In one sentence: Phil and Danielle recap Munger's 2021 Daily Journal meeting and Buffett's 2020 Berkshire letter, using them to restate Rule #1 (don't lose money), define value investing as paying less than value, and explain why Buffett and Munger sit on large cash in a rich market.
Key ideas
- Value is price below value. Munger said value investing is buying something for less than it is worth, even a growth stock. Phil goes further and says there is no other kind. [02:00–04:00]
- Why "Rule #1" and not "value investing". Value investing suggests Graham's cigar butts (buying below net cash). Rule #1 means buying wonderful businesses cheaper than they are worth. [05:30–07:30, 17:30–19:30]
- Buffett's two rules. Don't lose money, and don't forget rule one. Most people try to make money. Avoiding mistakes means the few big winners make you rich. [06:30–08:30]
- Venture capital is a different game. Munger said Sequoia is far better at early-stage investing and that he stays out of it, with the exception of BYD, which was small and thinly traded. Phil notes VCs accept many failures and that their math differs from don't-lose-money. [13:30–17:00, 19:00–22:00]
- Know what you don't know. The hosts admire Munger for saying what he can't do. Danielle says that is why he is venerated. [16:00–17:30]
- Regulation and the little investor. Phil complains that securities rules about accredited investors block the route Buffett and he used to build track records with a few small investors. This is his opinion. [09:30–12:30]
- Culture and management. Munger said culture and management matter, citing Costco, and named Bezos among the greatest businessmen. Danielle reads culture as selling good products that improve lives. [28:00–29:30]
- A bubble with no date. Phil says Munger called the US market a major bubble and that nobody knows how long it lasts. Buffett is holding about half of his investing money in cash because he can't find companies on sale, and a market on fire is hard to match. [29:00–34:00]
- Why Buffett doesn't talk the stock up. The hosts disagree on the letter's tone (Phil: hasn't pumped the shares, because Buffett is a net buyer; Danielle: a legacy letter about the businesses and middle America). Both note his candour about the Precision Castparts write-down. [30:00–37:00]
- Underperformance is expected. Berkshire has said for decades it will lag in a bull market because it buys what's on sale. [33:00–34:30]
How it maps to RuleOne
- The "wait with cash" posture is why the screen can show few or no names below your buy price. Treat that as a result, not a bug.
- Buffett's candour about a $10 billion write-down is a model for a thesis log in /holdings/: write down your mistakes.
Buffett, Munger and Graham links
- Buffett's 2020 Berkshire letter (published Feb 2021) and the Daily Journal annual meeting (Feb 2021) are the sources.
- Graham's cigar butts (The Intelligent Investor, ch. 7 and 20) and Buffett's later move to quality, described in the Berkshire letters of the 1980s.
- The Buffett Partnership letters (1956–1969) are the source for the partnership story.
Words to know
- Cigar butt: a cheap, poor business bought for the last puff of value.
- Earnings yield: earnings divided by price, the inverse of P/E.
- Write-down: lowering the book value of an asset that's worth less.
Try this
Read the first two pages of the latest Berkshire letter (Berkshire's website has them). Write one mistake Buffett admits to and how you would have spotted it.
Check yourself
- What are Buffett's two rules?
Answer
Don't lose money. Don't forget rule number one. - Why does Munger leave early-stage investing to Sequoia?
Answer
He says it is a different skill that he doesn't have; they do it better. - Why does Berkshire lag in bull markets?
Answer
It only buys what's on sale and holds cash when nothing is.
Short quotes
"Value investing is buying something for less than its value, period." (Danielle, paraphrasing Munger, ~03:00, auto-transcribed)