Thread by @tycoonmindset05

Warren Buffet & Charlie Munger's wisdom on

- Munger's Mental Models
- When to Sell
- Knowable & Important
- IT Sector
- Banking Sector

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@AvinashGoraksha @Kuntalhshah @Vivek_Investor @Atulsingh_asan @chokhani_manish

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#investing

1. View on Relative PE Ratio

Warren- Relative PE moves up, people expect company prospects to be better than peer companies. Absolute PE of the companies moves up in respect to earning power of the company.

- When you have an increased profit, people get more enthusiastic about a specific business or a specific industry, they will push up the relative P/E ratio for that stock or industry.

- This is not like Olympic diving, it doesn’t have any difficult factors.

- If you can do some very difficult dive, the payoff is greater if you do it well than if you do some very simple dive. You get paid just as well for the simplest dive, as long as you execute it all right. So we look at simple dive and go for 1 foot bars rather than 7-8 foot bars

Charlie - Our predictions have been a little better than other people’s, it’s because we tried to make fewer of them.

2. Munger’s multiple mental models

Charlie- Munger’s system for dealing with reality is to have multiple models in the head, and then run reality against multiple models. I think it’s a perfect disaster to look at reality through just one model or two.

3. Investment in IT

Warren - No we will not. I don’t know what that world will look like in 10 years in IT sector. I could spend all my time thinking about tech for next year and I wouldn’t be the 100th or the 10,000th smartest guy in country in looking at those businesses.

4. Warren Filters on technology

Warren- If something (technology) comes in, which can hurt the business in future, we look at it as something to worry about. We want things that we can understand, which filters out a lot of things.

Charlie- We have to have an idea if “A” a good idea “B” a good idea, we can understand. It’s just that simple. We need to understand the things.

5. Criteria Warren used to sell a stock

Warren- Well, the best thing to do is buy a stock that you don’t ever want to sell. We bought all of GEICO, See’s Candy or The Buffalo News. We’re not buying those to resell. We will be happy if we own it for the rest of our lives.

- If we want to invest in some other sector, we would trim, but that doesn’t mean we are negative on business.
We would sell if (A) If we need money for other things (B) If you believe valuation of different kinds of market are whack. But that can also turn into a mistake.

- I mean the real thing to do with a great business is just hang on for dear life.

Munger- Ideal way to sell when you like someone immensely better.

6. What keeps Management awake at night

Warren - I always ask the management what their nightmare is? I and Charlie, we don’t worry about investing. We don’t feel it’s tough times when the market’s going down a lot or anything of the sort.

We focus on figuring how to make money, and if we figure that out stock will take care of itself. And when the market goes down it’s a better chance for us to deploy capital, and that’s our business.

7. What is important in Annual Report

Warren- We find whether the management is telling us about the things that we would want to know about, if we owned 100% of the company. The management should talk in a language that we can understand.

We want to understand the business better when we pick up AR rather than reading about business from anywhere else. If the management can do it easily it is a plus point.

8. View on Efficient Market Hypothesis

Warren- We should respect EMH only till universities. Something that the academicians could not explain, and rather than re-examine their theories, they simply discarded any evidence of that sort as anomalous.

9. Are ROE of Tangible BV of Bank sustainable?

Warren- ROE and tangible equity of banks are high. We would not base our actions on the premise that they are sustainable. Banks are in the range of 30%. Now a system where GDP real growth is 3%, can business consistently earn 20%.

You cannot have corporate profits growing 20% YoY. For this they need to have huge payouts either through dividends or buyback. It is difficult to grow 20% at such a high base. Hence there cannot be a massive return which can be retained and same growth in future.

10. Book Recommendation

Munger “Guns, Germs and Steel” by Jared Diamond.
amazon.in/Guns-Germs-Ste…

Warren “The Quotable Einstein” “The Fermat Theorem”
amazon.com/Quotable-Einst…

11. Macro Outlook on Investment

Warren - We don’t think about those things very much. We try to think about two things. We try to think about things that are important and things that are knowable. Now, there are things that are important that are not knowable.

There are things that are knowable but not important. We don’t want to clutter our minds with those. Focus on What is important and What is Knowable. Things which are Unknowable, we don’t care. We will care about What our business will be in decade which is important and knowable

12. How Berkshire review spectrum of stocks in market

Warren - We use Value Line as 1,700 or so stocks they cover, and they do it every 13 weeks. We don’t care about the ratings.

Charlie- If I were running a business school we would be teaching from Value Line information. The chart of the price action doesn’t mean a thing to us. Price action has nothing to do with any decision we make.

13. Cost of Capital for Berkshire

Warren - When you have capital you have 2 options. Return it to shareholders or reinvest the money. If you simply look around for the thing that you feel the surest about, and that promises the greatest return weighted for that certainty.

14. Que from @BillAckman "Is there any wrong price for which company bringing buyback”

Warren- I don’t think everybody’s repurchase of shares is well reasoned at all. We see companies that repurchase shares at a way higher. It’s like they sell low and then they buy high.

- And they’ve got a different formula than I was taught.

Charlie - The stock could get to a price so high it would be foolish for the corporation to repurchase its shares.

15. Cost of Capital for Berkshire

Warren - When you have capital you have 2 options. Return it to shareholders or reinvest the money. If you simply look around for the thing that you feel the surest about, and that promises the greatest return weighted for that certainty.

- If we’re keeping dollar bills that are worth more in your hands than in our hands, then we’ve exceeded the cost of capital

16. Less Recommendation of Berkshire in social platform

Warren - We prefer people who figure out for themselves why they themselves want to buy Berkshire, because they’re much more likely to stick around.

