I didn’t make it to Pasadena for this year’s annual Charlie Munger sermon, but I have been told he was at his brilliant best. The arrival of the latest Outstanding Investor Digest on my desk, containing a detailed transcript of the meeting, confirmed the rumours.
Munger is Chairman of Wesco Financial Corporation and it’s in this capacity that he presents to hundreds of value investors at his annual meeting. He is, of course, famous because of his role as ‘right hand man’ to Warren Buffett (Wesco is currently 80% owned by Buffett’s Berkshire Hathaway and Berkshire is currently trying to mop up the remaining 20%, which might mean the end of Wesco annual meetings).
I find Munger’s candid remarks more insightful than Buffett’s homely but usually guarded public comments. Here’s a selection of my favourites from OID. (As part owner of a subscription based business I in no way condone copyright infringement. These extracts are mere morsels out of almost 20 pages of wonderful content. If you want to read more, subscribe).
On the importance of scepticism
How do you avoid being part of the majority that’s going crazy and be in the minority that stays sane? Well, that’s a very good question. Personally, I think it’s a lot like golf. You have to practice the right swing in golf. I think in the rest of life, you have to practice the right decision-making process. You have to be sceptical in many cases of conventional wisdom. And you have to be able to do what Kipling recommended—which is to keep your head when all about you are losing theirs. And that’s a wonderful quality for an investor or a corporate executive to develop…
For instance, academics taught that diversification was the secret of success. Well, diversification may be a way of avoiding disaster for some people, but it’s not the way to success. And if all you have is a way of avoiding disaster, you’re not much of a teacher in a world that wants a fair amount of success. That’s why some people who think the way I do don’t call if diversification —they call it di-worse-ification. Certainly, Berkshire and its subsidiaries have generally owned fewer things that we’ve known more about and just accepted a little more volatility.
On how to make money with small amounts of capital
I think I’d be looking in the small-cap world, of course. But I’d be looking anywhere where there were inefficiencies that I could exploit. I would be looking for a place where I could figure out something very useful that other people didn’t know—and that’s going to be hard to do if you’re trying to judge, say, Dupont and Dow… So I certainly wouldn’t go into the big places where the big boys have to be. I wouldn’t try to figure out whether the drug pipeline at Merck was better or worse than the drug pipeline at Pfizer—because (A) that’s very hard to do, and (B) a lot of smart people are already trying to do it.
So I’d go where there were market inefficiencies, where you could figure out something that will give you an advantage over other people who were trading in the stock and where by use of your own talent and work you would know important things that other people don’t.
That could be in a lot of different places. However, the basic idea is that if you want to succeed in life in a capitalistic world, go where the competition is low. That’s all I’m telling you to do.
On the importance of different mental models
At a Berkshire meeting of directors one management team came in and said “We’ve gotten very successful because we follow the 80/20 rule—80% of the profits come from 20% of the business and, therefore, we concentrate on the 20% that creates most of the profits”. And sure enough, their figures showed that policy had worked wonderfully for them.
The next man came in and he had an even more profitable division. And he said, “I try to figure out the worst 20% in my business—the activities that nobody else would want—and I specialise only in that. And because everybody else wants to get rid of it, and I have figured out a way to correct the miseries, I’ve created this wonderful business.”
And, of course, both presentations were totally correct.
So I need both models in my head in order to function – because if I had only the 80/20 rule, I would miss the merits of the second business.
On accumulating wisdom
In the end, you’re dead—and they take all the money away. “How much did old Charlie leave? I believe he left it all.” That’s the rule. And, of course, the wisdom goes away too. But I would say that wisdom acquisition is a moral duty if you have the capacity to get it. If you have the capacity to get wisdom and don’t use that capacity, I regard that as a moral failure. You can see why I like the Chinese—because that’s a pretty Confucian though. I literally believe that wisdom acquisition is a moral duty.
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