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Wednesday, February 3rd, 2010

What You Ought To Know About Buffett & Munger’s Four Filters Invention


You guys know I love Charlie Munger and Warren Buffett… I consider them American hereos.

I read an interesting book called The Four Filters Invention of Warren Buffett and Charlie Munger (by Bud Labitan) the other day — if you like business, investing or Buffett or Munger, you should buy this book.

I thought I’d briefly summarize their “Four Filters” below — I paraphrase Bud Labitan’s book at times and add in a dose of quotes I’ve collected (see my past postings on Charlie Munger Quotes or Warren Buffett Quotes) as well as some quotes and insights from other folks.

The Four Filters Invention

1) Understandable First-Class Businesses

  • Use The “Scuttlebutt Approach” — Go out and talk to a company’s customers, suppliers and competitors to find out how the industry really works (Philip Fisher wrote about this in Common Stocks and Uncommon Profits (thanks for correcting me, Santosh!)
  • Treat Any Investment As If You Owned Only That The Rest of Your Life
  • “To understand a business, figure out what results it is achieving, why it is getting those results, and what could happen to change what is causing those results.” — Charlie Munger
  • Keep it Simple — Charlie Munger is fond of saying: “We just throw some decisions into the ‘too hard’ file and go onto the others.”
  • Read as much as you can about businesses — Buffett and Munger recommend reading annual reports and The New York Times Century of Business by Floyd Norris and Christine Bockelmann)
  • “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” — Charlie Munger

Circle of Competence

Buffet advises investors to focus on their “circle of competence” (that which they know the most about).

“Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times.” — Warren Buffett

2) Enduring Competitive Advantages (Favorable long-term economics) (aka “A Protective Moat Around Their Economic Castles”)

Michael Porter suggests that there are two major types of competitive advantages:

1. A Cost Advantage

2. A Differentiation Advantage

“Something Special in People’s Minds”

Buffett and Munger have simplified this to “something special in people’s minds.”

“American Express has financial integrity; there’s worldwide acceptance of its name. It holds two-thirds of the market while charging more for its product…you have something special in people’s minds.” — Buffett at Berkshire’s 2000 Annual Meeting

“A Moat Around Their Economic Castles.”

“We look for moats around the castle. We think in terms of moats and the impossibility of crossing it — we want it widened every year. If it’s too narrow, we leave it alone.” Buffett at Berkshire’s 2000 Annual Meeting

The strong consumer brands of CocaCola and Gilette (later bought by Proctor and Gamble) were examples that Buffett gave in his 1993 Letter to Shareholders: “The might of their brand names, the attributes of their products and the strength of their distribution systems give them an enormous competitive advantage…”

Here’s another classic Buffett quote on the topic: “I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years time. Take Wrigley’s chewing gum. I don’t the think the Internet is going to change how people chew gum.”

3) First-Class Management

  • Only Work With Good People — “You can’t make a good deal with a bad person” — The Tao of Warren Buffett
  • They Should Be Able & Trustworthy — “Ability will get you to the top, but takes character to keep you there.” — Abraham Lincoln
  • Good Question To Answer: Does Management Have “Skin in the Game — A CEO should have at least one year’s salary worth of his own money in stock in the company they are running, according to Pick Stocks Like Warren Buffett by J.K.Lasser.
  • Management Should Have Their Own “Checklist” — “No wise pilot, no matter how great his talent and experience, fails to use his checklist.” — Munger

4) A Bargain Price

“We look for a horse with a one in two chance of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing. Charlie Munger from Poor Charlie’s Almanack.

Margin of Safety — Benjamin Graham called this “margin of safety” — that is, the difference between the intrinsic value of a business versus what the asking price is.

How do you calculate intrinsic value?

Well, I recommend digging into Ben Graham’s Intelligent Investor book for the real details…but if you want a neat little formula than check out this Warren Buffett Intrinsic Value Calculator.

Patience For A Sensible Price Tag — Munger & Buffett refer to waiting for the “fat pitch.” Be very patient, but be very aggressive when it’s time.

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Monday, November 9th, 2009

Put Your Eggs In One Basket


You can put all your eggs in one basket (just watch the basket!)

We’ve all heard the saying that you shouldn’t put all your eggs in one basket. While sometimes wise, I think there are many exceptions.

Mark Twain wrote that you should “put all your eggs in one basket and watch that basket.” I agree in many circumstances, including for business.

If you are super-selective and focus on one business (whether as investor or founder or employee) at a time, you can reap huge rewards. Look at Bill Gates of Microsoft (who loves using the word “super” by the way) — he invested purely in Microsoft for 30 years.

