#134.Truth#135.Perspective#136.Multidiscipline#137.Civilization#138.Reflection

AcknowledgmentsSourcesAbouttheAuthorIndexCopyright