In one sentence: More Munger quotes, mostly about psychology: acknowledge what you don't know, judge your decisions rather than the outcomes, it takes character to sit in cash, and why very smart fund managers do rationally self-serving, dumb things.
Key ideas
- Missed it, partly. Danielle notes the 2020 crash window lasted days. Phil's market gain figure ("up about 31% since last March") is a loose remark. Buffett himself only bought Berkshire stock. [01:00–04:00]
- Acknowledge what you don't know. Munger's "world class at knowing what they don't know" idea. It is hard because the gap is invisible when nobody better informed is in the room. [04:00–07:00]
- Outcome is not decision. A good or bad price result doesn't prove you knew or didn't know something. Review the process, because there is always something you didn't know. [07:00–09:00]
- Confirmation bias. Phil says he makes his analysts re-plough old ground to check his own bias. [08:00–09:30]
- Voting versus weighing. The market is a voting machine in the short run and a weighing machine in the long run. A short-term result is not evidence your reasoning was good. The current trading boom is "100% voting". [09:30–12:30]
- Character to sit in cash. "It takes character to sit with all that cash and do nothing." The point is not to bite on mediocre opportunities, not that waiting is a virtue. [12:00–14:00]
- Passive, passive, then load the truck. You might buy eight companies in two months and nothing for two years. [14:00]
- Institutional imperative. A fund manager is pressured to "swing" because clients can leave; Phil uses the "swing, you bum" baseball image and a scene from The Big Short where Burry ignores calls. Phil suggests Michael Burry's 13Fs are worth watching. [14:00–16:30]
- "It's not supposed to be easy." If it feels easy, you haven't found what you don't know. [16:30–18:00]
- Smart people do dumb things. Salomon Brothers is the example (Buffett and Munger watched very smart people use formulas built on nonsense). Phil says Munger wants to know why, in order to avoid it. [18:00–21:00]
- Incentives, not irrationality. Phil's own insight is that fund managers are rational about their jobs (keep assets, "don't lose more than the index", stay with the herd), which is irrational for you as the investor. When many sell a good company, ask why. Phil says it's his claim that nobody has really spelled this out. [21:00–26:00]
- Patience, discipline and agility. Be ready for a 50% fall in positions; those are mark-to-market losses. Understanding why you own a business is what stops you panicking. [26:00–30:00]
How it maps to RuleOne
- "Why are people selling?" is the Event step. Pair a drawdown on /stocks/ with the reason before you act.
- Judge decisions not results: keep a decision log in /holdings/ with the thesis and what you didn't know at the time.
- Fund-manager incentives explain why a stock can be cheap: forced selling is not a business problem.
Buffett, Munger and Graham links
- Voting versus weighing machine: Graham, The Intelligent Investor, ch. 8 (Mr Market), and Buffett's 1987 letter.
- Salomon Brothers: Buffett was interim chairman in 1991, told in Berkshire's 1991 letter.
- "Smart people do dumb things" and incentives: Munger's 1995 Harvard talk "The Psychology of Human Misjudgment".
Words to know
- Institutional imperative: Buffett's term for organisations copying peers and finding reasons to act.
- Confirmation bias: favouring evidence that agrees with what you already believe.
- Mark-to-market loss: a paper loss from a price change, not a lost business.
Try this
Take your last three buy or sell decisions. For each, write what you knew then (not the outcome), what you didn't know, and one fact that would have changed it.
Check yourself
- What is the difference between the voting and weighing machine?
Answer
Short run, prices reflect crowd votes; long run, they reflect the business's real worth. - Why do fund managers act "irrationally" for investors?
Answer
Their incentive is to keep their job and assets, which pushes them to follow the herd and keep acting. - Why isn't a good outcome proof of a good decision?
Answer
The outcome can come from luck or incomplete information. Judge the process.
Short quotes
"We recognized early on that very smart people do very dumb things." (Phil, reading Munger, ~18:10, auto-transcribed)