The Berkshire annual meeting was this past weekend. It was not quite the same without Charlie Munger. His one-liners were absent. No “I have nothing to add.”
Warren Buffett, with the help of Greg Abel, and Ajit Jain, answered questions for five hours. His answers seem to get longer every year. But the lessons were still there. The broader takeaway is that investing is still simple, but not easy. Let’s dive in.
Stocks are Businesses
We always look at every stock as a business. We have no attempt made to predict markets… It’s such a simple approach that it’s almost deceptive. Most things if you keep working harder and harder at it, you know, you learn a little more math or you learn a little more physics. But investments, you don’t really have to do that. You really have to have your mind set properly. — Warren Buffett
There’s a business behind every stock. It’s one of the first lessons Buffett learned from Ben Graham’s The Intelligent Investor. That simple idea can get lost in the daily noise when markets and media combine to misrepresent what’s important.
When you buy a stock, you own a piece of a business. If you want to know the stock you need to understand the business behind it. And if the business does well over time, the stock will eventually do well too.
Investing is not about predicting markets, what the Fed will do, the direction of interest rates, or what the inflation rate will be next year. It’s buying businesses. Everything else is a distraction.
How Much Can You Lose?
When you insure something, you really want to think of how much can you lose. — Warren Buffett
There are several similarities between insurance and investing. Insurance companies, for example, must understand the risk — probabilities — around anything they insure. Another example is how insurance companies diversify those risks across thousands or millions of policyholders to mitigate the possibility of catastrophic losses from a single event.
Investors also must think in probabilities and manage risk. Assess the risk first — how much can you lose on the investment — then the potential return. The risk will dictate how much money you should invest in any one investment, if at all, as it relates to your entire portfolio. The goal is to avoid the possibility of a major loss that erases years’ worth of compounding.
Investing is Simple But Not Easy
If you look back, as we did a few meetings ago, as to the top 20 companies in the world at 10 year intervals, you realize the game isn’t quite as easy as it looks. But getting a decent result should be reasonably easy if you just don’t get talked out of doing what has worked in the past, don’t get carried away with fads, and don’t listen to people who have different interests… — Warren Buffett
Buffett offered a history lesson in the 2021 meeting. He showed a list of the top 20 companies globally in 1989 and asked a simple question. How many of those companies are still in the top 20 today? None.
Capitalism is brutal. Competition, innovation, and creative destruction are features in the system that tear down old companies and build up new ones all the time. The lesson, of course, is picking long-term winners is hard.
But getting a decent return is less about picking those winners and more about avoiding common mistakes that lead investors astray. Fads, chasing returns, hunting stock tips, and more, to get rich quickly, leave you worse off than had you taken a slow and steady diversified approach to investing.
You Know It When You See It
One thing Charlie and I learned a lot about was consumer behavior. That didn’t mean that we thought we could run a furniture store or anything else. We did learn a lot when we bought a furniture chain in Baltimore and we quickly realized it was a mistake. Having made that mistake made us smarter… So we learned something on consumer behavior from that. We didn’t learn how to run a department store. Now, the next one was See’s Candy. And See’s Candy was also a study of consumer behavior. We didn’t know how to make candy… But we’ve learned more about consumer behavior as we go along…
I think that psychologists call this apperceptive mass. There is something that comes along that ticks a whole bunch of observations that you’ve made and knowledge you have and then crystalizes your thinking into action. Big action in the case of Apple… You sort of know it when you see it…
There is an aspect of knowing a whole lot and having a whole lot of experiences and then seeing something that turns on the light bulb. — Warren Buffett
How do you get good at something? Focused study for years. That’s how Buffett recognized Apple as a good investment.
Of course, the story behind that isn’t nearly as exciting as what most people want to hear. Most people want a shortcut. They want a simple formula they can use to find the next Apple.
Instead, they got a story about how Buffett and Munger bought a department store, that it was a mistake, and that their unique mindsets delight in studying failures.
We had as much fun, perhaps even more to some extent, with things that failed because then we really had to work and work our way out of them. — Warren Buffett
The lessons they learned about consumer behavior from investments in that department store, See’s Candy, GEICO, Coca-Cola, American Express, and many others played a big role in recognizing the opportunity that was Apple.
Of course, a massive amount of time and effort, failing and learning, went into that single investment in Apple. It was almost instinctual or second nature to them at that point.
Over a century of compounded knowledge and experiences to draw from combined can make one investment appear easy when it’s not.
Human Misjudgment
Charlie knew the importance of psychology, human behavior, and incentives and all that. He figured that out very early… Of course he gave some talks…on different ways that one person could take advantage of another by understanding how humans behave… He believed in understanding what others would do but he thought it was beneath him to actually use those methods to manipulate people. — Warren Buffett
One of Munger’s talks is titled The Psychology of Human Misjudgment. It was his way of organizing patterns of behavioral biases in an attempt to avoid them himself.
His goal was to make more good decisions in his life. Rather than spend decades studying good decisions, he inverted the problem and focused on avoiding the stupid ones. So he sought out the many biases that lead to repeated poor decisions. Then he figured out ways to avoid them.
In the talk mentioned above, Munger laid out 25 “tendencies” that lead to repeated mistakes. It’s a must read for anyone looking to increase the odds of making good decisions in their life.
Source:
2024 Berkshire Annual Meeting
Related Reading:
Lessons from the 2023 Berkshire Meeting
Lessons from the 2022 Berkshire Meeting