CategoryCharlie munger

Found this great interview with charlie munger. Some interesting excerpts from the interview

How much of your success is from investing and how much from managing businesses?
Understanding how to be a good investor makes you a better business manager and vice versa.
Warren’s way of managing businesses does not take a lot of time. I would bet that something like half of our business operations have never had the foot of Warren Buffet in them. It’s not a very burdensome type of business management.
The business management record of Warren is pretty damn good, and I think it’s frequently underestimated. He is a better business executive for spending no time engaged in micromanagement.

Your book takes a very multi-disciplinary approach. Why?
It’s very useful to have a good grasp of all the big ideas in hard and soft science. A, it gives perspective. B, it gives a way for you to organize and file away experience in your head, so to speak.

How important is temperament in investing?
A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. 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. You need an ability to not be driven crazy by extreme success.

How should most individual investors invest?
Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. I think that works better than relying on your stock broker. The people who are telling you to do something else are all being paid by commissions or fees. The result is that while index fund investing is becoming more and more popular, by and large it’s not the individual investors that are doing it. It’s the institutions.

What about people who want to pick stocks?
You’re back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you’re talking about a pretty complex body of knowledge.

What do you think of the efficient market theory, which holds that at any one time all knowledge by everyone about a stock is reflected in the price?
I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

What would a good investor’s portfolio look like? Would it look like the average mutual fund with 2% positions?
Not if they were doing it Munger style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn’t make you with a whip and a gun?

Should people be investing more abroad, particularly in emerging markets?
Different foreign cultures have very different friendliness to the passive shareholder from abroad. Some would be as reliable as the United States to invest in, and others would be way less reliable. Because it’s hard to quantify which ones are reliable and why, most people don’t think about it at all. That’s crazy. It’s a very important subject. Assuming China grows like crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock? That is a very intelligent question that practically nobody asks.

Ibbotson finds 10% average returns back to 1926, and Jeremy Siegel has found roughly the same back to 1802.
Jeremy Siegel’s numbers are total balderdash. When you go back that long ago, you’ve got a different bunch of companies. You’ve got a bunch of railroads. It’s a different world. I think it’s like extrapolating human development by looking at the evolution of life from the worm on up. He’s a nut case. There wasn’t enough common stock investment for the ordinary person in 1880 to put in your eye.

I was reading the transcipts of the meeting on fool.com . There were several comments from munger which really impressed me.

– He referred to a “seamless web of deserved trust” which is necessary to run any large coporation. This is a profound idea. how companies in india work this way ?
– he talked out currency trading being a zero sum game. he would prefer equity where it is not a zero sum game
– he talked about lowering return expectations in the current environment. Annhieser busch could that example. A certain investment with lower return. This is important. Better to be sure of lower returns that optimisitic of fantastic results

Found the Q&A really fantastic.

I have been reading the biography and found the following thoughts from charlie worth noting

– Adopt a multidisciplinary approach to investing. One should know the major ideas across varied disciplines such as physics, economics, mathematics etc.
– One should read with a purpose in mind and should array the fact with the major models from various disciplines. One should not just gather facts , but these facts should be used to prove or disprove the various mental models
– To be successful in investing and to constantly improve , one should always ask ‘why’ why’ why’
– one should adopt the approach of analyzing a problem for its most fundamental cause ( derived from physics ) which many times is the most simplest reason for the problem. As applied to investing this would mean that one should be able to zero down to the key factors in analyzing a business and focus on them

There is a good anecdote of charlie’s discussion with a professor on the dividend policy for companies. It is a fairly long one, but essentially it demonstrates the depth of his thinking and a commonsensical approach to complex issues. Charlie munger’s approach to dividend policy is that a company should retain earnings only if it can create more than a dollar of value for every dollar retained. In the discussion charlie also notes that cost of capital should not be a mathematical construct only…rather it should be looked at from opportunity cost point of view.

This is a very simple but powerful idea. for example if i am a very risk averse investor and my opportunity cost is say 6 % ( Bank FD ? ) , then i should discount a stock say by 6 % and to be safe ask for a high margin of safety.
compare this with an investor whose opportunity cost is 15 % ( current return on his portfolio maybe ). Then the investor should discount the stock with 15 % because if this stock cannot cross the 15 % hurdle , then the investor should not invest in the stock

This book contains a lot of gem of ideas

I have completed almost 100 pages of the biography. Several nuggets of wisdom and learnings come through. One thing which strikes is the honesty and fairness with which charlie has always conducted his affairs.

There is an incident in the book. Guerin ( if i have not got his name wrong ) joined charlie as a partner in the munger , wheeler and Co. ( which was an investment partneship modelled after the buffet partnership ). To start with guerin was not too rich when he joined munger in this partnership.
During the course of their dealing , they accquired a chemical company ( as an aside that too is an intersting tale of how they accquired it ). some time later , guerin wanted to cash out his portion of the deal. He valued it as 200000 usd and would have been happy with it. Munger remarked that he was wrong and it was closer to 300000 usd. His remark was to the effect ‘if you think hard about it , you will agree with me because you are smart and i am right’

As you go through the book, you realise that munger has always been fair and honest in all his dealing and has never tried to cut corners. This is admirable because there are enough examples of rich people who have cut corners. But buffet and munger are people who have achieved their success with out cutting corners. To use a quote from the book , which munger uses ‘To avoid envy from other , you should deserve your success’

i have been reading this biography for the last few days. Doing it for the second time. I have always admired charlie munger for his wisdom and the perspective he brings to investing, business and life in general.

i have read and re-read his talks on – mental models : multipdiscplinary approach to investing, his talk on 24 type of human misjudgement and several others. These talks are phenomenal and has opened an entirely new way of thinking for me .

I can say that along with warren buffet, charlie munger has influenced me a lot.

A few learnings from charlie biography for me have been
– act honorably / honestly . Treat people fairly. You never know when you will meet them again
– money is means to an end. It helps you to achieve financial freedom so that you can do what you love. money should not be an end in itself
– be rational. Rationality is more important than IQ
– keep an open mind . Always be inquisite . learning is a life long process
– learn from as many disciplines as possible. As charlie say – To a man with a hammer , every problem is like a nail. Learn the key models , and try to use them to solve problems
– reading should be with a purpose in mind. It should help one in building one’s knowledge

i could go on and on. frankly enjoying myself reading this biography for the second. i am also looking forward to charlie’s new book which is coming out in may.

if anyone is interested in his speeches , let me know. would be glad to share it. not sure if i can post them here .