And in terms of blowing it, IBM is some example. Those were brilliant, disciplined people. But there was enough turmoil in technological change that IBM go bounced off the wave after âsurfingâ successfully for 60 years. And that was some collapseâan object lesson in the difficulties of technology and one of the reasons why Buffett and Munger donât like technology very much. We donât think weâre any good at it, and strange things can happen.
At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up and those real obvious bargains disappeared. You could run your Geiger counter over the rubble and it wouldnât click.
But such is the nature of people who have a hammerâto whom, as I mentioned, every problem looks like a nail that the Ben Graham followers responded by changing the calibration on their Geiger counters. In effect, they started defining a bargain in a different way. And they kept changing the definition so that they could keep doing what theyâd always done. And it still worked pretty well. So the Ben Graham intellectual system was a very good one.
Of course, the best part of it all was his concept of âMr. Marketâ. Instead of thinking the market was efficient, he treated it as a manic-depressive who comes by every day. And some days he says, âIâll sell you some of my interest for way less than you think itâs worth.â And other days, âMr. Marketâ comes by and says, âIâll buy your interest at a price thatâs way higher than you think itâs worth.â And you get the option of deciding whether you want to buy more, sell part of what you already have or do nothing at all.
To Graham, it was a blessing to be in business with a manic-depressive who gave you this series of options all the time. That was a very significant mental construct. And itâs been very useful to Buffett, for instance, over his whole adult lifetime.
However, if weâd stayed with classic Graham the way Ben Graham did it, we would never have had the record we have. And thatâs because Graham wasnât trying to do what we did.
For example, Graham didnât want to ever talk to management. And his reason was that, like the best sort of professor aiming his teaching at a mass audience, he was trying to invent a system that anybody could use. And he didnât feel that the man in the street could run around and talk to managements and learn things. He also had a concept that the management would often couch the information very shrewdly to mislead. Therefore, it was very difficult. And that is still true, of courseâhuman nature being what it is.
And so having started out as Grahamites which, by the way, worked fineâwe gradually got what I would call better insights. And we realized that some company that was selling at 2 or 3 times book value could still be a hell of a bargain because of momentums implicit in its position, sometimes combined with an unusual managerial skill plainly present in some individual or other, or some system or other.
And once weâd gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.
And, by the way, the bulk of the billions in Berkshire Hathaway have come from the better businesses. Much of the first $200 or $300 million came from scrambling around with our Geiger counter. But the great bulk of the money has come from the great businesses.
And even some of the early money was made by being temporarily present in great businesses. Buffett Partnership, for example, owned American Express and Disney when they got pounded down.
Most investment managers are in a game where the clients expect them to know a lot about a lot of things. We didnât have any clients who could fire us at Berkshire Hathaway. So we didnât have to be governed by any such construct. And we came to this notion of finding a mispriced bet and loading up when we were very confident that we were right. So weâre way less diversified. And I think our system is miles better.
However, in all fairness, I donât think a lot of money managers could successfully sell their services if they used our system. But if youâre investing for 40 years in some pension fund, what difference does it make if the path from start to finish is a little more bumpy or a little different than everybody elseâs so long as itâs all going to work out well in the end? So what if thereâs a little extra volatility.
In investment management today, everybody wants not only to win, but to have a yearly outcome path that never diverges very much from a standard path except on the upside. Well, that is a very artificial, crazy construct. Thatâs the equivalent in investment management to the custom of binding the feet of Chinese women. Itâs the equivalent of what Nietzsche meant when he criticized the man who had a lame leg and was proud of it.
That is really hobbling yourself. Now, investment managers would say, âWe have to be that way. Thatâs how weâre measured.â And they may be right in terms of the way the business is now constructed. But from the viewpoint of a rational consumer, the whole systemâs âbonkersâ and draws a lot of talented people into socially useless activity.
And the Berkshire system is not âbonkersâ. Itâs so damned elementary that even bright people are going to have limited, really valuable insights in a very competitive world when theyâre fighting against other very bright, hardworking people.
And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. Youâre much more likely to do well if you start out to do something feasible instead of something that isnât feasible. Isnât that perfectly obvious?
How many of you have 56 brilliant ideas in which you have equal confidence? Raise your hands, please. How many of you have two or three insights that you have some confidence in? I rest my case.
Iâd say that Berkshire Hathawayâs system is adapting to the nature of the investment problem as it really is.
Weâve really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big moneyâs been made in the high quality businesses. And most of the other people whoâve made a lot of money have done so in high quality businesses.
Over the long term, itâs hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, youâre not going to make much different than a 6% returnâeven if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, youâll end up with a fine 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? One method is what Iâd call the method of finding them small get âem when theyâre little. For example, buy Wal-Mart when Sam Walton first goes public and so forth. And a lot of people try to do just that. And itâs a very beguiling idea. If I were a young man, I might actually go into it.
But it doesnât work for Berkshire Hathaway anymore because weâve got too much money. We canât find anything that fits our size parameter that way. Besides, weâre set in our ways. But I regard finding them small as a perfectly intelligent approach for somebody to try with discipline. Itâs just not something that Iâve done.