Agonizing over errors is a mistake. But acknowledging and analyzing them can be useful, though that practice is rare in corporate boardrooms. There, Charlie and I have almost never witnessed a candid post-mortem of a failed decision, particularly one involving an acquisition. A notable exception to this never-look-back approach is that of The Washington Post Company, which unfailingly and objectively reviews its acquisitions three years after they are made. Elsewhere, triumphs are trumpeted, but dumb decisions either get no follow-up or are rationalized.

Source:   Berkshire Hathaway Shareholder Letters

Charlie and I think it is both deceptive and dangerous for CEOs to predict growth rates for their companies. They are, of course, frequently egged on to do so by both analysts and their own investor relations departments. They should resist, however, because too often these predictions lead to trouble.

Source:   Berkshire Hathaway Shareholder Letters

The problem arising from lofty predictions is not just that they spread unwarranted optimism. Even more troublesome is the fact that they corrode CEO behavior. Over the years, Charlie and I have observed many instances in which CEOs engaged in uneconomic operating maneuvers so that they could meet earnings targets they had announced. Worse still, after exhausting all that operating acrobatics would do, they sometimes played a wide variety of accounting games to “make the numbers.” These accounting shenanigans have a way of snowballing: Once a company moves earnings from one period to another, operating shortfalls that occur thereafter require it to engage in further accounting maneuvers that must be even more “heroic.” These can turn fudging into fraud. (More money, it has been noted, has been stolen with the point of a pen than at the point of a gun.)

Source:   Berkshire Hathaway Shareholder Letters

Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system. [written in 2002]

Source:   Berkshire Hathaway Shareholder Letters

Charlie began as a lawyer, and I thought of myself as a security analyst. Sitting in those seats, we both grew skeptical about the ability of big entities of any type to function well. Size seems to make many organizations slow-thinking, resistant to change and smug. In Churchill’s words: “We shape our buildings, and afterwards our buildings shape us.” Here’s a telling fact: Of the ten non-oil companies having the largest market capitalization in 1965 – titans such as General Motors, Sears, DuPont and Eastman Kodak – only one made the 2006 list.

Source:   Berkshire Hathaway Shareholder Letters

When Warren lectures at business schools he says “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you get to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

Source:   Poor Charlie's Almanack

Acknowledging what you don’t know is the dawning of wisdom.

Source:   Poor Charlie's Almanack

Be a business analyst, not a market, macroeconomic, or security analyst.

Source:   Poor Charlie's Almanack

Opportunity meeting the prepared mind; that’s the game.

Source:   Poor Charlie's Almanack

Think forwards and backwards – invert, always invert.

Source:   Poor Charlie's Almanack

Our culture is very old-fashioned, like Ben Franklin or Andrew Carnegie’s. Can you imagine Carnegie hiring consultants?! It’s amazing how well this approach still works. A lot of businesses we buy are kind of cranky and old-fashioned like us.

Source:   Poor Charlie's Almanack

The reason we avoid the word “synergy” is because people generally claim more synergistic benefits than will come. Yes, it exists, but there are so many false promises.

Source:   Poor Charlie's Almanack

In the past, when Berkshire has gotten cheap, we’ve found other even cheaper stocks to buy. I’d always prefer this. It’s no fun to have the company so lacking in repute that we can make money for some shareholders by buying out others.

Source:   Poor Charlie's Almanack

Our approach has worked for us. Look at the fun we, our managers and our shareholders are having. More people should copy us. It’s not difficult, but looks difficult because it’s unconventional – it isn’t the way things are normally done. We have low overhead, don’t have quarterly goals and budgets or a standard personnel system, and our investing is much more concentrated than is the average. It’s simple and common sense.

Source:   Poor Charlie's Almanack

One of the key elements to successful investing is having the right temperament – most people are too fretful; they worry too much. Success means being very patient, but aggressive when it’s time.

Source:   Poor Charlie's Almanack

Our investment style has been given a name – focus investing – which implies ten holdings, not one hundred, or four hundred…The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But 98% of the investment world doesn’t think this way. It’s been good for us that we’ve done this…Focus investing is growing somewhat, but what’s really growing is the unlimited use of consultants to advise on asset allocation, to analyze other consultants, and so forth. Maybe 2% of the people will come into our corner of the tent, and the rest of the 98% will believe what they’ve been told [e.g. that markets are totally efficient].

