Podcast Summary
The value of thoughtful and disciplined decision-making: Acknowledge the 'point of no return', make rational decisions, simplify complex topics, and apply timeless wisdom from investing to various aspects of life and work.
The importance of being thoughtful and disciplined in decision-making, even when faced with difficult situations or the pressure of short-term outcomes. Tom Gaynor, the CEO of Mark L Corporation, emphasized the value of acknowledging the existence of a "point of no return" and making rational, reasonable decisions. He also shared insights from Charlie Munger about deserving what you want and writing your own obituary to guide your actions. Throughout the conversation, Tom demonstrated a mastery of simplifying complex topics and offered valuable lessons on investing, risk, leverage, and avoiding stupidity. Overall, this episode offers timeless wisdom that can be applied to various aspects of life and work.
Lessons from Charlie Munger's Father on Equality and Adding Value: Applying the Quaker value of equality and adding value to customers can lead to business success and longevity.
Treating people equally and adding value to their lives can lead to profound success. This lesson was exemplified by Charlie Munger's father, who taught him to always do favors and be helpful. Munger applied this principle in business, such as in Buffett's investment in Carmax, which succeeded because of its fixed pricing policy. This Quaker value of equality and win-win relationships can be seen in successful retail businesses like Macy's. By charging everyone the same price and creating value for customers, businesses can thrive and last for generations.
Understanding a business's natural rhythm and priorities for long-term customer relationships: Successful businesses prioritize fair treatment of customers based on their unique rhythm and cycle time. Long-term value creation should be a priority, even for businesses with longer cycles, and exploitation should be avoided.
The success of a business in creating a win-win-win architecture depends on the natural rhythm and cadence of the business. For instance, a grocery store, with its short cycle time, has a strong incentive to treat customers fairly and build long-term relationships. On the other hand, businesses with longer cycle times, like car dealerships, may not prioritize the long-term value of a customer as much. The example of a tourist trap selling overpriced water illustrates this concept further. It's essential to remember that companies should aim to provide value to their customers rather than exploiting them. The story of Markel, starting in 1930 and the speaker's joining in 1990, is a testament to navigating various economic challenges, including the internet bubble, the great financial crisis, and COVID-19. The speaker's encounter with Buffett's philosophy in the 1980s was a turning point in their career.
Discovering Markel Corporation's Potential and Building a Relationship: The speaker recognized Markel Corporation's potential resembling Berkshire Hathaway and Buffett's investment approach, leading to a relationship and profitable deals.
The speaker discovered the potential of Markel Corporation in 1986, seeing similarities to Berkshire Hathaway and Buffett's investment approach. He became intrigued and eventually bought some stock, developing a relationship with Steve Markel. In 1990, they completed a deal that more than doubled the company's size, and the speaker took advantage of a tax law to buy RJR junk bonds, which were later paid off in full. By 1999-2001, Markel had grown with a focus on specialization and diversification in insurance, utilizing both financial and intellectual capital for underwriting profitability. The speaker emphasized the importance of intellectual capital and long-term investment with an "eternal forever mindset."
Seeking guidance from mentors during tough times: Maintain trust, support, and relationships during struggles. Understand financial realities and adapt to changing times.
Even during periods of underperformance and uncertainty, it's important to maintain trust and support from colleagues and mentors. During a time of significant struggle in his career, the speaker found solace and guidance from Steve Jobs, who recognized the value of the speaker's unique perspective and approach. The speaker also emphasized the importance of understanding the true financial picture of businesses, which was a challenge during the internet boom when assumptions about growth rates seemed unrealistic. Through these experiences, the speaker learned the importance of staying true to his convictions, maintaining relationships, and seeking out new knowledge to adapt to changing times.
Acknowledging mistakes of omission is crucial for informed decisions and understanding people.: Being thoughtful about the paths not taken helps in making informed decisions and understanding people. Acknowledging mistakes of omission, or what was not done, is important for learning and growth.
Being thoughtful about the paths not taken is crucial for making informed decisions and understanding people. Two individuals, who were accounting and value-focused, found each other in confusion during their analysis of a business. They discussed the importance of acknowledging mistakes of omission, which are often bigger than mistakes of commission. Munger and Buffett, known for their intellectual honesty, have spoken about their substantial mistakes of omission. Opportunity costs, which are not easily tracked, are essential to consider. Curiosity about the paths not taken helps in making thoughtful decisions and understanding people. The singer-songwriter Todd Snyder's song "Green Castle Blues" asks the question, "How do you know when it's too late?" and emphasizes the importance of being thoughtful and aware of the point of no return. In general, it's better to err on the side of staying with people too long rather than making hasty decisions.
