Oh, the joys of spring: warmer temperatures, greening trees, budding flowers…and, of course, the Berkshire Hathaway annual shareholder meeting!
Every year we look forward to the first Saturday in May for our annual pilgrimage to Omaha, Nebraska, to learn something new and renew our faith in clear investment thinking and rationality.
One of the more timeless investment topics touched on by Warren Buffett and Charlie Munger, Berkshire's chairman, and vice-chairman, respectively, was delayed gratification. It goes without saying, investing is an exercise in delayed gratification. You have two choices in what to do with your pile of wealth today: spend it now or invest it for a higher return in the future. The cognitive bias towards or against delayed gratification might be ingrained in the brain from an early age (see the classic Stanford marshmallow experiment), and as a result, some folks may have to work harder to develop the habit than others.
Charlie's answer to a question from an audience member hit upon that very point. During the meeting, a 13-year-old from San Francisco asked, “Is there any way that kids can develop the delayed gratification skill?”
CHARLIE MUNGER: I’m a specialist in delayed gratification. I’ve had a lot of time to delay it. And my answer is that they [his children] sort of come out of the womb with the delayed gratification thing, or they come out of the womb where they have to have everything right now. And I’ve never been able to change them at all. So, we identify it. We don’t train it in.
Buffett added to Munger's answer on the topic:
WARREN BUFFETT: Charlie’s had eight children, so he’s become more and more of a believer in nature versus nurture!
It’s interesting. If you think about — we’ll take it to a broader point. But if you think of a 30-year government bond paying 3 percent, and you allow for, as an individual, paying some taxes on the 3 percent you’ll receive, and you’ll have the Federal Reserve Board saying that their objective is to have 2 percent inflation, you’ll really see that delayed gratification, if you own a long government bond, is that, you know, you get to go to Disneyland and ride the same number of rides 30 years from now that you would if you did it now.
The low-interest rates, for people who invest in fixed-dollar investments, really mean that you really aren't going to eat steak later on if you eat hamburgers now, which is what I used to preach to my wife and children and anybody else that would listen, many years ago.
He also chimed in with some great wisdom regarding delayed gratification as well:
WARREN BUFFETT: So, it’s — I don’t necessarily think that, for all families, in all circumstances, that saving money is necessarily the best thing to do in life. I mean, you know, if you really tell your kids they can —whatever it may be — they never go to the movies, or we’ll never go to Disneyland or something of the sort, because if I save this money, 30 years from now, you know, well, we’ll be able to stay a week at Disneyland instead of two days.
I think there’s a lot to be said for doing things that bring you and your family enjoyment, rather than trying to save every dime. So, I — delayed gratification is not necessarily an unqualified course of action under all circumstances.
I always believed in spending two or three cents out of every dollar I earn and saving the rest!
But I've always had everything I wanted. I mean, one thing you should understand, if you aren't happy having $50,000 or a hundred thousand dollars, you're not going to be happy if you have 50 million or a hundred million. I mean, a certain amount of money does make you feel — and those around you — feel better, just in terms of being more secure, in some cases. But loads and loads of money — I probably know as many rich people as just about anybody. And I do not — I don't think they're happier because they get super rich. I think they are happier when they don't have to worry about money. But you don't see a correlation between happiness and money, beyond a certain place. So, don't go overboard on delayed gratification!
As a shareholder and a fan, it is amazing to think about how Buffett and Munger are two of the best investors in the world in large part because they never stopped learning and improving their investment process. They are still doing it today at ages 89 and 95, which is absolutely amazing. A key to their success has been staying in their circle of competence and always knowing the edge of the circle.
Buffett and Munger expanded on this topic during this year's meeting:
WARREN BUFFETT: It’s important. I would just do a whole lot of reading. I’d try and learn as much as I could about as many businesses, and I would try to figure out which ones I really had some important knowledge and understanding that was probably different than, overwhelmingly, most of my competitors.
And I would also try and figure out which ones I didn't understand, and I would focus on having as big a circle as I could have and also focus on being as realistic as I could about where the perimeters of my circle of competence were.
Well under any conditions, you should expand your circle of competence — if you can.
CHARLIE MUNGER: If you can’t — I’d be pretty cautious.
WARREN BUFFETT: Yeah. You can’t force it. You know. If you told me that I had to, you know, become an expert on physics or, you know —
CHARLIE MUNGER: Dance maybe the lead in a ballet, Warren. That would be a sight!
Yes, it would!
Warren and Charlie always deliver the goods by cutting through all the noise and delivering the proper investment signal for long-term investment success. This year was no different.
BTW: If you are interested in watching a replay of the meeting, you can find it here.