In one sentence: Phil explains mistakes of omission (the great business you didn't buy because the price never came down) and reads Buffett's 2018 letter, where Berkshire can't find anything priced right, then argues that a high market is a gift of time to build a wish list.
Key ideas
- Two kinds of mistake. A commission mistake is buying the wrong business, and a margin of safety usually limits it to "no gain, no loss". An omission mistake is not buying a great one, and it can't be cushioned. Phil says Munger and Buffett make many of these. [00:00–04:30]
- The painful version. You set a buy price, the stock never reaches it, and it compounds anyway. Munger still regrets a 1970s miss (Phil's guess is that he wouldn't pay the price). [03:30–05:00]
- See's Candy. Per Phil, Buffett and Munger bought it for $25 million in the 1970s and it now sends about $65 million a year in cash to Berkshire. It grows only about 4% a year. They have said a price $10 million higher would have lost them the deal, and they laugh at it. [05:00–07:30]
- You will make omission mistakes. If you insist on a long-term business and a big margin of safety, some great ones will leave without you. The cost of the alternative is "price creep", which Phil says he sees in friends who manage others' money. [07:00–10:00]
- Hindsight caveat. A mistake only shows later. Setting a price from your best analysis and holding to it is correct even when the stock never gets there. [08:30–10:00]
- Buffett's letter: nothing to buy. Berkshire wants an "elephant" acquisition and can't find one at a sensible price. The private market is expensive too. [10:00–11:00, 17:00–20:00]
- Fewer public companies. Phil says the Wilshire index had about 5,000–6,000 companies 30 years ago against about 2,500 now, which he blames on regulation (Sarbanes-Oxley) and the pressure of quarterly reporting. Private equity money now dwarfs IPO money, which pushes up private prices. Treat his figures as approximate. [11:00–13:30]
- Accounting change. New rules make unrealized gains and losses on Berkshire's stock holdings run through earnings. Phil expects very noisy results and thinks Buffett is tired of it. Buffett also moved away from book value as the main measure of Berkshire. [15:00–17:30]
- Reading the letter. Buffett says Berkshire will stay a "financial fortress", will make costly mistakes of commission and miss obvious opportunities, and expects to buy more marketable equities in 2019. He stresses this is not a market call. Phil notes that Buffett has made softer market calls in the past. [17:00–20:30]
- Market level indicators. Phil cites the Shiller PE and the Wilshire-to-GDP ratio (over 175% against about 20% in the 1970s, per Phil) as signs of an expensive market. Danielle's counterpoint is that Buffett simply buys when a good business is cheap. Phil agrees on the method and says he is wary. Neither can predict the timing. [21:00–25:00]
- The market predicts too many recessions. The market has dropped without a recession, such as the near-20% fall of December 2018, so the real one will probably be a surprise. "The laws of economics no longer apply" is a sign of a top. [25:00–27:00]
- Use the time. Most listeners have no list of ten businesses they know inside out, so a late bull market is a gift. Danielle describes swinging between "I hope it crashes" and "I hope it waits, I have more to read". Phil's answer is to stack up the wish list now, because even after a crash it takes months for prices to reach a level you'd buy. [28:00–31:30]
How it maps to RuleOne
- The wish list is the screen's job. Build it from /stocks/ and note your buy price for each name so that the cost of waiting is visible.
- The event watch on / is how the "fear around a recent event" Buffett mentions shows up. Drawdowns and insider buys are where a wish-list name might fall into range.
- The Shiller PE and market-to-GDP view is not on the site, so treat it as outside context.
Buffett, Munger and Graham links
- Berkshire's 2018 letter (published February 2019) is the source of the "financial fortress", "elephant" and "not a market call" passages.
- Buffett and Munger's See's Candy story is in the 1984 and 2007 letters and in The Essays of Warren Buffett.
- The Wilshire-to-GDP idea is Buffett's 2001 Fortune article on market value to GNP.
- Graham's margin of safety (The Intelligent Investor, ch. 20) is the cushion against commission mistakes.
Words to know
- Mistake of omission: a good opportunity you saw and didn't take.
- Mistake of commission: a purchase that turned out wrong.
- Wish list: a set of researched businesses with the price you'd pay.
- Price creep: slowly raising the price you'll pay to get deals done.
Try this
Start a wish list. Choose five businesses from All stocks that you could understand, write a buy price next to each and read one 10-K for the first. Revisit the prices in a month and note whether any moved toward your number.
Check yourself
- How is a mistake of omission different from one of commission?
Answer
Omission is missing a great buy, and a margin of safety can't protect you from it. Commission is buying the wrong thing, which a margin of safety often limits to no loss. - Why did the See's Candy story matter here?
Answer
It shows that insisting on a price can come close to missing a huge winner, and that this is part of disciplined buying. - Why does Phil call a high market a blessing for most listeners?
Answer
It gives time to research and build a wish list before a crash, since even after one prices take months to reach buy levels.
Short quotes
"Prices are sky high for businesses possessing decent long term prospects." (Buffett's letter, read by Phil, ~17:30, auto-transcribed)