Focusing on workforce diversity ratios at companies is a terrible idea. Better to focus on process.

TL;DR – Many advocates of ‘more diversity’ in the workplace and in high-paying jobs like technology, are vague, misleading, and misguided in their calls to focus on the demographic ‘representation’ of a given workforce as evidence of bias. They ignore statistical ratios of qualified workers (and underestimate how tricky and complex it would be to estimate what the ‘bias-free’ workforce makeup for a given company “should be”, let alone the random factors that would cause actual ratios to differ.) Those who are concerned with potential bias in personnel decisions should instead focus on the processes of hiring/salary/promotion, and if they believe they see bias, they should investigate more thoroughly than simply arguing that “percentage female” or “percentage minority” are useful metrics to indicate bias.

What’s wrong with diversity ratios?

A number of companies have embraced the nebulous idea of ‘Diversity’, publishing statistics on how ‘diverse’ their workforce is, and publicizing their efforts to increase that diversity. It’s often unclear whether this is done out of genuine belief that having a more diverse workforce will be good for the company, or whether it’s a cynical attempt to foster positive public opinion for its products and employment opportunities, but I suspect it’s a combination of both.

What is also unclear, or in my opinion is often intentionally obscured, is what is meant by diversity, and why ratios of characteristics used to define diversity should be focused on (generally gender and race/ethnicity, but often sexual orientation or family income are mentioned as well.) Focusing on altering the racial, sexual, or [insert demographic variable here] makeup of a workforce is incredibly misguided, and ultimately harmful if actually pursued as a goal in itself.

Instead, companies and activists should focus on making sure that the process of finding, hiring, and promoting qualified candidates is free of bias. Ratios can be a good way to check whether processes are working well (unbiased) or not, but they should not be the goals themselves.

Defining diversity

First, we must determine what is meant by diversity. I would assume that the type of diversity beneficial to an organization would be diversity of opinion, experience, and thought process, but that’s not what most diversity conversations are about (and besides, it would be difficult to measure these things in a meaningful way, since they largely exist inside the heads of workers rather than in their skin pigment, parent’s W-2 forms, and genitals…) Diversity advocates usually look at gender & race (which I’ll combine here with ethnicity), and state that their goal is to ‘increase representation among underrepresented groups’ of people at a given company or industry. ‘Representation’ presumably means ‘% of the workforce’ and ‘underrepresented’ means ‘those who make up a minority as a % of the workforce’. In the US, this seems to mean anyone who is not a white male, or perhaps a straight white male. Outside of tech, white might be sufficient to categorize those who are ‘not diverse’, but since men are overrepresented in tech, it must also mean white men. (One sign that ‘diversity’ has simply become a euphemism for not being a white male is that candidates in the singular are now described as ‘diverse’, which makes no linguistic sense.) Strangely, Asians (which includes those from India for our purposes), are generally assumed to be increase ‘diversity’, despite the fact that they are hugely overrepresented in tech (and other high-paying jobs) in the US.

Computing diversity

One complication here is that under- and overrepresentation is only meaningful if we know what the expected or ‘unbiased’ level of representative should be. If I tell you that the workforce for a tech company in San Francisco is 5% black, does that mean that blacks are under- or overrepresented relative to other groups? Well, if San Francisco’s (SF) population is 10% black, you might say ‘yes, blacks are underrepresented compared to the general population of SF’, but if SF is 2.5% black, then 5% makes blacks way overrepresented relative to the general population.

However, why should the racial makeup of SF be the ‘correct’ level of representation? Tech companies hire from many parts of the US as well as abroad, and their workforces often don’t reflect the racial makeup of the cities they inhabit (sometimes to the annoyance of city officials and their residents who would like to see the locals hired in preference to others, or to the anti-immigrant crowd that believe people randomly born into the US should have more of a right to feed their families than people randomly born elsewhere.)

Furthermore, tech companies likely hire disproportionately from immigrants of certain countries (China & India, say) who move to SF for tech jobs, but less so for other jobs. So maybe we need to look at the hiring pool of qualified candidates both in the US and outside, and then compute the racial makeup of those candidates as a whole so that we know just how many of each group we ‘should’ have in our workforce. (Gender being 50-50 in general makes this much easier for the male-female divide.)

This already seems like a difficult enough task, but a further complication is that certain racial groups, genders, and countries may not be equally represented in having the skills required for a given job. This is easiest to see in a field where explicit credentials are required, such as nursing. Nursing in the US is very female-dominated, with only about 10% of Registered Nurses (RNs) being men. If we assume that 10% figure holds both for number of male nurses employed and number of male nurses with a RN certification who are looking for work, then we should not be surprised if a given hospital employs 90% women and 10% men as RNs. If one was to look at the 90-10 split in isolation, you can imagine unsophisticated diversity pundits exclaiming over the “discrimination” responsible for only 10% of RN jobs filled by men: “Male nurses are just as competent & well-educated as women, and yet for every male nurse, there are NINE female ones despite men making up 50% of the population. Hospitals are surely discriminating against men because it’s assumed men can’t be as caring or as conscientious as women in these jobs!” etc, etc.