Trusting People and Focusing on the Process: Adopting a positive mindset, trusting people, and focusing on the process can lead to meaningful relationships and better outcomes in life, even if not always reciprocated. Trusting and developing relationships can increase stakes and bets over time.
Adopting a positive mindset and trusting people can lead to meaningful relationships and better outcomes in life. This approach may not always result in reciprocal behavior from others, but the cumulative effect of consistently operating this way can lead to encountering people who will value and love you in return. Trusting people by default, focusing on the process rather than the outcome, and having appropriately sized stakes and bets are key components of this mindset. By trusting and developing relationships, we can increase our stakes and bets over time. The process of trusting and focusing on the process, rather than the outcome, can lead to multiple good outcomes in various aspects of life. As Annie Duke's book "Thinking in Bets" suggests, a sound process will lead to good outcomes over time, even if individual outcomes may not always be favorable. Buffett's coin flip analogy further emphasizes the importance of thinking long-term and playing the odds game. Ultimately, trusting people and focusing on the process can lead to lollapalooza outcomes, where luck, serendipity, and process combine to create exceptional results.
Recognizing when to take bold action in investing: Quick decisions based on clear understanding can lead to significant financial gains and valuable relationships.
Making instantaneous and dramatic decisions in investing, even if not the norm, can lead to significant financial gains. This was exemplified by the speaker's decision to sell nearly all equity positions right before the NASDAQ top in early 2001, which saved his company hundreds of millions of dollars. The ability to recognize when to take bold action, as Charlie Munger often did throughout his investing career, can make all the difference. The speaker's quick decision also put him in a favorable position to join the board of the Washington Post, leading to valuable relationships and ongoing consequences. Writing down thoughts and clarifying understanding through memos is also an essential part of the decision-making process.
Understanding Leverage and Its Risks: Being aware of leverage levels and their risks, making methodical decisions, reflecting before acting, and avoiding emotional biases are crucial during financial crises.
That being aware of the levels of leverage in one's life and keeping them constrained is crucial, as demonstrated during the great financial crisis. The speaker, who made mistakes leading up to the crisis, sold his Citi position at a loss but felt good about the decision as he was in the insurance business, which is less levered and subject to less run-on-bank risk. The speaker also emphasized the importance of being methodical and incremental in decision-making, taking time to reflect before making big decisions, and being aware of the potential emotional biases that can cloud judgment during a crisis. Overall, the speaker's experience serves as a reminder of the power and risks of leverage and the importance of staying calm and rational during times of financial uncertainty.
The importance of persistence and integrity in long-term success: Success requires enduring difficult times and maintaining integrity, as demonstrated by Mark Leonard's investment strategies learned from Shelby Davis
Persistence and durability are crucial for long-term success. Charlie Munger's long life and the disciplines he followed provide evidence of this. Being able to endure difficult episodes and still remain in the game is an important aspect of a successful life. Shelby Davis, a mentor of Mark Leonard, taught him that buying a business with little to no leverage can help ensure that the person running it is of integrity. This lesson, learned in the early days of Markle Ventures, has been a guiding principle for Leonard in his investment strategies. While there can be an addictive element to winning and the adrenaline rush it brings, it's important to maintain balance and not let it overshadow thoughtful decision-making and long-term planning. Mark Leonard is an example of a successful, thoughtful investor who has earned the confidence of the marketplace through his consistent execution of a well-laid-out plan.
Using past experiences as frames of reference: Leverage past knowledge to evaluate new situations effectively, like Robert Parker's wine rating system, and be mindful of debt opportunities, such as Walt Disney's long-term debt strategy
Experience and knowledge gained from past encounters can serve as valuable frames of reference when evaluating new situations or people. Robert Parker's creation of a wine rating system based on his extensive knowledge and comparisons is an excellent example of this concept. Regarding debt, the decision to use it should depend on the specific circumstances. For instance, if a company like Walt Disney can issue long-term debt at historically low rates, it makes sense to take on as much debt as possible, treating it as a form of fixed cost equity. Conversely, companies and even governments that failed to seize such opportunities may regret their decisions in the future. The ability to understand and apply these frames of reference effectively is crucial for making informed judgments.
The Importance of Long-Term Thinking: Advocate for long-term debt maturities, teach long-term thinking, make disciplined decisions, have optionality to the upside, and avoid circumstances forcing decisions.
Short-term gains can come at the expense of long-term consequences. The speaker shares his experience of advocating for longer-term debt maturities a decade ago, which was labeled as a mistake at the time but might prove to be wise in the future. He also discusses the importance of teaching people to think long-term and the challenge of making disciplined decisions in a short-term world. Using an example of a man who paid for a meal with monopoly money, the speaker emphasizes the importance of empathy and understanding that some people are living in the present due to their circumstances. He encourages taking advantage of good options and avoiding situations where circumstances force decisions. To position oneself for success, it's essential to always have optionality to the upside and rarely to the downside.
