A Value Investing Great

A Value Investing Great

Many years ago I would attend the Annual General Meetings of US company Wesco, in Pasadena California.  Its Chairman was one Charles T Munger, now 91 years of age, and who, in my opinion was the brains behind Berkshire’s success – Warren Buffett while no slouch in the IQ stakes also provided the temperament essential to being able to pull the trigger on very large bets.

The Wesco meetings with just 400-500 in attendance were, to my mind, always likely to be more valuable and entertaining than the Berkshire Hathaway meetings – much as seeing the Rolling Stones unplugged and performing to 100 people is preferable to attending a concert for 50,000.

In 2011 Berkshire acquired the remaining shares of Wesco, and as it was no longer publicly traded, Charlie ceased his public and didactic lectures.

Munger however is also the Chairman of Los Angeles based publisher and newspaper owner The Daily Journal Corporation.  Last week Munger spoke at DJCO’s (NASDAQ:DJCO) 2016 annual meeting.  Many transcripts have been produced and what follows are selected questions and excerpts.

You can listen to a recording of the meeting saved to Soundcloud here.

Unidentified Audience Member: Can you please turn the mic up?

Charlie Munger: Is this better? (Audience cheers) Some of you may remember that this same thing happened at a Wesco meeting once. Back to the Daily Journal. Like many newspapers it was once a fine business. Of course the world changed a lot, as it has for other newspapers.

But some things have gone well, like our stock holdings. We made a lot of money in the foreclosure boom. We had more than 80% of the foreclosure notice business. It was huge prosperity for us and that gave us a lot of money, and we then used that money to buy securities at low prices during the panic. We were aided by that peculiar circumstances, and it offset the deterioration of our newspaper business. Of course, we’ve also entered the software business.

And what’s happened now is that we have more software properties than print properties and those businesses are doing much better. And the business is doing better because our product is way better than that of our main competitor. And there is an endless market for this stuff. District attorneys, courts; it’s hard to imagine anything more certain to flourish.

Our stock may be reasonable if you like VC investments, but it’s not right for Ben Graham groupies. I’m not saying it won’t work, but if it does, you don’t deserve it.

(Audience laughs) With that I’ll take questions.

Questioner One: Tell us about one or two opportunities in technology and also give us one or two risks.

IBM is in a position where they have an old business and a new business. (Inaudible). The automated checklist is a great idea. It was particularly useful for Edison.

But now IBM is a kind of super market and I don’t really have an opinion about it. I’m neither a believer nor disbeliever in the new business. It could happen or it could not happen. I do think the old business is very sticky and will die slowly. On the Berkshire side, we have to play a long game. It may work in a mediocre way, it may work big.

Questioner Four: How does the current investment energy environment compare to the 1980s?

Charlie Munger: We owned Wesco for a long time. They did a lot of transactions. But it was only five or six outcomes that carried most of the freight. Now that is really interesting. To try and do a zillion little things is hard. Try to do a few things well, and it will work out. A few good decisions over a long period of time can lead to great success.

You make your money by the waiting. A fair amount of patience is required. Like when we had all this money flowing in from the foreclosure boom, and we deployed it in a day. It wasn’t luck we had the money on hand.

Questioner Five: Historically Berkshire was built around its insurance model. What other models did you try and pursue?

Charlie Munger: In the early days we thought we had a special advantage in any float business. Now we have enormous float but it’s not that useful. It’s not a tragedy but the float business in Berkshire is large and it’s not getting a great return.

Questioner Six: The Daily Journal is in software. What do you think of the attractiveness of the average software business?

Charlie Munger: Software based businesses are like any other business. Some of them are the dumps, some of them are the best on earth. Good spots and bad spots.

Questioner Eight: What are your expectations for BYD?

Charlie Munger: That too is a venture capital like company. The founder started by borrowing $300K from the Bank of China, and was going into the small batteries business. He succeeded in grabbing a small part of that market. He’s a very remarkable man, doing an insanely ambitious thing. Last month he sold 10,000 electric cars in China, which is more than Tesla sold. Most people have never heard of BYD.

BYD is in a position to benefit from this electrification trend. It’s very helpful when people are dying in the streets of Beijing.

