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Why Warren Buffett and Charlie Munger Were Right

Irrational Behavior Abounds During Market Collapse


Years ago, I was attending a Berkshire Hathaway shareholder meeting and something Warren Buffett and Charlie Munger said struck me as odd. When asked why they weren’t concerned about sharing their highly successful investing method, the two men insisted that they believed it was the right way to behave to create a better society, while noting that most people wouldn’t actually adhere to anything they said during the next crisis. Although I have tremendous respect for both men, I found that surprisingly depressing.

Yet, here we are in the midst of the greatest asset devaluation in generations and otherwise sensible people are behaving in ways so irrational I almost find myself not bothering to correct them anymore. One of my close family members now insists that owning stocks, or indeed, businesses in general, is nothing but a gamble. In his or her mind, however, working for that same company isn’t risky. The failure in logic should be obvious but for some reason, most people would rather have the illusion of job security (and it is an illusion, mind you) rather than the security of controlling their own destiny because the latter requires the fortitude to watch the asset values on your balance sheet fluctuate.

The process of building your net worth is not going to be a steady, easy ride up like an escalator. Instead, it’s going to come in fits and starts, with long periods in between where the wiser among us spend their time study, reading, and building up resources to take advantage of the opportunities when they do manifest.

In the past two years, I’ve purchased a substantial primary residence, expanded the operating businesses under my control, and begun investing in as many publicly traded stocks are we can responsibly afford without risking the health of the corporation. Long-term readers know that I even went so far as to launch a specialty luxury retail store in the Midwest called Kennon Home Accessories despite the economic climate. All because I believe in Warren Buffett’s maxim: Be fearful when others are greedy and greedy when others are fearful.

There is metaphorical blood running in the streets now and those with the resources, courage, and willingness to take advantage of the greatest fire sale on business ownership in the past half century will find themselves decidedly richer ten years hence. For now, when people begin ranting on the stock market or on taking risks, I find myself grimacing and walking away, feeling bad because they truly believe they are acting rationally. They’ll look back, wondering why men like me have continued to amass wealth.

For the few of you that aspire to become financially independent, consider the following things:

  • Build a complete portfolio. This is the first and most important step so you should take the time to read the accompanying article by following the link.

  • Utilize the Berkshire Hathaway model by diversifying not only your assets but your income streams. This will enable you to survive financial catastrophes because you aren’t dependent upon a single job or revenue source.

  • Continue to seek value but only invest in the things you know, understand, and can explain to your children. In my case, I can understand the implication of changing discount rates and pension return assumptions on the reported earnings figures of publicly traded corporations. You probably can’t. That doesn’t have to hold you back because but you might have a much better grasp in a different field. Think about the people that understood the potential for cell phones in the United States and bought up spectrum space for only a few hundred dollars, later selling it for tens or hundreds of millions to telecommunication companies! Your most valuable asset is your knowledge base – it is unique and you should take advantage of it.

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