What’s missing every time investors talk about Warren Buffet and Charlie Munger’s “words of wisdom”.

October 4, 2017

It is true, Warren Buffet and Charlie Munger are extraordinary investors. However, there are some very important background concepts/lessons that are sorely overlooked when all of the authors talk about the lessons we should all learn from some of the world’s greatest investors.

Generally, investment writers describe their lessons as simple ideas such as; buying amazing companies at fair prices, waiting for the right time to buy, and having cash available to buy them when the opportunity comes available. While there are of course many more lessons to learn from them, and they are all valuable… a lot of it really comes down to being patient, and buying when the opportunities are right. Being greedy when others are fearful. These are lessons I take to hear myself, and every investor could benefit from understanding their philosophies and trying to put them into action.

But what’s overlooked is the fact that…

Berkshire Hathaway is an incredible profit center. It generates huge sums of excessive cashflow, that will continually be built up. Whether or not they deploy their capital and invest in something, they’ll always constantly have more money to deploy.

Having businesses that spit off a considerable amount of extra cashflow makes investing all the easier, because you do not “need” the money that you’re investing. You can literally invest it all when the opportunity arises, you don’t rely on it for jack. You can also think and invest for the long-term, which is what they attempt to do. It’s always easier to go for the long term when you don’t need the money. Now of course, this is a investing 101, you don’t invest money you don’t need. Because in a time of bind, you’re going to sell it, generally at a huge loss, and likely pay taxes. That’s just about everything you could do bad.

However, what’s important here is that, they do in fact have business that generate excess cashflow. A ton of it. They are always in a position, to think and buy long-term because of the amount of capital their companies are generating. Even if they spent most of their capital, they’d have a lot of it recouped in no time. So when people think it’s extraordinary that they’re sitting on so much cash, it’s also not surprising given how much cash they generate…

#1) If you want to replicate their success, you also need profit centers, that generate so much excessive cash, you’ll always have more capital to deploy.

Warren and Charlie are extraordinary investors, and they are extraordinary entrepreneurs. They know how to raise capital, and have a team of A+ players to run their businesses. They’re also leveraging other peoples’ money to invest, they’ve all started funds and their getting a larger return off other people’s money.

#2) They ain’t just self-funding everything. They know how to raise capital, and go faster than money people would trying to save up all this money to invest.

Their insurance businesses are also very interesting, in the fact that they have “float”. All of the premiums that their insurance customers pay them are not considered income to their businesses. This is because they may have to pay out those premiums back to customers in a form of claim later on, so the IRS does not consider it as income. They have to hold onto the money for the customers. This allows them to hoard a ton of excess cash in “float”, and while it’s not being used they can invest it. As of 2016, they’ve collect over $91 billion dollars in float, which they haven’t had to pay any taxes on. They then use this to buy out other companies, and just always have more money to ensure they can always pay their claims in case anything happens.

This is extremely wise on their part. Their like a bank, in which they can invest money from their customers without paying taxes on the float. They of course have to be careful, but it’s beautifully designed.

#3) Their business is very cashflow efficient. They have “float”, and have extra capital to deploy like banks. I think they discovered this on accident, and this is also the reason that they are so focused now on buying insurance companies. It helps them invest more.

When you have all of this excess cashflow and float, it’s much easier for them to buy and hold for long-periods of time, and defer their capital gains.

So if you want to be a great investor like Warren Buffet & Charlie Munger, you’re going to want to develop profit centers that can continually create excess cash that you can invest. If there isn’t anything to buy, you don’t buy, and continually to let your capital grow.

Now even when they did not have excess cashflow, there are true examples of Warren Buffet actually giving back money to his investors because he could not find anything to buy. So those lessons you learned about being patient and waiting are absolutely true. However, as time progressed, Warren doesn’t have to do that any more, they’re not just an investor any more, they run business. Investing is just a side thing when the opportunity comes right, outside that, they’ll just collect their dividends and cashflow.

Berkshire Hathaway isn’t just an investment fund, it’s a conglomerate of companies generating significant revenues. Even without investing any more, they’d just be fine.