A Dozen Thoughts from Charlie Munger from the 2017 Berkshire Annual Meeting

  1. “To make teaching endurable, it has to have enough wiseassery in it. And we do.” “We’ve done a lot of preaching [about investing] to not much effect.” “To the extent you’re working on it, you’re on the side of angels, but lots of luck.”

Munger has tapped into something that makes his ideas both memorable and understandable. He is suggesting in these sentences above that part of his success as a teacher is that he injects a certain amount of “wiseassery” into his delivery.  The dictionary definition of wise ass is: “a person who is irritating because they behave as if they know everything, often in a way that is quite humorous but potentially insulting.” While a wiseass may be an effective teacher, Munger once suggested that he does not make for a good role model since what he says is often too controversial which can create significant problems. But the world would be a dreary and less interesting place if there wasn’t someone in it who said things like:

“I don’t think I’m a good example to the young.  I don’t want to encourage people to follow my particular path. I do not want a proctologist who knows Schopenhauer, or astrophysics.  I want a man whose specialized.  That’s the way the market is.  And you should never forget that.  On the other hand, I don’t think you’d have much of a life if all you did was proctology.”

Or:

“You do not want your first-grade school teacher to be fornicating on the floor or drinking alcohol in the closet and, similarly, you do not want your stock exchange executives to be setting the wrong moral example.”

To be a wise ass in public in the cause of educating the public requires a rather thick skin, which Munger clearly has. His willingness to say the truth out loud is a needed antidote to somethings that are wrong in the world today. Munger has also said that what brought he and Warren together as friends and business partners Munger was that they are both “natural wiseasses.  I’m not the only wise ass in the world. Warren can find another one.”

Teaching people anything, particularly about investing, is hard. Charlie has said that he has trouble getting his own family to follow value investing principles so he has little hope of his ideas being widely adapted. I think Munger understates his influence, but it may be true that he has helped more people improve the way they think than the way they invest. One final Munger thought on teaching is: “I think the only way you’ve got a chance is sort of by example. If you want to improve your grandchildren the best way is to fix yourself.”

One last point here I can’t resist. I know a blogger who Tweeted recently that he was responding to “hate mail.” He is a nice fellow who is trying to teach people a few things. That people are sending him hate mail is bullshit. Debating ideas is one thing but hate is quite another. People who are haters are often making up for something. like being teased in middle school for having small hands.  The unfortumate reality is that you need to either have think skin like Munger or quit blogging/ tweeting/writing. “Haters gonna hate” is the sad truth.  It is an advantage to not give a damn what people say. I like this from Felicia Horowitz:

unfu

  1. “A life properly lived is just learn, learn, learn all the time.” “If we had stopped learning, you [Berkshire shareholders] wouldn’t be here – you’d be alive, probably, but you wouldn’t be here.” “There’s nothing like a personal, painful experience if we want to learn, and we certainly have had our share of it.”  “There’s nothing like the pain of getting into a lousy business to find a good one.”  “We were young and ignorant then; Now we’re old and ignorant.” “Experience is like eating cockleburs – it really gets your attention.” “It is a good idea to not play where the other people are better.”

You may or may not know that a cocklebur is one of these little spiked seed pods that may attach itself to your shoes, socks or clothing, especially if you enjoy walking in riverbeds or pastures. I don’t think I have ever mistakenly eaten one, but I expect that it would not be pleasant. When you read the Munger quote if you found yourself wanting to know (or make sure you knew) what a cocklebur was, you are more likely to be a learning machine. Munger is pointing out that one very effective way to be a learning machine to pay close attention to your own mistakes. If you are not making some mistakes you not learning. The same thing goes for making too many mistakes that are not new mistakes. He also believes that if you are not changing your mind on some important questions each year you are not learning either. Munger believes: “Learning has never been work for me. It’s play.” Life gets better if you adopt this approach to learning.

  1. “The investment world has gotten tougher. Maybe now we have small statistical advantages, when before it was like shooting fish in a barrel.” “We can’t bring back the low hanging fruit; we will have to reach for higher branches.”

 Anyone who doesn’t realize that more competition has arrived in the investing world isn’t paying attention. The more widely held the asset class the more intense the competition has become. This is not new but the trend seem to have accelerated. It is hard to imagine that it was possible in the days of Ben Graham to buy companies at less than liquidation value. As just one example of how investing has become more competitive, Michael Mauboussin writes:

“Exhibit 1 shows that the standard deviation of excess returns has trended lower for U.S. large capitalization mutual funds over the past five decades. The exhibit shows the five-year, rolling standard deviation of excess returns for all funds that existed at that time. This also fits with the story of declining variance in skill along with steady variance in luck. These analyses introduce the possibility that the aggregate amount of available alpha—a measure of risk-adjusted excess returns—has been shrinking over time as investors have become more skillful. Investing is a zero- sum game in the sense that one investor’s outperformance of a benchmark must match another investor’s underperformance. Add in the fact that in aggregate investors earn a rate of return less than that of the market as a consequence of fees, and the challenge for active managers becomes clear.”

