Feel free to watch my YouTube video recap on what I found to be the key takeaways:
Legendary investor Charlie Munger shrewdly answered shareholder questions at the Daily Journal (DJCO) Annual Meeting on February 24, 2021 with the kind of wit and wisdom that many of us have come to treasure.
Charlie is not only the Vice Chairman of Berkshire Hathaway, but is the Chairman of the Board of Directors at DJCO. In his one page Chairman letter, I take special note of how he reflected on DJCO’s core businesses and market trends.
He said after many years as a cash cow, the newspaper business was down 14% because of Covid-19 but the company’s more important software business was up 12% and finally broke even. The company had a large trove of liquid wealth based on investing the business’s earnings and had previously seized opportunities of a type no longer available.
The company’s ownership of marketable securities increased by 45% from September to December 2020, and he wrote to not expect that type of result in the future. He noted DJCO’s stock price hit $404 at 2020’s end, and this price was driven by much speculative frenzy and forced index fund buying. This set the stage for many of the questions he took during the meeting itself.
My favorite highlights of what Charlie said include: “New Brokers are luring the gamblers in” and “it’s a dirty way to make money.” Charlie sure laid down the hammer on brokerage firms like Robinhood and others!
Asked about what he thinks is the most egregious, wretched excess in the financial system, Charlie thinks it’s momentum trading by novice investors lured in by new brokerage operations like Robinhood and thinks it’s regrettable and that civilization would do better without it. He said that Robinhood’s trades are not free because when the firm pays for order flow, they’re probably charging more money to the users [via the bid ask spread] and pretending that it’s free. Charlie thinks it’s a very dishonorable and low-grade way to talk and nobody should believe Robinhood’s trades are free. Burn!
Charlie believes that human greed and the aggression of brokerage firms are causing bubbles from time to time. Someone asked how can we cope with the current market frenzy? Charlie said since we have a market economy, we do get these crazy booms, saying remember the Dotcom bubble and huge real estate prices in Silicon Valley.
Charlie’s policy is to ride things out while people are crowding in buying stocks going up because he thinks it’s a dangerous way to invest. Shareholders should be more sensible and not just keep gambling on stocks, he said.
Asked if the standard causes of human misjudgment as outlined in “Charlie’s Almanack” are involved in the recent GameStop short squeeze, Charlie said certainly. He thinks this happens because people are gambling with the liquid stock market the same way they would with race horses. It’s very dangerous because we could have clearinghouse failures. and this means if a lot of collateral is tied up in clearinghouses and can’t be resolved, there could be a spread of problems throughout the financial markets, and billions of dollars could be at risk.
It’s not great to have a culture that encourages gambling, and thinks that people should make their money selling other people things that are good for them instead of gambling services.
When asked about the future of DJCO, he hopes the newspaper business will survive, and hope they’ll succeed in their software endeavor to automate the court system since a lot of the proceedings have been happening online due to the pandemic. He quoted Gerald Salzman saying to him you wouldn’t want to invest in a parking lot next to a court house, and that the whole country of Estonia is on the Internet.
DJCO’s software business is harder to sell than Microsoft because they answer government request for proposals (RFP) to sell to the government. Though he says they love it anyway and it’s doing a very big public service.
Charlie misses Rick Guerin, who he said was always great company, generous, a kidder, always jumping out of airplanes, parachutes, and running marathons. Rick together with Munger and Buffett took control of Blue Chip Stamps. Rick took the Navy’s IQ test and got one of the highest scores.
Not from this meeting but a special side note: Mohnish Pabrai asked if Buffett was close to Rick, and he said yes, though Rick was in a hurry to get wealthy so he sometimes overleveraged, whereas Buffett and Munger were not in a hurry because they always knew they would become wealthy.
With the amount of SPACs and IPOs soaring on their first day of trading as a parallel to the late 1990s DotCom bubble, Charlie agreed that yes, it must end badly but he doesn’t know when. Charlie doesn’t participate in SPACs and thinks the world would be better off without them. A kind of crazy speculation where a founder isn’t even picked out yet. He thinks it’s a kind of irritating bubble!