We have electric forklifts in this country. Do you really want carbon dioxide in the warehouse? It’s a very interesting venture capital investment. It was an accident that the Daily Journal is doing a venture. I only wish we came across more BYDs.

Questioner Nine: How do you use the discount rate to calculate intrinsic value?

Charlie Munger:  We don’t use numeric formulas that way. We take into account quality factors. It’s like a bridge hand, you have to think about a lot of things.

There is never going to be a formula. If that worked, every mathematical person would be rich, but that’s not the way it works.

Questioner Nine: But you value a company…

Charlie Munger: Opportunity cost is crucial, and the risk free rate is one factor.

Questioner Nine: Do you use the same rate for different businesses?

Charlie Munger: The answer is no, of course not, different businesses need different rates. They all are viewed in terms of value and weighed against one another. Of course we’re OK paying more for a good business. In the US you can make money out of a lousy business. But it’s a painful way to make money. Sometime we do it by accident, and in that case, it’s like hitting up a relative, and we deal with those the best we can, but we’re not looking for new ones.

Questioner 11: You said you try to reduce errors by avoiding auctions. What do you do in your daily life to reduce errors?

Charlie Munger: There are two things Warren and I have done. One is that we spend a lot of time thinking. Our schedules are not that crowded, and we sit around and think constantly. In a way, we look more like academics than businessman. My system has always been to sit quietly for a few hours.

I don’t mind if there are long period where nothing happens. Warren’s the same way. He’s sitting on top of an empire now. Sometimes he clears his schedule for a haircut. His calendar will say “Tuesday: Haircut day”.

All you people are very good at multitasking, and that’s fine if you are the chief nurse at a hospital. Otherwise, multitasking is bad. Juggling three balls at once is not ideal. Luckily, a lot of you are so obscure you’re not that busy (audience laughs).

Questioner 12: You bought Wells Fargo. Why was that a good investment?

Charlie Munger: Well I’ll take you back to when Berkshire bought Wells. The world was coming apart. Real estate was the source of the chaos. Wells Fargo had a huge exposure. But we knew that the lending officers at Wells Fargo were not normal bank lending officers. They were grownups, and they had a somewhat cynical view, and they were appropriately careful and it was the right way to run a bank.

And we knew they were better, and we knew they wouldn’t lose at much because they chose better and managed better. So we had an informational advantage. We were aware they had that special capacity, so we bought heavily.

Secondly when the Daily Journal bought Wells we again knew that bankers at Wells were more rational than normal. It’s a different kind of superiority and rationality. I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away.

Questioner 15: Increasingly people define success in different ways. Can you weigh in?

Charlie Munger: I think different folks live different ways. One of the things I like about Asian culture is that family is important. It’s a very sound idea. If we ever lost family values, we’d be in trouble.

Questioner 16: The Daily Journal bought property recently. Can you explain the choice to purchase real estate versus deploying that capital elsewhere?

Charlie Munger: We think we’re going to be in Provo, Utah for a long time. We have a lot of employees there, they like their work, and their location. It’s part of the business operations. We have customers that come there. I never see us leaving. We bought it cheaply, we built it cheaply, and it’s a nice piece of property. Our way of getting ahead has nothing to do with real estate investments.

Questioner 17: Do you think a person who can make money in a casino should?

Charlie Munger: Any person can make money running casino. But anyone that makes money running a casino is not moral. I regard it as a very dirty business.

Questioner 18: What advice would you give to a younger version of yourself?

Charlie Munger: My advice is always so trite: good behavior makes your life easier, makes it work better, and is less complicated than lying. And so

I’m very old fashioned. Disciple works, old fashioned good behavior works, generosity works. We all know people who go to a funeral just to make sure someone’s dead. We don’t want to be in that crowd.

Kiplinger’s If is a great poem. Kiplinger’s If is great advice: “Keep your head, be a man my son”. Why don’t you want to be a man? Some people are so angry, there’s much to be gained by never being an angry twit.

Questioner 19: What do you think of oil prices?

