At the end of the Berkshire Hathaway Shareholders Meeting, Warren Buffett was asked by a CNBC correspondent what he saw as the biggest threat to the company's future.
He replied "CNBC is the greatest threat to Berkshire -- that is, a Chemical, Nuclear, Biological, or Cyber attack." Beyond being a clever jab at the CNBC News correspondents who had been trying to get a sound bite out of him for the past five hours, the comment says something startling about what the duo who grew up working together in a grocery store have accomplished.
Berkshire has grown so large and become so integral to the U.S. economy that the only threat to the company is an existential threat to the entire country.
What can insights can we glean from someone with such a broad perspective on the American economy?
I got the chance to go to Berkshire conference earlier this year and hear them in person. Here are three lessons to carry into the future:
1. Thinking Long-term is a Moat
A moat is a term Buffett and Munger use synonymously with sustainable competitive advantage. It's something that makes it incredibly difficult for an upstart to become a legitimate competitor. In the context of companies, Munger likes to cite Coca-Cola, which combines good management, addictive ingredients (sugar and caffeine), huge amounts of social proof (Coke sponsors and is associated with The Olympics, FIFA, etc.), and availability (you can buy it anywhere). Combined, these form a huge moat. It's hard to envision anything which could cause major damage to the company in the near future.
What then, is the moat that Buffett and Munger themselves have? What is their sustainable competitive advantage which other investors haven't been able to replicate?
Listening to the pair speak and having read some of their books, the largest factor in their moat seems to be the ability to think in longer time frames.
Buffett himself has said: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
This seems to be the core sustainable competitive advantage of Berkshire compared to other investors
The advantages of playing the long game are linked to human nature. This seems most obvious in terms of personal brand and reputation. Having a ten, twenty, and thirty year track record of ethical behavior is an incredibly defensive career position. In Berkshire's case, that meant treating managers well and not breaking up companies for quick cash, a philosophy which gave them access to deals they would not otherwise have had. If a management wanted to be acquired but still maintain control over their company, there wouldn't be any better place to look for an acquirer than Berkshire.
Likewise, even an angel investor in high-tech companies can build a reputation for being absurdly helpful that lasts for a lifetime, even if the companies don't. An individual can build a reputation for being honest and competent even if the companies they are working with don't.
2. Charlie Munger: "The future will not be as good as the past but it doesn't have to be."
This statement from Charlie summed up their thoughts on public markets. Public markets in the United States over most of the last century (1932-99) were an anomaly.
Even as the population tripled, GDP per capita in the U.S. increased by 600%. A median income household, $57,843 per year in 1999, was better off than that of one of the richest men on Earth, John Rockefeller, who lived at the turn of the previous century. In 1999, average life expectancy was more than a decade longer than Rockefeller, and children had less than a 1% chance of dying before the age of one, compared to a 10% chance in Rockefeller's day.
Public markets in the U.S. will not repeat the success of the late 90s again in the 21st century and any investing premise built on that expectation won't work. If you invested $1,000 into the NASDAQ in 1999, you got back to breakeven in 2015. At no point between '32 and '99 was that true.
However, you don't need that much more growth, because standards of living are already so much higher. If you accept the latest research that a doubling of income increases well being by half a point on a ten point scale, going from $5,000 GDP per capita in 1900 to $40,000 in 2000 increased well-being three times more than going from $40,000 to 80,000 would be able to.
The investors I talked to who were achieving 20th century Berkshire-esque returns all seemed to be focused on smaller, private markets, where it's more difficult to invest and there's less competition because the markets are more opaque and smaller.
It's worth noting that low competition and high levels of opacity were the same conditions that public markets were in when Buffett and Munger began investing. Huge advances in communication technology (mostly the internet) and the huge amount of capital created in the second half of the 20th century have created a much more competitive, transparent public market.
3. Stick to Your Circle of Competence and Add in a Margin of Safety
At this year's shareholder meeting, Munger commented that "[i]n order to disagree with somebody you must first understand their argument better than they do."
This is known as the principle of Chesterton's Fence, from an anecdote in G.K. Chesterton's 1929 book, The Thing. Imagine there are two city planners walking down a road. They come to a fence which serves no immediate purpose crossing the road. The first says "I don't see the use of this; let us clear it away." The wiser of the two turns to him and says "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."
The most common way people lose money is to dramatically overestimate how smart they are and how much they know. Despite a fifty-year investing career and having read thousands of books and reports each, both Buffet and Munger often read upwards of 500 pages a day each, and they still confine themselves to a small circle of competence where they can explain the other side's argument better than they can.
They echo the sentiment a section from their 2004 letter to shareholders:
"What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes. Second, and equally important, we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying."
While their particular circle of competence, large industrial companies, isn't likely to endure, the notion of sticking to a narrow circle of competence and making sure there's a large margin of safety will.