More thoughtful people might start asking why men are so underrepresented as RNs. They might start professional societies for male nurses, non-profits to encourage men to acquire the education and interest in becoming a RN, or groups supporting men in the nursing profession at their hospital. (“ManlyNursing, a group for male nurses and those who support them!”) Others might misguidedly start calling for the creation of hospital ‘diversity boards’ to ‘encourage’ (read: browbeat) hospital staff to hire more men until the ratio of male nurses increases relative to female, or suggest a #deletehospitalXYZ boycott social media campaign.

I have no problem with, and in fact generally encourage, the efforts to make certain sectors of society more aware of and qualified for opportunities to improve their career position. Looking at employment sectors where certain groups are underrepresented might be a great way to decide where to focus these efforts. However, the fact remains that there’s nothing apparently discriminatory about a hospital employing 90-10 women to men if that ratio represents the talent pool available to that hospital.

The same logic goes for race, etc. Because of the fact that Hispanics and Blacks generally grow up poorer & less educated than Whites and Asians in America, and that family income & education are highly correlated with individual income and employment, we shouldn’t be surprised when we see Blacks & Hispanics underemployed and underrepresented in high-paying fields with respect to whites & Asians. This doesn’t mean that companies are discriminating (or that they’re not), and further analysis is needed to try to determine that*. None of this should dissuade us as a society from improving the lot of marginalized groups by addressing the root causes of poverty or lack of education, it should simply dissuade us from assuming there’s an ‘ideal’ ratio, or even an ‘improved’ ratio of gender/race mix to shoot for, or that imbalances in the workforce are equivalent with discrimination.

To come back to tech, 79% of Computer Science (CS) bachelor’s degrees awarded in 2016 at the top 5 institutions giving those degrees out were to men. Presumably that number was even higher in the past, so the workforce population with CS degrees is likely > 80% men to < 20% women. If CS degrees are a good proxy for “qualified tech workers”, then we’d expect to see about 80-20 men to women in tech, which is in fact what we often see.

(This split is similar for engineering as a whole: in 2015, 18.5% of engineering bachelor’s degrees went to women. In contrast, women obtained over 75% of of psychology bachelors, and graduate with every kind of degree, from associate’s to doctoral degrees, at a higher rate than men overall, and have since 2009.)

So, the real question becomes “why are women [or minorities] underrepresented in acquiring certain technical skills vs men [or whites/asians]?” Not “why aren’t tech companies hiring more women/minorities (hint: bias)?” This former question is a more complex one, and out of scope for this article, but it is the one that I believe companies and diversity advocates should get together on, rather than trying to shame companies in to hiring more of a certain group, which is a zero sum game at best.

Enforced ratio are clearly discriminatory

Another reason to oppose the simplistic idea of trying to enforce an ideal or better diversity ratio is that this practice in itself is discriminatory because companies would necessarily have to take someone’s race or gender into account when making hiring decisions, which is illegal and precisely the practice that diversity advocates claim they are trying to eliminate. Cynically, one could argue that many diversity advocates are not actually anti-bias in hiring processes, but rather anti-white male, and though they seem unaware of this, anti-Asian, and pro-black/Hispanic/female. Arguing that companies should hire a candidate from an ‘underrepresented’ group that they’ve deemed less qualified than a candidate from an ‘overrepresented’ group is anti-meritocratic, discriminatory, and generally outlawed by Federal law.

Diversity advocates might counter by stating that they’re merely ‘correcting’ for some underlying bias that has actually suppressed more qualified minority/female candidates from getting certain jobs. This gets into ‘hard to prove’ territory that needs much more careful analysis than is usually given. I think these advocates are at least overestimating the amount of the underrepresentation that is the result of biased hiring/promotion in favor of white (or Asian) men, and are overlooking the root causes like educational attainment, incarceration rates, and the factors that lead to these proximate causes (poverty, single parenthood, etc.)

One round-about benefit of pressuring companies to hire less-qualified candidates might be that companies would respond by trying to improve the talent level of these groups, and also that those candidates would gain the resources to improve the future talents of their offspring (at the expense of the more qualified candidate’s offspring…) The latter ‘benefit’ is of dubious value to society, but the former could be good, and can be seen when tech companies partner with non-profits like Code like a Girl. (Whether it’s the best use of resources to coerce a company to spend its resources in this way when it might not have otherwise is up for debate.)

Even if advocates were correct in their assumption of wide-spread bias against certain groups in corporate hiring decisions, the correction would be to remove the bias, not enforce discriminatory ratios that will never be tuned enough to ensure that the most qualified people are hired for a given job in a given place within a given company. One simple, non-intrusive example of how to do this is to remove names, which often give away gender & sometimes race/ethnicity, from resumes before they’re given to recruiters & hiring managers. Another might be to put more weight into phone screens + resume qualifications vs in-person interviews. (This one would be a tougher sell. Despite criticisms, interviewers, including myself, like to talk to someone face-to-face and put a lot of weight on those encounters when hiring.) Using a panel discussion format for hiring decisions made up of diverse interviewers is probably also a good practice to reduce bias (and more importantly, really helps to make better hiring decisions, in my experiences at two large tech firms.)

