Last week, Charlie Munger, the 95 year old Birkshire Hathaway Chairman and Chairman of the Daily Journal, spoke to shareholders of the newspaper’s annual meeting. In his usual no holds barred manner, he spoke for two hours addressing and answering questions from shareholders.
I watched his address from beginning to end. The man is 95 years of age, he’s one of the smartest minds in investing, and when he speaks, investors stop and listen.
His investment concepts, processes, and beliefs are so simple, which I believe is what makes it so difficult to implement and replicate.
It’s amazing how intelligent it is to spend some time just sitting. A lot of people are way too active.
– Charlie Munger
I’ve taken some of his best responses to questions he was asked in the hope that it would give you insight into, and be valuable in your endeavor to build your financial wealth. If you want to be anywhere near as successful as this man, take his advice. Okay, here we go…
Which money managers would you recommend besides you and Warren?
I’ve only hired one in my lifetime, I don’t think that makes me an expert. Everybody would love to have a money manager that would make him rich. Of course we would all want that. I would like to be able to turn lead into gold. But it’s hard. It’s very hard.
How do you know when to exit an investment?
You’re not talking to a great exiter. I’ve been a good picker. Other people know more about exiting. I’m trying never to have to exit. I’m no good at exits. I don’t even like looking for exits. I’m looking for holds.
Think of the pleasure I’ve got from watching Costco march ahead. Such an utter meritocracy and it does so well. Why would I trade that experience for a series of transactions? Firstly I’d be less rich, not more after taxes, and secondly it’s a much less satisfactory life than rooting for people I like and admire. So I say find Costco’s not good exits.
I’m a very patient man, and I know a lot, but I don’t know everything.
Why has apple stock declined over the past 12 months?
I don’t know why Apple stock is going up or down . I know enough about it so I admire the place, but I don’t know enough to have any big opinion about why it’s going up or down recently. Part of our secret is we don’t attempt to know a lot of things.
I have a pile on my desk that solves most of my problems – it’s called the too hard pile. And I just keep shifting things to the too hard pile. And every once in a while an easy decision comes along, and I make it. That’s my system.
In October of 2008, a month later Lehman fell bankrupt, and in the depths of the abyss. Mr. Buffett famously wrote an editorial saying that he was buying stocks and that he was bullish on America. You’re famous for bottom picking Wells Fargo in March of 2009. What made you decide to buy Wells Fargo in March of 2009, instead of October of 2008?
Well, I had the money at a later period. And the stock was cheaper. Those are two very important parts of the purchase.
If you didn’t have access to Li Lu and to the Chinese exchanges through him like many American’s don’t, would you feel comfortable investing in the American Depository of most Chinese companies that are comprised of a VIA structure, and offer shareholders few rights and minimal protections from the Chinese government?
I don’t know much about depository shares. I tend to be suspicious of all investment products created by professionals and I tend to go where nothing is being hawked aggressively or merchandised oppressively or sold aggressively, so you’re talking about a world which I don’t even enter. So I can’t help you. You’re talking about a territory I avoid.
Do you worry about the large use of derivatives on the balance sheet of banks?
All intelligent investors worry about banks. Because banks present temptations to their managers to do dumb things. There are so many things you easily do in a bank that looks like a cinch way of reporting more earnings soon, where it’s a mistake to do it long-term considerations being properly considered.
As Warren puts it, the trouble with banking is there are more banks than there are good bankers. And he’s right about that. So if you’re going to invest in banks, you have to go in at a time when you’ve got a lot going on for you. Because there’ll be a fair amount of stupidity that creeps into banking.
What level of discount would you be applying to potential investments today?
Generally speaking, I think professional investors have to accept less than they were used to getting under different conditions. Just as an old man expects less out of his sex life than he was 20.
Why is Warren so much richer than you?
Well, he got an earlier start. He’s probably a little smarter, he works harder, there are not a lot of reasons. Why was Albert Einstein poorer than I was?
He finishes his address with the following statement. A statement which I believe more investors should take into consideration when it comes to financial wealth creation.
If you actually figure out how many decisions were made in the history of the Daily Journal Corporation and Birkshire Hathaway, it wasn’t very many per year that were meaningful. It’s a game of being there all the time. And recognizing the rare opportunity when it comes. and recognizing the normal human allotment is to not have very many. Now there’s a very confident bunch of people who sell securities who act as though they’ve got an endless supply of wonderful opportunities. Well, those people are the equivalent of the race track tout – they’re not even respectable. It’s not a good way to live your life – to pretend to know a lot of stuff you don’t know. My advice is avoid those people, but not if you’re running a stock brokerage firm – you need then.
It’s not the right way to make money. And this business of controlling your costs and living simply, that was the secret. Warren and I had tiny bits of money. We always under spent our incomes and we invested, and if you live long enough you end up rich. It’s not very complicated.
Investing is simple, but not easy.