Maintaining control and stability for long-term success: Striving for long-term control and stability, even amidst criticism or isolation, can lead to significant rewards.
Striving for low leverage and being in control of your decisions, rather than being limited by circumstances, is crucial for long-term success. This means avoiding the temptation to focus on the short-term gains and instead, maintaining a stable environment and enduring potential criticism or isolation. The team aspect, whether in sports or business, can provide joy and help endure these challenges. Additionally, having experienced feelings of social isolation in the past gives a frame of reference to persevere through such situations. It's important to remember that the long-term view may require temporary sacrifices, but the compounding effect of staying in the game can lead to significant rewards.
Munger's social side and the costs of isolation during the pandemic: Despite Munger's serious image, he valued social connections. The pandemic's enforced isolation highlighted the human need for community and the costs of its absence, including financial losses and mental health impacts.
Despite Charlie Munger's legendary reputation for being a reclusive and serious individual, he was in fact a social person who drew sustenance from his fellow human beings. This was evident in the speaker's fond memories of sharing meals and laughter with Munger. Fast forwarding to January 2020, the speaker recounts the sudden onset of the COVID-19 pandemic and the social isolation that followed. As a social person, the speaker felt the immense costs of this enforced isolation. The speaker also reflects on the mistakes made during this period, including financial losses in the insurance industry due to event cancellations. Ultimately, the speaker emphasizes the importance of acknowledging these mistakes and the social, educational, and mental health costs of the pandemic. In essence, even in times of crisis, the human need for connection and community remains crucial.
Navigating Uncertainties: Adapting to Unexpected Global Events: During uncertain times, make tough decisions based on available information, maintain trust and transparency, and adapt to potential risks to navigate future uncertainties.
Unexpected global events, such as a pandemic, can significantly impact various aspects of business and personal life, leading to significant losses and uncertainty. During such uncertain times, it's crucial for individuals and organizations to make tough decisions based on the available information, even if they turn out to be less than optimal in hindsight. Trust and transparency are essential in maintaining social order and institutional legitimacy. As Peter Bernstein defined, risk is the possibility of more things happening than what actually does. Therefore, it's essential to be aware of potential risks and adapt accordingly. A recent example is the COVID-19 pandemic, which caught many off guard and led to significant losses and uncertainty. Despite the challenges, it's essential to learn from past experiences, adapt, and maintain trust and transparency to navigate future uncertainties.
Balancing known costs with potential dangers: Effective risk management requires weighing certain costs against uncertain threats, whether in personal or business contexts. Long-term incentives can help align interests, but human biases remain a challenge.
Effective risk management involves taking a measured approach to potential threats, balancing the certainty of known costs against the uncertainty of potential dangers. This was illustrated in a personal experience where the speaker chose not to confront a potential threat due to the potential costs and unknowns involved. In a business context, this thinking applies to cyber risk and the decision to centralize or decentralize operations. Long-term incentives for business leaders can also help align their interests with the organization as a whole. However, qualitative aspects of decision-making, such as being fooled by seemingly modest and trustworthy individuals, can be more challenging to mitigate.
Assessing values and compatibility in relationships: Being aware of social influences and values alignment are crucial in building successful relationships. Trusting your judgment and learning from past mistakes are essential parts of this process. Treat everyone with kindness, respect, and dignity.
Being aware of social influences and values alignment are crucial in building successful relationships, whether in personal or business contexts. Trusting one's judgment and learning from past mistakes are essential parts of this process. My father's lesson of "never making a good deal with a bad person" has been a valuable one, and I've learned that business interactions are similar to the dating process – assessing values and compatibility to build long-term relationships. Additionally, treating everyone with kindness, respect, and dignity, as my father did, is a fundamental principle I strive to uphold. A notable biography that resonated with me is "Ulysses S. Grant: Memoirs and Selected Letters." Grant's focus on logistics and support, fighting for a noble cause, and his determination in the face of adversity serve as inspiring examples.
Insights from Admiral Nimitz and Markel: Admiral Nimitz's focus and decision-making during uncertain times inspire us. Markel's prioritization of base rates, autonomy, and small groups maintains simplicity and efficiency.
Reading biographies provides valuable insights and inspiration, as demonstrated by Admiral Nimitz's ability to remain focused and make decisions during uncertain times. Simplicity and complexity are essential, and organizations like Markel prioritize base rates, autonomy, and small decision-making groups to maintain a streamlined structure. Reading physical books and e-books serves as a reminder of the time and effort authors put into their work. Additionally, focusing on the basics and avoiding unnecessary complexity is crucial in large organizations.
