I recently returned from Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) annual meeting in Omaha, and -- as I am every year -- was impressed with the extraordinary intelligence, rationality, and capital allocation abilities of both Warren Buffett and Charlie Munger (chairman and vice chairman, respectively) as well as the fabulous collection of businesses they've assembled over the past 30 or so years.
In this column, I have collected in numerous sound bites the most interesting, important, and/or funny things they said. You can find the entirety of my meeting notes here.
I've added a little commentary, but will generally let Buffett and Munger speak for themselves. As always, Buffett did most of the talking, so all quotes are his unless otherwise noted. Recording devices are not allowed in the meeting, so in many cases I am paraphrasing because I couldn't write quickly enough.
How to become a better investor
The basics
There's nothing different, in my view, about analyzing securities today vs. 50 years ago. I haven't been continually learning the basic principles [of sound investing], which are still Ben Graham's... You need an intellectual framework, which you can get mostly from The Intelligent Investor. Then, think about businesses you can get your mind around if you really work at it. Then, you will do well if you have the right temperament.
Munger: [But] temperament alone won't do it. You need a lot of curiosity for a long, long time.
Diversification
You'll occasionally see something that's so obvious that you'll load up on it, like junk bonds in 2002 or Berkshire Hathaway many years ago. If you think you'll see an opportunity every week, you're going to lose a lot of money.
Munger: The idea of excessive diversification is madness.
Valuation matters
If you pay way too much for a business, you'll get a poor return on what you paid, even if the return on tangible equity is very good.
Temperament
The key is to have a "money mind," which is not IQ, and then you have to have the right temperament. If you can't control yourself, you're going to have disasters... The whole world in the late 1990s went a little mad in terms of investments. How could that happen? Don't people learn? What we learn from history is that people don't learn from history.
Avoid leverage
The most dramatic way we protect ourselves is we don't use leverage. We believe almost anything can happen in financial markets... [so] even smart people can get clobbered with leverage. It's the one thing that can prevent you from playing out your hand.
Use index funds
Among the various propositions offered to you, if you invested in a very-low-cost index fund -- where you don't put the money in at one time but average in over 10 years -- you'll do better than 90% of people who start investing at the same time.
Irrational markets
Munger: The temporary collapse in junk bonds [in mid- to late-2002], where they got to 35%-40% yields, was just a strange thing. There was absolute chaos at the bottom tick. Apply this behavior to stocks -- it's not hard to imagine a big crunch coming along.
Buffett: Wall Street is awash in money and talent, but you get these absolutely extraordinary swings... At the minimum, you want to protect yourself from this type of insanity from wiping you out and, better yet, make a profit from it.
Outlook for the market
I would say that at any given point in history, including when stocks were the cheapest, you could find an equally impressive list of negatives [as there is today]... We don't pay any attention to this kind of thing... Going back to '59, I can't think of any discussions Charlie and I have had in which we've passed on something because of a view on macro conditions... Show us a good business tomorrow and we'll jump.
Munger: We wouldn't be surprised if professionally managed money in the U.S. will have unimpressive returns relative to the high returns we had until three years ago.
Buffett: Our expectations were more modest than three years ago. We didn't project the end of the world, but said anyone who thought they could sit at home and day trade to double-digit returns was living in a fool's paradise. It's hard to understand how people could believe such things.
Inflation
TIPS [Treasury Inflation Protected Securities] are not a bad investment for people worried about inflation heating up, which we're seeing signs of.
Derivatives
Derivatives were supposed to spread risk, but overall there's much more risk in the system because of derivatives.
CalPERS/ISS voting against Buffett
Munger: The cause of reform is hurt not helped when an activist makes an idiotic suggestion like saying that having Warren on the board of Coke (NYSE:KO) is contrary to the interests of Coke. Nutty behavior undermines their cause.
The mutual fund scandal
Munger: A significant fraction of mutual fund managers took bribes to betray their own shareholders. It was as if a man came up and said, "Why don't we kill your mother and we'll split the insurance money?" And many people said, "Why, yes, I'd like some of that insurance money." And many of them think what happened to them was unjust.
Buffett: Many people had to know what was going on... The Investment Company Institute was patting itself on the back and getting cozy with legislators, but nothing was done until a whistleblower went to Spitzer and he publicized it.
Stock options
[In a vote opposing expensing stock options 10 years ago,] 88 senators declared the world was flat because big donors said it was thus.
Munger: The people who voted this way were stupid and dishonorable. They knew it was wrong and did it anyway.
Compensation systems
[Our approach to compensation] is wildly different from the approach of most companies, which go through elaborate procedures. The typical corporation has a compensation committee, and, believe me, they don't ask Dobermans to be on it; rather, they want Chihuahuas who've been sedated.
Munger: I'd rather throw a viper down my shirt front than hire a compensation consultant.
IPOs
Munger: The average person is going to get creamed [buying IPOs].
Google's owner's manual
I'm pleased that the fellows at Google were, they say, inspired by the Berkshire Owner's Manual (pdf file), and that they think it's good for companies to communicate with shareholders. If you read it [the Google Owner's Manual], you know what they're like.
I like their prose, though that doesn't mean I agree with every idea. I hope more companies sign on for this.
Keys to happiness and success
Munger: Just avoid things like racing trains to the crossing, doing cocaine, etc. Develop good mental habits. And avoid evil, particularly if they're attractive members of the opposite sex.
Buffett: Look at the people you like to hang out with. What qualities do you like about them? Why don't you copy them? And look at the people you don't like. What don't you like about them, and can you stop doing these things?
Munger: If your new behavior gives you a little temporary unpopularity with your peer group, then the hell with them.
Buffett: This reminds me of the old lady who was asked what she liked about being 103 years old. She replied, "No peer pressure."
Conclusion
Buffett and Munger are, without doubt, two of the greatest investors and capital allocators of all time, so investors would be well served to study their thinking carefully. I recommend reading Buffett's annual letters on Berkshire Hathaway's website.
Finally, Fool Community members are always discussing all things Buffett on the Berkshire Hathaway discussion board.
Contributor Whitney Tilson is a longtime guest columnist for The Motley Fool. He owned shares of Berkshire Hathaway at press time, though positions may change at any time. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security. Mr. Tilson appreciates your feedback. To read his previous columns for The Motley Fool and other writings, visit http://www.tilsonfunds.com. The Motley Fool is investors writing for investors.
