Introduction: What truth has Munger distilled from his life experiences?
Howard Buffett (Buffett’s eldest son), my father is the second smartest person I know. Who is the number one? Charlie Munger.
Buffett and Charlie pushed me in another direction, it was the power of his ideas that expanded my horizons.
On February 11, 2016, at the headquarters of Daily Journal, a California based newspaper and magazine publishing company, Charlie Munger, as the chairman of the company’s board of directors, presided over the company’s 2016 annual meeting and delivered a speech.
As Buffett’s letter to shareholders becomes increasingly politically correct and carries more and more “positive energy,” his golden partner Munger’s remarks remain sharp and point straight to the point.
Truly a wiser person than Buffett.
The content is slightly lengthy. But it has many benefits, such as a large amount of information:
Talking about investment
People who think investing is simple are wrong
Q: Regarding the question of thinking models… what kind of model do you like the most?
Answer: We always talk about various models, provided that you have many models. This is the essence of reality. There is no simplified way.
You are all in the investment field – do you think investing is easy? Anyone who thinks it’s simple is wrong, because what you see is just an illusion. You may occasionally get an easy opportunity, but in most cases it is difficult.
How many people find investing difficult? (Most of the audience raised their hands) Everyone present is smart. (The audience laughed)
We rely on waiting to make money
Q: Compared to the 1980s, what is the current environment for energy investment?
Answer: We have held Wesco for a long time. They made many transactions, but only the results of five or six transactions were truly important. This is very interesting. Trying to do thousands of small things is difficult. But if you try to do a few things well, you will have good results. In the long run, a few good decisions are enough to achieve success.
We rely on waiting to make money, and moderate patience is a necessary condition for making money. During the wave of defaults, we made a lot of money and then deployed these assets within a day. We didn’t get that money by luck.
High frequency traders are like mice in a barn
Q: Do you think the fundamental value is losing its meaning?
Answer: I believe that the fundamental value will never lose its meaning. You must buy something below its value, it’s like arithmetic that will always be with us. High frequency trading is very complex. Many high-frequency traders are admirable, but they are like mice in a barn. They draw resources from civilized society and make no contribution.
Valuing a company is like playing bridge
Q: How do you use conversion rates to calculate intrinsic value?
Answer: We don’t use formulas like this. We consider quality factors. It’s like playing bridge, you have to consider many things, there’s no one formula that can solve all problems. If the formula works, everyone who studies mathematics should be very wealthy, but the fact is not like that.
Q: Since you mentioned earlier that you don’t need formula valuation, how do you value a company?
Answer: Opportunity cost is important, and risk-free rate of return is also a factor.
Q: Do you use the same ratio for different businesses?
(Note: Risk free rate is generally a fixed value, such as the five-year treasury bond bond of the United States, so this is not about risk free rate. On the contrary, it is very similar to the discount rate in the top question, as it is variable. However, it is not certain that Mangeti is necessarily a discount rate here. To be conservative, it is translated as a ratio here. )
Answer: Of course not. Different businesses require different ratios. They are all considered based on value and need to be measured one by one. But people are willing to spend more money for good business. We really don’t want any bad business anymore.
In the past, we made money by completely transforming terrible businesses, almost like squeezing money out of them, which was painful and difficult to do, especially when you already had money. We won’t do this business now if we can.
We occasionally do it, provided that one of our other businesses gets bad, just like dealing with your relatives who you can’t get rid of. We try our best to handle those businesses, but we also look for new ones.
I hope to meet more BYD vehicles
Q: What are your expectations for BYD?
Answer: BYD is a company similar to venture capital. The founder of the company borrowed 300000 US dollars from Bank of China as initial capital and then entered the field of small battery business. He successfully gained a small market share. He is a very outstanding person who has done something very ambitious. Last month, he sold 10000 electric vehicles in China, more than Tesla. Although most people have not heard of BYD.
Berkshire Hathaway does not engage in venture capital, and I hope the results of DailyJournal will also be good. BYD is benefiting from the trend of electrification. When people on the streets of Beijing are struggling to breathe air, BYD becomes very useful.
The United States has electric elevators. Do you really want carbon dioxide in the warehouse? It is a very interesting venture capital. It’s completely unexpected for Daily Journal to be involved in venture capital now. I just hope we can meet more BYD.
The banking industry is a dangerous place for investors
Q: You bought Wells Fargo Bank. Why is it a good investment?
Answer: Let me take you back to when Berkshire Hathaway purchased Wells Fargo.
