While Warren Buffet is quite famous, his partner, Charlie Munger, is not as much of a household name. But, together, they run Berkshire Hathaway. Below is an interview with Munger with my usual highlights on ideas I found particularly insightful. Munger’s thoughts on investing hit home:
–Know what you know and don’t know. Stay in your lane. “Knowing the edge of your circle of competence is one of the most difficult things for a human being to do.”
–Wait for an irresistible bargain. Then jump on it.
–A crazy combination of gumption and patience is necessary for investing.
P.S.– I have a bonus today. My friend Tom Radic attended the annual shareholders meeting last year. Below the article are a few of his notes. Here are my favorites:
— Appraise yourself, know your circle of competence so you are not in over your head.
— Kids should learn financial literacy early. The key is the parents, the only problem is when the parents have no financial literacy, meaning our public schools need to be reinvented.
— If you are in any social organization, if you keep belching at the dinner table, you’ll be eating in the kitchen. You need to pick your spots and how you do it. It’s hard to change others behavior, and it’s not helped by shouting.
The Secrets of Berkshire’s Success: An Interview with Charlie Munger
Warren Buffett’s Right-Hand Man Talks About Investing Philosophy and What Has Worked for Berkshire Hathaway
By JASON ZWEIG
Berkshire Hathaway Vice Chairman Charles T. Munger, left, and Chairman Warren Buffett in May.
Why did nearly 250 investors converge on Los Angeles this past week to listen to a 90-year-old man address the annual meeting of a tiny legal-publishing and software company? To hear Charles T. Munger — Warren Buffett’s right-hand man—expound on one of his least-known holdings and just about everything else.
Since 1977, Mr. Munger, the vice chairman of Berkshire Hathaway, has also been the chairman of a little-known firm called Daily Journal. His public appearances are so rare and his remarks so entertaining and illuminating that investors came from as far away as Alabama, Massachusetts, Minnesota and Ontario to hear him speak.
They weren’t disappointed. Mr. Munger talked almost nonstop for two hours, lambasting the financial industry, hailing the economic potential of China and, above all, dispensing common-sense advice that anyone can benefit from. His central message: Investors can reach their fullest potential only by thinking for themselves. “If you stay rational yourself,” he told the crowd, “the stupidity of the world helps you.”
I spoke to Mr. Munger privately after the meeting. Here’s some of what he told me.
He regards 3G Capital, the Brazilian firm with which Berkshire took over H.J. Heinz last year and which is seeking to merge Burger King Worldwide with Tim Hortons of Canada, as “probably the best in the world” at making “companies function better at lower cost.”
He added, “Ultimately, I think we don’t do the world a favor by employing more people than we need for companies to run efficiently.”
Fifty years ago next year, Mr. Buffett took control at Berkshire. For that anniversary, Mr. Buffett is asking Mr. Munger to answer two questions: “Why did it work? And will it continue?”
The questions are “very interesting,” said Mr. Munger, “because the actual result at Berkshire is really preposterous.” Even he is a bit puzzled by how two men could take a jumble of dying textile mills, stagnant department stores and a trading-stamp company and turn it into the fifth-biggest firm in America, with a stock-market value of $337 billion.
“How the hell does this thing end up blowing past GE?” asked Mr. Munger, a sense of wonder in his voice. (General Electric’s stock is valued at $260 billion.)
First, he said, other companies like GE “long had a history of moving [division leaders] around internally, and that’s like asking an oboe player in the symphony to perform on the piano and expecting the quality of the music not to suffer.” At Berkshire, great managers stay put.
Second, he added, “I think we have had a temperamental advantage: Warren and I know better than most people what we know and what we don’t know. That’s even better than having a lot of extra IQ points.”
Mr. Munger continued: “People chronically misappraise the limits of their own knowledge; that’s one of the most basic parts of human nature. Knowing the edge of your circle of competence is one of the most difficult things for a human being to do. Knowing what you don’t know is much more useful in life and business than being brilliant.”
Mr. Munger had mentioned during the annual meeting that some $120,000, apparently from a retirement-account distribution, had “floated” into his account earlier in the week.
He says he sees nothing worth investing it in right now and hasn’t bought an investment in his personal accounts in at least two years. He is waiting for an irresistible bargain.
Added Mr. Munger, “One person said to me, ‘I have a list of 300 potentially attractive stocks, and I constantly watch them, waiting for just one of them to become cheap enough to buy.’ Well, that’s a reasonable thing to do. But how many people have that kind of discipline? Not one in 100.”
Successful investing, Mr. Munger told me, requires “this crazy combination of gumption and patience, and then being ready to pounce when the opportunity presents itself, because in this world opportunities just don’t last very long.” Mr. Munger showed that in March 2009, when he bought 1.6 million shares of Wells Fargo for Daily Journal at an average cost he estimates at $8.58 per share. The stock was trading at around $51.50 this week.
“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait,” he said.
“If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
How long can he and Mr. Buffett, 84, run their companies? “We’re surrounded by a lot of smart people who will not hesitate to help us make the recognition [that it is time to retire],” Mr. Munger told me. “We won’t have an undiagnosed dotage.”
He added matter-of-factly, “I don’t have that much time relative to Warren, statistically speaking, given the longevity tables.”