Source:   Poor Charlie's Almanack

The general systems of money management [today] require people to pretend to do something they can’t do and like something they don’t. It’s a terrible way to spend your life, but it’s very well paid.

Source:   Poor Charlie's Almanack

Mutual Funds charge two percent per year and then brokers switch between funds, costing another three to four percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it’s disgusting.  It’s much better to be part of a system that delivers value to the people who buy the product. But if it makes money, we tend to do it in this country.

Source:   Poor Charlie's Almanack

You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.

Source:   Poor Charlie's Almanack

Most people will see declining returns (due to inflation). One of the great defenses if you’re worried about inflation is not to have a lot of silly needs in your life – you don’t need a lot of material goods.

Source:   Poor Charlie's Almanack

Eighty or Ninety important models will carry about ninety percent of the freight in making you a worldly-wise person. And, of course, only a mere handful really carry very heavy freight.

Source:   Poor Charlie's Almanack

How many insights do you need? Well, I’d argue that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man – Warren’s a lot more able than I am and very disciplined – devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying that most of the money came from ten insights.

Source:   Poor Charlie's Almanack

If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.

Source:   Poor Charlie's Almanack

To me it’s obvious that the winner has to be bet very selectively. It’s been obvious to me since very early in life. I don’t know why it’s not obvious to many other people. I think the reason why we got into such idiocy in the investment management business is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said “Mister, I don’t sell to fish”.

Source:   Poor Charlie's Almanack

In Investment Management today, everybody wants not only to win, but to have the path never diverge very much from a standard path except on the upside. Well, that is a very artificial, crazy construct…It’s the equivalent of what Nietzsche meant when he criticized the man who had a lame leg and was proud of it. That is really hobbling yourself. Now, investment managers would say, “We have to be that way. That’s how we’re measured.” And they may be right in terms of the way the business is now constructed. But from the viewpoint of a rational consumer, the whole system’s bonkers and draws a lot of talented people into a socially useless activity.

Source:   Poor Charlie's Almanack

Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns.

Source:   Poor Charlie's Almanack

Trying to minimize taxes too much is on the great standard causes of really dumb mistakes.

Source:   Poor Charlie's Almanack

Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it…In fact, anytime somebody offers you anything with a big commission and a 200-page prospectus, don’t buy it.

Source:   Poor Charlie's Almanack

Graham, great though he was as a man, had a screw loose as he tried to predict outcomes for the stock market as a whole. In contrast, Warren and I are almost agnostic about the market.

Source:   Poor Charlie's Almanack

If you think psychology is badly taught in America, you should look at corporate finance. Modern Portfolio Theory? It’s demented! It’s truly amazing.

Source:   Poor Charlie's Almanack

I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.

Source:   Poor Charlie's Almanack

Thaler pokes fun at much that is holy at the University of Chicago. Indeed, Thaler believes, with me, that people are often massively irrational in ways predicted by psychology that must be taken into account in microeconomics.

Source:   Poor Charlie's Almanack

All the equity investors in total, will surely bear a performance disadvantage per annum equal to the total croupiers’ costs they have jointly elected to bear. This is an inescapable fact of life. And it is also inescapable that exactly half of the investors will get a result below the median result after the croupier’s take, which may well be somewhere between unexciting and lousy.

Source:   Poor Charlie's Almanack

The great lesson in Microeconomics is to discriminate between when technology is going to help you and when it's going to kill you.

Source:   Poor Charlie's Almanack

…there's another model from microeconomics that I find very interesting. When technology moves as fast as it does in a civilization like ours, you get a phenomenon that I call competitive destruction. You know, you have the finest buggy whip factory, and, all of a sudden, in comes this little horseless carriage. And before too many years go by, your buggy whip business is dead. You either get into a different business or you're dead - you're destroyed. It happens again and again and again.

Source:   Poor Charlie's Almanack

You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose.