At this time, the world is becoming fragmented, and real estate is the source of chaos. Fuguo Bank has a significant exposure to real estate risks. We know that the credit personnel of Wells Fargo are not ordinary bank credit personnel. They are adults and have a skeptical eye. They are moderately cautious, which is the attitude that a bank should have when operating.
And we know they are better than other banks and won’t lose money like other banks because they are carefully selected and managed properly. So we have an advantage in terms of information. We realized that they have special abilities, so we made a large purchase.
Secondly, when Daily Journal purchased Wells Fargo, we once again confirmed that Wells Fargo’s bankers were more rational than ordinary bankers. This is a special rationality and advantage. If you don’t have a strong grasp of bank employees, I don’t think you should buy bank stocks. The banking industry is a very dangerous place for investors. People without deep insight should stay away from it.
Coca Cola is no longer as profitable as “fishing in a bucket”
Question: My question is about Coca Cola. But first, I want to tell you a brief story. My 17-year-old son and his friends were having a party, and we bought all the appropriate snacks, including two bottles of Coca Cola. At the end of the party, these young people hardly drank too much cola, which worries me: the dessert and beverage industry is declining. Does Berkshire Hathaway’s investment provide a shield for the management of Coca Cola, preventing them from thinking about the future of the beverage business?
Answer: Coca Cola has been a basic all sugar product for the past few decades and has been growing annually. Whole sugar cola is currently declining. Fortunately, Coca Cola Company has a huge infrastructure. Coca Cola’s sales have declined slightly, but other businesses are growing.
So I think Coca Cola is a fairly strong company and will be a considerable investment, but it’s not as easy as fishing in a bucket like it used to be.
Middle Easterners are like a group of wealthy individuals who only know how to spend money
Q: What is the correlation between oil prices and economic growth?
Answer: I am not very familiar with the correlation between oil prices and economic growth. I think it is significant that if oil had been cheaper and easier to obtain in the past, economic growth would have been faster than in the past. In this sense, if oil had become expensive and we still crave it… this is the correlation between oil prices and economic growth.
For companies like ExxonMobil, damn oil prices rise faster than their production declines. Who can say what other business, besides oil, has been experiencing a continuous decline in production while increasing revenue?
Those who truly have a lot of free energy, such as Middle Easterners, have severely dysfunctional economies. They are like a group of wealthy people who can’t do anything except spend money. So, in this sense, I believe that stricter measures are beneficial for us. My answer to this question reminds me of my old professor at Harvard Law School, who once said, ‘Charlie, let me know what your problem is, and then I will try to make it more difficult.’ That’s what I’m doing to you.
I didn’t expect the price of oil to be like this
Q: Can you talk more about your views on oil
Answer: I didn’t anticipate the current price of oil, it forced me to examine things.
I think the general logic is as follows: raw materials will have periods of extreme prices, and I believe it is important that raw materials can do strange things. If you are in Australia, this is a disaster. I think it’s human nature to become strange at times, during periods of high and low prices. I have never been able to accurately predict the market, and I do not rely on accurate predictions to make money. I just tend to enter good businesses and stay there.
I don’t think the automotive industry is the place to go
Question: Berkshire Hathaway holds stocks in some automotive companies. What are the special attractions of car companies that make you do this now?
Answer: Berkshire Hathaway invested in General Motors because one of our young people likes it. Buffett, when he was a young man, would do anything he wanted to do, just so willful.
Indeed, the federal government may ultimately take protective measures against General Motors, so it could be a good investment in the end. But the current level of competition in the automotive industry is something I have never seen before. Every company produces good cars, they have the same suppliers, and the cars have been around for a long time. It only possesses basic commercialization features. So, I don’t think the automotive industry is the place to go.
The culture of everyone owning three or four cars is not as popular anymore. So I don’t think the automotive industry is good. If I were to invest, I would choose a better but difficult to find path.
Buying a house is just because we need it
Q: The Daily Journal recently purchased a property. Can you compare the difference between choosing to purchase property and investing the funds elsewhere?
Answer: We believe we will be staying in Provo, Utah for a considerable amount of time. We have many employees there who enjoy their work and the place they are in. Buying real estate is a part of business operations. We have clients from there. At present, we have no intention of leaving there either.
We purchased it at a cheap price, built it at a cheap price, and it is a great property. The development of the company is not closely related to real estate investment.
IBM today is somewhat like a supermarket
Q: I am from Stanford, and first of all, thank you very much for donating the Munger Building. You said you want to know the location of your future death so that you can avoid going there in advance. A few years ago, Buffett purchased IBM, and some people said he had stepped out of his own circle of abilities. Can you provide some opinions on Buffett’s purchase of IBM based on your above theory?
