The Essays of Warren Buffett by Lawrence Cunningham

The Essays of Warren Buffett by Lawrence Cunningham

The Book in a Few Sentences

The most comprehensive book on Buffett that I’ve read (out of half a dozen). Learn everything you ever wanted to know about management, investment, finance and accounting from one of the world’s smartest businessmen and investors.

The Essays of Warren Buffett summary

This is my book summary of The Essays of Warren Buffett by Lawrence Cunningham. My summary and notes include the key lessons and most important insights from the book.

Preface

  • As the book Buffett autographs most, its popularity and longevity attest to the widespread appetite for this unique compilation of Buffett’s thoughts that is at once comprehensive, non-repetitive, and digestible.

Introduction

  • As organized, the essays constitute an elegant and instructive manual on management, investment, finance, and accounting.
  • Having first-rate people on the team is more important than designing hierarchies and clarifying who reports to whom about what and at what times.
  • As Buffett explains, however, simply by retaining and reinvesting earnings, managers can report annual earnings increases without so much as lifting a finger to improve real returns on capital. Stock options thus often rob shareholders of wealth and allocate the booths to executives. Moreover, once granted, stock options are often irrevocable, unconditional, and benefit managers without regard to individual performance.
  • Better yet, as at Berkshire, stock options should simply not be part of an executive’s compensation.
  • Many professionals still believe that stock market prices always accurately reflect fundamental values, that the only risk that matters is the volatility of prices…
  • Long-term investment success depends not on studying betas and maintaining a diversified portfolio, but on recognizing that as an investor, one is the owner of a business.
  • Buffett follows the principle devotedly, noting that Graham had said that if forced to distill the secret of sound investment into three words, they would be: margin of safety.
  • …the term “value investing” is a redundancy. All true investing must be based on an assessment of the relationship between price and value. Strategies that do not employ this comparison between price and value do not amount to investing at all, but to speculation—the hope that price will rise, rather than the conviction that the price being paid is lower than the value being obtained.
  • The circle of competence principle is the third leg of the Graham/Buffett stool of intelligent investing, along with Mr. Market and the margin of safety. The commonsense rule instructs investors to consider investments only concerning businesses they are capable of understanding with a modicum of effort.
  • Buffett laments, “as happens in Wall Street all too often, what the wise do in the beginning, fools do in the end.”
  • Earnings retention is justified only when “capital retained produces incremental earnings equal to, or above, those generally available to investors.”
  • Buffett emphasizes that useful financial statements must enable a user to answer three basic questions about a business: approximately how much a company is worth, its likely ability to meet its future obligations, and how good a job its managers are doing in operating the business.
  • The ultimate point to understand about accounting is that it is a form. As a form, it cam be manipulated.

Prologue: Owner-Related Business Principles

  • 1. Although our form is corporate, our attitude is partnership.
  • 2. …most of our directors have a major portion of their net worth invested in the company. We eat our own cooking.
  • 3. Our long-term economic goal is to maximize Berkshire’s average annual rate of grain in intrinsic business value on a per-share basis.
  • 4. Our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and constantly earn above-average returns on capital.
  • 5. Charlie and I pay a great deal of attention to how well our businesses are doing, and we also work to understand the environment in which each business is operating.
  • 6. In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.
  • 7. We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis. The financial calculus that Charlie and I employ would never permit our trading a good night’s sleep for a shot at a few extra points of return. I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.
  • 8. We will only do with your money what we would do with our own…
  • 9. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained.
  • 10. We will issue common stock only when we receive as much business value as we give.
  • 11. Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations.
  • 12. We will be candid in our reporting to you, emphasizing the pluses and minuses important in appraising business value. The CEO who misleads others in public may eventually mislead himself in private.
  • 13. Despite our policy of candor we will discuss our activities in marketable securities only to the extent legally required.
  • 14. To the extent possible, we would like each Berkshire shareholder to record a gain or loss in market value during his period of ownership that is proportional to the gain or loss in per-share intrinsic value recorded by the company during that holding period.
  • 15. We regularly compare the gain in Berkshire’s per-share book value to the performance of the S&P 500. Over time, we hope to outpace this yardstick. Otherwise, why do our investors need us?

