Lessons From The Legends: Warren Buffet & Charlie Munger (Part I)

I recently finished reading this book called “The Complete Financial History of Berkshire Hathaway” by Adam J. Mead . Describing the epic journey of Warren Buffet and Charlie Munger’s conglomerate, this book depicts the story of Berkshire Hathaway - from the struggling textile company to a $400 Billion empire.

Being an entrepreneur and an avid reader, I wasn’t surprised by how much this book would offer me. Although quite a long read, the book contained so many genii and never-thought-before tactics on business, investing, and management by the “Oracle of Omaha” himself that I knew I had to put it out.?

So this week, I’ll be sharing all my learnings from my latest read with you all. It shall be a brief, two-part series of everything that I could churn out from the book. Here’s the first bit of what I learned from The Complete Financial History of Berkshire Hathaway:?

1. Knowledge is temporarily fruitful: Having a good amount of knowledge about your business and industry helps but only to an extent. After that, it confers no benefit because every organization in your industry will sooner or later have access to the same information and the same best practices.

2. The second mover advantage: Everyone knows about the first mover advantage. But fewer people are aware of the second mover advantage that one enjoys when they understand and take note of the strategies that worked for the first mover and build on them. This edge over the first mover puts the second mover in a better position a lot of times.?

3. Technology is limitedly beneficial: New technology doesn’t mean extra profits if it is already there with the rest of the organizations in the industry and, more specifically, if the industry is commoditized.?

4. Focus on your returns on capital: Profit margins are important but generating good returns on capital is far more essential. That’s so because a low-margin business with less capital requirements can still survive through its returns on capital. But a business with low margins and high capital requirements will eventually be doomed because it won’t be able to generate satisfactory returns on capital in the long haul.?

5. Develop your competitive advantages: If yours is a capital-intensive business, the only way to ensure growth is by developing strong competitive advantages. Factors like better brand awareness and skilled manpower make a huge difference as in the case of such businesses decreasing profits explicitly represents a fall in capital returns.?

6. Look for more opportunities: Capital allocation is an ongoing process in every business. So one must never stop hunting for new opportunities to put their capital in. Not only within the industry but opportunities outside of the industry must also be examined to ensure constant wealth creation. In the lack of good opportunities, however, the management must consider returning capital to its shareholders via buyback or dividends.

7. Economics over accounting: To quote billionaire Warren Buffet, accounting “obscures rather than illuminates” and is only the starting point of financial analysis. The actual catch lies in focusing on economic realities. That’s how you can build wealth in the long run.?

8. Simple businesses can also make excellent returns on capital: For a business to generate great capital returns, it doesn’t need to be complicated. Berkshire proved this fact when it acquired Scott Fetzer in 1986. This company held simple operating subsidiaries like World Book and Kirby. Yet eventually ended up making billions of dollars for Berkshire and even surpassed its initial purchase price.?

9. Simple businesses are built by great managers: Berkshire owned many uncomplicated businesses like See’s, Nebraska Furniture Mart, Borsheims, and many more. But all these businesses had tough competitors in the industry. Still, the company made amazing capital returns as the managers focused relentlessly and applied their industry knowledge in the business.?

Final thoughts…?

The History of Berkshire Hathaway is as exciting as it gets. More than exciting, it’s a read rich in experience and filled with knowledge and mantras that most people don’t even know of.?

This was it for the first part of my learnings from this financial genius of a book. Stay tuned for the second part.?

Till then, do let me know in the comments below which piece of advice struck you the most.