In one sentence: A rerun of 047, where Phil and Danielle argue that you can't know what you don't know until something puts the thought in front of you, so you stay inside a small circle, keep a margin of safety, and borrow wisdom from the "uncles" of value investing.
This is a rerun, so the note records only the main points and what is new on this airing. The new part is a short holiday greeting from Danielle at the start [00:00–01:00]; the rest is the original episode.
Key ideas
- Munger's hit rate. Phil reports Munger saying their results over 60 years come down to about 10 or 15 businesses they got right. Phil's own recollection, not a checked quote. [01:00–03:00]
- Berkshire's textile mistake. Buffett bought a cheap New England textile company in the 1960s just as foreign competition arrived, then repurposed it as his investment vehicle. The margin of safety let him get out about even. [03:00–05:00]
- Rule #1 as a downside focus. Estimate a long-term value and pay about half; being wrong then costs little. [03:00–09:00]
- Read Buffett's letters. They are free on the Berkshire site and openly list his errors. [05:00–07:00]
- You can't know what you don't know alone. Phil argues something must introduce the thought (his skydiving, carpet-business and college examples); Danielle says the test is simply asking "am I capable of understanding this business?" [08:00–13:00]
- Common-sense gaps hurt. The horse-kicking story: a thing you think you know but don't gets you hurt, in investing as with horses. [11:00–15:00]
- Stay a student. Danielle worries about overconfidence once you get good, and sees a practice as continued learning. Phil says a master realises the more they learn, the less they know. [15:00–28:00]
- Size of loss matters at any wealth. Losing $800,000 of a retiree's $1 million forces a return to work. [16:00–18:00]
- The canyon. Keep your circle an inch wide and a mile deep, then widen it. [17:00–18:30]
- Join another family. If your family never taught you investing, adopt "uncles": Graham (The Intelligent Investor, 1949), Buffett and Munger, and authors such as Howard Marks, Joel Greenblatt, Guy Spier and Mohnish Pabrai. Knowledge learned this way passes to your children. [36:00–40:00]
- Expectations need a path. Danielle notes that family expectations help only if the means to meet them exist. [40:00–42:00]
How it maps to RuleOne
- The tickers on /stocks/ are many more than any one circle covers; the guide is to restrict yourself to the few industries you can explain.
- Margin of safety is the discount to the fair-value estimate on each stock page, which is the lever for the "wrong but not hurt" idea.
Buffett, Munger and Graham links
- Buffett's Berkshire textile purchase is told in his shareholder letters (for example the 1985 letter on closing the textile operation).
- Circle of competence: see 001, the 1996 letter.
- Margin of safety is Graham's central idea (The Intelligent Investor, ch. 20).
Words to know
- Circle of competence: the set of businesses you can honestly explain.
- Canyon: Phil's image for a narrow, deep area of knowledge.
Try this
List three industries you could explain to a friend. Then open /stocks/, pick one name from each, and note what you would still need to learn before valuing it.
Check yourself
- What lets you survive being wrong about a company's value?
Answer
A big margin of safety: you buy so far below value that even a poor outcome returns about your money. - What is the "canyon"?
Answer
A narrow but deep area of knowledge that you widen slowly.
Short quotes
"You have to have the thought come into your mind before you can know what you don't know." (Phil, ~10:00, auto-transcribed)