If you are for more equal diversity, you are against Asians in tech

Interestingly, while much has been made of ‘white male privilege’ in America, I’ve heard little talk of ‘Asian male privilege’ in tech, despite the fact that Asians are hugely overrepresented in tech. (Which I attribute to their education, skills, and ambition, not to heavy bias in their favor!) Uber recently released its diversity stats, so let’s use them as a hopefully-representative example. In 2018, Uber’s tech jobs were filled by 46% white people and 45% asian (with the remaining 9% about equal parts black, hispanic, and ‘multiracial’.)

 In 2015, about 63% of the US population was non-Hispanic white, 5% Asian, 13% black, and 17% hispanic. Compared to the US as a whole, blacks & Hispanics in Uber’s US workforce are way underrepresented (about 20-25% of their US-population representation), whites are also somewhat underrepresented (about 73% of their US representation), and Asians are way overrepresented by about 900%!

One might argue that Uber is an SF-headquartered company, and the Bay Area has a larger-than-average Asian population. The Bay Area is 42% non-hispanic white, 23% Asian, 24% Hispanic, and 7% African American. Compared to the Bay Area instead of the US, whites look roughly equally represented at Uber, Hispanics look even more underrepresented (13%), and Asians much less overrepresented (but still 200% of the local average), and blacks a bit less underrepresented (about 35%.)

Either way, it seems that Asians are vastly overrepresented, whites about equally, and blacks & Hispanics way underrepresented. Strangely, even such upstanding (but left-leaning) news sources as the Washington Post want to cling so badly to the idea that Uber has poor diversity that it falsely claims that “Uber employs a relative dearth of women and racial minorities, particularly in technical roles” [emphasis mine]. Uber’s US numbers for 2018 show us plainly that whites make up 49% of Uber’s total (tech + non-tech) workforce, even though non-Hispanic whites make up 63% of the total US population. The Post goes on to admit that “Uber employees identifying as Asian make up 30.9 percent of the ride-hailing company’s U.S. workforce and hold 47.9 percent of technical roles”, but the author is incapable of seeing how this single fact invalidates its initial conclusion.

Corporations already have a vested interest in unbiased hiring

Profit-loving owners/shareholders of large companies want to hire the best talent regardless of demographics. It is in their economic self-interest to do so, and any company that doesn’t will lose out somewhat on the talent battle to a more unbiased company.

Of course, this theoretical idea doesn’t prove anything about how companies and individuals at those companies actually hire. Just because a company loses out from not hiring the best across all demographics doesn’t mean that its agents (employees in charge of hiring) are doing what they should be. Individuals, and even private owners, have other motivations besides maximizing company value, and might indeed be acting on their own prejudices. That said, it should suggest that the default systematic behavior of most large private companies, especially corporations since they are typically owned by diverse shareholder groups, will be to make relatively unbiased hiring, salary, and promotional decisions.

Individual bias

While individual bias may play a role in seeing less women or minorities in tech, this needs to be studied explicitly. In one randomized simulation on hiring an academic, for example, significant bias was found… in favor of hiring women.


Ratios (or worse, quotas) of diversity should not be the goal of diversity programs. Instead, maintaining unbiased personnel processes to cast the widest net possible for talent should be the goal. One might start with a ratio and look at how it compares to the talent pool from which a company can choose from to get clues about bias, but that should lead to a study of whether bias is actually occurring, and the ratio itself should not be confused for the goal, or as a way to measure bias in hiring.

Diversity advocates should focus more on the much harder problem of addressing the (non-discriminatory) causes of workforce underrepresentation such as poverty and educational attainment, both of which aren’t neatly segmented into race and gender categories. Fair employment and well-being should be a constructive discussion about improving the lot of all humans, not one of zero sum social politics where each group’s default assumption is that the ‘others’ are trying to keep them down or hold them back.


Preemptory clarifications

Since this is a controversial subject, here a few clarifications of what I’m trying to say above:

  • I’m talking here specifically about personnel decisions including hiring, firing, promotions, and compensation. I’m NOT talking about workplace environments, or other forms of ‘discrimination’ like hostile work environments for women or minorities. Undoubtedly these would lead to lower-than-expected ratios of the negatively-impacted demographic group in those environments. That kind of discrimination is potentially separate from what I’m talking about (although surely biased hiring might be correlated with an unfriendly environment towards the group experiencing the bias.)
  • Hiring bias is likely not the primary driver of most gender/racial disparity among jobs in the US. Instead, educational attainment, family income, physique, cultural values (male deaths in the military), and prior workforce ratios (some of which may have occurred due to past discrimination or demographic-influenced choices, like female teachers and nurses, say) are probably responsible for more of the variation we see in employment. This is NOT to say that there is NO bias in hiring decisions as a whole, and especially not in individual hiring decisions.
  • I’ve steered clear of the debate over why women get paid slightly less than men (about 95 cents to a man’s $1 after controlling for various factors) and are less represented, along with minorities, among management ranks. (Arguing that the cause is anything other than sexism is a good way to lose a career.) Frankly, I find most arguments made by both sides of the female wage gap unconvincing. These arguments seem more like narrative fallacies to me than carefully constructed causal explanations based on clear evidence. It has been argued that some of the unexplained difference between male & female salaries and positions is due everything from biology, sexism, to women prioritizing their family lives over their careers (which again might be due to social expectations that are the result of bias/traditional values, etc.) I can see how those arguments might be true, but I can see equally how they might be entirely fictitious ‘common sense’ which will evaporate in a few decades as women continue to become more equal players in the workforce (and as men in turn take a more equal role in child-rearing and domestic duties.) In general, many arguments that have ‘explained’ why women (or minorities) historically have done, or not done, this or that have turned out to be self-serving falsehoods by the, typically, white men who’ve espoused them. (See Stephen J. Gould’s The Mismeasure of Man for a good overview of the faulty biology and anthropology that produced erroneous conclusions as a result of racial bias.)
  • From looking at education & income statistics, as well as my personal experience, I think women are going to be just fine career-wise, and that America should focus more on the impoverished, which contain a disproportionate amount of black, Hispanic, and Native Americans.  This confidence with regard to female career prospects is not meant to take away from other challenges women face such as sexual violence and unwanted advances from men. These social problems (still) haven’t received enough mitigation in society, especially outside the US.

All of Jeff Bezos’ Amazon Letters to Shareholders together in one PDF

*** UPDATED to include 2017 letter released April 2018 ***

For your reading pleasure and business edification, here’s the complete set of Amazon Shareholder Letters penned by CEO and founder Jeff Bezos in one handy PDF file:

Jeff Bezos – Compilation of Amazon Shareholder Letters 1997-2017 – FINAL.pdf

This volume starts with the classic and first 1997 letter to the 2017 letter, which came out in April of 2018. Bezos is known for his clear and profound thinking about business generally, how to delight customers, and how to build and sustain an incredibly innovative enterprise.

(Special thanks go to the good people that maintain the free version of PDF Split and Merge which I used to compile this, and to whomever already did the work for letters from 1997 – 2012.)

How does your credit score stack up against the average for your age group?

I ran across this article while trying to find some data on average/median credit scores by age group.  They had a handy graph (see below), courtesy of my favorite free FICO-like credit score site, Credit Karma.

Why should you care about your credit score?

As financial writers like Ramit Sethi have pointed out, your credit score is crucial when it comes to saving BIG BUCKS on loans (via a lower interest rate) for items like cars & homes.  Additionally, folks ranging from landlords to employers to cable companies are using credit score to evaluate you, so keep your credit score high!

What the data says

As you might expect, credit scores tend to increase with age.  Those aged 25 – 34 have an average credit score of about 650, while those over 55 have an average of about 725.

Another useful metric is the FICO median credit score for the US, which is 723.  (‘Median’ means 50% of people have a score below 723, and 50% have one above, whereas average just combines everyone’s score & divides by the total population, which allows really bad, or really good, scores to move the average a lot more than they’d move the median.)

Since the median method of calculation keeps terrible scores from dragging down the average (which is probably why it’s higher than the average score shown in the chart below), this is probably a better measure to benchmark yourself against if you’ve never had any terrible credit history (default, bankruptcy, foreclosure, etc.)

So, where do you rank?

I recommend you get your credit score by signing up (quickly, and with no hassles or gimmicks!) for a free account at  (I’ve used them to check my score every year or so for the past few years, and have been very happy with their site.)

Anything over 750 range is good, with a good goal being around 780 or above.

Check out the above-linked article from Ramit Sethi on how to improve your credit score if it needs a boost!

Highlights from the Berkshire Hathaway shareholder’s meeting 2012

I finally got around to visiting Omaha to hear superinvestor & ‘world’s 3rd richest man’ Warren Buffett and his business partner Charlie Munger hold forth at the annual Berkshire Hathaway shareholder’s meeting on May 5th, 2012.  For those of you who aren’t Buffett fanatics (you should be; start with this, then this, and then read these), Berkshire Hathaway is a conglomerate of insurance companies & other businesses that Warren Buffett has presided over for some 35+ years, and has returned ludicrous results to its investors (which are NOT likely to be repeated, mind you!)

Every year, thousands (about 35,000 this year) flock to Omaha to hear about the condition of their beloved company, to shop at Berkshire subsidiaries like See’s candies and GEICO, and to catch the pearls of wit & wisdom that drop from the mouths of Buffett and Munger.