Answer: IBM is very similar to us. Their traditional business is very sticky, but now the world has changed. Of course, in the new game rules, they are no longer leaders, with Oracle and Microsoft coming from behind. IBM did not perform well during the period of personal computer growth.
But IBM’s advantage is that they have both old and new businesses. The idea of automatic review is great and particularly useful for Edison Company.
But now IBM is somewhat like a supermarket, and I really don’t have a clear stance on this. I am not a supporter or opponent of new businesses, they may be very sticky or slowly decline. From Berkshire’s perspective, we have to play long-term games. It may operate averagely, or it may operate very well.
The most exciting thing is entering the case software market
Question: Please share with us one or two opportunities in the field of technology or provide one or two risk warnings.
Answer: What excited me the most was getting it (I can’t hear it clearly, but it should be Journal Technologies). We bought this small, penniless software company, and now it has 80-90 employees. This new business is very interesting because it operates in a large market. I believe that whoever is rooted in this market will be in a very sticky business.
At least we have entered a market where we are difficult to be eliminated. The current obstacle is that we want to become the most important player in this new and highly promising niche market. I believe this market will continue to improve rather than decline. (Author’s note: Journal Technologies is a subsidiary of DJCO, providing case software for courts and judicial institutions)
Q: Daily Journal has entered the software industry. What do you think is the attractiveness of ordinary software business?
Answer: Software business is no different from any other business, there are both junk and high-quality products, good and bad coexist, the key depends on how you choose.
Q: On the surface, Journal Technologies appears to be developing slower than its competitors, but people are paying a high P/E ratio for it. Have you ever considered selling Journal Technologies?
Answer: There is no absolute in the world. The uniqueness of software business lies in the coexistence of opportunities and problems. We cannot judge it like ordinary businesses or ordinary growth companies. It is venture capital. You have a business that looks like venture capital but is not actually venture capital itself.
Getting good business at Berkshire is very simple, but at Journal Technologies, even small business acquisition is not easy, let alone good business. We will launch a venture capital like attack in the software business. Don’t measure those things by conventional standards.
Floating gold is not as useful as it used to be
Q: Historically, Berkshire Hathaway has developed around its insurance model. Have you tried or pursued other modes?
Answer: In the early days, we believed that we had a special advantage in the floating gold business. We have a large amount of floating gold now, but it is not as useful as before. Although Berkshire Hathaway’s massive floating fund business did not receive corresponding huge returns, it does not mean that it is a tragedy.
I barely have enough ability to understand the new industry
Q: How do you understand a new industry or business with different dynamics that you are trying to enter? How do you gain insights into specific fields?
Answer: When it comes to how I understand the new industry, the answer is reluctantly. I barely have enough cognitive ability to engage in what I do. This is also because this world has elevated me to a position that puts me under pressure.
If it happens to you, you are lucky because that is the outcome you want: stress. You want to summon it with all your power. Believe me, it once happened in my life. After repeated attempts, I managed to barely find the correct answer, and sometimes I also fail.
talk politics
Regarding the US presidential election
The political chaos we are currently in is insignificant. We must now face this political situation. Of course, many of these people are not honorable. What I mean is, as leaders of a civilized society, it’s bad for our country to have these candidates running for high positions.
And they are not all in the same political party, but you don’t have to be angry. After all, politicians have played this role for a long, long time. What you want is constructive management and elections, not anger. There is too much anger and unconscious hatred in current politics.
How do we know that fifty years from now, America will become better because we choose either the Republican or Democratic Party in the next election? Who can say the exact combination between sympathy and other things?
Trump is morally incompetent as president
Q: Do you think someone who can’t even run a New Jersey casino (implying Trump) is qualified to be the President of the United States?
Answer: Actually, he made money during a period of time. My attitude is that anyone who relies on casinos to make money is morally unfit for the presidency. I think that’s a very dirty way to make money.
Talk about life
How to overcome fear
Question: Someone once gave me advice that overcoming fear is very important. Can you talk about your relationship with fear and whether you have overcome it?
Answer: Generally speaking, I avoid situations that lead to fear. What I mean is, if you want to go gliding, of course you can.
My son Philip is in the audience. He once said, ‘If you don’t succeed the first time, your attempt at gliding ends here.’ (The audience laughed) I won’t seek fear for excitement.
Generally speaking, I am not an enthusiast of dangerous sports, and that is not what I enjoy. I never felt fear for a long time, I only lived for a long time. I used to have feelings of fear when I was young, but they gradually disappeared.
By reading and thinking more, one can gain wisdom
Question: How do we acquire wisdom?
Answer: If you read enough books and think enough, you don’t have to do too much else.