I had the good fortune of meeting Bill Gates a few times and I recall how reporters and other people were highly critical of the fact that he was reinvesting his Microsoft profits in Microsoft and not, for instance, in Philanthropic endeavors.

He told me that he believed his most valuable contribution at that time was focusing on Microsoft and that he would later focus on investing his money elsewhere.

Well, in 2000 Bill and his wife Melinda French (who I also had the pleasure of meeting once) created what is now the largest charitable foundation in the world and Bill turned his focus to investing in creating value elsewhere (specifically, helping solve many of life’s diseases).

So, Bill had his Microsoft basket for 30 years and now has his Foundation basket.

Similarly, Warren Buffett, who has created more wealth investing than anyone to date, has focused primarily on one business — Berkshire Hathaway — most of his life.

If the stock in Berkshire were to tank, Warren’s net worth too. But it probably won’t, because Warren is watching his one basket!

It’s no coincidence that when Warren finally decided to put his eggs (his money!) in a second basket, he chose to put them in the Bill and Melinda Gates Foundation basket – one that he trusted would be watched closely for years to come by his younger friends Bill and Melinda.!

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Monday, October 12th, 2009

Warren Buffett Quotes


I’ve been into motivational business quotes lately and I was reading the Tao of Warren Buffett (which I highly recommend!) and it reminded of the great quotes Mr. Buffett has shared.

Here are some of my favorite Buffett quotes:

How to define friendship

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Wednesday, June 24th, 2009

Financial Crisis Most Wanted Playing Cards


There have been numerous financial crises in our world’s history but the financial meltdown of 2007-2008 will certainly be remembered in the history books.

A clever man named Jason Witt has compiled a list of the 52 key players in the financial crisis.

Why 52, you might ask? Well, to put them on the faces of a deck of cards of course.

Witt, from my neighboring town San Ramon, California, is emulating the success of other Most Wanted Playing Cards such as the Iraq Most Wanted.

I spoke to Jason and he’s a good guy — If you’d like to buy a deck, you can do so here: Financial Crisis Cards.

While this isn’t meant to be a financial crisis blog, I am into business, the media and Wall Street…so I couldn’t wait to order a pack of these for myself and one other for my good buddy Larry the Wall Street Recruiter (Jason says that most people are like me: They’re buying 2 to 3 packs each).

And for those who can’t wait to see who “made the deck,” below is a list of the players that Jason was kind enough to email me. He told me he felt bad about putting Obama in the deck but that he believes that half the country thinks Obama is to blame for the financial crisis.

Without further adou, here are the men Witt thinks made financial crisis history.

The Spades

Ace: Bernard Madoff, Chairman, Bernard L. Madoff Investment Securities

2: Warren Buffett, CEO, Berkshire Hathaway Inc. (WILD CARD)

3:  Martin Sullivan, ex-CEO, AIG

4:  James Lockhart, Director, Office of Federal Housing Enterprise Oversight

5: Stephen Schwarzman, Chairman, Blackstone Group

6: Stephen Joynt, President, Fitch Ratings

7: Herb Sandler, ex-CEO, Golden West Financial Corp.

8: Vikram Pandit, CEO, Citigroup

9: James “Jimmy”Cayne, ex-CEO, Bear Stearns

10: Timothy Geithner, Secretary, U.S. Department of Treasury

Jack: Christopher Cox, ex-Chairman, U.S. Securities and Exchange Commission

Queen:  Deven Sharma, President, Standard and Poor’s

King:  Alan Greenspan, ex-Chairman, U.S. Federal Reserve

The Hearts

Ace. George Bush, President of the United States (2000-2008)

2:  Jeffrey Immelt, CEO, General Electric

3:  Bill Miller, Chairman, Legg Mason Capital Management

4:  Ronald Logue, CEO, State Street Corporation

5:  John Paulson, President, Paulson & Co.

6:  Neel Kashkari, Assistant Treasury Secretary, U.S. Department of Treasury

7:  Sheila Bair, Chairman, U.S. Federal Deposit Insurance Corporation (FDIC)

8: Jamie Dimon, CEO, JPMorgan Chase & Co.