I. Corporate Governance

  1. Full and Fair Disclosure
  • At Berkshire, full reporting means giving you the information that we would wish you to give to us if our positions were reversed. What Charlie and I would want under that circumstance would be all the important facts about current operations as well as the CEO’s frank view of the long-term economic characteristics of the business.
  • The requisites for board membership should be business savvy, interest in the job, and owner-orientation.
  • In Matthew 6:21 He observed: “For where your treasure is, there will your heart be also.”
  • In our view, based on considerable boardroom experience, the least independent directors are likely to be whose who receive an important fraction of their annual income from the fees they receive for board service.
  • …self-interest inevitably blurs introspection.
  • Charlie and I really have only two jobs. One is to attract and keep outstanding managers to run our various operations. [The other is capital allocation, discussed in Parts II and VI.]
  • When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept, or uninterested, you will find yourself with more than you can handle.
  • On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous.
  • But when short-term and long-term conflict, widening the moat must take precedence.
  • My conclusion from my own experience and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
  • When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.”)
  • Many corporate compensation plans reward managers handsomely for earnings increases produced solely, or in large part, by retained earnings—i.e., earnings withheld from owners.
  • …options should be priced at true business value.
  • CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options.
  • Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets.
  • In setting compensation, we like to hold out the promise of large carrots, but make sure their delivery is tied directly to results in the area that a manager controls.
  • Indeed, the combination of a ten-year option, a low dividend payout, and compound interest can provide lush gains to the manager who has done no more than tread water in his job.
  • We have carefully designed both the company and our jobs so that we do things we enjoy with people we like. Equally important,  we are forced to do very few boring or unpleasant tasks.
  • If you can’t tell whose side someone is one, they are not on yours.
  • “We can afford to lose money—even a lot of money. But we can’t afford to lose reputation—even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.
  • Sometimes your associates will say “Everybody else is doing it.” This rationale is almost always a bad one if it is the main justification for a business action. It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as a rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives you this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.
  • When auditors are put on the spot, they will do their duty. If they are not put on the spot…well, we have the results of that.
  • Cultures self-propagate. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior. 
  • Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent. 

II. Finance & Investing

  • …we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values.
  • You don’t need to be an expert in order to achieve satisfactory investment returns.
  • When promised quick profits, respond with a quick “no.”
  • Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on.
  • If you instead focus on the prospective price change of a contemplated purchase, you are speculating.
  • Games are won by players who focus on the playing field—not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.
  • Forming macro opinions or listening to the macro or market predictions of others is a waste of time….I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”
  • Owners of stocks, however, too often let the capricious and often irrational behavior of their fellow owners cause them to behave irrationally as well. Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc, some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments.
  • Indeed, tumbling markets can be helpful to the true investor if he has cash available when prices get far out of line with values. A climate of fear is your friend when investing; a euphoric world is your enemy. 
  • In the 54 years we have worked together, we have never foregone an attractive purchase because of the macro or political environment, or the views of other people. 
  • Whenever Charlie and I buy common stocks for Berkshire’s insurance companies, we approach  the transaction as if we were buying int a private business. We look at the economic prospects of the business, the people in charge running it, and the price we must pay.
  • We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate. When investing, we view ourselves as business analysts—not as market analysts, not as macroeconomic analysts, and not even as security analysts.
  • Rather an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behaviors from the super-contagious emotions that swirl about the marketplace. 
  • The market may ignore business success for a while, but eventually it will confirm it. As Ben [Graham] said: “In the short run, the market is a voting machine but in the long run it is a weighting machine.”
  • What’s the sense to in getting rich just to stare at a ticker tape all day?
  • In our view, what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of the business.
  • Charlie and I decided long ago that in an investment lifetime it’s too hard to make hundreds of smart decisions.
  • Indeed, we’ll now settle for one good idea a year.
  • In fact, the true investor welcomes volatility.
  • That’s true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.

The primary factors bearing upon this evaluation are:

  • 1. The certainty with which the long-term economic characteristics of the business can be evaluated;
  • 2. The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows;
  • 3. The certainty with which management can be counted on to channel the reward from the business to the shareholders rather to itself;
  • 4. The purchase price of the business;
  • 5. The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor’s purchasing-power return is reduced from his gross return.
  • By periodically investing in an index fund, for example, the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when “dumb” money acknowledges its limitations, it ceases to be dumb.
  • Our motto is: “If at first you do succeed, quit trying.”
  • In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the asset.
  • An investor needs to do very few things right as long as he or she avoids big mistakes.
  • If we calculate the value of a common stock to be only slightly higher than its price, we’re not interesting in buying.
  • [A]n intelligent investor in common stocks will do better in the secondary market than he will do buying new issues.
  • To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.
  • But I would rather be certain of a good result than hopeful of a great one.
  • Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.
  • You have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
  • Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards—so when you see one that qualifies, you should buy a meaningful amount of stock. 
  • You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.
  • Time is the friend of the wonderful business, the enemy of the mediocre.
  • I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. 
  • To the extent that we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.
  • After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.
  • We’ve never succeeded in making a good deal with a bad person.
  • Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds—though we have learned to live with those also.
  • Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by zero always equals zero.
  • When leverage works, it magnifies your gains. Your spouse things you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices.
  • History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.
  • Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.