On the topic of bubbles, Charlie said wise people just stay out of them. He feels treasury bonds are a bad investment when interest rates are so low, and he doesn’t know what will happen with all the artificially low interest rates. Or how the economy will do in the future from all the government’s money printing.
“It takes character to sit with cash and do nothing,” someone cited how Charlie didn’t get to where he is by going after mediocre opportunities. Is Charlie now willing to lower his standards? He said of course people are willing to hold stocks at higher price to earnings (PE) multiples when interest rates are so low. He thinks on the other hand, he didn’t get rich by buying stocks at high PE multiples. In the midst of crazy, speculative booms he’s not going to change.
Someone asked if value investing is still relevant in a GDP decreasing world, and he said that’s easy. Value investing will never go out of style because the way he conceives it, it’s always wanting to get more value than you paid for it when you buy a stock. Some people think value investing is going after companies that generate cash flow but are lousy businesses, but every value investor wants to get more value than they paid for it.
It’s absolute insanity that a lot of people think investing in 100 stocks is a lot more professional than investing in 4 or 5. He thinks it’s much easier to find 4-5 stocks to invest in that he’s comfortable with, knows something about, has an advantage, and has a reasonable chance of doing above average. He calls diversification: “di-worse-ification.”
Shouldn’t DJCO have the same standards of Berkshire in selling Wells Fargo? Charlie said there are sometimes different considerations like with taxes, and they don’t have to be the same. But there’s no question that Wells Fargo (WF) disappointed long term investors, and he understands why Warren Buffett got disenchanted with them. Although WF management wasn’t malevolent, it exhibited terrible judgement in a bad incentive system and culture. Charlie’s more lenient and expects less out of bankers than Warren does.
On the future of banking, Charlie said he doesn’t know nor how the payment system will evolve. He says that a properly run bank is a great contributor to civilization. Just like he doesn’t buy gold, he doesn’t buy bitcoin and doesn’t think it will end up as a medium of exchange since it’s too volatile. He likened it to an Oscar Wilde quote in that it’s like fox hunting: the pursuit of the uneatable by the unspeakable.
If he thinks electric vehicles are in a bubble, for five years their BYD autos investment didn’t do anything until it recently hit nosebleed prices. He thinks it’s cheap compared to Tesla. If he has a system for selling, he said he doesn’t have one, and he’s just learning as he goes. As long as they like the company and the management of BYD, he tends to stay too loyal and probably won’t change on that.
Costco has one thing that Amazon doesn’t, and that’s people really trust Costco to be delivering enormous values. Costco has a better reputation for delivering value than anybody, including Amazon. This is why Costco is more of a danger to Amazon than the other way around.
Borrowing from his 2020 CalTech interview, Charlie brought up how long term business success is a lot like biology where individuals and species die like a lot of things that used to be prosperous have now faded away. Moats have been destroyed but new moats have come around. He talked about chess and how it’s hard for ordinary people to become great investors. He was able to master the right temperament. You don’t want to be a one-legged person in a butt-kicking contest.
When asked if the pace of rapid innovation is reducing circles of competence, Charlie said of course if someone brings new tech you’re at somewhat of a disadvantage. If it’s fixable remove it, if unfixable learn to live without it. Fix what can be fixed, otherwise what can you do, what you can’t fix you learn to endure.
Charlie says we should study the life of Singapore Prime Minister Lee Kuan Yew who has the best record of being a nation builder in the history of the world. His mantra was simple: figure out what works and do it, keeping at it until things were figured out.
Charlie also thinks it’s a mistake when investment firms hire an army of people to make decisions, he thinks that investing decision power should be concentrated in the one right person, like in the Li Lu Himalaya Fund management.
My favorite thing that Charlie was asked, what is his wisdom to live a happy life. He said it’s very simple. The first rule is to have low expectations because if it’s unrealistic, you’ll be unhappy all your life.
All of us are on the journey towards FIRE (Financial Independence, Retire Early) and it is one filled with much gratitude and enlightenment, and I look forward to making more investor friends.
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