Poor Charlie’s Almanack

His essays extol the virtues of free enterprise, yes, but also of doing business the right way, with integrity and rigor. Of taking your work very seriously, but never yourself. (Location 80)

Look first for someone both smarter and wiser than you are. After locating him (or her), ask him not to flaunt his superiority so that you may enjoy acclaim for the many accomplishments that sprang from his thoughts and advice. Seek a partner who will never second-guess you nor sulk when you make expensive mistakes. Look also for a generous soul who will put up his own money and work for peanuts. Finally, join with someone who will constantly add to the fun as you travel a long road together. All (Location 112)

you will soon discover, Charlie’s observations and conclusions are based on fundamental human nature, basic truths, and core principles from a wide range of disciplines. (Location 137)

lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one’s own beliefs, and many more. (Location 146)

Independence is the end that wealth serves for Charlie, not the other way around. (Location 157)

However, he never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending. (Location 277)

When Charlie returned to Los Angeles, the conversations continued via telephone and lengthy letters, sometimes as long as nine pages. It was evident to both that they were meant to be in business together. There was no formal partnership or contractual relationship—the bond was created by a handshake and backed by two Midwesterners who understood and respected the value of one’s word. (Location 305)

Charlie continues to influence the firm’s attorneys, reminding them, “You don’t need to take the last dollar” and “Choose clients as you would friends.” (Location 314)

When he left, he didn’t take his share of the firm’s capital. Instead, he directed that his share go to the estate of his young partner, Fred Warder, who left behind a wife and children when he died of cancer. (Location 316)

On the last day of a family ski vacation in Sun Valley when I was 15 or so, my dad and I were driving back in the snow when he took a 10-minute detour to gas the red Jeep we were driving. He was pressed for time to have our family catch the plane home, so I was surprised to notice as he pulled into the station that the tank was still half full. I asked my dad why we had stopped when we had plenty of gas, and he admonished me, “Charlie, when you borrow a man’s car, you always return it with a full tank of gas.” (Location 360)

“It’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.” (Location 613)

Darwin’s result was due in large measure to his working method, which violated all my rules for misery and particularly emphasized a backward twist in that he always gave priority attention to evidence tending to disconfirm whatever cherished and hard-won theory he already had. In contrast, most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. (Location 849)

If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. (Location 891)

What are the models? Well, the first rule is that you’ve got to have multiple models—because if you have just one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. (Location 894)

know what it looks like and I know that events and huge aspects of reality end up distributed that way. So I can do a rough calculation. But if you ask me to work out something involving a Gaussian distribution to 10 decimal points, I can’t sit down and do the math. (Location 951)

He played the chain store game harder and better than anyone else. [Sam] Walton invented practically nothing. But he copied everything anybody else ever did that was smart—and he did it with more fanaticism and better employee (Location 1085)

You can say, “Is this a nice way to behave?” Well, capitalism is a pretty brutal place. But I personally think that the world is better for having Walmart. I mean, you can idealize small town life, but I’ve spent a fair amount of time in small towns. And let me tell you—you shouldn’t get too idealistic about all those businesses he destroyed. (Location 1092)

But a fellow like Buffett does. For example, when we were in the textile business, which is a terrible commodity business, we were making low end textiles, which are a real commodity product. And one day, the people came to Warren and said, “They’ve invented a new loom that we think will do twice as much work as our old ones.” And Warren said, “Gee, I hope this doesn’t work—because if it does, I’m going to close the mill.” And he meant it. What was he thinking? He was thinking, “It’s a lousy business. We’re earning substandard returns and keeping it open just to be nice to the elderly workers. But we’re not going to put huge amounts of new capital into a lousy business.” And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners. That’s such an obvious concept—that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. (Location 1132)

And Warren and I don’t feel like we have any great advantage in the high tech sector. In fact, we feel like we’re at a big disadvantage in trying to understand the nature of technical developments in software, computer chips, or what have you. So we tend to avoid that stuff, based on our personal inadequacies. (Location 1170)

Over the long term, it’s hard for a stock to earn a much better return than the business that underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return, even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result. So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects. How do you get into these great companies? (Location 1342)

Warren and I personally don’t drill oil wells. We pay our taxes. And we’ve done pretty well so far. Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it. In fact, anytime anybody offers you anything with a big commission and a 200 page prospectus, don’t buy it. Occasionally, you’ll be wrong if you adopt Munger’s rule. However, over a lifetime, you’ll be a long way ahead—and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man. (Location 1379)

Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young, and then you start expressing it, you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition. (Location 1607)

Each of you will have to figure out where your talents lie. And you’ll have to use your advantages. But if you try to succeed in what you’re worst at, you’re going to have a very lousy career. I can almost guarantee it. To do otherwise, you’d have to buy a winning lottery ticket or get very lucky somewhere else. (Location 1785)

Well, I hope that your optimism is justified. But I do not change my opinion. After all, today we’re in uncharted territory. I sometimes tell my friends, “I’m doing the best I can. But I’ve never grown old before. I’m doing it for the first time, and I’m not sure that I’ll do it right.” Warren and I have never been in this kind of territory—with high valuations and a huge amount of capital. We’ve never done it before. So we’re learning. (Location 1859)

try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they’re like the bee dancing its incoherent dance. They’re just screwing up the hive. (Location 1907)

He can’t shave in the morning if he thinks there’s been any cheating he could get by with that he hasn’t done. And there are people like that. They just feel they aren’t living aggressively enough. (Location 1947)

Then everyone feels sorry, the injuries are horrible, and the case is dangerous for the manufacturer. I think big, rich corporations are seldom wise to make football helmets in the kind of a civilization we’re in. And maybe it should be harder to successfully sue helmet makers. (Location 2001)

California, I believe the Rand statistics showed that we have twice as many personal injuries per accident as in many other states. And we aren’t getting twice as much real injury per accident. So the other half of that is fraud. People just get so that they think everybody does it and it’s all right to do. I think it’s terrible to let that stuff creep in. (Location 2010)

Napoleon46 said he liked luckier generals—he wasn’t into supporting losers. Well, the Navy likes luckier captains. It doesn’t matter why your ship goes aground, your career is over. Nobody’s interested in your fault. It’s just a rule that we happen to have, for the good of all, all effects considered. I like some rules like that. I think that the civilization works better with some of these no-fault rules. But that stuff tends to be anathema around law schools: “It’s not due process. You’re not really searching for justice.” (Location 2019)

Well, I am searching for justice when I argue for the Navy rule—for the justice of fewer ships going aground. Considering the net benefit, I don’t care if one captain has some unfairness in his life. After all, it’s not like he’s being court-martialed. He just has to look for a new line of work. And he keeps vested pension rights and so on. So it’s not like it’s the end of the world. (Location 2024)

Such a course would be a perfect circus. The examples are so legion. I don’t see why people don’t do it. They may not do it mostly because they don’t want to. But also, maybe they don’t know how. And maybe they don’t know what it is. But the whole law school experience would be much more fun if the really basic ideas were integrated and pounded in with good examples for a month or so before you got into conventional law school material. I think the whole system of education would work better. But nobody has any interest in doing (Location 2061)

Like pilot training, the ethos of hard science does not say “Take what you wish” but “Learn it all to fluency, like it or not.” And rational organization of multidisciplinary knowledge is forced by making mandatory 1) full attribution for cross-disciplinary takings and 2) mandatory preference for the most fundamental explanation. This simple idea may appear too obvious to be useful, but there is an old two-part rule that often works wonders in business, science, and elsewhere: 1) Take a simple, basic idea and 2) take it very seriously. And as some evidence for the value of taking very seriously the fundamental organizing ethos, I offer the example of my own life. (Location 2561)

General Motors recently made just such a mistake, and it was a lollapalooza. Using fancy consumer surveys—its excess of professionalism—it concluded not to put a fourth door in a truck designed to serve as the equivalent of a comfortable five-passenger car. Its competitors, more basic, had actually seen five people enter and exit cars. Moreover, they had noticed that people were used to four doors in a comfortable five-passenger car and that biological creatures ordinarily prefer effort minimization in routine activities and don’t like removals of long-enjoyed benefits. There are only two words that come instantly to mind in reviewing General Motors’ horrible decision, which has blown many hundreds of millions of dollars, and one of those words is “oops.” (Location 2649)

It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from the practices of the rest of the crowd. Well, this is (Location 2858)

