Warren Buffett and Charlie Munger get questioned on economics at the 1995 Berkshire Hathaway annual meeting.
Warren Buffett And Charlie Munger: Fundamental Rules Of Economics
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Mike Assael from New York City. And the mistake does your section of the annual report. You mentioned a fundamental rule of economics that you missed. I’d like to know that two or three most important fundamental rules of economics you habitually get right. In other words what are the fundamental rules of economics you used to make money for Berkshire. And I’m not talking about Ben Graham‘s principles here but rather rules of economics which may be found in an in an economics textbook.
Yeah we try to. I mean we try to follow Ben’s principles in terms of the attitude we bring toward both investing and in buying businesses. But the most important thing you can you know what we’re what we’re trying to do is we’re trying to find a. A business with a wide. And long lasting moat around it. Surround and protecting a terrific economic Castle. With an honest Lord in charge of the castle and.
In essence that’s what business is all about.
I mean you may want to be the Lord of the castle yourself and which case you don’t worry about that last factor. But what you’re trying to what what we’re trying to find as a business. That for one reason or another it can be it can be because it’s the low cost producer in some area it can be because it has a natural. Franchise because of surplus capabilities it can be can be because of its position in the consumer’s mind it can be because of a technological advantage or any kind of reason at all. That it has this motor on it and then are then now what we have to decide is is all mulcher are subject to attack in a capitalistic system so everybody is going to run. If you’ve got a big castle in there people are going to be trying to figure out how to get to it. And what we have to decide and most most molts aren’t worth a damn and now in capitalism I mean that’s the nature of it and it’s a constructive thing that that’s the case. But. We are trying to figure out what is keeping. Why is that castle. Still standing. And what’s going to keep it standing or cause not to be standing five 10 20 years from now. What are the key factors and how permanent are they. How much do they depend on the genius of the Lord in in the castle and then if we feel good about the moat. Then we try to figure out whether. You know the lawyers are going to try and take it all for himself. Or whether he’s likely to do something stupid with the proceed setc. But that’s that’s the way. We look at businesses them. Charlie.
You want to. Well I think you Arnson translate it into the ordinary terms of economics. The honest Lord is low agency cos. That’s the word in economics and the. Micro economic business advantages are by and large advantages of scale. Scale of market. Dominance which can be a retailer that just. Has huge. Advantages in terms of. Buying cheaper. And enjoying higher sales per square foot. So are you by and large you’re talking. Economies of scale you can have scale of scale of intelligence. So. You can have a lord with. Enough extra intelligence that he has. A big advantage so you’re by and large you’re talking scale advantages and low agency costs. To some extent Charlie and I try and distinguish between. Businesses where. You have to have been smart once.
And businesses where you have to stay smart. And I mean retailing is a good case of a business where you have to stay smart you can. If you are under attack all the time people are in your store. You’re doing something successful there in your store the next day trying to figure out what it is about your success that they can transplant. And maybe add a little something on their own situation. So you cannot coast. In retailing. There are other businesses where you only have to be smart. Once at least for a very long time. There was once a southern publisher. Who was doing very well and with his newspaper and someone asked him the secret of his success. And he said monopoly and nepotism.
And I mean it wasn’t so dumb. I mean it didn’t have any illusions about himself. And if you had a big network. Of Television Affiliates station. 30 years ago.
There’s still a major difference between good management and bad management. I mean a major difference but you could be a terrible manager. And and make a fortune. Basically because the one decision to own the network. TV affiliate overcame. Almost any deficiency. That existed from that point forward. And that would not be true. If you were the first one to come up with some concept in retailing or something of the sort. I mean you would have to be out there defending it every day ideally. You know as you want. You want terrific management at a terrific business and that’s what we will look for. But as we pointed out in the past if you have to.
Choose between the two get a terrific business Charlie anywhere on.