When Charlie Munger Speaks…

…people listen. As Chairman of Daily Journal Corp., a small publication and software company, he recently presided over the firm’s annual shareholder meeting. Mr. Munger spoke to nearly 200 attendees who traveled from as far away as Toronto to listen to the man best known for being Warren Buffett’s long-time Vice Chairman of Berkshire Hathaway. Now 90 years old, Munger spoke for more than two hours during the shareholder meeting, then another three-plus hours to the board of directors and finally for more than an hour to a few members of the media.

In addition to being at Buffett’s side throughout the previous six decades, Munger has spent considerable time writing and speaking about various other subjects from his favorite way to increase knowledge to the multi-faceted process of decision making. For those who want to take a deeper dive into his various thoughts, Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger is a superb anthology of Munger’s written texts and speeches. (You may spend as much time as you would like with one of our copies of Poor Charlie’s Almanack the next time you visit us in our offices.)

“Charlie Munger is truly the broadest thinker I have ever encountered,” says Bill Gates. When Warren Buffett’s children were asked if their father was the smartest person they ever met, they all said that award should go to Munger. With former world champion Sharon Osberg as Buffett’s bridge partner, Bill, Charlie, Sharon, and Warren are known to play hours-long games of bridge together. To be a fly on that wall…

So well does Munger articulate worthwhile thoughts on the decision-making process applied to investing, we excerpted below some of his recent comments from the Daily Journal Corp. shareholders meeting. Interspersed are a handful of our favorite comments delivered by Charlie in years past. Among other virtues, he espouses patience, a long-term perspective and learning how to defer gratification intelligently in the investment process.

What is the recipe for successful investing? “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.”

It takes considerable time and much study to determine which companies to buy and requires discipline to wait for those companies to be priced right for purchase. According to Munger, the investor needs “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.”

“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene [at birth], you’ve got to work very hard to overcome that.”

          “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene [at birth], you’ve got to work very hard to overcome that.”                – Billionaire investor Charlie Munger

What is Charlie’s current view of the financial markets? In light of some new funds made available to him, he said the markets remain devoid of intelligent opportunities right now. Employing the legendary patience that made him so successful, Munger has not purchased shares of any companies during the last two years.

“I’ve been through a number of down periods [for our style of investing]. If you live a long enough time, you’re going to be out of investment fashion some of the time.”

Value investing is not in favor during all years but it proves successful over time. “All intelligent investing is value investing,” says Charlie. Cheviot’s style of value investing seeks to gain considerably over the long-term with less than average volatility along the way. Surprisingly, Munger’s portfolios struggled with volatility when he invested for clients.

His investment track record outside of Berkshire Hathaway spanned the years 1962 through 1975. Munger beat the stock market over that entire time but his portfolio’s volatility was terrifyingly turbulent. During the bear market years of 1973 and 1974, for example, Charlie’s investors suffered losses of 32% in both years. Within a couple of years, and after he recouped his investors’ losses, Munger chose to focus exclusively on running Berkshire Hathaway with Buffett.

Having firsthand experience of investment cycles spanning many decades, today’s environment is starting to remind him of the market mania at the turn of the century. “Back in 2000, venture-capital funds raised $100 billion and put it into Internet startups — $100 billion! They would have been better off taking at least $50 billion of it, putting it into bushel baskets and lighting it on fire with an acetylene torch.”

Munger views many of the practices of the investment management industry to be appalling. “I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’ He said, ‘20%.’ I couldn’t believe it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!’” Not to mention that it violates regulations of the investment industry, Munger thinks this type of promise – and that a client would entertain such nonsense – is “insane.”

And he is not encouraged when he sees how Wall Street promotes itself. Start with “the advertisements on television,” he says. “Imagine teaching ordinary people the way to get ahead in life is to trade securities actively and on a daily basis. Is that an honest product? It’s a legal product, but is it honorable?”

How investors view their own portfolio is something Munger has given considerable thought. “What difference does it make if somebody else in some year goes up 10% and you go down 5%?” Professionals on Wall Street are afraid of “clients who will fire them if they don’t get the same results as everybody else. That is a crazy system. Everybody gets on the same merry-go-round. I never had any interest.” Buying Wall Street’s “products” is not Munger’s recommended way to long-term success.

His outspoken nature and repeated criticisms of Wall Street has caused Wall Street and its many consultants to dismiss Munger’s investment style (so, too, is Buffett’s approach dismissed by many). “You could go to the rest of finance, they think they know how to handle money, and they’d say [how I do] it is totally unthinkable, Munger doesn’t know what the hell he’s doing. He doesn’t fit our models. But,” the billionaire says bluntly, “I’m right and they’re wrong.”

Clients and investment managers should avoid fads and take the long-term view. Nobody can predict the short-run consistently and successfully. This is true if one is managing an investment portfolio or a business. “When you’re not managing for quarterly earnings and you’re managing only for the long pull, you don’t give a damn what the next quarter’s earnings look like.”

Munger is a pioneer in the field of “behavioral finance” which studies the intersection of behavioral psychology and traditional economics and finance. Put simply: it explores why humans think the way they do in the economy and in financial markets. Conventional theory states that human decision making is always made in one’s self-interest with the goal of maximizing wealth. Conventional theory errs when it assumes that the thought process is always rational.

In fact, Buffett recalls a time when Munger was asked to explain the secret of his success. He says Charlie was ready to talk at length, but the woman asked him to boil it down to one word. His response: “rational.”

“You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy.” Munger pulls no punches: “If you stay rational yourself, the stupidity of the world helps you.”

Munger admits that finance is “a hard subject to be rational about.” But, “there is nothing wrong with keeping your head when all about you are losing theirs – Kipling was right.”

We are committed to Munger’s principles. We continue to exercise patience, strive to remain rational, and invest safely within the discipline of value investing.

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