In one sentence: After a short teaser with Jacob Taylor (author of The Rebel Allocator), Phil and Danielle argue that the finance industry makes investing look harder than it is. The skills can be learned by anyone, and the episode ends with a look at the MSCI ACWI global index and why Buffett stays America-centric.
Key ideas
- Teaser: Jacob Taylor. He runs Farnham Street Investments, hosts the Five Good Questions series and wrote The Rebel Allocator, a fable about capital allocation (a "Mr. Miyagi as Buffett" story). The full interview comes in about six weeks, and the hosts ask listeners to read the book first. Charlie Munger phoned him after reading it. [00:00–04:30]
- Capital allocation is the CEO's real job. Taylor says smart executives keep making preventable mistakes in deciding where the money goes. The same biases and group-think appear in investors. [01:00–03:30]
- The "priesthood". Phil argues finance keeps its jargon and rituals (Sharpe ratio, CAPM, beta adjustments) so outsiders believe they can't manage money, and the industry benefits when they pay fees. He calls the formulas "built on quicksand" because risk can't truly be quantified. [10:00–13:00]
- Munger on the math habit. Phil recounts Munger's account of watching clever people at Salomon keep using formulas they knew rested on faulty assumptions, because they were good at the math. Treat this as Phil's retelling. [12:00–14:00]
- Investing is a learnable skill, not an athletic one. Unlike hitting a fastball, it takes no physical talent. Danielle says people who aren't drawn to Wall Street culture, women and men alike, can become strong investors. Disliking the "good old boys club" may be a good sign. [09:00–11:00, 14:00–16:00]
- Stay away from Wall Street thinking. Munger is in Pasadena, Buffett in Omaha, Phil in Atlanta, Danielle in Zurich. Distance from the herd helps you stay independent of its fear, greed and comparison. [14:00–15:30]
- Prove it small. Phil says a verifiable 15% a year on a small amount would attract capital, since many people have too little money to interest a human adviser. Treat this as his claim, not a promise. [15:00–16:30]
- Reading and focus. Danielle is reading accounting books and swapping phone time for book time in bed. Phil says a circle of competence has edges you only see if you are an expert in one industry, so build the reading around a few areas. [17:00–22:30]
- MSCI ACWI. It is the All Country World Index, roughly 2,400 stocks, combining a developed-market "World" index with an emerging-markets one. In Phil's telling it is "like the S&P 500 for the world". [22:30–29:00]
- Why Buffett stays American. Phil quotes the line that when America catches a cold the rest of the world gets pneumonia, so a global index doesn't offset US trouble. He says Buffett's index advice is for people who won't learn to pick companies. [29:00–31:00]
- Munger's "do less". Munger's explanation at the Daily Journal meeting for why Berkshire beat indexes was that they tried to do less. [31:00–32:00]
How it maps to RuleOne
- The screen and stock pages are meant to remove the "priesthood" barrier. The checks (moat, management, price against value) are plain numbers on /stocks/, with nothing that needs CAPM or beta.
- RuleOne is a US-listed screener, so it takes the same Buffett-style view of the US, and any foreign name still carries its country risk.
- /holdings/ is where you would compare a deliberate set of picks with an index.
Buffett, Munger and Graham links
- Munger's "man with a hammer" and his criticism of academic finance appear in his talks on worldly wisdom and in Poor Charlie's Almanack.
- Buffett's criticism of beta as a measure of risk is in his 1993 Berkshire letter.
- Buffett's advice on a plain index fund is in the 2013 Berkshire letter, addressed to a trustee investing for non-experts.
Words to know
- MSCI ACWI: a global stock index spanning developed and emerging markets.
- Beta: how much a stock moves compared with the market. Phil does not regard it as true risk.
- Capital allocation: how management decides to spend the business's cash, from projects to buybacks.
Try this
Open /stocks/ and choose one company you know well. Write its moat, its management and a rough price in plain words, with no ratios beyond the ones shown on the page. If you can do that in a page, the "priesthood" idea loses some of its force for you.
Check yourself
- Why does Phil call the finance formulas a priesthood?
Answer
The jargon makes outsiders think they can't do the job, and that keeps clients paying fees. He also says the formulas are built on unmeasurable risk. - What is the MSCI ACWI?
Answer
A global equity index of about 2,400 stocks across developed and emerging markets. - Why does Buffett prefer a US index to a world index?
Answer
He believes US troubles spread abroad, so a world index adds no offset, while the US economy has been the strongest long term.
Short quotes
"We tried to do less." (Munger at the Daily Journal meeting, as quoted by Danielle, ~31:30, auto-transcribed)