Considering Opportunity Costs and Avoiding Mistakes: Making informed decisions requires asking questions about opportunity costs, learning from mistakes, and approaching choices with a thoughtful, open-minded perspective.
Making informed decisions involves considering opportunity costs and avoiding "stupid mistakes." This means asking questions about what we're giving up by choosing one option over another, and being open to new possibilities. Building a network of supportive and forgiving colleagues can help us learn from our mistakes and make better decisions in the future. Additionally, interest rates can act as a "curfew," shaping our financial priorities and decisions. By reflecting on past experiences and learning from them, we can make wiser choices and avoid repeating the same mistakes. Ultimately, the key is to approach decision-making with a thoughtful, open-minded perspective, considering all available information and potential consequences.
Low interest rates fuel risky investments and progress: Low interest rates can lead to technological advancements but also risky investments and unsustainable situations. Bailing out failed entities instead of letting them go bankrupt should be avoided.
During periods of low interest rates, there's a sense of "no curfew" or no consequences for borrowing and investing, leading to a proliferation of ideas and companies that might not have been viable under normal economic conditions. This can result in significant technological progress, but also comes with great costs and potential risks. However, bailing out failed entities instead of letting them go bankrupt could create unsustainable situations. As for stock option accounting, it's a complex issue with potential benefits and drawbacks, but overall, it might not be a sustainable solution for long-term economic health.
Understanding Accounting's Limitations: Accounting provides valuable information but shouldn't be relied on solely. Understand opportunity cost, fully allocate costs, be aware of accounting practices, define acceptable practices, admit mistakes, and invest in companies with good accounting practices.
While accounting knowledge is valuable for investors and business people, it's essential to remember that accounting is just a tool and not the entire truth. Accounting information should be economically analyzed to understand the underlying substance. The speaker emphasized the importance of understanding opportunity cost, fully allocating costs, and being aware of accounting practices that may not align with economic reality. Additionally, investors should define their own acceptable practices and be humble enough to admit mistakes. The speaker also shared his personal experience of avoiding companies that heavily relied on complex accounting practices, such as option accounting during the dot-com bubble. Lastly, the speaker noted the challenge of accounting for inflation-protected assets like oil, which are priced based on historical cost and not present cost, and questioned the usefulness of accounting in such cases. Instead, he suggested investing in companies with good accounting practices, like Disney, as a better way to protect against inflation.
Understanding EBITDA's limitations: Recognize EBITDA's value but don't rely on it blindly, consider the full economic reality of a business to make informed investment decisions.
Understanding the limitations and implications of financial metrics like EBITDA is crucial for making informed investment decisions. Charlie Munger refers to it as "bullshit earnings," but it still provides some valuable information. However, it's essential to recognize its limitations, particularly in capital-intensive industries where substantial ongoing expenses are required. The key is to go beyond the 60% map provided by EBITDA and consider the full economic reality of a business to make rational investment decisions. For example, in the case of TV or radio stations, the amortization costs can be safely added back since the assets have already been paid for. Overall, the goal is to maintain a clear understanding of the economic realities behind financial metrics and use them as tools rather than relying on them blindly.
Find joy in what you do for success: Finding joy in what you do can lead to personal and financial success. Investing in what already works, like Berkshire Hathaway, requires patience and acceptance.
Finding joy in what you do and sticking with it can lead to success, both personally and financially. Eric Thomas, a world-class runner, found joy in running and has had a remarkable track record. Similarly, investing in what already works, such as consistently buying stocks like Berkshire Hathaway, can lead to significant returns. However, letting go of ego and embracing patience are essential challenges in sticking with what works. The tax efficiency of holding onto gains also plays a role in the decision to sell or buy more. Ultimately, doing more of what works requires patience, acceptance, and a willingness to let go of the desire for instant gratification.
Creating Value for Others and the World: Success is about more than personal achievements. It's about creating value for others and building a system that helps people grow and make a difference.
Success is not just about personal achievements, but also about the positive impact we have on others and the world around us. The speaker, a business leader, reflects on his own successes, including a long-lasting marriage, grown children, grandchildren, and the growth of his organization, Markel, which now employs over 20,000 people. He sees the organization as a system that provides sustenance, learning opportunities, and a foundation for its employees to make the most of their circumstances and help others. The speaker enjoys being one of the architects of this system and sees the opportunities it creates for people to grow and make a difference. In essence, success is about creating value for others and continuing to build and improve upon what we have.
