Buffett and Munger: A Study in Simplicity and Uncommon, Common Sense by Peter Bevelin

Summary

A very interesting dialogue between Warren Buffett, Charlie Munger, the “librarian” and the “seeker” of knowledge. The dialogue discusses how to live a successful, happy and fulfilling life, what to avoid in life and in business and how to improve mental biases and heuristics in order to make better decisions

Key Takeaways

On fatal mistakes, prevention and simplicity
1. Mistakes are a fact of life
2. Don’t bother about mistakes that don’t actually matter
3. Avoiding problems is better than being forced to solve them
4. If we understand what works and not, we know what to do
5. It is better to try to be consistently not stupid than to be very intelligent
6. Thinking backwards is a great tool for solving problems
7. Keep it simple and make it easy for yourself
8. The secret is ignorance removal
On what doesn’t work and what does
1. Find and marry a lousy person
2. Turn our body and mind into a wreck
3. Only learn from your own terrible experiences
4. Use a hammer as your only tool and approach every complex problem as if it was a nail
5. Go through life with unreasonable expectations
6. Only take care of your own interest
7. Blindly trust and follow the recommendations of advisors and salesmen
8. Mindlessly imitate the latest fads and fashions
9. Overly care what other people think about you
10. Let other people set your agenda in life
11. Live above your means
12. Go heavily into debt
13. Go down and stay down when bad things happen
14. When in trouble, feel sorry for yourself
15. Be envious
16. Be unreliable and unethical
17. Be a jerk and treat people really badly
18. Have a job that makes you feel miserable
19. Work with something that goes against your nature and talent
20. Believe you know everything about everything
21. Associate with assholes
22. Distort your problems so they fit your wishes
23. Stick to, justify and rationalize your actions no matter how dumb they are
24. Be an extreme ideologue
25. Make it easy for people to cheat, steal and behave badly
26. Risk what you have and need, to get what you don’t need
27. Only look at the sunny upside (over stress the downside)
On what else doesn’t work and what does in business and investing
1. Invest your money in overpriced assets – preferably businesses without any competitive advantages or future and with lousy and crooked management
2. If you are a businessman think like an investor and if you’re an investor, think like a businessman
3. Investing is about where to allocate your capital
4. Buy “wrongly” cheap productive assets you understand
5. Things are often cheapest when people are fearful and pessimistic
6. Be opportunistic and adapt and change when the facts and circumstances change
7. Stick to businesses where you can assess that their economics is good and getting better
8. Buy assets protected with a durable competitive advantage run by able and honest people
9. Understand why it has a moat – the key factors and their permanence
10. One test of the strength of a moat is essentiality and pricing power
11. Go in a field, in which you have no interest, not any competence or talent for, no edge in and where the competition is huge
12. Think about where the business is going to be in the future – not the macro factors
13. Common sense is better than advanced math and computer models
On filters and rules
1. The right filters conserve thought and simplify life
2. Never lose sight of what you’re trying to achieve or avoid
3. The tune out “folly” filter
4. The important and knowable filter
5. The circle of competence filter
6. The too tough filter
7. The opportunity cost filter
8. The “and then what?” filter
9. The “compared to what?” filter
10. Checklists help – assuming of we are competent enough to pick the key factors and evaluate them
11. Have some avoid-rules
12. Learning never stops

What I got out of it

An incredible book on heuristics, mental biases, how to live, how to not live, what to avoid, the importance of thinking backwards. Highly recommend and will re-read many times moving forward

Buffett and Munger have an amazing ability to eliminate folly, simplify things and boil down issues to their essence and get right to the point and focus on simple and timeless truths. Succeed because rational and very seldom let extraneous factors interfere with their thoughts
Making better decisions helps avoid a lot of misery
Start out with failure and then engineer out its removal
Einstein’s razor – things should be made as simple as possible, but no simpler
The more basic knowledge you have, the less new knowledge you have to get
Seeking Synthesis – always putting things in context and having a latticework mindset, linking the largest areas and using/always adding to your toolbox
The very successful say no to almost everything – you must keep control of your time
Consistently rub your nose in your own mistakes
Best way to avoid envy is to plainly deserve the success you get
Set up a system and environment which plays to strengths and minimizes weaknesses
Ignorance more often begets confidence than does knowledge
There is enormous efficiency in good character. If crooks knew how profitable being honest is, they would be
Knowing what you ultimately want to accomplish makes it easier for you to decide what is and is not important
Good question for field you know little about – “can you give me a very simple example and explanation for what you’re talking about?”
To speak/write clearly is to think clearly – orangutan test
Iron rule of nature is you get what you reward for
No need for extra analysis – just know what you need to know
Attractive opportunities come from capitalizing on human behavior (fear, pessimism, greed)
Understanding a business should always be filter #1
Best way to understand moats and their key factors and permanence is to study companies who have achieved them
Almost always easier to figure out who loses (short horses rather than long autos)
Franchise – another word for moats, a product or service that: is needed or desired; is thought by its customers to have no close substitute and; is not subject to price regulation. These three allow a company to regularly price its product or service to earn high ROC. The test of a franchise is what a smart guy with a lot of money could do it if he tried. The real test of a business is how much damage a competitor can do, even if he is stupid about returns
Share of mind matters more than share of market
Best business by far has high ROC with little need of incremental capital to grow at high rates
If you had $1b, could you compete? – silver bullet question (ask CEOs if they could kill one competitor, who would it be and why?)
- When speaking with management ask “If roles reversed, what would you ask if I were running your business?
Northern Pike Model – if you introduce a dominant species, they will soon take over (as WalMart did early on)
You don’t have to make money back the same way you lost it
It’s simple, to be a winner, work with winners – get great management and let them do their thing
if you can detach yourself temperamentally from the crowd, you’ll end up being very successful
What is important and knowable? Ignore the rest
Wall of Shame for things / investments that have been mistakes (don’t forget to include omissions!)
Always consider higher order effects and the implications