Watching the dynamic of Buffett & Munger as they each added their ‘2 cents’ to the varied discussions was highly entertaining, and often elucidating.  Buffett, long-spoken, friendly, upbeat, and literary, was contrasted and complimented by Munger’s laconic, pessimistic (he might say realistic), and sharp-tongued (and often hilarious) responses.

My notes

Lest such pearls escape me, I furiously scibbled notes during the 5 hour question & answer session during which Buffett and Munger deftly responded to questions from investors, media, and analysts on a host of topics ranging from investing to politics to ethics.

Here’s the ‘best of’ what I was able to catch and jot down.  Please note that while I often tried to capture exact quotes, a good deal of even the quoted material may not be ‘word perfect.’

The newspaper business

One shareholder asked Buffett about the recent purchase of a (print) newspaper, the Omaha-World Herald.  Given the declining economics of print media, the shareholder was (quite rightly) concerned about the future of newspapers.  Buffett responsed that he “believes in newspapers where there’s a sense of community.”  And explained that papers must have “primacy” (primary importance) in an area that the people who read it are interested in.

He described how traditional domains of newspapers (stock prices, classified ads, real estate listings) no longer have ‘primacy’ for their readership, who have largely moved on to the internet as the primary source for such info.  However, Buffett believes that community papers with local issues (like obituaries) can still thrive in the digital age, so long as those papers can remain as the most important source of that community-centric information for the paper’s readers.

Management of Berkshire’s businesses

Buffett often talks about the quality of management hired to run Berkshire’s subsidiaries.  Buffett claims to do nothing more than 1) make capital allocation decisions with the cash that Berkshire’s subsidiaries create and 2) create an environment (including compensation arrangements) to retain and attract top-quality managers.

Commenting on how independently competent Berkshire’s managers must be when it comes to running their operations, Buffett commented that “if we thought the success of our investment [in a subsidiary] depended on our advice [to management], we wouldn’t make the investment.”  In describing the work environment for managers that he tries to create, Buffett noted that he “can’t create passion in someone, but he can take it away [through a bad management structure.]”

One aspect of creating a good management structure is appropriate compensation. Berkshire has hired two former hedge fund managers to invest funds for Berkshire’s own portfolio.  These managers will receive 10% of any 3-year rolling gains above the S&P 500, incentivizing them to beat the stock market average, but also making sure they have to do it on a long-term basis.  Additionally, 80% of each individual’s bonus will come from his own efforts, but 20% will come from that of the other guy’s performance, as an incentive for them to work together and share investment ideas.

Munger added that “90% of those in the investment business would starve to death on that [compensation] formula.”  (Although I’ll add that each of those two Berkshire investment managers also receive a ‘base’ salary of $1 million per year, so ‘starvation’ probably shouldn’t be taken literally.  Interestingly, any employees or other expenses that these managers create must come out of that $1 million, which I thought was a nice way to sync incentives between the managers and Berkshire.)

Buffett also talked about how Berkshire didn’t use ‘compensation consultants’, who, in Buffett’s opinion, generally just tell CEOs and boards what they want to hear anyway.  In straight-faced monotone, Munger opined that “prostitution would be a step up” from compensation consultant, to which Buffett quickly added “Charlie’s in charge of diplomacy at Berkshire too.”

Creating shareholder value

When asked why Berkshire wasn’t paying a dividend, Buffett answered that “we feel we can create more than $1 of present value per $1 retained.”  Munger said he thought that “Warren’s learned new things each decade, resulting in much better results” at Berkshire than expected at the outset of their venture.  Munger, 88 years old & 7 years Buffetts senior, then added wryly, “but he’s getting old; I’m worried about him.”

Competitive advantages

“We sort of buy[s] barriers to entry; we don’t build them”, said Munger.  Buffett gave the example of the brand strength of Coca Cola, and how virtually impossible it would be to take away their market power.  Richard Branson, found of Virgin Airlines, and other Virgin companies, started ‘Virgin Cola’, which failed.  Buffett made the remark that “people say a brand is a promise.  I’m not sure what [Branson] was promising” with his cola brand.


Buffett noted that “if you caress an ounce of gold for 100 years, you’ll still have one ounce of gold”, and then compared that to the huge growth in what you’d have from growing businesses that pay out and reinvest cash, or to farmland that produces valuable crops every year.

This fundamental principle, that gold doesn’t actually ‘produce’ anything, is behind the fact that only periodic and unanticipated demand for it can drive the price up.  This also explains why, despite the last several years of the run up in gold prices, gold’s real return (after inflation) has only been slightly positive.

If one compares that to the massive growth of stocks, and even the modest growth of bonds, over long periods of time (not to mention the price swings of precious metals), it’s clear that gold is a very poor investment in itself.


When asked about the prevalence of the corporate political fundraising vehicles called ‘Super PACs’, Buffett stated that, even if donations to such a vehicle would increase Berkshire’s profits, he was morally opposed to it, and wouldn’t do it: “The whole idea of Super PACs is wrong, and relatively huge money [going to politicians] from a few people is wrong.”  While he acknowledged that others might defend their contributions to Super PACs by pointing out that their corporate competitors are doing it, Buffett asserted that “you have to take a stand somewhere.”

