In one sentence: How do you know you're capable of understanding a business? A little related experience is enough to start (like skiing before snowboarding), start from humility rather than self-doubt, wait for a "fat pitch" you can obviously hit, and sort every candidate into too hard, watch list or buy.
Key ideas
- Finding names is now easy. Part three of the series. Before the internet, Phil used library copies of Value Line and ordered annual reports by mail, and professionals paid for terminals. Today a Google search surfaces candidates. Guy Spier's book The Education of a Value Investor notes that a Bloomberg terminal's stream of information distracted him, so he moved it to a side room. [00:00–10:00]
- Munger's four filters again. Understanding, moat, management, price with a margin of safety (see 001, 076). Munger and Buffett are rigorous about the first filter and stay inside what they understand. The skill is knowing what you don't know. [10:00–15:00]
- Experience transfers. Being a skier made snowboarding accessible after a week with an instructor. Likewise, anyone who has rented, bought or used products has a little real-estate or consumer experience to build on. The instructor is Buffett and Munger. [15:00–23:00]
- Humility, not self-doubt. Danielle's exchange with Phil: "think for yourself or leave" is the wrong message. Start assuming you understand nothing, and treat it as being a beginner, which carries no judgment of your worth. Phil traces his harsher tone to Army and Wall Street training. [23:00–34:00]
- The fat pitch. Buffett's idea, borrowed from Ted Williams: there is no called strike in investing, so you can watch pitch after pitch until one arrives in the zone you know. When you start, the zone may be tiny, and that's fine. [34:00–38:00]
- Beginner starting place. Choose something you already use (a grocery chain, a phone), watch it as a customer, and then read. [37:00–39:00]
- Rule #1 as the target. Pairs with the idea that it's the downside you aim for: you want a business that, in 10 years, will be worth more than today even if it falls in the next two. Pabrai's "free lottery ticket" is the same thought. (The next episode's opening makes this explicit, see 079.) [38:00]
- The case-study idea. Phil plans workshop case studies of simple companies in 2009, to see how a fat pitch would have looked. Danielle notes that the market was very low then, so hindsight flatters. [40:00–43:00]
- Reading overcomes a lot of missing information. Munger, Buffett and Phil all read heavily. [43:00–44:00]
How it maps to RuleOne
- The /stocks/ screen and each stock page are a way to look at lots of "pitches" cheaply and pass on most. Putting a name on a /holdings/ or watchlist-style list is the "wonderful business, not on sale" bucket.
- The agent stack's Radar produces candidates, but the "can I understand it?" test is yours and can't be delegated.
Buffett, Munger and Graham links
- Ted Williams's strike-zone story is told in Buffett's partnership-era and later writings (for example the 1997 Berkshire letter's "no called strikes" passage). Check the exact letter year before quoting it.
- Buffett's "too hard pile" and his one-foot hurdle versus seven-foot hurdle idea is related to the "two-inch bar" Phil uses.
- Guy Spier, The Education of a Value Investor (2014), for the Bloomberg terminal story.
Words to know
- Fat pitch: an investment so obviously inside your competence and so cheap that the decision is easy.
- Circle of competence: the businesses you can genuinely understand.
- Watch list: wonderful businesses you track until the price is right.
Try this
Choose two products you use every week. Look up each company on /stocks/, then answer in one sentence each: "How does this company make money?" If you can't do it after reading its stock page, put it in the too-hard pile and note what you'd need to learn.
Check yourself
- What does Phil mean by experience "informing" your ability to understand a business?
Answer
Skills and familiarity from a related area (as a skier learning snowboarding, or as a renter and buyer looking at real estate) make a new area learnable. - Why is there no cost to waiting in investing?
Answer
You don't have to swing: you can watch pitches go by until one lands in the zone you understand, so there are no strikeouts for not acting. - Which three outcomes can a candidate have?
Answer
Too hard, wonderful business that isn't on sale yet (watch list), or wonderful business on sale (buy).
Short quotes
"Humility… there's nothing negative about being humble." (Danielle, ~38:00, auto-transcribed, paraphrased)