Charlie - If you’ve got a standardized bunch of popular jargon that looks like it came out of the same consulting firm, I do think it’s a big turnoff. We want management to tell us the problem they are facing in business.

17. Berkshire Stocks or Berkshire. Which is good?

We are not going to great lengths to tell you everything that Berkshire is doing and there could be changes that can happen in Berkshire which is difficult to duplicate.

But on other hand if you invested in Co-Cola than Berkshire years back than you have done better. We really make no recommendations as to what people do with their money.

18. Time Buffet give in Bridge

Warren - At least ten hours a week. Maybe a little more.

Charlie - I probably play three or four hours a week. I play a lot of golf though

20. Option between Berkshire Insurance or Securities

Warren - I would choose an operation business. I’d give up the marketable securities. But it’s not going to happen, so we’re going to be happen in both arenas, and I look forward to being in both arenas for the rest of my life

21. Filters in selecting people

Warren- We need management with the businesses that we buy. We have to decide, when we meet them, whether they love the business or love money. And we’re not making a moral judgment. We look at what is their prime motivator.

There are people in Berkshire who find love in money rather than business and in 6 months they would say , Why am I doing this, you know, for Berkshire Hathaway when I could be doing.

Charlie- You’ve got integrity, intelligence, and experience, and dedication and that’s what human enterprises need to run well.

22. When to buy house

Warren- I waited 4 years after marriage, I waited for 4 years for not owning a house until the EMI payment was 10% of my income.

Charlie - I think the time to buy a house is when you need one. I have very old-fashioned ideas on that, too. The single people, I don’t care if they ever get a house.

23. Criteria for selecting stock

Warren- Criteria for selecting a stock is looking at a business. We are looking for a business we can understand. If we understand what product they sell, their nature of the competition, what could go wrong with it over time, then we proceed.

The checklist that is going through our mind is not very complicated. Knowing what you don’t know is important, and sometimes that’s not easy. And then when you get all through, you have to find it at a price that’s interesting to you and that’s very difficult for us now.

24. Guide to teenagers

Warren - Learn accounting before 20 as accounting is the language of business. Do a lot of reading. Read as many business and talk business with different businessman. You understand business, you understand investment.

Charlie- Also add underspending of income and save that money to invest and grow money.

25. Investment outlook outside US

Warren - There’s been a bull market all over the world in a huge way in the bigger markets. We are not reluctant to invest abroad. We are interested in business and there are many more areas abroad than here.

26. Is the book buffetology discuss the entire framework of Buffet

Warren - Author did a very good job. However one can get our entire framework reading our Annual Report. But if I picked the one book to read, then that would probably be the one.

27. View on Tobacco Settlement

Warren - One of the major problem is labour negotiation. At the end of the negotiation you as management are committed, and basically the union isn’t, because the union is going to have a vote on it.

- It smelled like trouble to me when they were bound and you had another side that was not bound.

View on US market

Warren- We don’t make any recommendation on Berkshire. In terms of market overvalued, we don’t think the market is overvalued interest rates remain at near or present value and corporate profitability in the U.S. stays at the present or close to present.

28. Japan market vs US Equity Market

Warren- Japan BVPS will be lower than US BVPS due to lower earnings of Japan than that of the US. However we consider future earnings, and earnings have been poor for a great many Japanese companies.

- While the ROE of the japan stocks is very low leading to low book value. And if a company’s earning 5 percent on book value, I don’t want to buy it.

Charlie- I suppose anything could happen.

29. How to figure maintenance CAPEX

Warren- Depreciation charge is not inappropriate in most companies to use as a proxy for required capital expenditures. Reported earnings plus amortization of intangibles usually gives a pretty good indication of earning power.

- It matters on business to business.
- In case of Gillette, there is no need to spend a hundred million dollars more to maintain its competitive position. While in airline business you have to spend like crazy (pilots are to be trained, so capital is required to produce profits)

- Even in our textile business, to stay competitive we would’ve needed to spend substantial money. In a business like co-cola you every capital expansion leads to higher return.

30. No investment in equities from past few months

Warren- We won’t buy anything until we are happy with the business and the valuation. We won’t feel we missed anything. We have no timeframe. If the money piles up, the money piles up.

- And when we see something that makes sense, we’re willing to act very fast, very big.
Charlie- An occasional dull stretch for new buying, this is no great tragedy in an investment lifetime.

31. View on Scuttle Butt

Warren - Now I spend practically none because I’ve done it in the past. I’m probably fairly familiar with most of the businesses that might qualify for investment at Berkshire.

But when I started out, and for a long time I used to do a lot of what Phil Fisher described. As you are acquiring knowledge about industries in general, you can start with reading about then going to every stakeholder. Here you would learn a lot, but it should be 20% of interest

Opinions will interest you a lot but you have to verify the hypothesis from your learning vs stakeholder learning. You cannot listen to what everyone says.

32. Different investment philosophy in MCDonald's & Dairy Queen

Warren- MCDonalds perhaps owns 1/3 of the area. They own many outlets and operate them. They have many large investments and they earn that much money. Dairy Queen has 6000+ operations.

Hence investment is very different. Capital Employed in Dairy Queen is comparatively high, but MC Donald even makes higher money on the stores they own. The franchise charge is low for Dairy Queen.

33. Quality vs Price for 3-5 year

Warren- First we wouldn't advise it being that way. Because I think if you think you’re going to get out then, it gets more toward — leaning toward the bigger fool theory.

- For quality we need the certainty that the business will perform as expected it to perform over a period of time.

Charlie - The investment game always involves considering both quality and price. And the trick is to get more quality than you’re paying for, in the price.