Munger added that he might consider giving to a Super PAC if he actually thought he could stop something really bad, and gave legalized gambling as an example of something that “does us no good” as a society.  And that “making the securities market more like gambling” was also going on, and also bad.


Buffett said that the tax code is important in sharing wealth, and that it may be the case that the natural “trend in democracy that pushes toward plutocracy.”  Therefore, we should use the tax code as a “countervailing balance” against this anti-democratic, and yet perhaps expected, outcome of our market-based economy and its liberal principles (I mean ‘liberal’ in the free sense, not in the left-wing sense.)

On corporate taxes, actual taxes paid by corporations were 13% of revenues in 2011, versus the marginal rate of 35%.  Despite the play that US corporate tax rates get in the press, Buffett stated that neither corporate tax rates nor balance sheets nor liquidity were holding back the US economy.  Buffett called medical costs the “tape worm” of American business, and noted that they composed about 17% of GDP, versus a mere 2% for corporate taxes.  Munger also added that he thought a Value Added Tax should probably come into play in the US.

Munger thinks that “Paul Krugman is a genius” but that he maybe too optimistic about “Keynesian economic tricks.”  He also asserted that, in the US (and presumably around the world), we’ve lost a good deal of our “fiscal virtue”.  “Everybody wants fiscal virtue, but not yet.  Like [Saint Augustine], who was willing to give up sex, but not quite yet.”

Energy policy

Munger said he supports subsidies for wind and electric cars “to wean us off oil and gas.”  It “would’ve been better to use up other [countries’] oil” and to have kept our own in the US as a “strategic reserve” over the past decades, said Buffett.  Munger agreed with this, saying “I’m a puritan and believe in suffering now and making the future better.  That’s how I believe grown people should behave.”

I thought this was a great quote, and that it bears on several issues facing the US, such as the ballooning debt that’s being placed on the backs of young people in America.  I personally feel that too much is being done in the US to avoid short-term sacrifice at the expense of future prosperity.

Recent market crises (Europe & also 2007-2008 in the US)

“Alan Greenspan overdosed on Ayn Rand as a youth…  Greenspan was really wrong [on his actions that helped precipitate the 2007-2008 US recession.]  He’d think an ax murder was okay if it happened in a free market.”  Harsh, and humorous, words from Charlie Munger on the former US Federal Reserve chairman.

Due presumably to the low interest-rate environment*, and the fact that yields aren’t significantly higher (in Buffett’s opinion) for long-term vs short-term bonds, Buffett noted that he’d “avoid medium and long-term [US] government bonds.”

* Bond prices move inversely with interest rates, so if rates go up, the prices of existing bonds go down (and vice versa.)  The longer-term a bond is, the more its price is affected by interest-rate changes, hence Buffett’s shyness about longer-term bonds.


Both Buffett and Munger dismissed the investment risk ‘measurements’ used today by many large money managers like sigma (standard deviation, generally of a normal distribution), beta, and value at risk (VaR).  According to Munger, ‘value at risk and such are … some of the dumbest ideas ever’.  They criticized heavily the ‘precise’ (but not necessarily accurate or even useful) mathematical models used by finance and math PhDs to try to predict various events with many decimal places of certainty (think of Long-term Capital Management to understand where Buffett & Munger are coming from.)

Munger repeated a story of investor Sandy Gottesman firing a young man who was a major ‘producer’ (i.e.: money maker) at Gottesman’s investment firm.  The producer objected to being fired on the grounds that, despite the alleged riskiness of his investments, he had made a lot of money for Gottesman’s firm.  Gottesman replied “yes, but I’m a rich old man and you make me nervous!”

Buffett equated much of the failure of math-heavy risk management with a poor grasp of history, and of the many investing blow ups of the past.  He said that he keeps copies of newspaper articles from market crashes as a reminder of worst-case scenarios, including one about a man who killed himself in a boiling vat of beer during the May 1901 crash!

Buffett noted in this year’s annual shareholder letter that risk is not the volatility of an asset, but rather the chances of a decline (or unsatisfactory gain, I would say) in purchasing power as the result of an investment.  As a financial advisor that helps clients reach specific goals that rely on the purchasing power of their investments, I agree that this is the only meaningful way to think about financial risk.

He also noted that you shouldn’t “risk what you have & need to get what you don’t have & don’t need.”  Wise words, and applicable to more than just investing.

Avoiding mistakes

“We’re always thinking about worst case scenarios”, said Buffett.  Munger adding “studying other people’s mistakes” was key as well, and that both Buffett & himself were keen students of “folly”.  “People with 180 IQs didn’t have an understanding of human behavior”, noted Buffett when describing the causes of recent blow ups around the turn of the 21st century.