Source:   Poor Charlie's Almanack

…it's rather interesting because one of the greatest economists in the world is a substantial shareholder in Berkshire Hathaway and has been from the very early days after Buffett was in control. His textbook always taught that the stock market was perfectly efficient and the nobody could beat it. But his own money went into Berkshire and made him wealthy. So, like Pascal in his famous wager, he hedged his bet.

Source:   Poor Charlie's Almanack

Is the stock market so efficient that people can't beat it? Well, the efficient market theory is obviously roughly right - meaning that markets are quite efficient and it's quite hard for anybody to beat the market by significant margins as a stock picker by just being intelligent and working in a disciplined way. Indeed the average result has to be the average result. By definition, everybody can't beat the market. As I always say, the iron rule of life is that only twenty percent of the people can be in the top fifth. That's just the way it is. So the answer is that it's partly efficient and partly inefficient. And, by the way, I have a name for people who went to the extreme efficient market theory - which is "bonkers". It was an intellectually consistent theory that enabled them to do pretty mathematics. So I understand its seductiveness to people with large mathematical gifts. It just had difficulty in that the fundamental assumption did not tie properly to reality.

Source:  

If you stop to think about it, a pari-mutuel system [like a race-track] is a market. Everybody goes there and bets, and the odds change based on what's bet. That's what happens in the stock market.

Source:   Poor Charlie's Almanack

If you invested Berkshire Hathaway-style, it would be hard to get paid as an investment manager as well as they're currently paid - because you'd be holding a block of Wal-Mart aand a block of Coca-Cola and a block of something else. You'd be sitting on your ass. And the client would be getting rich. And, after a while, the client would think, "why am I paying this guy half-a-percent a year on my wonderful passive holdings?" So what makes sense for the investor is different from what makes sense for the manager. And, as usual in human affairs, what determines the behavior are incentives for the decision maker.

Source:   Poor Charlie's Almanack

Of course, the best part of [Benjamin Graham's approach] was his concept of "Mr. Market". Instead of thinking the market was efficient, Graham treated it as a manic-depressive who comes by every day. And some days "Mr. Market" says, "I'll sell you some of my interest for way less than you think is worth." And other days, he comes by and says "I'll buy your interest at a price that's way higher than what you think it's worth." And you get the option of deciding whether you want to buy more, sell part of what you already have, or do nothing at all. To Graham, it was a blessing to be in a business with a manic-depressive who gave you this series of options all the time. That was a very significant mental construct. And it's been very useful to Buffett, for instance, over his whole adult lifetime.

Source:   Poor Charlie's Almanack

…averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager.

Source:   Poor Charlie's Almanack

There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass. You're paying less to brokers. You're listening to less nonsense. And if it works, the governmental tax system gives you an extra one, two, or three percentage points per annum compounded. And if you think that most of you are going to get that much advantage by hiring investment counselors and paying them one percent to run around, incurring a lot of taxes on you behalf, Lots of luck.

Source:   Poor Charlie's Almanack

…some of the worst dysfunctions in businesses [and professional investment managers] come from the fact that they balkanize reality into little individual departments with territoriality and turf protection and so forth. So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries. You don't have to know it all. Just take in the best big ideas from all these disciplines. And it's not hard to do.

Source:   Poor Charlie's Almanack

Good literature makes the reader reach a little for understanding. If you've reached for it, the idea's pounded in better.

Source:   Poor Charlie's Almanack

Well, Berkshire's whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to. I think you'd have to believe in the tooth fairy to believe that you could easily outperform the market by seven percentage points per annum just by investing in high-volatility stocks.

Source:   Poor Charlie's Almanack

Two sources in particular have inspired my thinking on diversity. The first is the mental-models approach to investing, tirelessly advocated by Berkshire Hathaway’s Charlie Munger. The second is the Santa Fe Institute (SFI), a New Mexico-based research community dedicated to multidisciplinary collaboration in pursuit of themes in the natural and social sciences.

Source:   More Than You Know

Charlie Munger’s long record of success is an extraordinary testament to the multidisciplinary approach. For Munger, a mental model is a tool—a framework that helps you understand the problem you face. He argues for constructing a latticework of models so you can effectively solve as many problems as possible. The idea is to fit a model to the problem and not, in his words, to “torture reality” to fit your model.

Source:   More Than You Know