The Berkshire Hathaway annual meeting was this past weekend. Warren Buffett and Charlie Munger were back to their old ways.
Though, Buffett rambled a bit more than usual. Which probably cut the number of questions in half.
But the lessons were still there. The main takeaway from this year’s meeting is about avoiding the many ways investors can lose money. Let’s dive in.
The Gambling Instinct
The market has been extraordinary. Sometimes it’s quite investment oriented. It’s always what you’ve read about in the books and everything — what capital markets are supposed to do, and you study it in school and all that. And other times, it’s almost totally a casino, and it’s a gambling parlor.
And that existed to an extraordinary degree in the last couple of years — encouraged by Wall Street because the money is in turning over stocks. I mean, people say how wonderfully you’ve done if you bought Berkshire in, you know, 1965 or something and held it. But your broker would’ve starved to death.
Wall Street makes money on — one way or another — catching the crumbs that fall off a table of capitalism… And they make a lot more money when people are gambling than when they’re investing. It’s much better to have somebody that’s going to trade 20 times a day and get all excited about it, just like pulling the handle on a slot machine. — Warren Buffett
Gambling in the stock market has gone on for centuries and will continue because most people don’t see it as gambling. They see it as an opportunity to get rich quickly because a handful of people got lucky doing the same thing.
Except, it’s a losing endeavor. It leads to more trading, higher costs, and inevitable losses. Millions have tried it before and failed.
But there is an upside to gambling for those who choose to invest for the long run.
I think we’ve made more because of the crazy gambling. I think it’s made it easier for us, net, over the decades we’ve been operating. — Charlie Munger
We depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing of them. And overall, we learned something a long time ago, that it doesn’t take a high IQ. It doesn’t take anything. It just takes the right attitude. — Warren Buffett
Gambling creates opportunities. In fact, if you pay attention to the markets long enough, you’ll realize that the stock market provides multiple chances to buy at discounted prices.
But the opportunities alone aren’t enough. You need the “right attitude” — patience, discipline, courage, etc. — because behavior has a huge impact on returns. When you combine good behavior and discounted prices, your returns can be extraordinary.
I totally missed, you know, in March of 2020. We have not been good at timing. We’ve been reasonably good at figuring out when we were getting enough for our money. And we had no idea when we bought anything — well, we always hoped it would go down for a while so we could buy more, and we hoped even after we were done buying and ran out of money that if it was cheap the company would keep buying, in effect, taking our interest up.
And so never give us any credit… We haven’t ever timed anything. We’ve never figured out insights into the economy. — Warren Buffett
In addition to the quote above, Buffett told the story of being too early in buying during the financial crisis in 2008. Had he waited six months, he would have made more money. Of course, he only knows that in hindsight.
What Buffett is good at is buying when the value is there. He’s not good at timing the market. Nobody is. Trying to forecast the swings in the market is just as bad as gambling in it.
Inflation — the question is how much… The answer is nobody knows… You can listen to all kinds of stuff, but nobody knows how much inflation there will be over the next 10 years or 20 years or 50 years or next month.
And people talk about it all the time, because you’re interested in knowing the answer to your question. And they don’t know the answer, but there are a lot of people that will tell you they know the answer if you pay them enough. And other people that will tell you for nothing, because they think it enhances their prestige and makes them more valuable and all that.
But the answer is they don’t know. And we don’t know either. — Warren Buffett
It’s not just inflation. It’s the stock market. It’s the economy. We want to know what’s going to happen next.
And there will always be charlatans willing to take your money or attention in exchange for an answer. Be aware that their talent is sounding believable. They don’t have a crystal ball or any unique insight into the future. Most likely, they got lucky once and have been living off it ever since.
The best we can do is look at the past to give us a rough guide to the future. Of course, the past is only a rough guide because drawing from past experiences, changes our behavior and our actions, and impacts how things play out going forward.
Of course, inflation is never the same. Nothing in economics is the same the second time after it happens than the first, because the first affects people’s attitudes in the second, and their attitudes always influence the activity itself. I mean, it is an interesting phenomenon. People write a textbook, and they write it based on the last experience. And people read the textbooks, so they behave differently next time. And then they wonder why they’re getting a different result than they got the time before. — Warren Buffett
So the next crisis, the next crash, the next speculative mania is never exactly the same as the last. It merely rhymes.
Learning from Mistakes
Warren Buffett: It is incredible how many dumb decisions we made. Charlie and I bought that…department store, and that was in 1966. And, you know, we were working with our own money. And why in the world did we think… But the whole idea was crazy. And we got there for a little while, and we figured it out, finally.
Charlie Munger: We reversed course.
Warren Buffett: Yeah. But why the hell did we do it in the first place?
Charlie Munger: Well, because we were stupid.
Warren Buffett: That’s important to realize. We paid $6 a share for that stock, and if the department store had succeeded, it might be worth, you know, $30 a share now — and it failed, so… But that’s the way life is. You just keep going. And —
Charlie Munger: And keep learning, that’s the secret.
Buffett and Munger reminisced about several mistakes they made along the way. Buying Berkshire was one. The exchange above about the department store is another example that investing mistakes are inevitable. Each mistake is a learning experience to draw from and move on.
The lesson from the department store was not that it failed, but it was a bad investment if it succeeded. If Buffett’s estimates are even close to accurate, they would have earned about a 3% annual return on the store over the last 56 years.
Buffett and Munger eventually came around to the idea that department stores and textile mills are terrible businesses to own for the long run. It just took time.
The key is to keep learning, not only from your mistakes but learning in general. Knowledge accumulates. It compounds just like money.
The Best Inflation Hedge
The best protection against inflation, though, still is your own personal earning power.
Great businesses have pricing power. They can raise prices on their products or services without losing business to the competition. Pricing power is immensely beneficial whenever inflation is higher than expected. That great business can raise prices and its value won’t be negatively impacted by inflation.
Of course, pricing power comes from a competitive advantage like extreme customer loyalty, better patents, regulatory rules, network effects, high switching costs, and low-cost producers. Those advantages need to be constantly maintained and improved to ward off competition.
Earning power, like pricing power, is the perfect inflation hedge for people. Your ability to make money is your greatest asset. Someone with in-demand skills will find it easier to raise their income along with inflation. But those skills need to be constantly honed and improved to maintain that edge. The learning never stops.