Over the past couple of weeks, I've gone down a rabbit hole.
I've been consuming everything I can about Charlie Munger and Warren Buffett and their investment juggernaut, Berkshire Hathaway.
What I've learned is that their business strategy is pretty simple:
- Find great businesses, and invest in them at fair prices
- Avoid stupidity vs. trying to be brilliant
- Limit corporate overhead
- Invest and hold for the long run (Berkshire first bought Coca-cola stock in 1988, and they still hold their position today)
Berkshire Hathaway is one of the most valuable businesses in the world, worth more than $700 billion. It's also one of the most straightforward.
They buy and invest in companies and allow great operators to continue building those businesses, largely hands-off.
For their part, Warren and Charlie spend most of their time reading and thinking.
Their goal is to advance their personal knowledge of business and markets so that they can identify great businesses, and take positions in them when the timing is right.
Munger coined a phrase for their management style, "sit on your ass investing."
It's the idea that you make a few smart decisions and let time do the rest.
As Einstien said, "Compound interest is the eighth wonder of the world. He who understands it earns it... he who doesn't pays it."
I couldn't help but notice the contrast between this business philosophy and how most of the software industry behaves.
In fact, they're almost polar opposites.
In software, we invest in hyped-up, mediocre businesses at high prices, and average hold times for VCs are 7-10 years. Private equity only 3-5.
While Berkshire and most tech investors are involved in the same type of activities–the buying and selling of companies–they are in vastly different businesses.
But as the software tech sector matures, it will adopt behaviors and characteristics of the types of great businesses that Buffett and Munger invest in.
These businesses will obsess over customers and deliver ever-increasing value to them over long time horizons.
They will create enduring competitive advantages.
They will closely monitor and manage costs, run profitably, and provide shareholder returns.
Innovation is never cheap, so outside capital will always be part of the equation.
But I'd argue the biggest innovations of the past 15 years have been 1) the SaaS business model itself and 2) the cloud platforms that support the multi-tenant SaaS model.
At this point, both are widely adopted, which is a win.
Now we must operationalize go-to-market and customer success, obsess over increasing customer value, and grow efficiently.
As we do, time will take care of the rest.
SaaS companies embody the phenomenon of compounding interest that Einstien revered and that Munger and Buffett have leveraged to amass their fortune.
Here are a few of the resources on Buffett and Munger to check out if you want to follow me down the rabbit hole:
- The Tao of Charlie Munger - Over one-hundred Charlie Munger quotes with additional analysis by David Clark unpacking their impact.
- The Snowball: Warren Buffett and the Business of Life. I've been reading this off and on for the past several months. It's long and winding, but filled with anecdotes of business and personal details of Buffett's life.
- The Founders Podcast is an absolutely amazing podcast that unpacks the biographies of notable founders and figures from history. Episode #303 , Episode #295 - the Tao of Charlie Munger, Episode #286 - Munger and Buffett talking directly to you, Episode #227 - Unpacking Buffett's essays, and Episode #88 - Buffett's shareholder letters.
I hope you enjoy these as much as I have.