By 1982, Quant Tech had a dominant market share in its business and was earning $100 million on revenues of $1 billion. Its costs were virtually all costs to compensate technical employees engaged in design work. Direct employee compensation cost amounted to 70 percent of revenues. Of this 70 percent, 30 percent was base salaries and 40 percent was incentive bonuses being paid out under an elaborate system designed by the founder. All compensation was paid in cash. There were no stock options because the old man considered the accounting treatment required for stock options to be “weak, corrupt, and contemptible,” and he no more wanted bad accounting in his business than he wanted bad engineering. Moreover, the old man believed in tailoring his huge incentive bonuses to precise performance standards established for individuals or small groups instead of allowing what he considered undesirable compensation outcomes, both high and low, such as he believed occurred under other companies’ stock option plans. (Location 2925)

Economics was always more multidisciplinary than the rest of soft science. It just reached out and grabbed things as it needed to. And that tendency to just grab whatever you need from the rest of knowledge if you’re an economist has reached a fairly high point in N. Gregory Mankiw’s73 new textbook. I checked out that textbook. (Location 3178)

And finally, even in the present era, if you take Paul Krugman and read his essays, you will be impressed by his fluency. I can’t stand his politics; I’m on the other side. But I love this man’s essays. I think Paul Krugman is one of the best essayists alive. (Location 3198)

So economics should emulate physics’ basic ethos, but its search for precision in physics-like formulas is almost always wrong in economics. (Location 3275)

My fourth criticism is that there’s too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It’s like trying to master medicine without knowing anatomy and chemistry. Also, the discipline of microeconomics is a lot of fun. It helps you correctly understand macroeconomics, and it’s a perfect circus to do. In contrast, I don’t think macroeconomics people have all that much fun. (Location 3277)

Well, how did I solve those problems? Obviously, I was using a simple search engine in my mind to go through checklist-style, and I was using some rough algorithms that work pretty well in a great many complex systems, and those algorithms run something like this: Extreme success is likely to be caused by some combination of the following factors: Extreme maximization or minimization of one or two variables. Example, Costco or our furniture and appliance store. Adding success factors so that a bigger combination drives success, often in nonlinear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often, results are not linear. You get a little bit more mass and you get a lollapalooza result. And, of course, I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurrence. An extreme of good performance over many factors. Example, Toyota or Les Schwab. Catching and riding some sort of big wave. Example, Oracle. By the way, I cited Oracle before I knew that the Oracle CFO [Jeff Henley] was a big part of the proceedings here today. (Location 3309)

failures occur, and so on and so on. It’s my opinion that anybody with a high IQ who graduated in economics ought to be able to sit down and write a 10-page synthesis of all these ideas that’s quite persuasive. And I would bet a lot of money that I could give this test in practically every economics department in the country and get a perfectly lousy bunch of synthesis. They’d give me Ronald Coase.81 They’d talk about transaction costs. They’d click off a little something that their professors gave them and spit it back. But in terms of really understanding how it all fits together, I would confidently predict that most people couldn’t do it very well. By the way, if any of you want to try and do this, go ahead. I think you’ll find it hard. In this connection, one of the interesting things that I want to mention is that Max Planck, the great Nobel laureate who found Planck’s constant, tried once to do economics. He gave it up. Now, why did Max Planck, one of the smartest people who ever lived, give up economics? (Location 3383)

The answer is, he said, “It’s too hard. The best solution you can get is messy and uncertain.” (Location 3391)

effects of effects, and so on. One good thing about this common form of misthinking from the viewpoint of academia is that businesspeople are even more foolish about microeconomics. The business version of the Medicare-type insanity is when you own a textile plant and a guy comes in and says, “Oh, isn’t this wonderful? They invented a new loom. It’ll pay for itself in three years at current prices because it adds so much efficiency to the production of textiles.” And you keep buying these looms, and their equivalent, for 20 years, and you keep making 4 percent on capital; you never go anywhere. And the answer is, it wasn’t that the technology didn’t work, it’s that the laws of economics caused the benefit from the new looms to go to the people that bought the textiles, not to the guy who owned the textile plant. (Location 3436)

I’ll go further: I say economic systems work better when there’s an extreme reliability ethos. The traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religions instilled guilt. We have a charming Irish Catholic priest in our neighborhood, and he loves to say, “Those old Jews may have invented guilt, but we perfected it.” This guilt, derived from religion, has been a huge driver of a reliability ethos, which has been very helpful to economic outcomes for man. (Location 3525)

Read the book Fiasco, by law professor and former derivatives trader Frank Partnoy, an insider account of depravity in derivative trading at one of the biggest and best-regarded Wall Street firms. The book will turn your stomach. (Location 3606)

