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hey investor friends I'm Michelle Markey and how would you like to have an advantage over Wall Street if you just listen to one of the best investors of all time Charlie Munger who at the 2019 Daily Journal Corporation annual meeting explained how you can outperform Wall Street by not listening to what's typically taught in Business Schools and what a lot of people in Wall Street end up doing by following academic formulas so if that sounds good to you please be sure to like And subscribe and watch the following it's weird and what's happened of course is that we're standing a bit for some combination of basic morality and sturdy common sense and it's amazing how well Berkshire Hathaway in the Daily Journal for that matter have succeeded with nothing more than basic morality and sturdy common sense but of course when people talk about common sense they mean Uncommon Sense every time you hear that somebody has a lot of common sense it means he's got Uncommon Sense and it is much harder to have common sense than is generally thought let me give you an interesting example in the investment world people involves enormous amount of high IQ people trying to be more skillful and normal you can hardly imagine another activity that gets so much attention and weird things have happened and years ago one of our local investment counseling shops a very big one just they were looking for a way to get an advantage over other investment counseling shops and they reasoned as follows we've got all these brilliant young people from Wharton and Harvard and so forth and they work so hard trying to understand business and market trends and everything else and if we just ask each one of our most brilliant men for their single best idea they haven't created a formula with this collection of best ideas we would outperform averages by a big amount and that seemed plausible to them because they were ill-educated that's what happens when you go to Harvard and Horton and and so they tried it out and of course it failed utterly so they tried it again and it failed utterly they tried the third time and it also failed and of course what they were looking for is the equivalent of the Alchemists of centuries ago who I wanted to turn led into gold they thought if you could just buy a lot of leader Magic Wand Over and turn into gold that would be a good way to make money this counseling shop was looking for the equivalent of turning lead in the gold and of course it didn't work I could have told them but they didn't ask me nothing the interesting thing about this situation is this is a very intelligent group of people that's come from all over the world you've got a lot of bright people from China where people tend to average out a little smarter and the issue is very simple there's a simple question why did that plausible idea fail just think about it for a minute you've all been to fancy educational institutions I bet you there's hardly one in the audience who knows why that thing failed they're pretty ridiculous demonstration I'm making how can you not know that it's one of the main activity of America is an obvious important failure surely we can explain it you have to have stayed awake in your freshman college courses to answer that question but if you ask that question at the Department of Finance at a leading place the professors wouldn't answer it right now I'm going to leave you that question because I want you perplexed and I will go on to another issue but that's when you should be able to answer it shows how hard it is to be rational on something very simple how hard it is how many kind of crazy ideas people have and they don't work you don't even know why they don't work even though it's perfectly obvious if you've been properly educated and by the way my definition of being properly educated is being right with my professor is wrong anybody can spit back what the professor tells you the trick is to know when he's writing when he's wrong that's the properly educated person and of course they're frequently wrong particularly in the soft Sciences in fact if you look at a modern Elite Institution it's fair to say that a lot of the faculty are a little crazy it's so left-wing now in the humanities and it's very peculiar that's another thing why should 90 percent of the college professors in the humanities be very left-wing I leave that question for you too but it happens another issue of course that's happened in the world of stock picking where all this money and effort goes in to try and be trying to be rational is that we've had a really horrible thing happened to the investment counseling class and that is these index funds have come along and they basically beat everybody and not only that the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in Investments so you have a whole profession is basically being paid for accomplishing practically nothing this is very peculiar this is not the case with bowel surgery or even the criminal defense bar and the law or something that will hold profession or the chosen activity they've selected they can't do anything now in the old days the people in the profession always had some of this problem and they rationalized as follows we are saving our clients from the insurance salesman and the stock broker the standard stock broker for the it serves the active Trader and they were saving people from the life insurance salesman and the the hustling stock broker who liked active Trading and I suppose in the sense that the investing class is still saving those people from an even worse fate but it's very peculiar with a whole profession that worked so hard and is so admirable and the