III. Investment Alternatives

  • Having loads of liquidity, though, lets us sleep well. Moreover, during the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offense while others scramble for survival.
  • The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else—will pay more for them in the future. 
  • This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce—it will remain lifeless forever—but rather by the belief that the others will desire it even more avidly in the future.
  • My own preference—and you knew this was coming—is the third category: investment in productive assets, whether businesses, farms, or real estate.
  • I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.
  • Lethargy bordering on sloth remains the cornerstone of our investment style…
  • The most common cause of low prices is pessimism—sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.
  • In an unregulated commodity business, a company must lower its costs to competitive levels or face extinction.
  • Whatever the outcome, we will heed a prime rule of investing: You don’t have to make it back the way that you made it.
  • …the cemetery for seers has a huge section set aside for macro forecasters. We have in fact made few macro forecasts at Berkshire, and we have seldom seen others make them with sustained success.
  • Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 yers, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of  the purchaser.

IV. Common Stock

  • Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree.
  • Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy when others are fearful.
  • What could be more exhilarating that to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. Unfortunately, however, stocks can’t outperform businesses indefinitely.
  • Indeed, because of the heavy transaction and investment management costs they bear, stockholders as a whole and over the long term must inevitably underperform the companies they own. 
  • Bull markets can obscure mathematical laws, but they cannot repeal them.
  • …the most that owners in aggregate can earn between now and Judgment Day is what the businesses in aggregate earn.
  • In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.
  • For investors as a whole, returns decrease as motion increases.
  • [T]ransaction costs are very heavy for active stocks, often amounting to 10% or more of the earnings of a public company. In effect, these costs act as a hefty tax on owners, albeit one based on individual decisions to “change chairs” and one that is paid to the financial community rather than to Washington.
  • In many businesses—particularly those that have high asset/profit ratios—inflation causes some or all of the reported earnings to become ersatz.
  • Unrestricted earnings should be retained only when there is a reasonable prospect—backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future—that for every dollar retained by the corporation, at least one dollar of market value will be created by owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.
  • …major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. 
  • Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended.
  • There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds—cash plus sensible borrowing capacity—beyond the near-term market needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated. 
  • But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.
  • But wishing makes dreams come true only in Disney movies; it’s poison in business.
  • Indeed, disciplined repurchases are the surest way to use funds intelligently: It’s hard to go wrong when you’re buying dollar bills for $.80 or less.
  • But never forget: In repurchase decisions, price is all-important. Value is destroyed when purchases are made above intrinsic value.

V. Mergers and Acquisitions

  • Managers who want to expand their domain at the expense of owners might better consider a career in government.
  • A cumulation of small management stupidities will produce a major stupidity—not a major triumph. (Las Vegas has been built upon the wealth transfers that occur when people engage in seemingly-small disadvantageous capital transactions.)
  • Only in the sales presentations of investment banks do earnings move forever upward.
  • We find it meaningful when an owner cares about whom he sells to. We like to do business with someone who loves his company, not just the money that a sale will bring him (though we certainly understand why he likes that as well).
  • When this emotional attachment exists, it signals that important qualities will likely be found within the business: honest accounting, pride of product, respect for customers, and a loyal group of associates having a strong sense of direction.

