In one sentence: With markets turbulent, Phil argues that a recession is the classic event to prepare for: build a list of about ten wonderful businesses, wait until they are obviously on sale, then hold them through the drops, and he explains why professionals struggle to invest this way.
Key ideas
- Why Wall Street can't copy this. Professionals need track records and clients who will wait; a fund that is wrong for eight years loses its investors. Danielle notes Buffett had a 30-year record before it was easy. [01:30–04:00]
- Li Lu's bar. Li Lu says he doesn't trust a 10-year record; he wants 15 years including a downturn or two. Danielle applies this to herself: how confident can you be before a downturn? [04:30–06:00]
- Untested investors. Phil says many middle-aged investors have never seen a lasting reversal: "the tide goes out and you see who's been swimming naked" (a Buffett line). [05:30–06:30]
- Trusting what you own. Danielle, unable to manage actively while ill, found her past choices held up; she counts that as a big plus. [06:30–08:00]
- Use the time to prepare. If this cycle follows the last 140 years (Phil's rough view, "looking at clouds", not a forecast), there may be a year or two before recovery. Build a list of ten companies and wait until they're obviously on sale; don't worry about rounding errors. [08:00–09:30]
- Examples Phil gives. He left the market in late 2007 and returned about 18 months later. A class's ten picks made in June 2009 compounded around 30% a year for roughly 13 years, in Phil's recollection (unverified). [09:30–10:30]
- The hard part is staying in. Returns came quickly: about 40% in year one and about 100% after two years, then the Greek-debt scare in 2011. Phil's answer: you bought wonderful businesses at attractive prices, so let them compound; it is safer than leaving and hoping to get back in. Be ready for a 50% fall from the high. [11:00–14:30]
- Different temperaments. Danielle finds it easy to pull the trigger and hard to hold and has a record of leaving compounders too early; Phil finds holding easy. They say Rule #1 has room for both, but she plans to hold on more. [14:00–16:00]
- Buffett's shift. Early Buffett bought cheap, mediocre businesses and kept rotating ("cigar butts" in Graham's style); Munger pushed him toward great businesses at fair prices that he could hold, partly because size left fewer small opportunities. [15:00–17:30]
- If you're small, look under rocks. Micro and small caps ignored by analysts are where the "cheap and missed" game is. Li Lu's Timberland story: he checked a controversial CEO in person (even his church and club) before deciding. [17:30–21:30]
- Our approach. Keep a list of wonderful businesses, wait for an event to put them on sale; a recession is the big one. Phil says the Fed is creating one to slow inflation. Next time: how to slice this into smaller steps. [22:00–24:00]
How it maps to RuleOne
- The "list of ten" is the watch list; /stocks/ lets you sort by distance to your buy price, so you see which names are "obviously on sale" rather than slightly cheap.
- Tranche buying (
Rb): the site's holdings view supports building positions in steps so a further fall is an opportunity, not a surprise. - The event watch tracks drawdowns, but a drawdown on its own is not a reason to buy.
Buffett, Munger and Graham links
- "Only when the tide goes out do you learn who's been swimming naked": Buffett's 2001 Berkshire letter.
- Buffett's partnership letters (1950s–60s) describe the cheap-stock "generals" approach; Munger's influence is recounted in Schroeder's The Snowball.
- Graham's margin of safety is the root of "obviously on sale".
Words to know
- Compounder: a business that reinvests profits at a high return.
- Drawdown: the fall from a previous high.
- Micro-cap: a very small listed company, often ignored by analysts.
Try this
Write a list of ten companies you would be glad to own for ten years, with a buy price for each. Open /stocks/ and see how many are currently within 10% of your price.
Check yourself
- Why is a recession a good time for Rule #1 investors?
Answer
Wonderful businesses go on sale, which is the event that creates a margin of safety, provided you have prepared the list and the cash. - What did Munger change about how Buffett invested?
Answer
He pushed him from buying cheap mediocre businesses and rotating toward buying wonderful ones at fair prices and holding. - Why does Li Lu want a 15-year record?
Answer
To see how an investor behaves through at least one or two downturns.
Short quotes
"Be emotionally prepared to have them go down 50% from their high and you just stay with them." (Phil, ~14:00, auto-transcribed)