Ep 285 | It's Berkshire Hathaway Week! Charlie's 5 Sim

Thank you for joining me today. It's Brian Gubernick, and welcome to the No Days Off podcast. We believe that every single day brings a new opportunity to get better. This week I happen to be making the annual pilgrimage to Omaha, Nebraska. Why am I going to Omaha? Because we have the Berkshire Hathaway shareholder meeting, which as I've talked about in previous episodes is a really, really awesome event to attend. Berkshire Hathaway, company owned by Warren Buffett and what, well, used to be owned by Charlie Munger who unfortunately passed late last year, as the CEOs, as the leaders of that company. It's a public company, so of course all the investors own the company as well, but Charlie and Warren's company Berkshire Hathaway holds its annual shareholder meeting this weekend. And so I will be making the trip out there. I've gone a couple times. This will be the third time that I've attended. And I don't necessarily know if it's something you have to go to every year, but I do think that if you want to be smarter, if you want to be inspired, if you want to be around some great minds and hear, you know, this year it's going to be Warren and it's going to be a couple of the, uh, leaders that he, he's kind of moved up the ranks, especially now that Charlie's passed. Uh, this is the place to go. Who gets to go? Anybody that's in fact a shareholder of Berkshire Hathaway stock. So if you own a share, you can go, you get credentials to go. So, uh, even if you don't own a share, if you really wanted to go, you could buy a ticket for next to nothing on on eBay or something like that. So this weekend I am going out to the Berkshire Hathaway meeting, which means that we should talk a little bit about Charlie Munger, who I've shared in the past is just one of my favorite, favorite people to study. Charlie's mental models and just the way he went about doing different things, just an amazing man to study. And I was reading an article, it's actually an article from last November. So it was, it was, uh, you know, a little bit ago, but the article was entitled The Wisdom of Charlie Munger: 5 Simple Steps to Investment Success. And I had it, had it flagged and it popped up in my notes today when I was looking for something else. And I thought, you know what, this might be a great article, the 5 simple steps to investment success to share with the No Days Off Nation. So Charlie Munger says the best thing a human being can do is to help another human being know more. I think these 5 steps to investment success are exactly that. What are these 5 steps? Number 1, Charlie says, know your stuff. Know your stuff. Charlie often referred to this basic concept as really kind of staying within your own circle of competence. You know, what is it that you know, you know? Right? Like what in your world— I want you to think about this right now— what is it in your world that you are certain is something you know and/or that you're good at? Charlie would say, stay from an investment standpoint, stay within your own circle of competence and focus on investment decisions on industries and companies that you truly understand. I think that this know your stuff and, and stay within your circle of competence applies obviously not just within investment, but well beyond. That as well. I think too often we get outside of our circle of competence. It's probably, probably a podcast episode in the future around that, but we get outside of our circle of competence and therefore we're in this uncharted territory and we wonder why we're not having success at the level that we would expect. And it's because we're outside the scope of what we know. Now you have two options, either don't play outside your circle of competence, or expand that circle by learning and studying and getting some experience. So number 1, in terms of, uh, 5 simple steps to investment success, know your stuff. Number 2, Charlie would say, who gains? Who gains? Understand incentives is what Munger would say, is what Charlie always said. Understanding incentives is key in making investment decisions. You've got to have a clear understanding as to why management of a company makes certain decisions and how they can guide the future outcome of that company. Charlie Munger would say, show me the incentive and I will show you the outcome. The basic rule of incentives is that you get what you are rewarded for. If you have a dumb incentive system, you get dumb outcomes. So to back up, understand who gains, understand the incentives, understand how the company and its employees and the decision-makers are in fact rewarded. If you show me how that is to occur, I will show you what the outcome is likely to be. So understand from an investment perspective who gains. Number 3, be safe. Be safe. Charlie, uh, lived pretty simply, yet he lived pretty well. He was a value investor, and he always had baked into his calculations a margin of safety. Charlie knew that undervalued stocks can always get cheaper, and therefore he opted to instead buy securities that trade well below their inherent value in order to provide a cushion to unexpected losses. So he always looked for a deal, but the deal was relative to the inherent value of the company. If he couldn't find that space, if he didn't find that margin of safety, he didn't make the acquisition, which is why, you know, one would say both Charlie and Warren are pretty conservative. They're called conservative because they don't take a lot of risk and they're only buying those things where in fact there's a margin of safety. They are in fact safe. Next, number 4, in terms of investment rules or, or ways to have investment success: see the edge. Charlie, like his partner Warren, has always favored investment in companies with a so-called competitive moat or some sort of protective layer against their rivals. Moats were very, very big for Charlie when it came to companies that he was underwriting and considering. He wanted to know what made them special. An example of this would be Apple's services division that tied directly to its hardware, that created the recurring revenues in this ecosystem that so many of us are locked into. That has tremendous value. Charlie Munger would say that he buys barriers because building a barrier is tough, but buying into a barrier is a little bit simpler. Might cost a bit more, but that's what makes for a great investment. So maybe you're not investing in stock. If you're investing in real estate, I'd ask you like, what makes this property unique or different? What gives you a competitive advantage versus other properties that you are naturally gonna be competing with. Maybe it's location, maybe it's size, right? So you wanna make sure specifically in rental properties that you are appealing to the greatest quantity of potential tenants. If you're buying a rental property, that would arguably be a version of an advantage, of a competitive advantage or a moat. Lastly, no surprise here, and I don't have to dig too deep because we've talked about it quite a bit. Charlie believed that a simple step to investment success is to understand the power of compound interest. It is the most underrated investment principle, as Charlie shared countless times. Same with Warren. They talk about it nonstop. Charlie would say, spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step, you get ahead, but not necessarily in fast spurts, but you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. And at the end of the day, if you live long enough, most people get what they deserve. That is compound interest, not just in investment, but in, but in life. On that note, let's make sure we celebrate the Berkshire Hathaway shareholder meeting, Warren Buffett, and RIP Charlie Munger. He'll definitely be missed this coming weekend. That's all I have for you today, the No Days Off podcast. Thank you so much for listening, and remember, every single day brings a new opportunity to get better. So let's get after it. [MUSIC] [MUSIC]