Richer, Wiser, Happier by William Green
Following Buffett’s lead, we should always keep enough cash in reserve, so we’ll never be forced to sell stocks in a downturn. We should never borrow to excess because, as Eveillard warns, debt erodes our “staying power.” Like him, we should avoid the temptation to speculate on hot stocks with supposedly glorious growth prospects but no margin of safety. And we should bypass businesses with weak balance sheets or a looming need for external funding, which is liable to disappear in times of distress.
To be a great cloner, you have to check your ego at the door.
Be patient and selective, saying no to almost everything. Exploit the market’s bipolar mood swings. Buy stocks at a big discount to their underlying value. Stay within your circle of competence. Avoid anything too hard. Make a small number of mispriced bets with minimal downside and significant upside.
Guerin used margin loans to leverage his investments because he was “in a hurry to get rick.” Guerin was hit with margin calls after suffering disastrous losses in the crash of 1973-74. As a result, he was forced to sell shares to Buffett that were later worth an immense fortune. By contrast, Buffett said that he and Munger were never in a hurry because they always knew they’d become enormously rich if they kept compounding over decades without too many catastrophic mistakes.
Buffett was true to himself – that he lived in extraordinary alignment with his own personality, principles, and preferences. Buffett is to ask yourself, “Would I rather be the worst lover in the world and be known publicly as the best, or the best lover in the world and be known publicly as the worst?”
He handles his own daily schedule and keeps it blissfully uncluttered by rebuffing almost any request that might distract him from reading and contemplation. Similarly, he insists on working solely with people he likes and admires.
As much as possible, Pabrai remains inside this cocoon. He avoids meeting the CEOs of companies that he’s analyzing because he thinks their talent for selling makes them an unreliable source of information – a policy he cloned from Ben Graham. He avoids speaking with his own shareholders, except at his annual meeting, and he refuses to meet potential investors: “I genuinely don’t enjoy that whole interaction, the mumbo jumbo of all that.”
“Munger says he doesn’t care about being rich. What he really cares about is having independence. I fully endorse that. What the money gives you is the ability to do what you want to do in the way want to do it… And that’s tremendous benefit.”
During the financial crisis of 2008-09, Pabrai’s highly concentrated funds fell about 67 percent before staging a rapid recovery. At his 2009 annual meeting, he told his shareholders, “Most of the mistakes in the funds occurred because I was stupid. They didn’t happen because of market issues.” He highlighted several “dumbass” errors he had made in analyzing stocks such as Delta Financial and Sears Holdings, which were crushed. Almost none of his investors abandoned him. The lesson: “You go as far out as you can on the truth variable and the payback is huge.”
The future may be unpredictable, but this recurring process of boom and bust is remarkably predictable. Once we recognize this underlying pattern, we’re no longer flying blind.
Watching the meteoric rise in the price of Bitcoin in 2017, Marks wondered if this was just the latest in a long history of incredible wonders that would prove less than wondrous. Likewise, he could never bring himself to bet that thrilling stocks such as Tesla and Neflix would continue to soar to infinity and beyond: “When things or people are successful, it usually brings in hubris, overexpansion, a belief that we can’t miss, which is very dangerous.”
Financial independence doesn’t come from making or having a lot of money. You know what it comes from? Spending less than you make. Living within your means. It’s important to know that your anti-fragility comes from the extent to which you are not at the limit. The trouble is, we tend to forget this when we’re thriving – or when we’re watching others thrive while we lag behind. So we edge closer to our limits and eventually stray beyond them.
It’s vital, then, to be honest with ourselves about how much risk we can handle: “If you take on too much, it will overwhelm your emotional resilience and you will be forced to do the wrong thing even if nothing else transpires against you – like a margin call or a need to buy bread.”
