The myth-busts, hot takes, explainers, and tools worth keeping.
◆Hot Take· 1
◆Hot Take1:52:30
Buffett and Munger vs. the Efficient Market Hypothesis
Buffett's 'Superinvestors of Graham-and-Doddsville' speech and Munger's blunt dismissal of academic efficient-market theory set up the leverage-driven excesses of 1980s Wall Street.
Buffett gives his famous 'Superinvestors of Graham-and-Doddsville' talk at Columbia
Munger's one-word rebuttal to the theory that risk equals volatility
The theory's real-world consequence: leveraged buyouts and junk bonds explode in the 1980s
“Charlie has a one word retort to that, which is bullshit.”
Blue Chip Stamps: The Weird Float Business Behind Berkshire's Rise
An explainer on the trading-stamp industry's float and two-sided network effects, and how a DOJ antitrust case let Munger, Buffett, and Guerin buy 45% of Blue Chip Stamps.
Stamps incentivized cash purchases over credit at department stores
Business had float: cash collected upfront, stamps redeemed years later
Two-sided network effect between stores and consumers
DOJ forces divestiture in 1968; Munger/Buffett/Guerin acquire 45%
“So there's float, and then two, even better, there's network effects in this business, two-sided network effect.”
#Blue Chip Stamps#float#network effects#antitrust
❝Story· 9
❝Story07:00
Young Charlie Munger: IQ, Ambition, and Ben Franklin
Charlie Munger's childhood in Omaha, top-tier military IQ score, Harvard Law without an undergrad degree, and his early hero-worship of Ben Franklin.
Born New Year's Day 1924 in Omaha, named after his federal-judge grandfather
Wanted wealth for independence, aspiring to be 'like Lord Keynes'
Scored among the highest IQs the military ever tested
Went to Harvard Law without ever finishing an undergraduate degree
“I wanted to get rich so I could be independent. Like Lord John Maynard Keynes.”
#Charlie Munger#biography#Berkshire Hathaway
❝Story14:30
After Losing His Son, Munger Sets Cold, Rational Goals
After his son Teddy dies of leukemia, Munger sets two rational life goals — remarry and diversify beyond law — and famously scans divorce and obituary notices to find a spouse.
Son Teddy dies of leukemia at age nine in 1955
Munger sets goals to remarry and diversify business activities
Scanned divorce and obituary notices looking for prospects
Marries Nancy Borthwick, a Phi Beta Kappa Stanford economics grad
“you should never, when facing some unbelievable tragedy, let one tragedy increase into two or three through your failure of will”
#Charlie Munger#mindset#resilience
❝Story20:00
The Dinner That Started It All: Warren Meets Charlie
The Davis family arranges a 1959 dinner between Warren and Charlie in Omaha; the two hit it off instantly, and Charlie decides to start his own investment partnership in LA.
Set up by the Davis family, early Buffett partnership investors
Instant rapport; dinners together every night that week
Charlie asks if he could do 'something like that' in California
Susie Buffett recalls each thought the other was the smartest person they'd met
“I think Warren felt that Charlie was the smartest person he'd ever met. And Charlie felt that Warren was the smartest person that he'd ever…”
#Warren Buffett#Charlie Munger#partnership
❝Story43:00
See's Candy: Paying 6x Book Value and Loving It
Blue Chip Stamps buys See's Candies for $25M despite only $5M in hard assets, marking the first real application of the 'wonderful business' philosophy.
See's asking price of $30M vs. only $5M in book assets
Warren and Charlie negotiate down to $25M
Company generates over $2B in cumulative free cash flow afterward
“This company is doing four million dollars in annual pre-tax profit, and that's growing at 12% per year without putting any more capital into the…”
#See's Candies#Blue Chip Stamps#M&A
❝Story1:29:30
Geico's Near-Bankruptcy and Jack Byrne's Rescue
Geico's underwriting losses from mispriced growth nearly bankrupt the company in 1976; Buffett buys in as new CEO Jack Byrne engineers a reinsurance and capital rescue.
$190M underwriting loss in 1976, largest in company history
Dividend eliminated, regulators circling
Buffett buys stock at $2/share after meeting Byrne
Solomon Brothers underwrites a $76M convertible debt rescue deal
“there is never any such thing as a bad risk, but there is such a thing as a bad price.”