Business schools and how to think about investing

Buffett criticized business schools for teaching ‘fads’, and also suggested he didn’t put much stock (no pun intended) in ‘finance theory’, like that of efficient markets or modern portfolio theory.  Charlie Munger commented that while there was some rationale for these topics, business school teachings on investing were ‘a considerable sin’.  (Despite this, I’d argue from other things each have said that Buffett & Munger do acknowledge some of the more general points of modern finance theory like market efficient MOST of the time.  They take issue with the ‘semi-strong form’ of market efficiency, arguing that publicly available information can be used to make profitable (after controlling for volatility) investments.  I think they also take issue with the use of finance theory as a tool with high predictive value in, say, valuing businesses and stocks.)

Buffett stated that he would have two courses taught to teach students about investing: one on how to value businesses (which I would assume would be done using accounting statements & other means to approximate future cash flows, and then discount those cash flows back to the present.)  The other class would be how to think about markets (e.g.: read Chapter 8 of Benjamin Graham’s ‘The Intelligent Investor‘.)  By thinking about markets, Buffett means that you should treat market prices as random fluctuations that are there to serve you (by sometimes offering prices that are lower than the value of what you are buying), not to guide you (i.e.: causing you to panic and sell when prices fall, or become gleeful when prices rise.)

The result of this business valuation would be to ‘understand’ a business.  To wit: “understanding a business means having a good idea around 1) its competitive position and 2) its earnings power 5 years from now”, said Buffett.

Munger added that if you receive any offer to buy an investment product with a large commission, “don’t read it.”  Instead, he suggested “looking at things other smart people are buying.”  That said, you must make sure you use others’ ideas only as starting points, and do all of your homework to ensure you understand the business, and can value it against its current price, factoring in some ‘margin of safety‘ in case your estimates are wrong.


If you just can’t get enough Buffett/Munger action, or else want to compare the validity of my ‘journalism’ to that of other sources, here’s some alternative coverage of the 2012 Berkshire meeting, along with some other related links:

NY Times considers Buffett’s politics:

Highlights from the meeting from Reuters:

Munger-mania! (Highlights from an awesome 2-hour U of Michigan speech, also available on YouTube) ‘The Motley Fool’:

Buffett talks to MBA students at Florida U in 1998 (great talk in 10 parts):

10 tips on how to get rich from Warren Buffett

Okay, the tips are technically from Buffett’s biographer… as told by Parade magazine.  STILL, it’s a decent list, and as a HUGE Warren Buffett fan, I can’t help but share them.  The original Parade story is HERE.

I’ve copied the 10 items below with my own take on how to make them actionable in your life.

1. Reinvest your profits
This is key.  When your income goes up, invest/save a large portion of that increase (like, 75% of the gross!)  This keeps your lifestyle in check while allowing you to build more wealth.  For youngish people, continuing to basically live like college students after graduating and getting a ‘real’ job is brilliant.  You don’t feel like your neglecting yourself because you’re used to living cheap, and you can get a great start on retirement, saving for a house, paying off debt, etc.

Another corollary to this rule is to do what I call ‘banking windfalls’.  This just means that when you run into unexpected cash (a bonus at work, an inheritance, or a tax refund check), save it or pay off debt, don’t blow it.  To celebrate, treat yourself to something small like a nice dinner out with your significant other rather than immediately take a vacation or buy a big screen TV.  This allows you to feel good while preserving most of the windfall.

2. Be willing to be different

Buffett talks frequently about the importance of having an ‘Inner Scorecard’, “judging yourself by your own standards and not the world’s”.  This is really key to being financially successful (or successful in many other ways) because success by its very definition usually means doing something that the majority of people have not and will not do.

For personal finance, this means saving a large chunk of your income and investing in a smart-yet-unflashy way (hint: stock index funds!)  It also means forgoing what others might think of as ‘normal’ or at least highly desirable: spending a lot of money going out, driving an expensive car, not talking about money, etc.  Instead, take control of your own money by deciding exactly what’s important to you AND what’s not.  You should splurge on things you love, but make it up by cutting costs aggressively on things that are less important to you, and always keep track of how this spending relates to your financial goals.

3. Never suck your thumb
“Thumb-sucking” is Buffett’s phrase for not taking action when you should be.  Personal finance is full of this behavior.  People ignore their debt, investments and other parts of their financial lives because of mental blocks they have dealing with these areas.  Instead, take action on the areas of your personal finance that you know deep down need work.  If you’re not even sure where to start, read through this blog, talk to a friend who you know is on the way to wealth (it may not be who you think; ask for balance sheets as proof 🙂 ), or contact a professional advisor like me who can help you.

4. Spell out the deal before you start
This means always knowing the price, rates, and any other terms of any financial agreement, formal or informal, small or large.  On the small scale, this means simple stuff like knowing how much drinks or that delicious-sounding special on the menu is going to cost you (AFTER factoring tax and tip.)

(A personal aside: I HATE it when waiters rattle off the specials without telling you how much they are!  I suspect this is because 1) they know you’ll feel like a cheapskate if you ask how much they are and 2) they are usually much more expensive than the ‘regular’ items on the menu.  Same thing with bars that don’t list prices next to alcoholic drinks, what the hell is up with that!?  I want to know what beer is going to cost BEFORE I order it damn it!!)