VI. Valuation and Accounting

  • Their [LBO] new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquired’s capital structure compared to that previously existing.
  • Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business.
  •  Nothing sedates rationality like large doses of effortless money.
  • By shamelessly merchandising bridles bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them.
  • First, many in Wall Street—a community in which quality control lis not prized—will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.
  • Really juicy results from negotiated deals can be anticipated only when capital markets are severely constrained and the whole business world is pessimistic.
  • [Intrinsic value is] an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. 
  • Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.
  • The value to Berkshire Hathaway of retained earnings is not determined by whether we own 100%, 50%, 20% or 1% of the businesses in which they reside. Rather, the value of those retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage.
  • The goal of each investor should be to create a portfolio (in effect, a “company”) that will deliver him or her the highest possible look-through earnings a decade or so from now.
  • In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.
  • The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.
  • In contrast, a disproportionate number of the great business fortunes built up during the inflationary years arose from ownership of operations that combined intangibles of lasting value with relatively minor requirements for tangible assets.
  • During inflation, Goodwill is the gift that keeps giving.
  • In analysis of operating results—that is, in evaluating the underlying economics of a business unit—amortization charges should be ignored.
  • In evaluating the wisdom of businesses acquisitions, amortization charges should be ignored also.
  • Investors are often led astray by CEOs and Wall Street analysts who equate depreciation charges with the amortization charges we have just discussed. In no way are the two the same: With rare exceptions, depreciation is an economic cost every bit as real as wages, materials, or taxes.
  • In contrast, economic goodwill does not, in many cases, diminish. Indeed, in a great many instances—perhaps most—it actually grows in value over time.
  • But “cash flow” is meaningless in such businesses as manufacturing, retailing, extractive companies, and utilities because, for them, (c) [the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume] is always significant.
  • In effect, accounting principles offer management a choice: Pay employees in one from [salary] and count the cost, or pay them in another form [stock options] and ignore the cost. Small wonder then that the use of options has mushroomed.

VII. Accounting Shenanigans

  • A few years ago we asked three questions to which we have not yet received an answer: “If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”
  • Beware the glib helper who fills your head with fantasies while he fills his pockets with fees.
  • Operating earnings, despite having some shortcomings, are in general a reasonable guide as to how our businesses are doing.

VIII. Taxation

  • Because of the way the tax law works, the Rip Van Winkle style of investing that we favor—if successful—has an important mathematical edge over the more frenzied approach.
  • We have found spending business relationships to be so rare and so enjoyable that we want to retain all that we develop. This decision is particularly easy for us because we feel that these relationships will produce good—though perhaps not optimal—financial results. Considering that, we think it makes little sense for us to give up time with people we know to be interesting and admirable for time with others we do not know and who are likely to have human qualities far closer to average.
  • Charlie and I would follow a buy-and-hold policy even if we ran a tax-exempt institution.
  • …tax-paying investors will realize a far, far greater sum from a single investment that compounds internally at a given rate than from a succession of investments compounding at the same rate.

IX. Berkshire at Fifty and Beyond

  • Equity is dramatically reduced and debt is piled on in virtually all private-equity purchases. Indeed, the amount that a private-equity purchaser offers to the seller is in part determined by the buyer assessing the maximum amount of debt that can be placed on the acquired company.
  • In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.
  • Financial staying power requires a company to maintain three strengths under all circumstances: (1) a large and reliable stream of earnings; (2) massive liquid assets; and (3) no significant near-term cash requirements.
  • Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only think in mind when it is absent.
  • Though practically all days are relatively uneventful, tomorrow is always uncertain. 
  • In our view, it is madness to risk losing what you need in pursuing what you simply desire
  • Although our form is corporate, our attitude is partnership.
  • Berkshire is primarily a job of capital allocation, coupled with election and retention of outstanding managers to captain our operating subsidiaries.
  • A CEO’s behavior has a huge impact on managers down the line: If it’s clear to them that shareholders’ interests are paramount to him, they will, with few exceptions, also embrace that way of thinking.
  • My successor will need one other particular strength: the ability to fight off the ABCs of business decay, which are arrogance, bureaucracy and complacency.
  • If our non-economic values were to be lost, much of our economic value would collapse as well.
  • To a large degree, both good and bad cultures self-select to perpetuate themselves.
  • Buffetts decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza.
  • And Buffett held self-delusion at bay as he under claimed expertise while he knew better than most corporate executives what worked and what didn’t in business, aided by his long experience as a passive investor. And, finally, even when Berkshire was getting much better opportunities than most others, Buffett often displayed almost inhuman patience and seldom bought.
  • Ted Williams, in The Story of My Life, explains why: “My argument is, to be a good hitter, you’ve got to get a good ball to hit. It’s the first rule in the book. If I have to bite at stuff that is out of my happy zone, I’m not a .344 hitter. I might be a .250 hitter.
  • Fear is a foe of the faddist, but the friend of the fundamentalist.
  • Casey Stengel described managing a baseball team as “getting paid for home runs other fellows hit.” That’s my formula at Berkshire, also. 
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