Shi Hongjun on Buffett and Munger's Definition of "Greatness": Companies Serving Daily Needs with Enduring Demand Are Truly Great

Shi Hongjun, founder of the Munger Academy, reflected on Warren Buffett's formative years during a speech. He noted that Buffett's youth was 70 years ago, in 1956. That year, the 26-year-old Buffett left his mentor Benjamin Graham's firm in New York and returned to his hometown of Omaha. On May 1, 1956, Buffett's first partnership, Buffett Associates, Ltd., was officially established. His initial partners were family and friends: his father-in-law, aunt, sister and brother-in-law, college roommate, and childhood friends. This group collectively invested $100,000, to which Buffett added $100 of his own, creating a total initial capital of $100,100 and marking the founding of his first partnership.

Buffett agreed with his limited partners on a specific structure: partners would first receive a fixed 4% annual interest; any investment returns exceeding 4% would be split evenly, with Buffett and the partners each taking 50%. This was his earliest partnership model.

Shi highlighted that the young Buffett was exceptionally diligent, establishing three partnership firms within 1956 alone and subsequently setting up two more. Counting from the founding of his first partnership on May 1 seventy years ago, Buffett's investment era officially began and has now spanned exactly 70 years.

Around the same period, a profoundly influential event occurred on the US West Coast. In 1957, eight young men, later known as the "traitorous eight," resigned from Shockley Semiconductor Laboratory. In June of that year, they gathered at a hotel in San Francisco. Someone present produced ten one-dollar bills, and each of the eight signed them. These signed dollar bills served as the initial, simple partnership agreement for what would become Fairchild Semiconductor.

Beyond these eight individuals, two young investors from the East Coast, similar in age to Buffett—Arthur Rock and Alfred Coyle—were also pivotal. These two individuals pioneered the venture capital model in capital markets, significantly propelling the later development of Silicon Valley. The logic of venture capital was fundamentally different from traditional models and stood in stark contrast to Buffett's value investing.

Shi discussed how value investing and venture capital in the tech startup sphere began almost concurrently but were vastly different in core philosophy. Venture capital operates on a grand scale, aiming to drive commercial and technological transformation. Venture capitalists and entrepreneurs aspire to change the world with new technologies and models. In contrast, the value investing style epitomized by Buffett is relatively conservative, seeking extremely high probabilities of success and adhering to two principles: first, never lose money, and second, always remember the first rule. It focuses on achieving stable, positive cash flow through long-term holdings.

From this perspective, we can reinterpret what Buffett and Charlie Munger often mean by "investing in great companies." Munger once told Buffett that his past investments were mostly in undervalued, mediocre companies, and he hoped Buffett would later be willing to buy great companies at fair prices. Here, "great" essentially refers to enterprises capable of consistently generating stable, positive cash flow over the long term, rather than companies that rely solely on a single product or technology to disrupt the world.

Shi mentioned that seeing the products of Berkshire Hathaway's subsidiary companies at the recent exhibition provides an intuitive understanding of Buffett and Munger's definition of "greatness": athletic shoes, candy, beverages, and underwear—all are essential consumer goods in people's daily lives. In their view, businesses that cater to universal daily needs and have enduring demand are reliable, good companies—truly great companies.

Shi Hongjun stated that AI is currently reshaping business, daily life, and even human society as a whole, with numerous industries and products being disrupted. However, the transformation driven by AI is really just beginning. Looking back over the past century, technology has consistently brought disruptive changes to society, and the philosophy of value investing has faced challenges from the zeitgeist multiple times.

In 1999, at the peak of the US dot-com bubble, Buffett attended the Sun Valley Conference. The stage was dominated mostly by founders of emerging tech companies, and in a sense, Buffett was seen as outdated at the time. Yet, at this very conference, Buffett unusually delivered a systematic explanation of his views on the technology industry. His speech from that year remains profoundly insightful today.

Buffett cited examples: during the heyday of the US automotive industry, over 2,000 car brands emerged, but by the 1990s, only a handful remained with enduring value, the rest having vanished. Between 1919 and 1939, more than 300 aircraft manufacturers were founded in the US, ultimately leaving only a few. Similarly, the cumulative net profit of the entire US airline industry throughout its history is nearly zero.

From these industry case studies, Buffett drew two crucial investment lessons:

First, in times of rapid industrial transformation, think contrarily and prioritize predicting who will fail. For instance, when the automobile industry was rising, instead of betting on which carmaker would ultimately succeed, it was a more certain investment logic to identify the decline of the horse-drawn carriage industry.

Second, the core of investing lies not in chasing sectors and industries that promise to change the world, but in discerning a specific company's core competitiveness and judging whether the enterprise can develop steadily over the long term, possessing a strong and sustainable moat.

In Shi Hongjun's view, when returning to the essence of both value investing and venture capital, their fundamental underlying logic is highly consistent.

Davis & Rock, a venture capital firm founded in 1961, had a founder, Tommy Davis, who proposed that the most core principle of venture capital could be summarized in four words: "bet on the right people," putting people first.

"I have attended the Berkshire Hathaway Annual Meeting for many consecutive years and noticed that every year, the core topic Buffett repeatedly discusses is 'people': board members, long-time friends, founders of acquired companies, CEOs of subsidiaries, even his childhood friends in Omaha. This morning, he also mentioned that Abel is a reliable and trustworthy person. Throughout, the emphasis was on people. In Buffett's investment system, trust between people is placed in the highest position," he said.

Therefore, whether it is value investing or venture capital, whether one is pursuing technological world-changing or adhering to high-probability success by seeking stable, great companies, the underlying logic is interconnected: identify reliable people, trust the right people, and entrust responsibilities to those who are worthy.