The same requirement exists in lower walks of life. I constantly see people rise in life who are not the smartest, sometimes not even the most diligent. But they are learning machines. They go to bed every night a little wiser than they were that morning. And boy, does that habit help, particularly when you have a long run ahead of you. (Location 3663)

Consider Warren Buffett again. If you watched him with a time clock, you’d find that about half of his waking time is spent reading. Then a big chunk of the rest of his time is spent talking one-on-one, either on the telephone or personally, with highly gifted people whom he trusts and who trust him. Viewed up close, Warren looks quite academic as he achieves worldly success. (Location 3670)

“Listen, Chuck, I want to explain something to you. Your duty is to behave in such a way that the client thinks he’s the smartest person in the room. If you have any energy or insight available after that, use it to make your senior partner look like the second-smartest person in the room. And only after you’ve satisfied those two obligations do you want your light to shine at all.” (Location 3699)

you turn problems around into reverse, you often think better. For instance, if you want to help India, the question you should consider asking is not “How can I help India?” Instead, you should ask, “How can I hurt India?” You find what will do the worst damage and then try to avoid it. (Location 3715)

Another thing to avoid is extremely intense ideology, because it cabbages up one’s mind. You see a lot of it in the worst of the TV preachers. They have different, intense, inconsistent ideas about technical theology, and a lot of them have minds reduced to cabbage. That can happen with political ideology. And if you’re young, it’s particularly easy to drift into intense and foolish political ideology and never get out. (Location 3722)

have what I call an iron prescription that helps me keep sane when I drift toward preferring one intense ideology over another. I feel that I’m not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I’ve reached that state. (Location 3736)

One also needs checklist routines. They prevent a lot of errors, and not just for pilots. You should not only possess wide-ranging elementary wisdom but also go through mental checklist routines in using it. There is no other procedure that will work as well. (Location 3783)

Another idea that I found important is that maximizing non-egality will often work wonders. What do I mean? Well, John Wooden of UCLA presented an instructive example when he was the number one basketball coach in the world. He said to the bottom five players, “You don’t get to play; you are practice partners.” The top seven did almost all the playing. Well, the top seven learned more—remember the importance of the learning machine—because they were doing all the playing. And when he adopted that non-egalitarian system, Wooden won more games than he had won before. I think (Location 3784)

Well, the reason I tell that story is not to celebrate the quick-wittedness of the protagonist. In this world, I think we have two kinds of knowledge. One is Planck knowledge, that of the people who really know. They’ve paid the dues, they have the aptitude. Then we’ve got chauffeur knowledge. They have learned to prattle the talk. They may have a big head of hair. They often have a fine timbre in their voices. They make a big impression. But in the end, what they’ve got is chauffeur knowledge masquerading as real knowledge. (Location 3798)

Another thing that I have found is that intense interest in any subject is indispensable if you’re really going to excel in it. I could force myself to be fairly good in a lot of things, but I couldn’t excel in anything in which I didn’t have an intense interest. So, to some extent, you’re going to have to do as I did. If at all feasible, you want to maneuver yourself into doing something in which you have an intense interest. (Location 3807)

You may well say, “Who wants to go through life anticipating trouble?” Well, I did, trained as I was. I’ve gone through a long life anticipating trouble. And here I am now, well along in my 84th year. Like Epictetus, I’ve had a favored life. It didn’t make me unhappy to anticipate trouble all the time and be ready to perform adequately if trouble came. It didn’t hurt me at all. In fact, it helped me. So I quitclaim to you Housman and Judge Munger. (Location 3836)

The last idea that I want to give to you, as you go out into a profession that frequently puts a lot of procedure and some mumbo-jumbo into what it does, is that complex bureaucratic procedure does not represent the highest form civilization can reach. One higher form is a seamless, non-bureaucratic web of deserved trust. Not much fancy procedure, just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo Clinic. (Location 3839)

second reason for my decision is my approval of the attitude of Diogenes when he asked, “Of what use is a philosopher who never offends anybody?” (Location 3892)