Charlie Munger: Well, basically, sometimes oil prices are high and sometimes they’re low. But some very peculiar things have happened. What’s happened to Exxon and so on, the damn price of oil went up faster than their production went down. Name me another business who’s earnings goes up when production units go down down down?

And there’s another trick. People in the Middle East have free energy, and they are like a bunch of rich people spending capital. My answer reminds me of my old Harvard Law Professor who said “Charlie your problem is you make it harder than it has to be”.

Question 22: Berkshire owns some auto companies. What about automobiles are uniquely different today that makes you own them?

Charlie Munger. The second one is easy. Berkshire is in GM because one of our young men likes it. Warren, when he was a young man, got to do whatever he wanted to do, and that’s the way it is. It is true GM may be protected by the federal government in the end, and it may be a good investment in the end, but the industry is as competitive as I’ve ever seen. Everyone can make good cars, they have the same suppliers, and cars last forever. It just has all these commoditized features. So I don’t think the auto industry is the place to be.

The culture of everyone having three or four cars is also shrinking so I think the auto industry is not great. If I were investing I’d want some way to be better than the others, and that’s hard to find.

Question 23: Can you give us more thoughts on oil?

Charlie Munger: I would not have predicted that oil would reach its present price. It’s forced me to look at things. I think it’s generally true that with commodities, there will be periods of extreme prices. I think commodities can do strange things, and of course that has huge consequences. If you’re Australia, this is a disaster. I think it’s the nature of the human condition that you’re are going to have weird periods. Weird periods of high and low prices. I’ve never been able to predict accurately. I don’t make money predicating accurately. We just tend to get into good businesses and stay there.

Question 27: I’m pretty excited about self-driving cars, but as a Berkshire shareholder I’m worried about the prospect for the auto insurance business.

Charlie Munger: It will be bad for GEICO if cars don’t have drivers. But I think it will be quite slow. I think the auto industry, even if we don’t get self-driving cars, that the driving culture may be waning. Not so much in the third world, but in places like America.

Roger Montgomery Note;  Most people think the switch to driverless will be slow.  Elon Musk however believe we will see huge advances in just three years.

Questioner 29: What is your view on unicorn companies on Uber, Palantir, AirBnB, Can they ever go public?

Charlie Munger: I have a circle of competence, and it doesn’t include which companies in Silicon Valley are going to succeed, so I tend to avoid the subject entirely. And it’s the same way with others.

But I will comment on one thing. The venture capital industry is a more honorable than some other areas of finance. VC is a useful member of society. But they don’t escape sin. They sneak a clause in contracts where anyone that’s new to a company is preferred. It’s a disgusting, dishonest thing to do, and worse because it’s obscured. So even in our most reputable parts of finance, there are dirty sleazy activities sneaking in. Large amounts of money make people behave badly. That’s Munger’s rule.

Questioner 30: Do you think fundamental value is losing relevance?

Charlie Munger: I don’t think fundamental value will ever lose relevance. You have to be buy things for less than they’re worth. It’s like arithmetic, it will always be with us.

Questioner 31: You mentioned that you haven’t changed your children much. Do you have an approach for quality time with family?

Charlie Munger: I don’t think I want to make myself a wonderful example of a family. We all have to live with our imperfections.

Additional Question: If you were starting a hedge fund right now with a much smaller amount of money would you still care as much about quality?

Charlie Munger: I’d always care about quality. But if I was running a smaller fund, I wouldn’t have to choose been Exxon and IBM. There would be a lot more interesting places to look.

Alright, one more question. One last question.

Questioner 35: My question is about Coke. But first I want to tell you quick story. My 17 years old son had his friends over, and we bought all the right refreshments including two bottles of Coke. At the end of the party, there was hardly any Coke consumed by these young men, and it gave me pause. Sweet beverages are on the decline. Does Berkshire’s investment gives Coke’s management cover to not address the future of the beverage business?

Charlie Munger: Easy one: Coke for many decades has been a basic product full of sugar, and it grew every year. Full sugar coke is now declining. Fortunately, the Coca-Cola Company has a vast infrastructure. Coca-Cola is declining some, but the rest of the businesses are rising. I think Coke is a strong company, and will do very well. It’s still like shooting fish in a barrel.

(Audience Applauds)

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.