Berkshire Hathaway 2018 Annual Meeting Audience Question # 51

Investing is not a complicated business, but its got to be a disciplined business

Warren Buffett:

Station 6.

Audience Member:

Hi, I’m Brady Ritchie from St. Louis, Missouri. Shareholder since 1996.

Warren Buffett:

Terrific.

Audience Member:

Warren, you and Charlie have been critical of business schools in the past and what they teach.

With respect to value investing, in “Superinvestors of Graham-and- Doddsville,” you featured the returns of many great investors with different backgrounds’ work in education, with the lesson being, “Following the philosophy is the key.”

To be successful today, does it still just fall back to chapter eight of “The Intelligent Investor?”

And what do you think of programs and designations such as CFA, CFP, et cetera, which purport high standards yet root it heavily into academia? And I’d like to challenge you to a round of bridge tomorrow.

Warren Buffett:

And what was the last part?

Charlie Munger:

Well, he was talk… what do we think about…

Warren Buffett:

Yeah, business schools and all that.

Charlie Munger:

… business schools and all that.

Warren Buffett:

I didn’t catch the last…

Charlie Munger:

They’re better…

Warren Buffett:

Oh, he’s challenged me to a round of bridge. OK. The…

I went to three business schools, and at each I found a teacher or two. I went to one specifically to get a given teacher. But at each one of them I found a teacher or two that I really got a lot out of. The… so we’re not anti-business school here at all.

We do think that the priesthood, say, 30 years ago, for example, in terms of… or 40 years ago
…in terms of efficient market theory and everything. They strayed pretty far, in our view, from the reality of investing. And I would rather have a person… if I could hire somebody among the top five graduates of number one, two or three of the business schools, and my choice was somebody that had… was bright… but had chapter eight of “The Intelligent Investor”
absolutely… it just was natural to them… they had it in their bones, basically… I’d take the person from chapter eight.

This is not… what we do is not a complicated business. It’s got to be a disciplined business, but it is… it does not require a super IQ or anything of the sort. And there are a few fundamentals that are incredibly important, and you do have to understand accounting. And it helps to get out and talk to consumers and start thinking like a consumer in many ways in certain… and all of that.

But it just doesn’t require advanced learning. And… I… I certainly… you know, I didn’t want to go to college, so I don’t know whether I would have done better or worse if I’d just quit after high school, you know, and read the books I read and all of that.

I think that if you run into a few great teachers, and they really change the way you see the world to some degree, you know, you’re lucky. And you can find them in… you can find them in academia and you can find them in ordinary life.

And I’ve been extraordinarily lucky in having great teachers, including Charlie. I mean, Charlie’s been a wonderful teacher. And, you know…

Anyplace you can find somebody that gives you insights into things you didn’t understand before, maybe makes you a better person than you would have been before, you know, you get
…that’s very lucky, and you want to make the most of it. If you can find it in academia, make the most of it. And if you can find it in the rest of your life, make the most of it.

Charlie?

Charlie Munger:

Well, when you found Ben Graham he was unconventional, and he was very smart. And of course, that was very attractive to you. And then when you found out it worked and you could make a lot of money while you’re sitting on your ass… of course you were an instant convert.

And so…

Warren Buffett:

It still appeals to me, actually. I mean…

Charlie Munger:

But the world changed. Before he died, Bill Graham… I mean, Ben Graham… recognized that the exact way he sought undervalued companies wouldn’t necessarily work for all times under all conditions. And that’s certainly the way it worked for us.

We gradually morphed into trying to buy the better companies when they were underpriced, instead of the lousy companies when they were underpriced. And of course, that worked pretty well for us.

And Ben Graham, he outlived the game that he played personally most of the time. He lived to see most of it fade away. I mean, just to find some company that’s selling for one third of its
working capital, and figure out it could easily be liquidated and distribute $3 for every dollar of market price. Lots of luck if you can find those in the present market. And if you can find them, they’re so small that Berkshire wouldn’t find them of any use anyway.

So we’ve had to learn a different game. And that’s a lesson for all the young people in the room. If you’re going to live a long time, you have to keep learning.

Warren Buffett:

Yeah.

Charlie Munger:

What you formerly knew is never enough. So if you don’t learn to constantly revise your earlier conclusions and get better (the sound in this part of the video is inaudible), you are… I always use the same metaphor. You’re like a one-legged man in an ass-kicking contest.

Warren Buffett:

If anybody has suggestions for another metaphor, send them to me.

Graham, incidentally, one point, important point. Graham was not scalable. I mean, you could not do with really big money. And when I worked for Graham-Newman Corp, here he was, the dean of all analysts. And you know, he was an intellect above all others around that time.

But our… the investment fund was $6 million, and the partnership that worked in tandem with the investment company also had about $6 million in it. So we had 12 million bucks we were working with. Now, you can make adjustments for inflation and everything. But it was just a tiny amount. It wasn’t really scalable.

And the truth is that Graham didn’t care, because he really wasn’t interested in making a lot of money for himself. So he had no reason to want to find something that could go on and on, become larger and larger.

And so the utility of chapter eight, in terms of looking at stocks as a business, is of enormous value. The utility of chapter 20 about a margin of safety is of enormous value. But that’s not complicated stuff.

Charlie Munger:

I finally figured out why the teachers of corporate finance often teach a lot of stuff that’s wrong.

When I had some eye troubles very early in life, I consulted a very famous eye doctor. And I realized that his place of business was doing a totally obsolete cataract operation. They were still cutting with a knife after better procedures had been invented.

I said, “Why are you in a great medical school performing absolute obsolete operations?” And he said, “Charlie, it’s such a wonderful operation to teach.”

Well, that’s what happens in corporate finance. They get these formulas, and it’s a fine teaching experience.

You give them a formula, you present the problem, they use the formula. You get a real feeling of worthwhile activity.

There’s only one there. It’s all balderdash.

Warren Buffett:

Yeah, whenever you hear a theory described as elegant, watch out, you know.

Charlie Munger:

Right.

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