By then, my craving for more theory had a long history. Partly, I had always loved theory as an aid in puzzle-solving and as a means of satisfying my monkey-like curiosity. And partly, I had found that theory-structure was a superpower in helping one get what one wanted, as I had early discovered in school, wherein I had excelled without labor, guided by theory, while many others, without mastery of theory, failed despite monstrous effort. Better theory, I thought, had always worked for me, and, if now available, could make me acquire capital and independence faster and better assist everything I loved. So I slowly developed my own system of psychology, more or less in the self-help style of Ben Franklin and with the determination displayed in the refrain of the nursery story: “‘Then I’ll do it myself,’ said the Little Red Hen.” (Location 3922)

then, my craving for more theory had a long history. Partly, I had always loved theory as an aid in puzzle-solving and as a means of satisfying my monkey-like curiosity. And partly, I had found that theory-structure was a superpower in helping one get what one wanted, as I had early discovered in school, wherein I had excelled without labor, guided by theory, while many others, without mastery of theory, failed despite monstrous effort. Better theory, I thought, had always worked for me, and, if now available, could make me acquire capital and independence faster and better assist everything I loved. (Location 3922)

When I finally got to the psychology texts, I was reminded of the observation of Jacob Viner, the great economist, that many an academic is like the truffle hound, an animal so trained and bred for one narrow purpose that it is no good at anything else. I was also appalled by the hundreds of pages of extremely nonscientific musing about comparative weights of nature and nurture in human outcomes. (Location 3948)

And I found that introductory psychology texts, by and large, didn’t deal appropriately with a fundamental issue: Psychological tendencies tend to be both numerous and inseparably intertwined, now and forever, as they interplay in life. Yet the complex parsing out of effects from intertwined tendencies was usually avoided by the writers of the elementary texts. (Location 3950)

“If you would persuade, appeal to interest and not to reason.” (Location 4039)

This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives. (Location 4040)

Perhaps the most important rule in management is “Get the incentives right.” (Location 4046)

Later, Skinner lost most of his personal reputation by 1) overclaiming for incentive superpower, to the point of thinking he could create a human utopia with it, and 2) displaying hardly any recognition of the power of the rest of psychology. He thus behaved like one of Jacob Viner’s truffle hounds as he tried to explain everything with incentive effects. (Location 4057)

In my long life, I have never seen a management consultant’s report that didn’t end with the same advice: “This problem needs more management consulting services.” (Location 4080)

Of course, money is now the main reward that drives habits. A monkey can be trained to seek and work for an intrinsically worthless token as if it were a banana if the token is routinely exchangeable for a banana. So it is with humans working for money, only more so, because human money is exchangeable for many desired things in addition to food, and one ordinarily gains status from either holding or spending (Location 4157)

And what will a man naturally come to like and love, apart from his parent, spouse, and child? Well, he will like and love being liked and loved. So many a courtship competition will be won by a person displaying exceptional devotion, and man will generally strive lifelong for the affection and approval of many people not related to him. One very practical (Location 4187)

a result, the long history of man contains almost continuous war. For instance, most American Indian tribes warred incessantly, and some tribes would occasionally bring captives home to women so that all could join in the fun of torturing captives to death. Even with the spread of religion and the advent of advanced civilization, much modern war remains pretty savage. But we also get what we observe in present-day Switzerland and the United States, wherein the clever political arrangements of man channel the hatreds and dislikings of individuals and groups into nonlethal patterns, including elections. (Location 4205)

have no less an authority for this than Max Planck, Nobel laureate, finder of Planck’s constant. Planck is famous not only for his science but also for saying that even in physics the radically new ideas are seldom really accepted by the old guard. Instead, said Planck, progress is made by a new generation that comes along, less brain-blocked by its previous conclusions. (Location 4265)

myself, the would-be instructor here, many decades ago made a big mistake caused in part by the subconscious operation of my deprival-superreaction tendency. A friendly broker called and offered me 300 shares of ridiculously underpriced, very thinly traded Belridge Oil at $115 per share, which I purchased using cash I had on hand. The next day, he offered me 1,500 more shares at the same price, which I declined to buy, partly because I could only have made the purchase had I sold something or borrowed the required $173,000. (Location 4631)

With advanced age there comes a natural cognitive decay, differing among individuals in the earliness of its arrival and the speed of its progression. Practically no one is good at learning complex new skills when very old. But some people remain pretty good at maintaining intensely practiced old skills until late in life, as one can notice in many a bridge tournament. Old people like me get pretty skilled, without working at it, at disguising age-related deterioration because social convention, like clothing, hides much decline. Continuous thinking and learning, done with joy, can somewhat help delay what is inevitable. (Location 4794)