SDM

  1. “An expert who is really good at money management suffers terrible performance problems when he gets more money in.” “In the future, with our present size, in terms of rates of return will be less glorious than the past we keep saying it now we are proving it. But it is still a collection of businesses on average that has a better investment return than the S&P 500.”

Munger: “It’s a lot harder now (with $90B in cash to deploy).”

Munger: “$150B is probably too big for us.”

Buffett: “We both would do a very big deal.”

Munger: “We don’t have to agree perfectly.”

Buffett: “If we found a deal that makes compelling sense, we would do it.”

Munger: “Now you’re talking.”

Investing large sums of money a market like we are in now is particularly hard. That is why some fund managers return cash or keep funds smaller that they could raise relative to demand.  Warren Buffett’s friend the famous investor Bill Ruane said once: “Staying small is simply good business. There aren’t that many great companies.” It is beyond question that the size of the portfolio is a drag on performance.  The bigger the fund the harder it is to outperform. Buffett puts it this way: “Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money.”

  1. “The first rule of fishing is to fish where the fish are, and the second is don’t forget the first.” “We’ve gotten good at fishing where the fish are. There’s too many boats in the damn water, but the fish are still in it.” A good fisherman can find more fish in China; it’s a happier hunting ground.”

Munger loves fishing and fishing sayings. There are of course other fising sayings like “fish or cut bait” and of course his story about visiting the tackle shop. William Safire in his Political Dictionary wrote:

fish for votes

The tackle shop story? Chris Davis tells it here in this one minute video: http://davisfunds.com/document/video/charlie_munger_fishing_lure

As an aside, in Wisconsin, populations of silver pike have been reported in Munger lake in Oconto County.

 Mfish

 

  1. “I do think the Chinese stock market is cheaper than the American market. China has a bright future.” “Too many people believe in luck and gamble, and that’s a national defect.There will be growing pains of course.”

Munger said that China was not an easy market to invest in due to opaque financial reporting but it is a better place to find bargains still. Munger said: “One of the things we got into [in China] was the Shanghai airport, the main airport in China, with no debt net. How can you lose owning the main airport in China? It takes extra work. But why should it be easy to get rich?”

  1. “If all [a business owner] cares about is getting highest price, we are not a good call. We can offer happiness to a person who sells us the business. He will have lots of money and be doing what he loves doing while leaving family and employees in the best possible position. This is not the equation of many people who buy businesses borrowing everything they can and resell after dressing up the accounting.” “Don’t call leveraged buyouts private equity – that’s like a janitor calling himself chief of engineering.” “We do well, because people don’t want to sell to those guys.” “There is an army of people in finance and shadow banking who are leveraging these deals with liberal leverage and of course they pay very high prices and they get part of the upside and they don’t take any of the downside and they get fees off the top. So it is fee driven buying and it is very extreme.  Of course, it makes it hard for us to buy companies.

People who sell businesses to Berkshire are rich enough that they have more money than they will ever need. Berkshire gives the selling owner the chance to make sure that the business they care about and the people that work there continue to thrive. For this reason, Berkshire gets offered the opportunity to buy businesses at very attractive prices. Warren Buffett said in the most recent shareholder’s meeting: “Private equity firms buy businesses, but they’re looking to sell those holdings down the road.”  To reassure selling owners, Warren Buffett holds on to businesses even if returns are less than stellar. Here’s Buffett on this point:

“You would not get a passing grade in business school if you put down our principles for why we keep some businesses, but we made a promise. If we don’t keep our promise, word would get around. We list the economic principles, so managers who sell to us know they can count on it. We can’t make some promises, and we don’t promise never to sell. But we’ve only had to get rid of a few businesses, including the original textile business. We also let managers continue to run their business. We are now in class that is hard to compete with. A private equity firm won’t be impressed by what we put in the back of our annual report. People who are rich and run a company their grandfather started –they don’t want to hand it over to a couple MBAs who want to show their stuff. As long as we behave properly, we will maintain that asset, and many will have trouble competing with it.”

