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Money and risk

Warren Buffett

The moat

Warren Buffett (Contemporary · 1930–) — The moat.

Money and riskThe industrial ageThe moat

What actually happened?

In 1973–74 the American market fell by half. The Washington Post went from thirty-eight dollars to sixteen. Everyone was getting out; he was buying. He wrote to the management that he had bought, for ten million dollars, a piece of a company they themselves valued at four or five hundred million. The position eventually returned more than a hundred times. Nothing about the company had changed in those months. What had changed was what other people could stand to hold.

Four kinds of moat

A brand people ask for by name, a network that gets more valuable as it grows, a cost position nobody can match, and a switching cost that makes leaving expensive. The wider the moat, the less the future depends on being clever.

Nobody switches accounting software to save nine dollars a month. That is a moat, and it was built by the tedium of migration, not by the features.

The edge of the circle matters more than its size

You do not need to understand every business, only the ones you understand. He stayed out of technology for decades and said so plainly. Knowing where your competence stops is the part that protects you; the size of the circle is vanity.

He passed on the deal because he could not explain how the company made money in one sentence. That is not timidity; that is the boundary doing its job.

The moat that matters is emotional

Be fearful when others are greedy and greedy when others are fearful. In 1987, in 2000, in 2008 he was the one buying into the collapse. The analysis was available to everyone. The stomach was not.

Everyone knew the rule about buying the dip. Almost nobody transferred the money on the Monday the number was red on every screen.

How do I use it today?

Before the next purchase, write in one sentence why this thing will still be earning in ten years. If you cannot write the sentence, you are not buying a business; you are buying a price movement.

Deep read

The circle of competenceThe edge matters more than the sizeKnowing where it stops is the part that protects youYou find out at low tideRisk shows up late, on purposeIn a rising market every stroke looks good

Read alongside

Charlie MungerThe partner who moved him from cheap and broken to good and fairly priced. Duan YongpingDuan Yongping is Buffett's most serious Chinese student, but he moved the moat from investing to operating: Buffett buys the company that has one, Duan builds one by entering last and building better. Wang XingTwo shapes of the long view: Buffett will not own something for ten minutes he would not own for ten years, Wang Xing asks whether the thing will still matter in ten years. Benjamin GrahamThe student past the teacher: Graham bought cheap ordinary companies, Buffett bought great ones at fair prices. Jesse LivermoreSpeculation against investment: Livermore took the price movement and rose and fell four times, Buffett took the business and compounded. Jim SimonsThe two poles of investing: Buffett bets heavily on a few near-certainties, Simons bets tiny amounts on millions of near coin-flips — and both refuse the middle ground. George SorosTwo poles of investment philosophy: Buffett trusts that the market gets there in the end, Soros treats it as permanently wrong.

Further

Charlie Munger Li Ka-shing Fan Li Jeff Bezos Peter Thiel Naval Ravikant Duan Yongping Kazuo Inamori Wang Xing Benjamin Franklin Bai Gui Benjamin Graham Jesse Livermore Peter Lynch Howard Marks Jim Simons George Soros

Lines to keep

Rule one: never lose money. Rule two: never forget rule one.

You do not have to understand every company. Only the ones you own.