Video Link: https://youtu.be/u6kRjjt2vtE
In this episode, Warren Buffett was asked how is he able to tell when he had a big idea?
In this episode, you’ll learn:
How Warren Buffett were able to tell when he had a big idea in investing?
Charlie Munger on opportunity cost.
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AUDIENCE MEMBER 00:00
Good afternoon, Mr. Buffett and Mr. Munger. My name is Kevin Truitt (PH) from Chicago. I have three questions for you.
My second question is, Mr. Buffett you’ve stated the importance of an occasional big idea. How were you able to, in fact, tell when you had a big idea?
WARREN BUFFETT 00:18
Now, moving onto the big ideas, you know when you’ve got a big idea. And I can’t tell you, you know, exactly what happens within your nervous system or brain at that time.
But we’ve had relatively few big ideas, good ideas, over the years. I don’t know how many you think we’ve had in aggregate, probably, career, maybe 25 each or something?
CHARLIE MUNGER 00:44
If you took the top 15 out of Berkshire Hathaway, most of you people wouldn’t be here. So, roughly one every two years.
WARREN BUFFETT 00:54
Yeah, one every year or two. And sometimes there’ll be a bunch of them, like in 1973 and -4. But the problem is, for us is that big, now, really means big. I mean, it has to be billions of dollars to move the needle very much at Berkshire.
But I would say that when I would turn those pages, 50 years ago in the Moody’s Manuals, I would know when I hit a big idea. I’ve got half a dozen of them that I keep the Xeroxes from those reports around from 50 years ago just because it was so obvious that they just — they were incredible. And that happens every now and then.
When I met Lorimer Davidson, you know, in end of January, 1951, and he spent four hours or five hours with me explaining GEICO, I knew it was a big idea.
Eight months later, no, probably 10 months later, I wrote an article for The Commercial and Financial Chronicle on “The Security I Like Best.” It was a big idea.
When I found Western Insurance Securities, I knew it was a big idea.
I couldn’t put billion — millions — of dollars into it, but I didn’t have millions so it didn’t make any difference.
And I — we’ve seen things subsequently. And we’ll see, you know. If we have a normal lifespan, we’ll see a few more before we get done, but I can’t tell you that — exactly how —
I can’t tell you exactly what transpires in my mind that says, you know, flashes a neon sign up that says, “This is a big idea.”
What happens with you, Charlie?
Actually, one of my — I’ve have a real system. (Laughter)
My idea of a truly big idea is, one I get it and I call Charlie and he only says no, rather than, “That’s the worst idea I’ve ever heard of.” But if he just says no, it’s a hell of an idea.
CHARLIE MUNGER 02:58
You know, the game in our kind of life is being able to recognize a good idea when you rarely get it, and — or when it rarely is presented to you. And I think that’s something you have to prepare for over a long period.
What is the old saying? That opportunity comes to the prepared mind? And I don’t think you can teach people in two minutes how to have a prepared mind. But that’s the game.
WARREN BUFFETT 03:36
Things we learned 40 years ago, though, will help and recognize the next big idea.
CHARLIE MUNGER 03:43
And on opportunity costs, going back to that, the current freshman economics text, which is sweeping the country, has right in practically the first page. And it says, “All intelligent people should think primarily in terms of opportunity cost.” And that’s obviously correct.
But it’s very hard to teach business based on opportunity cost. It’s much easier to teach the capital assets pricing model where you could just punch in numbers and out come numbers. And therefore, people teach what is easy to teach, instead of what is correct to teach.
It reminds me of Einstein’s famous saying. He says, “Everything should be made as simple as possible, but not simpler.”
WARREN BUFFETT 04:35
Write that down. (Laughter)