 8. “If things go to hell in a hand basket and then get better later, we will do better than others. We are good at navigating through that kind of stuff.” “When the rest of world is fearful, we know America will come out fine. We won’t put the company at risk. We’ll grab all the opportunities we can without losing sleep.” “Fear spreads like you can’t believe, unless you’ve seen it.” “Everywhere you look in Berkshire Hathaway someone is being sensible. Combine that with being very opportunistic so when some panic or something comes along it’s like playing a one-hand sport with two hands.”

Buffett and Munger don’t time markets but they do buy more companies when they are undervalued and buy less when market are high.

daily j

 9. “What was done [at Amazon] was very difficult; it was not at all obvious that it was going to work as well as it did. Other things were easier, and we screwed those up. I don’t regret missing it – I do with Google. We’ll miss out on more, but that’s our secret – we don’t miss out on them all.” “You can read Bezos’ annual report in 1997, and he lays it all out. And he has done it and done it in spades. It just always looked expensive.”  “We are sort of like the Mellons – old fashioned folks who’ve done right, and Jeff Bezos is a different species.”

When asked in a press interview why he did not buy Amazon shares Buffett said on CNBC:

STUPIDITY. I WAS IMPRESSED WITH JEFF EARLY. I NEVER THOUGHT HE COULD PULL OFF WHAT HE DID. AND WHAT IS REALLY – I MEAN, I THOUGHT HE COULD PULL OFF SOMETHING, BUT ON THE SCALE THAT IT HAS HAPPENED. IT’S CHANGED YOUR BEHAVIOR, YOU KNOW, IT HAS CHANGED EVERYBODY IN THE OFFICE’S BEHAVIOR. THE REMARKABLE THING ABOUT JEFF, AND EVERYTHING ELSE, IS HE’S DONE IT IN TWO INDUSTRIES ALMOST SIMULTANEOUSLY THAT REALLY DON’T HAVE THAT MUCH CONNECTION. I’VE NEVER SEEN ANY PERSON DEVELOP TWO REALLY IMPORTANT INDUSTRIES AT THE SAME TIME.”

 10. “It’s a very good thing that Warren bought Apple. Either he’s gone crazy or is learning. I prefer to think he’s learning.” “The world has changed a lot, and people who’ve gotten into these [capital light] businesses have done very well.” “Now Warren did run around and take his grandchildren’s tablets away for market research.” “We failed you [on Google]. We were smart enough to do it and we didn’t.”

At Munger and Buffett he used their error of omission on Google to illustrate how you can learn from experience. Buffett said:

“I SHOULD HAVE HAD SOME INSIGHT INTO GOOGLE. GEICO WAS A HEAVY USER VERY EARLY ON. HERE WE SAW VALUE. AT THAT TIME, I HAVE NO IDEA WHAT WE WERE PAYING FOR PER CLICK NOW. WE WERE PAYING $10 OR $12 PER CLICK FOR SOMETHING THAT HAVE NO COST OF GOODS SOLD, AND WE WERE GOING TO KEEP DOING THAT WE COULD SEE THAT. I SHOULD HAVE HAD MORE INSIGHT INTO THAT. IF I WAS FORCED TO BUY IT OR SHORT IT I’D BUY IT, SAME WAY WITH AMAZON. IT IS A LITTLE HARD WHEN YOU LOOK AT SOMETHING AT X AND IT SELLS AT 10X TO BUY IT.  THIS IT SHOULDN’T BE TRUE BUT I CAN JUST TELL YOU PSYCHOLOGICALLY, IT’S HARDER WHEN YOU LOOKED AT IT IN THE FIRST PLACE AND PASSED AT X AND BUY AT 10X. AND THEN BUY IT.  IT HAS COST A LOT OF PEOPLE MONEY AT BERKSHIRE. THEY SAW IT AT A LOWER PRICE THEN AND JUST SAID ‘IF IT EVER GETS BACK THERE, I’LL BUY IT.’ THAT’S A TERRIBLE WAY TO THINK.”

Buffett said, “The five largest market cap companies in America are worth $2.5 trillion and require no equity capital. That is an extraordinary change from the past,

“IF YOU TAKE SAY THE FIVE LARGEST BUSINESSES IN THE COUNTRY BY MARKET VALUE, YOU’RE PROBABLY – AND ASSUMING BERKSHIRE ISN’T IN THERE, IT FLIPS IN AND OUT, LETS ASSUME WE’RE OUT – THOSE FIVE BUSINESSES HAVE A MARKET VALUE OF $2.5 TRILLION OR MORE, YOU KNOW, STARTING WITH APPLE. YOU COULD RUN THOSE FIVE BUSINESSES WITH NO EQUITY CAPITAL. SO YOU HAVE CLOSE TO 10% OF THE MARKET VALUE PERHAPS OF THE UNITED STATES IN FIVE EXTREMELY GOOD BUSINESSES THAT ESSENTIALLY TAKE NO CAPITAL. NOW, THAT WAS NOT THE CASE IN THE PAST.”

