Summary of Charlie Munger's DJCO speech
I’m not sure how the 99-year-old Charlie keeps doing it, but he is still delivering wisdom, while remaining sharp and candid. Here is his version of the secret: “I'm eating this good peanut brittle. That's what you want to do if you want to live to be 99.”
Below is my summary of the latest 2-hour talk featuring politics, stocks, crypto, investing in general and life advice.
Politics
Chances of a big conflict involving China have gone down, not up after the war in Ukraine. Seeing what happened in the Ukrainian conflict, China is unlikely to go for Taiwan
Charlie is more optimistic about Xi than most other people: he believes that the Chinese leader has done a lot of things right, while no government is perfect
The government is now very hostile towards business. The culture in the world is likely to become more and more anti-business in the big democracies. Taxes will also go up, not down
One of the greatest achievements of US political leaders is post-war alliance with its recent enemies - the Germans and the Japanese
A critical factor for a country’s prosperity is having most of the assets in private hands
Macro
Interest rates couldn’t be kept at zero forever, so a period of higher rates is normal
Inflation is inevitable given the nature of politics in a democracy: politicians tend to support printing money and spending it. It may help to avoid some recessions, but overall it will do more harm than good
Jay Powell is honorable and intelligent, he is doing the best he can. Charlie doesn’t know a lot of people who would handle the situation better
Population growth is likely not a threat because as societies become more wealthy, population growth tends to slow down
Investing and markets in general
Investing will become harder for everybody. In the past it has been almost too easy to make money as an investor
Despite their growing influence, index funds should not be making decisions about the way companies they invest in are managed
Excessive use of stock-based compensation in some companies is just human nature: if management is given an opportunity to make earnings look better, they will use it
Capitalism is not easy. There is always someone who comes up and does something better. Notable examples of failure by formerly dominant players are Kodak, IBM, Xerox. Like living creatures, businesses eventually die
In Ben Graham’s days there was a lot of low-hanging fruit, so he could find net-nets. The opportunity largely diminished when the aftermath of the Great Depression was gone. Graham made 50% of his money on GEICO, a quality growth company
Quality of the business is more important than quality of management. Charlie and Warren didn’t succeed by investing in great managers running lousy businesses. If the business is good enough, it may do well even under awful leadership (e.g. Coca-Cola in its heyday was run by someone who has often been seen drunk)
Great businesses usually trade at high valuations like 25-35x P/E, so you can lose a lot if you are wrong. Also, great businesses usually don’t stay cheap for a long time. So if you want a good entry point, you must recognize that a business is great before everyone else does which is very hard
AI is very important and is already working well in some fields like insurance underwriting. But it’s not a magic pill: e.g. some people tried to apply it to ordinary tasks like buying an office building and failed
Stocks
Alibaba is one of the worst mistakes Charlie has ever made. He got charmed by the idea that they are well positioned in the Chinese internet, but didn’t realize that they were still just a retailer which implies lots of competition
BYD is so much ahead of Tesla in China that it’s almost ridiculous. An illustration of this is that Tesla’s cut prices twice last year, while BYD raised prices. BYD is quite expensive at 50x P/E, but they may still be growing at a 50% rate. BYD’s history of success is remarkable: led by a self-made genius engineer, they built the auto business from scratch on the basis of a crappy bankrupt auto manufacturer. Charlie believes that an early stage investment in BYD was his greatest contribution to Berkshire: $270k turned into $8bn
Chinese stocks in general: you can still buy better, stronger companies at a cheaper valuation in China than in the US, so maybe the extra risk is worth the return
DJCO still owns bank stocks that they bought at the peak of 2008 crisis. Charlie’s main rationale for continuing to hold them is that in case of sale DJCO gets taxed immediately at 40%+ (California), while dividends received from them are almost tax free. Effective dividend yield is pretty attractive when you compare dividends to the after-tax cash inflow that DJCO would get if it sold these bank stocks now
Costco is still a great business. The problem is valuation (40x P/E), but Charlie doesn’t want to sell as he loves the business