#Geico#insurance#turnaround#Jack Byrne
❝Story1:41:00
Byrne vs. New Jersey: Burning the House Down to Reprice
Jack Byrne cancels tens of thousands of New Jersey policies and shrinks Geico to just seven states to force regulators to let the company reprice its risk.
Byrne throws Geico's license on the state commissioner's desk
Cancels 30,000 NJ policyholders and fires 2,000 employees in one afternoon
Geico shrinks to only seven states plus DC to gain repricing rights
“He had a sour ass little wisened actuary at his side who'd been fired by some insurance company and had a bone to pick.”
“It showed everybody, all audiences I was serious about this, and then I was gonna fight for the life of this company no matter what,…”
#Geico#Jack Byrne#insurance regulation#turnaround
❝Story58:30
Courting Kay Graham: How Buffett Won a Board Seat at the Post
Buffett accumulates 12% of the Washington Post, signs a contract promising never to buy more without permission, and eventually maneuvers his way onto the board and into a decades-long friendship with Kay Graham.
Buffett builds a 12% stake for $10M starting in 1971-73
Signs contract vowing never to buy more shares without Graham family consent
Awkward, indirect campaign (via Tom Murphy) to get invited onto the board
Berkshire's stake is later sold in 2014 for $1.1 billion
“This purchase represents a sizable commitment to us being Berkshire and an explicitly quantified compliment to the post as a business enterprise and to you…”
#Washington Post#Kay Graham#Warren Buffett#media
❝Story1:13:30
There's Got to Be an Indictment in Here Somewhere
The SEC investigates Berkshire, Blue Chip, Diversified, and Wesco's tangled cross-ownership structure, forcing Buffett and Munger to simplify their corporate holdings.
SEC threatens securities-violation charges over the tangled entity structure
Wesco Financial merger-scuttling episode draws federal scrutiny
Settlement requires simplification: Diversified merges into Berkshire, Blue Chip follows by 1983
“There's got to be an indictment in here somewhere, guys. I don't know what you've been doing.”
The Solomon Brothers Scandal: Berkshire's Brush with Disaster
A Treasury bond auction fraud and a cover-up by Solomon's CEO push the Fed to the brink of cutting the firm off; Buffett becomes interim chairman and personally pleads with Washington to save it.
Trader Paul Moser submits fake bids to corner Treasury bond auctions
CEO Goodfriend and general counsel sit on a warning letter from the Fed for months
Buffett becomes interim chairman and calls Treasury Secretary Nick Brady in tears
Assistant Treasury Secretary Jerome Powell relays the deal that saves the firm
“he recognized with a sickening jolt that investing in Solomon, a business with problems over which he had essentially no control, had put it all…”
“Lose money for the firm, and I will be understanding, lose a shred of reputation for the firm, and I will be ruthless.”
#Solomon Brothers#Warren Buffett#crisis management#Wall Street
✦Tool· 1
✦Tool2:28:30
The Waiver That Saved Solomon: Turning Lawyers Into Whistleblowers
Munger Tolles & Olson proactively waives attorney-client privilege with the government, forcing every Solomon employee to cooperate with investigators or be fired.
MTO offers to share all findings directly with regulators
Employees must talk to MTO or be fired, with no privilege protection
Move demonstrates cooperation and speeds Solomon's rehabilitation
“The more evidence that MTO found on employees that were guilty, the more proof it would show the government that Solomon was cooperating and that…”
The Solomon Villain Who Founded Long-Term Capital Management
John Merriweather, the Solomon arbitrage desk head implicated in the scandal, goes on to found Long-Term Capital Management in 1994, foreshadowing the 1998 crisis.
Merriweather ran the arb desk that got a cut of trading profits with no downside risk
Founds LTCM two years after leaving Solomon
Only Paul Moser, the trader who rigged the auctions, ever served jail time — four months
“Literally John Merriweather, founder and CEO of long term capital management.”
#Long-Term Capital Management#Solomon Brothers#Wall Street history
▲Takeaway2:54:00
Grading the Golden Years: Berkshire's 27.4% Annual Return
From 1970 to 1992, Berkshire compounded at 27.4% annually, nearly matching Buffett's legendary partnership years and turning $45 shares into $11,750.
27.4% annualized return from 1970-1992, close to the partnership's 29.5%
Share price grows from $45 in 1970 to $11,750 by end of 1992
Compared to Michael Jordan's championship prime for dramatic effect
“it was 45 bucks a share. And at the end of 1992, and and of course, these are what we now call the A shares.…”