Indeed, Nomad rejected all of the get-rich-quick tactics that hedge funds routinely use to pump up their short-term performance – high-testosterone strategies that Sleep dubbed “investment Viagras.” For example, Nomad never used leverage, never shorted a stock, never speculated with options or futures, never made a macroeconomic bet, never traded hyperactively in response to the latest news, never dabbled in exotic financial instruments with macho names such as LYONs and PRIDEs. Instead, Sleep and Zakaria played what they viewed as “a long, simple game,” which involved buying a few intensively researched stocks and holding them for years.
Sleep and Zakaria are titans of impulse control. How else could they have held Costco for eighteen years and Amazon for sixteen years while it has soared from $30 to more than $3,000 per share? They understood the fundamental truth that we benefit by deferring gratification and prioritizing long-term outcomes. But it’s not enough to grasp this principle intellectually. Equally important, they constructed an internally consistent ecosystem that supported such behavior.
If you and I hope to achieve long-lasting success as investors, we need to follow their example by systematically resisting the external and internal forces that push us to ac impetuously. With that in mind, I ignore all of the useless media chatter about looming market corrections and crashes. I go weeks on end without checking how my investments have performed. My default position is to do nothing.
Howard Marks once told me, “Our performance doesn’t come from what we buy or sell. It comes from what we hold. So the main activity is holding, not buying and selling. I’ve always wondered if it wouldn’t enhance an organization to say, ‘We only trade on Thursdays.’ And the other four days of the week, all you can do is sit and think.”
“I call myself a farmer,” says Russo. “Wall Street is flooded with hunters – people who try to go out and find the big game. They fell it and bring it back, and there’s a huge feast and everything is fabulous, and then they look for the next big game. I plant seeds and then I spend all of my time cultivating them.”
His weight gradually drifted above two hundred pounds. Determined to drift no more, he proclaimed to friends and colleagues that he’d lose one pound per year for the next ten years. That may sound absurdly unambitious, but some studies suggest that the average American male gains one to two pound per year between early adulthood and middle age. Gayner, a master of compounding money, understood how small advantages – or disadvantages – add up over long periods. So he set about changing the unhealthy habits of a lifetime. … All of this points to an important conclusion that applies both to investing and life. Resounding victories tend to be the result of small, incremental advances and improvements sustained over long stretches of time. “If you want the secret to great success, it’s just to make each day a little bit better than the day before,” says Gayner. “There are different ways you can go about doing that, but that’s the story… Just making progress over and over again is the critical part.” NEW FLASH! When we spoke again in 2020, Gayner informed me, “This morning, as I stepped on my scale, I was 189.6.” His steady, persistent effort had paid off and he had finally returned to what he weighted thirty years ago.
If you want to understand Gayner’s success, then look no further. Nobody cares more about all the little things. Individually, his day-to-day habits seem inconsequential – then equivalent of cyclists traveling with their favorite pillows. He gets up early and arrives at the office early. He jogs and does yoga. He eats heaps of salad and a dearth of doughnuts. He works in a quiet office where he can focus. He consistently applies four time-tested principles as a filter for every investment idea. he invests in a tax-efficient manner. He keeps his investment expenses as low as possible. He lives way below his means. He read insatiably. He studies and intelligently clones other sophisticated investors. He prays, goes to church, and draws emotional strength from his faith in a higher power. He behaves in way that inspire trust and goodwill. None of these practices is earth-shattering in isolation. But remember: it’s the aggregation of marginal gains that’s so powerful. Moreover, the modest benefits generated by smart habits continue to compound over many years. In the short run, all those tiny, incremental advances seem insignificant. But time is the enemy of bad habits and the friend of good habits. When you pound away year after year, decade after decade, the cumulative effect is stunning.
Sustainable competitive advantages, reliable cash flows, high returns on invested capital, and strong balance sheets
Munger once observed, “Three things ruin people: drugs, liquor, and leverage.” The category of activities that exhibit this type of dangerous asymmetry also includes drunk driving, extramarital affairs, and cheating on taxes or expense reports. Regardless of our moral views, these are fooling bets.