TSMC is the strongest semiconductor company in the world at the moment. But semiconductors is a hard business: you have to invest enormous amounts into capex and even as a leader you can still lose your competitive position as Intel did
Having exposure to Permian basin through Occidental Petroleum and Chevron as Berkshire does will probably be a good investment long-term
Berkshire: some are calling for a breakup of the conglomerate to unlock value, but Charlie believes that in the long term shareholders would benefit more if everything remains within one holding. At the current price Berkshire is still attractive for long term investors. The results will probably not be as good as in the past, but still OK considering how poorly everything else is going to do
Portfolio management
What’s the right allocation to a stock that you believe is clearly an excellent investment? The rational answer is 100% or maybe even 200% (with leverage)
Charlie used some leverage to buy Alibaba stock despite not doing it for a long time. However, early in his career he also used leverage from time to time. Berkshire did it too by borrowing funds against stocks that they held in their portfolio and investing these funds into arbitrage opportunities (“Jewish Treasury Bills” as Ben Graham called them)
Most people should avoid leverage, but it may benefit some. “The young man knows the rules, the old man knows the exceptions”
Charlie made 3 short sales during his lifetime: 2 stocks (one was a winner, another a loser, so they evened out) and 1 currency (made $1mn on it, but hated the process as he needed to add margin multiple times)
Daily Journal’s business
Historically DJCO made money on the publishing business, but now its core assets is Journal Technologies, a software company that automates courts
This is a very slow and difficult business because even though courts are in Stone Age in terms of technology, it takes a lot of time to go through all bureaucratic procedures to sell them software. The benefit is that there are not many companies willing to compete in this market
DJCO has accumulated a significant cash pile from its legacy business but they prefer to keep it in marketable securities rather than in cash due to inflation. Having a surplus also helps to win court contracts because it shows that DJCO is a stable partner
DJCO’s valuation: Munger is neither a buyer nor a seller at current price (it trades at ~60x EV/EBIT as of 23.02.2023, but I guess most of the value is in the future provided that their software business becomes a success)
Crypto
Charlie believes that people who oppose his extremely negative view on crypto are idiots. National currencies have done a lot of good for the development of human race by enabling convenient exchange. Suggesting to displace them is like suggesting to displace air
Western governments are totally wrong not to ban crypto, while China did the right thing
“It’s worthless. It’s no good. It’s crazy. It will do nothing but harm and it’s antisocial to allow it”
Intelligent people should avoid “crypto shit” and those who are promoting it
Personal
Charlie almost never exercised, except for the time in the army
You lose some mental capacity as you get older, but you can adapt to limitations
If you have good judgment, your life will work out a lot better than if you have bad judgement. You get good judgement gradually over time and it involves making bad decisions and seeing them work out poorly. The advice is just to keep trying to improve your life, then you have some chance; otherwise you don’t have a chance
One factor that dominates bad human decisions is denial. If the truth is unpleasant enough, our mind starts playing tricks on us and we ignore the truth. A striking example is the money management industry: maybe just 5% of money managers can beat the indices on a net basis, but they still keep collecting fees for engaging in a value destructive activity
Rationality is the most helpful quality. If you are just not crazy, you have advantage of 95% of people because most people have some crazy patches
If you are consistently exceptionally good at satisfying your commitments to other people, you automatically improve your resources and chances in life
You can also teach a person that almost knows what you are teaching. You can’t teach someone who is ignorant. That’s how the education system should work: focus on those who want to learn and let others drop out
Delayed gratification is critical for success in life. Unfortunately, this ability is inborn to a large extent, although you can partially train it. Charlie naturally started practicing deferred gratification early in life
If you have enough capital to cover losses from an accident without getting ruined financially, you should not be buying insurance. Otherwise you are just compensating an insurance company’s costs on frauds. But health insurance in the US makes sense because medical services are extremely expensive, while insurance companies pay doctors much less than someone going to a hospital directly