Mr. Munger told me that after speaking to investors for two hours nonstop, then presiding over a board meeting that ran for at least three hours after that. Men half his age would have been ready for a nap, but he shows no signs of slowing down.
NOTES by Tom Radic
BRK annual shareholder meeting in Omaha, Nebraska. For ease, I will refer to Warren Buffett as WB and Charlie Munger as CM.
- WB benchmarks BRK vs. the S&P. CM thinks that is wrong, BRK is growing after paying corporate taxes. Indexes like the S&P don’t pay taxes. CM thought WB set too high of standard considering how BRK is structured when comparing it to the S&P500. In classic CM form, CM stated that if this is failure, I want more of it. The place erupted in approval! CM said something to effect of, its hard for WB to make himself look good. More laughter from the crowd.
- WB would never IPO any of their businesses within their portfolio. WB believes in repurchasing shares only if they are trading below book value. The example he used was paying .90 cents for 1 USD..i.e. you are doing shareholders a favor. The is why he is against some companies repurchasing shares when their stock price is artificially too high.
- WB was asked about Obama’s low rating, and some commentary Steve Wynn made to the effect of Obama being a wet blanket to the economy. WB responded by saying, I don’t agree with a number of things you said. American business is doing great, American people are not! WB kept highlighting how well American business is doing and that earnings on net tangible assets are the envy of the world. Also, corporate taxes vs. GDP are low, i.e. a lot lower than in the past. CM avoided the question, i.e. saying I’m going to avoid this one. I think he thought the question was loaded. Then WB finished by saying, and people complain about me abstaining. The place went nuts in laughter!
- Somebody asked about their weaknesses, they both highlighted they are slow to make personal changes. They made some commentary on how long it takes them to fire people vs. other business owners. One line that stood out, WB and CM waited too long to fire a manager that they had to take the manager from the office to the Alzheimer’s home. The place erupted in laughter! They over-trust, is the message they were sending.
- Private equity firms would be unimpressed with what’s in the back of our annual report.
- On replacing CM due to age, WB said, “CM is my canary in the coal mine”. WB is very comfortable how CM is handling middle age. CM is 90 yrs old! The place erupted in laughter, everybody was shaking their heads in disbelief.
- Appraise yourself, know your circle of competence so you are not in over your head. WB thinks the world is full of idiots and comedians. The place went nuts, we were all in tears.
- Someone asked CM and WB what company they would buy today. They both avoided the question.
- They are big on asking questions, always asking CEO’s which companies they would buy and short. Great way to learn a particular industry, i.e. good source of intel.
- WB talked about being frugile. He has no interest in owning numerous houses, too much of a headache and does not bring him happiness. WB still lives in the same home he bought in the 50’s. He mentioned that at some point wealth and happiness are negatively correlated. I believe he was referring to having too much wealth.
- WB thinks global warming exists, however, predicating outcomes is impossible. WB and CM are agnostic to global warming as it relates to their investment thesis when buying a business.
- WB believes all things considered, Uncle Ben did a great job stabilizing the economy and is a fan of Yellen also. WB did highlight, he has not seen this movie before and does not know how it ends. Obviously, referring to QE that the FED has implemented. WB said, “just look at corporate profits and where the stock market is”. WB thoroughly impressed!
- Some knuckle head in the crowd tried to discuss politics with WB. WB went on to say, don’t try to convince me on your views and I won’t try to convince you, I’ll let somebody else convince you. Very funny!
- WB talked about their investment in Wells Fargo, they bought it because of its perceived quality. In hindsight, they should have bought all the banks, the weak banks got hit harder and went up more during the recovery.
- BRK, would never buy a business to save on taxes, i.e. Pfizer trying to buy AZN. America has helped BRK to make a tremendous amount of money, meaning they have no issue with paying taxes.
- Net Jets, unit sales are not growing, purchases of travel hours is growing. Net Jets is planning big China expansion.
- Kids should learn financial literacy early. The key is the parents, the only problem is when the parents have no financial literacy, meaning our public schools need to be reinvented. They both love what the Asians are doing with education. It was brilliant how WB articulated the point. CM also highlighted that public schools need to be fixed!
- WB thinks the government should run Fannie and Freddie. The problem is when they start running it as a hedge fund. Also, WB thinks you leave the Investment Banks out of the picture.
- Both CM and WB were -ve on shareholder Activists. I found this somewhat surprising to be honest. They both feel, the goal of an Activist is to raise the stock price and monetize the gains and move on to the next trade. They feel activist’s are bad for America. Big Statement!
- WB would stay away from long term bonds, wants to avoid duration risk on the long end. WB also said, we are not in bubble territory as it relates to asset prices. Most people I talked to were surprised by this! Me included!
- If you are in any social organization, if you keep belching at the dinner table, you’ll be eating in the kitchen. You need to pick your spots and how you do it. It’s not even a bad thought to keep in mind for marriage. It’s hard to change others behavior, and it’s not helped by shouting.
I highly recommend for those of you who have never been to the annual Berkshire Hathaway shareholder meeting attend one in the future. Both Warren and Charlie are not getting any younger.
The event is entertaining from start to finish. You get to be part of WB’s and CM’s wisdom and view of the world. On the top, they are entertaining, funny and love to rip each other in a subtle way! Priceless!