In one sentence: Phil and Danielle play and unpack four Munger answers from the 2017 Daily Journal meeting: keep learning and change your mind, keep getting back up after mistakes, index funds can't work perfectly forever, and diversification is for people who don't know what they are doing.
Key ideas
- Buffett's returns fell as his money grew. Phil says Buffett earned about 36% a year in his first 15 years and about 19% over 50 or 60 years. Small investors can use small companies that analysts ignore, and a double in a small company moves their portfolio. At Berkshire's size it wouldn't register. [01:00–02:30]
- Learning keeps compounding. Munger says Berkshire would be modest if Buffett had stopped learning. His example is airlines, which Buffett once called a terrible business and which Berkshire now owns. [02:30–05:00]
- Changing your mind is a skill. Phil's reading of the airline move: oil looks stable at $50–$60, consolidation cut eight big airlines to four, and Delta throws off free cash. He cites a free-cash-flow yield of 11–12% on the purchase price, which he calls a huge turnaround. [05:00–09:00]
- A tip is a reason to research, not to buy. Berkshire's airline stakes (about 7.5% of the portfolio, per Phil) surfaced through 13F filings. Phil and Danielle both stress that they are not recommending United or Delta. The exercise was to see why Munger likes them. [05:00–11:00]
- Keep getting back up. Munger's advice paraphrased: keep at it, avoid bad people, and you will do reasonably well. Phil ties it to Rick Guerin's 42% and 34% losing years alongside 33% a year compounded, and to Berkshire itself, which began as a failing textile mill. Rule #1 means don't realise a permanent loss, not never see a drawdown. [11:00–16:00]
- Choose good companies run by good people. Phil links "do good, be honorable" to picking businesses with a mission you support. [16:00–17:30]
- Index funds can't work perfectly forever. Phil's summary of Munger's answer: money flowing into an index pushes up its stocks with no regard for value, a self-fulfilling loop. The big S&P 500 is probably fine, but narrow industry indexes can become bubbles. He says managers of such funds know they are selling something they can't fully deliver. Berkshire's results came from about two decisions a year. [17:30–22:00]
- Diversification is "no-nothing" protection. Asked about a billion-dollar foundation in three stocks, Munger said his own family holds three: Costco, Berkshire and Li Lu's Himalaya fund. Phil's gloss is that for someone who does know something, diversifying means you can be wrong either way: you under-own the winner. Danielle notes the three are actually quite different from each other. [22:00–30:00, 33:00–35:00]
- Recessions are the opportunity. Right now Phil is finding few "six-inch bars" and hopes for a downturn. If nothing is on sale you sit in cash, which is the anti-fragile position: others get crushed and you have cash. Be specific, not "I'll work it out when it drops". [30:00–33:00]
- Pabrai's version. Don't look for the cheapest deal in town. Look for the best rocket ship with the least downside, which is a free lottery ticket made by understanding the business, its moat and its people. [35:00–36:30]
How it maps to RuleOne
- The airline example is a worked case of Radar: a 13F filing is a lead, and the work (circle of competence, cash-flow yield) is yours. The screen's free-cash-flow yield is the same test Phil ran on Delta.
- /holdings/ is where the concentration question lives: Munger's three holdings versus a spread of 30 small positions.
- The "be dead ready" point matches a watch list with a price in front of each name.
Buffett, Munger and Graham links
- Buffett's partnership-era returns versus Berkshire's long-run record: see the annual-letter performance tables. Phil quotes the 36% and 19% figures from memory.
- Buffett on airlines is in his 2007 and 2008 Berkshire letters (he wrote that airlines had been a death trap for investors). His 2016 purchases became public in 13F filings, as Phil describes.
- Munger on diversification and "no-nothing" investors: the line is Buffett's, e.g. the 1993 letter's argument that diversification protects against ignorance. The quotes here come from the audio and are not verbatim.
- Graham-and-Doddsville (1984) for Guerin; see 098.
Words to know
- 13F: quarterly holdings report from large managers, with up to a 45-day lag.
- Free-cash-flow yield: free cash flow divided by the price you pay for the business.
- Anti-fragile: gains from shocks (Taleb). See 097.
Try this
Pick one of the airline names and, on its /stock/TICKER/ page, find the ten-year free cash flow history. Write whether the cash is steady (a business) or lumpy (a cycle), and what price you'd need for an 11% yield. Do not treat the answer as a recommendation.
Check yourself
- Why did Munger's airline stake matter to Phil as a lesson?
Answer
It showed that Buffett and Munger change their minds when facts change (fuel, consolidation, free cash), and that a tip like a 13F buy is a prompt to research. - What was Munger's view of index funds?
Answer
That the idea can work for a long time but not perfectly forever, since money flowing in lifts prices regardless of value. Narrow industry indexes are the likeliest to become bubbles. - Why does Phil say recessions matter to a Rule #1 investor?
Answer
They put wonderful businesses on sale, and a patient investor with cash and a ready list can buy them.
Short quotes
"It's not about finding the cheapest deal in town. It's about finding the best rocket ship with the least downside." (Phil quoting Mohnish Pabrai, ~35:30, auto-transcribed)