Large scale financial deals require proportionally more caution.  Understand all the terms of any loan, investment (check expense ratios and other fees), credit card, real estate purchase, job offer, insurance, etc that you buy.

For me, the key things to ALWAYS be aware of are 1) Price, 2) Fees, 3) Interest rates/historical rates of return (investment sellers try to trick you here, so be careful accepting what they seem to indicate you should expect), and 4) periods of payment or any timelines associated with getting or giving a good or service.

5. Watch small expenses

I would note that while this is true, pay even more attention to LARGE expenses and small, recurring expenses that add up to large expenses (think, your cable or cell phone bill.)  An extra $50 per month for a cell phone data plan may not sound like a ton, but that’s $600/year, which is roughly $12,000 in present value (a fancy term for adding up all future payments and discounting them back to the present.)   For comparing recurring expenses to one-time purchases, I use a rule of thumb of multiplying the yearly expense by 20.  So, saving $20/month on your heating bill by turning the thermostat down 3 degrees amounts to $240/year or ~$4,800 in present value (assuming you keep it up for the rest of your life.)

Improving your credit score to secure a lower mortgage interest rate in the future will similarly save you dramatic amounts of money in interest payments saved.  Buying a cheaper model of used car vs an expensive used or new car will similarly make a huge difference in your finances.

6. Limit what you borrow
Try to never incur high-interest debt like that associated with credit cards or car loans.  I recommend always paying cash for cars, and never financing a house with less than 20% down.  In both instances this forces you to avoid buying things that cost too much relative to your saving ability, and to keep interest payments low.  Keep lower-interest debt like that associated with student loans and mortgages to the bare minimum too.  You want to have your money making interest for you by investing in stocks and bonds, rather than letting someone else (bank, credit card company) use their money to keep you paying them.

7. Be persistent
Stick to financial goals.  The easiest way to do this is through automatic investing and debt-paying.  Use direct deposit and paycheck withdrawals to fund savings and retirement.  401k plans are great for this.  Set up automatic transfers that take money out of your paycheck BEFORE the rest of it goes into an account for you to spend on discretionary items.  (You’ve probably heard of this rule as ‘pay yourself first’.)

Being persistent also means continuing with a well-thought out plan in the face of adversity.  When the stock market tanked in 2008 and 2009, did you keep you money in there and keep investing?  I and many others did, and it paid huge dividends.

8. Know when to quit

Just like a bad relationship, you need to break off financial deals when they aren’t working.  This might mean giving up smoking to improve your health and wealth, switching to a no-fee credit card or checking account, or moving your money from high-priced, broker-pushed mutual funds or annuities into index funds, perhaps with the help of a no-commission financial advisor.  It could also mean asking for a raise, leaving a job where you’re underpaid (find out if you are here), or getting a new job where you’re paid more.

9. Assess the risks
Know the potential risks of decisions you make.  This does NOT mean avoid risks.  On the contrary, it means taking appropriate risks for your situation.  My entire retirement portfolio is in stocks.  Is this risky?  For me, absolutely not.  I don’t plan to retire for at least 20 – 30 years, so what do I care when the market dives in between this period?  (In fact, I viewed ‘bad markets’ as great opportunities for youngish investors like me to buy more of the market at a cheap price.)  On the other hand, if I was a widow(er) living on a social security and some small personal savings, having ANY amount of money in the stock market might be too risky.

Take risks that you can afford that have large upside and only moderate downside (or downside that can be mediated) given your situation.  When you’re young and living well below your means, you can afford to take more risks to make you even better off.

Just make sure you’re being honest about the upside of your investments and not just abusing the notion of ‘taking risks’ to gamble in negative expectation situations (casino gambling, lotteries, penny stocks, picking individual stocks, etc.)  Even though I’m in an all-st0ck retirement portfolio, that money is safely invested across thousands of companies and in the hands of a secure financial company.

10. Know what success really means

For me, being wealthy doesn’t mean having a huge house, expensive car, wine collection, etc.  It means being able to live in comfort and security and do the things I really care about doing: spending time with my family & friends, traveling (on a modest budget), eating well for cheap, reading, and savoring the world’s greatest beers.  This essentially boils down to being able to control how I spend my time, rather than slaving away at some job I don’t like just to pay for an expensive lifestyle that doesn’t make me any happier than I would be without it.

Lest you think wealth has to only be about you, I also would like to have efficiently given away a large sum of money to help those most in need by the end of my life.  Whatever your philanthropic impulses, I encourage you to factor them into your financial plan as well.

I’ll leave you with a great quote by Mr. Buffett himself on this subject (bolding mine):

“I know people who have a lot of money,” he says, “and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age, you’ll measure your success in life by how many of the people you want to have love you actually do love you. That’s the ultimate test of how you’ve lived your life.”