of Berkshire Hathaway, almost unique in the business world, shows that Buffett and Munger designed the enterprise to thrive in chaos – and this is important – even if they can’t predict what the chaos might be. The company uses the “float” that it receives from its insurance companies (premiums) and until the insurable event arrives Buffett invests the proceeds in stocks, bonds, or operating companies that he can buy for less than they’re intrinsically worth. If the Berkshire insurance managers have priced their premiums correctly then Berkshire stands to profit handsomely over time. If there is nothing worth buying, Buffett and Munger avoid temptation and patiently wait as the cash from insurance premiums accumulates. When chaos arrives in a market crash (2008) or an international crisis (9/11) or an act of nature (Katrina) then Berkshire Hathaway is armed and ready with all of the capital patiently accumulated during good, benign times when conditions were not optimal. Once the chaos smashes the prices and the values of high quality enterprises, then Berkshire is able to buy things cheaply, gain market share, and strengthen its business. This makes Berkshire Hathaway the ultimate antifragile business. I found that Munger, however, more closely aligned his life and his personal affairs with what I deem to be the ideal. A self-made man who sought wealth not for its trappings, but for the independence it would provide. He often counsels to “lower your wants” as a way to cope with life’s costs and inflation. He famously told a student audience at the University of Michigan to “suck it in and cope.” He obviously wasn’t out to win a popularity contest but it’s a message that people badly need to hear.
Bottom Line Up Front
Be frugal, live beneath your means, buy quality things that last and hold value, build multiple income streams, learn self-reliance, invest in great corporations, and live life with passion. When chaos inevitably comes seize the opportunities with decisive gusto.
Introduction to Chaos
This journey began in the swamps of Ft. Benning Georgia during Officer Candidate School (OCS). As part of the US Army’s leadership training, officer candidates are thrust into different leadership scenarios and asked to create, innovate, respond in an invented crisis. There is nowhere to hide – you either figure it out or you are unceremoniously dropped from the course. These practical lessons are accompanied with classroom lessons where previous leaders are intensely studied to see what they did in different circumstances. The overarching lesson is that a simple decision, done by one individual, can change the outcome of a battle and the outcome of a battle can change a war. En Shalla doesn’t fly at OCS. In combat the price of failure can be death. Poor decisions create brutal consequences. That means you train. You prepare. You practice. You maintain. You study. You learn the environment. You learn human nature. You theorize how to apply principles into the chaos of war and learn cause and effect. One of the most powerful lessons from the military is that if it can go wrong, it will go wrong so there is a natural mindset to prepare for the worst case scenario. But to achieve the Dream it’s going to take more than just being prepared for bad things – those bad things need to be turned into positive advantage.
Colonel Joshua Chamberlain
I could select any number of famous military figures for this part with similar patterns but Colonel Joshua Chamberlain is as good as any. Chamberlain is famous for his crucial role at Gettysburg at the Battle of Little Round Top. Often studied by young officers, his actions that day are a great introduction to the core philosophy. After repeated Confederate attempts to overrun his position Chamberlain’s unit was nearly out of ammunition and the Confederates were again assaulting up the hill. Chaos all around. What to do? If the Confederates overran his position they would be behind Union lines and could roll up the Army of the Potomac – victory in Gettysburg could change the outcome of the war. Now was the time for action. Chamberlain did some crucial analysis of the situation and even in a dire setting knew that he had some advantages if he acted decisively. He knew that the Confederate soldiers were exhausted from repeated attacks. He knew that they were charging uphill. He knew the terrain to his left, right,and down the hill. He knew the morale of his own men. He knew that a downhill charge, though risky, would be sudden and terrifying to the Confederates. Chamberlain was decisive and ordered his forces to fix bayonets and charge downhill as a wheeled hinge. In the fury of the Union charge, the Confederate ranks broke and the route was on. Victory. Chamberlain may not have fully foreseen the circumstances but he was prepared to act at the right place and the right time in the teeth of chaos. It is telling because Chamberlain had no formal education on military strategy. He had not read hundreds of books on previous battles, yet he knew what to do – a well read man who understood the important things of natural law and human nature.
Chamberlain’s example is compelling in that war is the ultimate form of chaos – life and death are often totally random. The environment is defined by asymmetric uncertainty. Although we were taught to prepare and think our way through problems I realized that trying to predict an exact scenario where I might be a key actor was fruitless. Chamberlain knew what to do – intuitively. If one could study every battle of every war through history one would be historically well grounded – yes – but odds are almost 100% that any dire situation would have unique qualities leading to an array of confusing choices. In war, things tend to be grey rather than black and white, often with no clearly right answer. I realized that it might be a better idea to increase understanding of the world at large, of the nature of man, and of the nature of risk and chaos and randomness. Although there are “Principles of War,” war touches a deeper, more fundamental set of principles that transcend well beyond the confines of conflict. Perhaps these deeper principles were more comprehensive and universal and only played out in the sphere of war as they no doubt were in all facets of life. To learn what I was after I stopped reading military history books and started reading a vast array of multidisciplinary topics – human psychology, philosophy, biology, physics, math, English, economics, chemistry and geography etc. The multidisciplinary background is necessary to both recognize and understand many of the patterns which define our world – to include the patterns (or lack thereof) of chaos.
Charlie Munger (The ideological Godfather of Go4itusa)
The ensuing intellectual journey brought me to the business world and investing and it wasn’t long before I found the multidisciplinary decision-making of Charlie Munger and Warren Buffett. Munger in particular had developed a decision-making thought prism of what I’ll call an inverted multidisciplinary attack on the problem at hand. Buffett and Munger are giants of the insurance industry and masters of probabilities – where risk and probabilities are priced every day in an attempt to quantify chaos. Buffett’s quote, “It’s Armageddon here every day” was thought provoking and no different from how military leaders think. Here’s the richest guy in the world, overseeing a large insurance and re-insurance operation, describing how he views the world. What could go wrong? What threats do we face? What actions should we take now to enhance and improve the moats around our business? How can we extend our competitive advantage? Buffett’s design
I soon realized that the Berkshire model was parallel to the teaching found in the Sun Tzu. The Sun Tzu is more philosophically grounded than most military readings in that it’s more a way of life that transcends the pure military realm. The commander (Sage) must fully understand nature and the environment. He must understand the natural flow of things and develop an innate feel for the totality of the environment. The sage knows the condition and morale of his forces and the enemy’s forces. He understands the logistics situation. He understands the terrain. He understands the weather. He understands human nature. The sage accumulates and gathers his resources and increases his strength without acting. He attempts to win using all of the tools and forces at his disposal in a holistic use of the environment. If force is to be used it is unleashed only when conditions are overwhelmingly favorable – to exploit weakness.
After putting it all together and finding the patterns and common themes from the above the philosophy began to round into shape. What do Chamberlain’s actions at Little Round Top, the design of Berkshire Hathaway, and the teachings of the Sun Tzu have in common? EVERYTHING. The principles are timeless. Moreover, the principles are applicable in all facets of human life – from nations to governing institutions to corporations to small businesses to communities to families to individuals. None of us know when chaos or opportunity will find us. We don’t know where. We don’t know how. By definition it will be random. What we are charged with doing is to posture our circumstances to seize the day and grow stronger when it inevitably arrives. That’s the ideal this blog is after – trying to design a personal life that closely mirrors the design of Berkshire Hathaway. Welcome to the journey.