Below are my personal notes (portfolio management highlights) from Charlie Munger’s Q&A Session during the 2013 Daily Journal Shareholders Meeting this Wednesday in Los Angeles. Opportunity Cost
After the meeting, I approached Munger to ask him about his thoughts on opportunity cost (a topic that he mentioned numerous times while answering questions, and in previous lectures and speeches).
His response: “Everyone should be thinking about opportunity cost all the time.”
During the Q&A session, Munger gave two investment examples in which he cites opportunity cost.
Bellridge Oil: During the the Wheeler-Munger partnership days, a broker called to offer him 300 shares of Bellridge Oil (trading at 20% of asset liquidation value). He purchased the shares. Soon after, the broker called again to offer him 1500 more shares. Munger didn’t readily have cash available to make the purchase and would have had to (1) sell another position to raise cash, or (2) use leverage. He didn’t want to do either and declined the shares. A year and a half later, Bellridge Oil sold for 35x the price at which the broker offered him the shares. This missed profit could have been rolled into Berkshire Hathaway.
Boston-based shoe supplier to JCPenney: One of the worst investments Berkshire made, for which they gave away 2% of Berkshire stock and received a worthless asset in return.
For both examples, opportunity cost was considered in the context of what "could have been" when combined with the capital compounding that transpired at Berkshire.
Making Mistakes, Liquidity
DRC (Diversified Retailing Company) was purchased by Munger & Buffett in the 1960s with a small bank loan and $6 million of equity. Munger owned 10% so contributed $600,000. But as soon as the ink dried on the contract, they realized that it wasn’t all that great a business due to “ghastly competition.” Their solution? Scrambled to get out as FAST as possible.
Related to this, be sure to read Stanley Druckenmiller’s thoughts on making mistakes and its relationship to trading liquidity (two separate articles).
Generally, humans are bad at admitting our mistakes, which then leads to delay and inaction, which is not ideal. Notice Druckenmiller and Munger come from completely different schools of investment philosophies, yet they deal with mistakes the exact same way – quickly – to allow them to fight another day. Liquidity just happens to make this process easier.
Another Munger quote related to mistakes: “People want hope.” Don’t ever let hope become your primary investment thesis.
“Treat success and failures just the same.” Be sure to “review stupidity,” but remember that it’s “perfectly normal to fail.”
Munger told story about press expansion – newspapers paying huge sums for other newspapers – relying largely on leverage given the thesis of regional market-share monopolies. Unfortunately, with technology, the monopolies thesis disintegrated, and the leverage a deathblow.
Perhaps the lesson here is that leverage is most dangerous when coupled with a belief in the continuation of historical status quo.
The masterplan doesn’t always work. Some of life’s success stories derive from situations of people reacting intelligently to opportunities, fixing problems as they emerge, or better yet:
“Playing the big bass tuba in an open field when it happened to rain gold.”
Munger’s personal account had zero transactions in 2012.
On the decline of the General Motors: “prosperity made them weak.”
This is a lesson in hubris, and associated behavioral biases, that's definitely applicable to investment management. Investing, perhaps even more so than most businesses, is fiercely competitive. In this zero sum game, the moment we rest on the laurels of past performance success, and become overconfident etc., is the moment future performance decline begins.
Always be aware, and resist behavior slithering in that dangerous direction.
Berkshire had “two reasonable options” to deploy capital, into both public and private markets. Munger doesn’t understand why Berkshire’s model hasn’t been copied more often. It makes sense to have a flexible hybrid mandate (or structure) which allows for deployment of capital into wherever assets are most attractive or cheapest.
Clients, Time Management
Most people are too competitive – they want ALL business available, and sometimes end up doing things that are "morally beneath them," and/or abandon personal standards. Plus, general happiness should be a consideration as well.
The smartest people figure out what business they don’t want and avoid all together – which leads to foregoing some degree of business and profit – that’s absolutely okay. This is what he and Buffett have figured out and tried to do over time.
On doing what’s right: He and Buffett fulfill their fiduciary duty in that they “wanted people who we barely know who happen to buy the stock to do well.” Munger doesn’t think there are that many people in the corporate world who subscribe to this approach today.