The 5 Commandments of Warren Buffett and Charlie Munger

Dear Fellow Investors:

Below you will find our review of the 2014 Berkshire Hathaway Annual Shareholder Meeting. As we consider these men pioneers of long-duration common stock investing, we wanted to share what we believe were the best nuggets of wisdom from the weekend.

1. Thou Shalt Not Envy.
Munger: “We are way better off by not adding to a culture of envy.”

At Smead Capital Management, our motto is “Only the Lonely Can Play.” Sticking to your own discipline when other investors are temporarily doing better than you, is effectively avoiding envy. We don’t envy the returns others make in their disciplines and hope our investors stick to the kind of long durations emphasized by Berkshire Hathaway.

2. Thou Shall Hire Great People and Over-trust Them.
Buffett: “They make mistakes, but we get more success overall.”

Mr. Buffett sounded like author Jim Collins who said, “get the right people on the bus.” We try to look for this in our investments and attempt to do this in our own company.

3. Thou Shall View Competition as the Enemy of Competence.
Munger: “Don’t try out for the NBA if you are 5’2″ tall. To find a circle of competence, compete against idiots. The slowness of what we do causes few to compete with our model.”

In essence, we think Buffett and Munger were saying that one should invest in S&P 500 index sectors, industries and companies where the consensus is fearful. Buffett has said that you “pay a high price for a cheery consensus” and gave a loud re-endorsement of CEO Brian Moynihan at Bank of America. The long duration confidence and “slowness” of what we do in our large bank holdings will be a source of future success, in our lonely opinion!

4. Thou Shall Value Qualitative over Quantitative.
Buffett: “Aesop Was Right (a bird in the hand is worth two in the bush). Fisher was qualitative in analyzing stocks, Graham was quantitative and Charlie convinced me that Fisher is correct.”

Our eight criteria have a clearly qualitative bent and do not emphasize the deep value pattern of Ben Graham. We will comment more about this subject next week, related to recent statistics which show that long-term Alpha is connected to low-capex and high free-cash flow generation companies.

5. Thou Shalt Remove Ignorance from Investing.
Munger: “Investing and business success is about ignorance removal.”

We have argued for years (just ask my kids) that all the math you need to be a great investor is learned by the end of 7th grade. Don’t let complexity and high math fool you in the investment vehicles you analyze. We contend that successful investing in common stocks comes in long durations and from doing something which is relatively simple, but humanly hard to execute. Charlie said that See’s Candy taught Warren and him about brands and led to the purchase of Coke in 1988. In effect, it “removed some of their ignorance” associated with brands.

Warm Regards,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.

This Missive and others are available at smeadcap.com

We Advise Investors

Sign up to get our advice sent straight to your inbox.

Recent Missives

1Q24 U.S. Value Strategy Newsletter: Common Stock Psychology Matters

April 15, 2024

There are four main educational disciplines that are important to us in the investment process. We believe investors need to understand economics, the history of the stock market, the mathematics of investing and...

⟶ Keep Reading

1Q24 International Value Strategy Newsletter: Higher Natural Rates

April 15, 2024

As we finish the first quarter of 2024 and look ahead, global stock investors are looking for lower short-term rates from central banks. The question remains whether they will get them. Looking back...

⟶ Keep Reading

Bloomberg Markets: Bill Smead on Bank Stocks and Inflation

April 13, 2024

Bloomberg Markets 4/12/2024 For more information go to www.bloomberg.com. The information contained in this article represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past […]

⟶ Keep Reading

Hit Them Where They Ain’t

April 2, 2024

[...] As value investors, we go into companies that are out of favor but have characteristics that could lead us to multi-year winners. Our best stocks were found in the holes in the...

⟶ Keep Reading

Saved by Zero

March 19, 2024

[...] The U.S. Federal Government has set a net zero carbon goal by 2050. Tremendous resources have been applied with borrowed money to fund these goals and subsidize money-losing green investments. After pouring...

⟶ Keep Reading

Looking for the Outsiders

March 12, 2024

William Thorndike’s book "The Outsiders" has been considered a classic for some time now. His story teaches readers about the business performance of Henry Singleton, Katherine Graham, John Malone and Daniel Burke. These...

⟶ Keep Reading

We Advise Investors

Sign up to get our advice sent straight to your inbox.

US INVESTORS

Individual Investors

OR

Financial Advisors, Family Offices,
and Institutional Investors

OR

NON-US INVESTORS

Individual Investors

OR

Financial Advisors, Family Offices,
and Institutional Investors

OR

Scroll to Top