“Here’s how to invest, here’s how I did it; this is the road I took. Now, let’s see if you can follow me down the path.”
In the Introduction, Miller cites seven “Common Rules” (on pages xii-xiii) that Warren Buffett shared (in 1956) with prospective investors in his new firm, Buffett Associates, Ltd. Before agreeing to accept their checks, he asked them to meet him for dinner at the Omaha Club. Everyone went Dutch. “These ground rules are the philosophy. If you are in tune with me, then let’s go. If you aren’t, I understand.” Everyone signed on.
The annual “Partnership Letters” that Buffett shared thereafter are sometimes referred to as his “essays” and each of them is certainly well within the tradition of Montaigne’s wit and wisdom but they also have been seasoned (in my opinion) by George Orwell and E.B. White. The “words of wisdom” that Miller provides are from these remarkable letters
In one of his first annual letters, Buffett explains that members of Berkshire Hathaway’s shareholder group receive communications directly “from the fellow you are paying to run the business. Your Chairman has a firm belief that owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively. You should demand that in a private company; you should expect no less in a public company. A once-a-year report of stewardship should not be turned over to a staff specialist or public relations consultant who is unlikely to be in a position to talk frankly on a manager-to-owner basis.”
With regard to the CEOs of the operating companies within the Berkshire Hathaway portfolio, the editor of all four volumes, Lawrence A. Cunningham explains that they enjoy a unique position in corporate America. “They are given a simple set of commands: to run their business as if (1) they are its sole owner, (2) it is the only asset they hold, and (3) they can never sell or merge it for a hundred years.” With regard to investment thinking, “one must guard against what Buffett calls the ‘institutional imperative.’ It is a pervasive force in which institutional dynamics produce resistance to change, absorption of available corporate funds, and reflexive approval of suboptimal CEO strategies by subordinates. Contrary to what is often taught in business and law schools, this powerful force often interferes with rational business decision-making. The ultimate result of the institutional imperative is a follow-the-pack mentality producing industry imitators, rather than industry leaders – what Buffett calls a lemming-like approach to business.”
Those who read this book will gain a much better understanding of how, working closely with his partner and friend Charlie Munger, achieved so much for what was once a small, private investment firm. Miller correlates key business issues and themes with relevant passages in Buffett’s annual letters.
Consider, for example, compounding. As Miller explains, “Compounding’s importance is hard to overstate. It explains why Charlie Munger, Buffett’s friend in the Partnership years and current vice chairman of Berkshire, once said that Buffett viewed a $10 haircut like it was actually costing him $300,000. Turns out he was only modestly conservative; a $10 haircut skipped by Buffett in 1956 and instead invested in the Partnership would be worth more than $1 million today ($10 compounded at 22% for 58 years.) Viewed through Buffett’s compound interest lens, it’s not hard to see why he has lived such a frugal life. His haircuts really are expensive!
Here are some samples of Buffett’s wit and wisdom:
“What we learn from history is that people don’t learn from history.”
“Chains of habit are too light to be felt until they are too heavy to be broken.”
“The difference between successful people and really successful people is that really successful people say no to almost everything.”
“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”
“Rule No. 1: never lose money; rule No. 2: don’t ever forget rule No. 1.”
“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Channeling Ben Graham, “Price is what you pay. Value is what you get.”
I am deeply grateful to Jeremy Miller for the abundance of information, insights, and counsel that he has examined, evaluated, and then organized so brilliantly. Obviously, this book would not have been possible without the material Warren Buffett created but the value of that material would not have been so accessible without Miller’s presentation of it, in context, within a frame of reference. Bravo!
These are among his concluding remarks: “Buffett leaves us a road map that is invaluable for students and investors alike. It’s as if he laid down a challenge to all of us. It’s as if he has written the letters, made them public, and said, ‘ Here’s how to invest, here’s how I did it; this is the road I took. Now, let’s see if you can follow me down the path.’”
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There are several other primary sources that I also recommend highly. First, Benjamin Graham’s The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition). Warren Buffet was one of Graham’s students and later an associate. I have read all four volumes of Buffett’s essays (i.e. his letters to Berkshire-Hathaway shareholders), edited by Cunningham whose introductions are exceptionally informative as well as eloquent. I am grateful to Carol Loomis – a former FORTUNE magazine business editor — for her entertaining as well as insightful book, Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013. With regard to other sources, I also highly recommend these: Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life, Roger Lowenstein’s Buffett: The Making of an American Capitalist, and Tren Griffin’s Charlie Munger: The Complete Investor.