  1. “A lot of other people are trying to be brilliant and we are just trying to be rational. Trying to be brilliant is very dangerous, particularly when gambling.”   

My post on this is: A Dozen Things I’ve Learned from Charlie Munger about Making Rational Decisions

 12. “We don’t want to go back to subsistence farming. I had a week of it and hated it growing up. I also don’t miss the elevator operator sitting there with a crank.” “No one ever complained about the advent of air conditioning. I am worried more about the change not being fast enough.”

Productivity getting better is what makes the quality of a person’s like get better. Munger believes that what we need to realize is that people get hurt by this shift and we need to help them make the transition. One of the more impressive arguments I have seen on issues related to productivity and innovation set of issues was made recently by Marc Andreessen.  Marc said:

“There are two very different parts of the economy. There’s the part where there’s rapid technological change and very rapid productivity improvement. You’ve got this other, second part of the economy that’s the exact opposite — where quality is not improving and prices are rising.” “The economy has bifurcated. In high productivity sectors, prices are crashing. The sectors where prices crashing are shrinking as a percentage of the economy. TVs are going to cost ten dollars and health care is going to cost a million dollars.” “The rising cost of a modern college education is just staggering. In the industries where there’s rapid productivity growth, everybody is freaked out, because what are people going to do after everything gets automated? In the other part of the economy, that second part, health care and education, people are freaked out about, ‘Oh my God, it’s going to eat the entire budget! It’s going to eat my personal budget. Health care and education is going to be every dollar I make as income, and it’s going to eat the national budget and drive the United States bankrupt!’ And everybody in the economy is going to become either a nurse or teacher. Both sides of the economy get polar opposite emotional reactions.”

Today’s technology advances often produce efficiency improvements which in turn produce lower costs, which translates into lower spending and measured GDP. More is being done with less and yet traditional measurements say that productivity is decreasing since less money is being spent in more productive sectors. In addition, many people assume that innovation always creates more producer surplus and profit. Charlie Munger describes the reality: “The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. And most people do not get this straight in their heads. There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.” These are confusing times, but that is no reason to adopt a pessimistic outlook on the potential of innovation to create enormously beneficial impacts. There is no question that today’s economy and the technological changes that power the economy have created a significant number of new problems like worker retraining that we must solve. We must discover new solutions to these new problems and this will require innovations of many kinds. Andreessen argues that we don’t have enough technological innovation: “With higher productivity growth, we’d have higher economic growth and more opportunity. But without enough opportunity, we’re all at risk on all sides of the ideological spectrum.”

Notes:

http://www.cnbc.com/2017/05/09/full-transcript-billionaire-investor-warren-buffett-speaks-with-cnbc-percent-u2019s-becky-quick-on-percent-u201csquawk-box-percent-u201d.html

http://www.cnbc.com/2017/05/05/cnbc-excerpts-billionaire-investor-warren-buffett-speaks-with-cnbcs-becky-quick-ahead-of-the-berkshire-hathaway-annual-meeting.html

http://www.valuewalk.com/wp-content/uploads/2017/05/Adam-Blums-2017-Berkshire-Hathaway-annual-meeting-notes-May-6-2017.pdf

http://www.realclearmarkets.com/articles/2017/05/09/at_the_berkshire_annual_meeting_charlie_munger_stole_the_show_102677.html

http://fortune.com/2017/05/08/warren-buffett-berkshire-hathaway-annual-meeting-quotes/

https://novelinvestor.com/notes-2017-berkshire-meeting/

http://blogs.marketwatch.com/thetell/2017/05/06/warren-buffett-live-blog-berkshire-hathaway-annual-meeting/

http://www.wsj.com/livecoverage/berkshire-hathaway-2017-annual-meeting-analysis/card/1494091165

http://www.cnbc.com/2017/05/06/best-wit-and-wisdom-warren-buffett-at-the-berkshire-annual-meeting.html

http://blogs.ft.com/the-world/liveblogs/2017-05-04/

https://www.usatoday.com/story/money/markets/2017/05/07/5-key-takeaways-from-todays-berkshire-hathaway-meeting/101377184/

http://www.superinvestorbulletin.com/2017/05/11/15-minutes-with-charlie-munger-the-day-after-the-2017-berkshire-meeting/

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