members of which we are delighted when they marry into our families and they just can't do what the Russian is really trying to do which is get better than average results how is that profession handling this terrible situation as index investing gets more and more popular and including by a lot of fancy places well I guess very simple answer they're handling with denial they have a horrible problem they can't fix so they just treat it as non-existent this is a very stupid way to handle a problem now it may be good when you're thinking about your own death which you can't fix just denial all the way to the end but in all the Practical fields of life this problem thoroughly understood is half solved or better coped with so it's it's wrong to have all these people in just a state of denial and doing what they've always did year after year and hoping that the world will keep paying them for it even though an unmanaged index is virtually certain to do better it's a very serious problem and think of how much New York say needs a flow of money from Finance I think what happened to Manhattan if there weren't any fees for investment management or trading spreads and so on and so it's a weird situation and of course it's it's unpleasant big investment counseling shops are some of them shrink and some go out of business and the value investors of course who many of I know because we came from that tradition the value investors who are honorable are quitting boom boom boom and what worked for them for years stopped working and they they're honorable people they just quit and they're also Rich so it makes it easy but those who aren't rich or have a hell of a problem and it costs about fifty thousand dollars to stay in Manhattan to send your kid to preschool non-deductible and that's just the start of an endless procession of years of vast expense so if your game is Money Management you have a serious problem and I don't have any solution for this problem I do think that index investing if everybody did it won't work but for another considerable period index investing is going to work better than active stock picking where you try and know a lot now the place like Berkshire Hathaway or even the Daily Journal we've done better than average and now there's a question why has that happened and the answer is pretty simple we tried to do less we never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about can soup and Aerospace utilities and so on and so on and so on we never had that dream we never thought we could get really useful information on all subjects like Jen Cramer presents it tends to have and we always realized that we worked very hard we can find a few things where we were right and the few things were enough and that that was a reasonable expectation that is a very different way to approach the process and if you would ask Warren Buffett the same thing that this investment counseling did give me your best idea this year and you just followed Warren's best idea you would find it work beautifully but he was trying to know a whole he would give you one or two stocks he had more limited ambitions I had a grandfather who was very useful to me my mother's grandfather and he was a Pioneer and he came out to Iowa with no money but using health and took it away from the Indians he fought in the black oh he was a captain in the Blackhawk Wars and he he stayed there and he bought cheap land and he he was aggressive and intelligent and so forth and eventually he was the richest man in the town on the bank and uh I'm highly regarded and a huge family and a very happy life and and he had the attitude having come out to Iowa when the land was not much more than a dollar an acre and having stayed there until that blacktop soil created the modern Rich civilization in some of the best land in the world his attitude was that a favored life like his when you were located in the right place you just got a few opportunities if you live to be above 90.
and the trick in coming out well was easing a few opportunities that were your fair share that came along when they did and he told that story over and over again to the grandchildren around him all summer and my mother who had no interest in money remembered the story and told it to me but I'm not my mother's natural imitator and I knew grandma was right and so I always knew from the very first when I was a little boy that the opportunities that were important that were going to come to me were few and the trick was to prepare myself for seizing the few that came this is not the attitude they have at a big investment counseling thing they think if they study a million things they can know a million things and that of course the result is almost nobody cannot perform an index whereas I sit here with my Daily Journal stock my Berkshire Hathaway stock my Holdings at Lulu's Asian fund my Costco stock and of course I'm outperforming everybody and I'm 95 years old I apparently never have a transaction and the answer is I'm right and they're wrong and that's why it's worked for me and not for them and you know the question is do you want to be more like me or more like them and so the moral of the story is just like Charlie Munger says you've got to be prepared to seize the few investment opportunities that might come along and I think a part of the reason why typical Wall Street and academic strategies are not as successful as Warren Buffett and Charlie munger's investing approach is because they often lack wisdom and conviction and so if you can truly understand and believe in your very few investment ideas you're bound to be more successful and end up ahead of the pack
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