9:  Rick Wagoner, CEO, General Motors

10: Alphonso Jackson, ex-Secretary, Housing and Urban Development, (HUD)

Jack: Hank Paulson, ex-Secretary, U.S. Department of Treasury

Queen: Barney Frank, Chairman, House Financial Services Committee

King: Ken Lewis, CEO, Bank of America

The Diamonds

Ace: Ben Bernake, Chairman, U.S. Federal Reserve

2: Michael Perry, ex-CEO, IndyMac Bank

3: John Stumpf, CEO, Wells Fargo

4: Christopher Dodd, U.S. Senate, Chairman Senate Committee on Banking

5: Allen Stanford, Chairman, Stanford Financial Group

6: Alan Mulally, CEO, Ford Motor Company

7: Kerry Killinger, ex-CEO, Washington Mutual

8: Charles “Chuck” Prince, ex-CEO, Citigroup

9: Lloyd Blankfein, CEO, Goldman Sachs

10: Phil Gramm, U.S. Senate, ex- Chairman Senate Committee on Banking

Jack: John Thain, ex-CEO, Merrill Lynch

Queen: Jerome Kerviel, Trader, Societe Generale

King: Daniel Mudd, ex-CEO, Fannie Mae

The Clubs

Ace:  Jim Cramer, TV Host/Author, CNBC

2:  Richard Syron, ex-CEO, Freddie Mac

3:  Robert Toll, CEO, Toll Brothers Inc.

4:  Ken Thompson, ex-CEO, Wachovia Corporation

5:  Stanley O’Neal, ex-CEO, Merrill Lynch

6: Robert Nardelli, CEO, Chrysler

7:  Robert Kelly, CEO, Bank of New York Mellon

8: Barack Obama, President of the United States (2008- )

9:  Raymond McDaniel, President, Moody’s Corporation

10: John Mack, CEO, Morgan Stanley

Jack: David Lereah, ex-Chief Economist, National Association of Realtors (NAR)

Queen: Angelo Mozilo, ex-CEO, Countrywide Financial

King: Richard “Dick” Fuld, ex-CEO, Lehman Brothers

If you like Financial Crisis Cards, you may also be interesting in buying the Iraqi Most Wanted Playing Cards and America’s Most Wanted Playing Cards.

Disclaimer: I do earn commissions off of products mentioned in this blog.

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Friday, May 1st, 2009

7 Tips for Writing Like Warren Buffett


I’m willing to bet you that half of Warren Buffet’s success is due his effective communication (most of his other half is his sustained focus (i.e. his singular focus on creating wealth over 60 years!).

If you don’t believe me, you should read his annual reports or watch video of him on CNBC and YouTube.

I wonder if one of the reasons I like Warren’s Plain English style is that we’re the same personality type (ISTJ).

Warren Buffett: A Master of Plain English

Some people, including me, refer to his communication style as “Plain English.”

Here are seven tips for using the plain english style of writing used by Warren Buffett, Mark Twain and others:

Seven Tips for Writing Like Warren Buffett (Plain English)

#1: Personal Pronouns

Focus on the first-person plural (we, us, our/ours) and second person singular (you and yours). The purpose is it’s more direct, more conversational and avoids the he/she dilemma.

For example:

(Before/Poor) — “This article will enlighten readers and contribute to people’s success versus.”

(After/Better)– “I will enlighten you in this article and contribute to your success.”

#2: No Weak Verbs!

Steer clear of verbs such as “to be” and “to have.” They are weak!

Take the following sentence for example:

(Before/Poor) — “We will make a distribution of cash to every person in the company if our business is ever sold.”

(After/Better) — “We will distribute cash to everyone in our company if we are sold”

Hint: nouns that usually end in “ion” can be replaced with a more powerful verb (in that case, “Will distribute” replaced “will make a distribution”).

#3: Write in the Positive

Use “unable” instead of “not able” and “exclude” instead of “not include,” etc. — This is shorter and more clear.

#4: Active Voice (Instead of Passive Voice)

Try to use active (as opposed to passive) voice and go in order of Subject, Verb and Object. For example:

(Before/Poor) — “The product is bought by the customer”

(After/Better) — “The customer buys the product.”

#5: Avoid Superfluous Words

Try to avoid words that don’t add much value such as “in order to” (use “to”) and “Despite the fact that” (use “Although”).

Why?  Readers understand sentences in the active voice more quickly and easily because it follows how we think and process information

#6: Communicating to a Group

When communicating, you should know your audience…that’s basic, but if you’re communicating to a number of people try to write with a certain person in mind.

For example, in this article I try to envision writing to Lakshmi, a department head of a medium-sized business I know.

When I’m writing about something technical, I write with my Mom in mind.

#7: Avoid Contract Language

Steer clear of “Contract-type” language with definitions — this is the opposite of Plain English.

The best book on the subject of Plain English is How to write, speak and think more effectively by Rudolf Flesch.

And then there are Warren Buffett’s famous annual reports.

Plain English, Please!

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