Another cognitive danger that Munger highlights in his speech is the “tendency to quickly remove doubt” by rushing to make a decision – a habit that’s often triggered by stress.
The reluctance to reexamine our views and change our minds is one of the greatest impediments to rational thinking. Instead of keeping an open mind, we tend consciously and unconsciously to prioritize information that reinforces what we believe – Charlie Munger
“I know that anger is stupid. I know that resentment is stupid. I know self-pity is stupid. So I don’t do them… I’m trying not to be stupid every day, all day.” – Munger
For Munger, the goal has never been to win at all costs. “Money was very important to him,” says his daughter Molly. “But to win it by cheating or win it and lose the battle for life, that was never what he was about.” In the foreword to Damn Right!, a biography of Munger by Janet Lowe, Buffet writes, “In 41 years, I have never seen Charlie try to take advantage of anyone… He has knowingly let me and others have the better end of a deal, and he has also always shouldered more than his share of the blame when things go wrong and accepted less than his share of credit when the reverse has been true. He is generous in the deepest sense…”
Munger embodies an enlightened form of capitalism that is infused with old-fashioned values. Fore example, he disapproves of mean-spirited tactics such as “brutalizing” suppliers by paying them late. “My theory of life is win-win,” he says. “I want suppliers that trust me and I trust them. And I don’t want to screw the suppliers as hard as I can.” But how does he reconcile his faith in fairness with the reality that many fortunes have been built in a less honorable manner? Munger responds by speaking about the multibillionaire media tycoon Sumner Redstone – a famously shrewd and “hard-driven tough tomato” who amassed controlling stakes in Viacom and CBS. “Almost nobody ever liked him, including his wives and his children,” says Munger. “Sumner Redstone and I graduated from Harvard Law School about a year or so apart, and he ends up with more money than I did. So you can say he’s the success. But that’s not the way I look at it. And so I don’t think it’s just a financial game, and I think it’s better to do it the other way… I use Sumner Redstone all my life as an example of what I don’t want to be.”
When I ask Munger what we can learn from him and Buffett about how to lead happy lives, he talks about the quality of their relationships and the joy of partnering with decent, trustworthy people: “Warren has been a marvelous partner for me. I’ve been a good partner for him… If you want to have a good partner, be a good partner. It’s a very simple system, and it’s worked very well.” The same principle applies to marriage, too: “If you want a good spouse, deserve one.”
“Possessions make you rich? I don’t have that type of richness. My richness is life, forever!” The satisfaction of being right and making good choices and doing better than others.
Just think for a moment about those basic ingredients that helped to make for a richly rewarding life. Family. Health. Challenging and useful work.
His priority was never to maximize his returns, but to preserve his capital and make sustainable progress over many decades. He set aside a hefty cash reserve, which reduced his gains but insured that he’d never be forced to sell any of his investments prematurely in times of trouble. That stable foundation, along with his modest spending habits, allowed him to withstand any amount of economic turmoil.
Basically, you can’t control what happens to you, but you can control your attitude towards it. Whether it’s good, bad, indifferent, fair, unfair, you can choose the attitude you take to it.
It’s simple. If your life is more important than your principles, you sacrifice your principles. If your principles are more important than your life, you sacrifice your life.
I feel wealthier not because I have more money but because I’ve got health, good friendships, I’ve got a great family. Prosperity takes all of these things into consideration: health, wealth, happiness, peace of mind. That’s what a prosperous person is, not just a lot of money.
The most important thing people need is love-and the less love they have, the more they need these material things. They look for money, for some accomplishment, or something external to validate them. But all they need to do is be loved and to give love. You know, my wife never knows how much money we have. She never cares and she never thinks about it other than how she could use it to spend it on somebody.
He is constantly gifting books that have helped him on his journey, including a special edition of From Poverty to Power that he paid to reprint. I feel that the best gift I could give anybody, whether they’re poor or rich, is to give them a book that could change their life he says. And so my hobby is giving out books.