I can’t change my child
Q: Thank you very much for sharing your wisdom with us. Two questions: What advice do you give to your grandchildren? Question 2: Can you share your favorite investment story with us?
Answer: Speaking of grandchildren, I can’t change my children too much. My situation reminds me of Clarence Darrow’s words about great poetry: ‘I am the master of fate, the master of the soul, the master of fate? I can’t even paddle a boat!’ That’s how I feel about my grandchildren.
Clarence Darrow, a renowned 19th-century lawyer, quotes and challenges the spirit of William Ernest Henley’s poem ‘invictus’. Darrow said, “Not to mention being a captain of the soul, as I sometimes express, one cannot even be a sailor on a rudderless ship! He just floats and tries to persevere, persisting as long as possible.” – The Clarence Darrow Collection
Since I was young, I have had many favorite investment stories, but many of them have been told before. Al Marshall and I did something in 1962 while bidding for some oil rights. I quickly realized that under the equity rules, only oil traders could bid for the right to use these oil mines, and they were a bunch of bastards. I realized that the oil mine usage rights business was dominated by notorious guys, but they could easily be defeated. In a short period of time, my company was granted an equity of $10000 each.
(Author’s note: Munger provided more details about this trade/arbitrage, but they were not heard clearly.)
The problem is that, like most investment stories, this business didn’t last long. The real test of a person lies in how to obtain a second, third, or fourth chance.
Methods to spend precious time with family
Q: You mentioned that you haven’t changed your children much. Do you have any ways to spend precious time with your family?
Answer: I don’t want to become a role model for my family. We must all coexist with our own imperfections.
How to deal with stress
Question: How to deal with stress?
Answer: The answer is that I am rarely nervous now. I guess it’s because over the years, I’ve gradually gotten rid of it.
Advice for young people: avoid being angry fools
Q: What advice would you give to your younger self?
Answer: My advice is always so clich é d: good behavior makes your life easier, more effective, and less complex than lies.
I am just so conservative. Discipline, outdated good behavior, and generosity are all effective. We all know that people attend funerals just to confirm someone’s death, and we don’t want to be among that group of people.
Kiplinger’s “If” is a great poem, and the advice in it is great: “Stay rational, be a man, my child. Don’t you want to be a man? Some people are easily angered, but in fact, by avoiding being an angry fool, you can gain a lot.
The most fulfilling thing
Q: What is the most fulfilling thing for you?
Answer: My family is very happy. Cicero once said that one way to feel happy in old age is to recall your achievements. Some people say it’s too human centered. I agree with Cicero that recalling the past is a good thing.
For most people, marriage is the best choice
Q: Gradually, men and some women have not found valuable returns in long-term relationships. What do you think?
Answer: I believe that different people can have different lifestyles, but I think the fact shows that for most people, marriage is the most practical choice, and the statistical results also support this view.
Married people live longer. They measure happiness, smiles, and the like using physiological methods. It’s not that many marriages won’t fail, or won’t be like being in hell, or anything like that. But considering how difficult life is, for most people, marriage is the best choice. So, marriage should be taken seriously.
This is one of the things I like about Asian culture, in Confucian culture, family is very important. Therefore, marriage is very reasonable. If we lose our family values, we will encounter many troubles.
How to become more rational
Q: You have said that rationality is the most important thing for you. Is there any way to make us more rational?
Answer: If you start dedicating yourself to this at a young age, it’s great and fun. I can hardly think of anything more interesting than it. I think you are on the right track. Not everyone is the Emperor of Japan.
Rationality means giving up something, trying the opposite of rationality, jealousy, anger. Although anger and jealousy are actually useless, some people just want to die and immerse themselves in them, and of course, life is a mess. Self pity and self pity cannot change anything, drive these emotions away from your life.
How to avoid making mistakes
Q: You have mentioned trying to reduce errors by avoiding auctions. How do you avoid making mistakes in life?
Answer: Buffett and I have both done these two things. Firstly, we spend a lot of time thinking. My schedule was not satisfactory, so we sat down and kept thinking. To some extent, we look more like scholars than businessmen. I often sit quietly and think for hours. I don’t mind if nothing happens for a long time, and Buffett is no exception. He is sitting at the pinnacle of an empire. Sometimes he clears his schedule and goes to get a haircut, and his calendar says’ Thursday: haircut ‘.
You are all very good at handling multiple tasks, and if you are the head nurse of a hospital, multitasking is certainly not a problem. If not, multitasking is not suitable for you. Playing three balls at once is unrealistic. Fortunately, many of you are not well-known, so you are not so busy (laughs from the audience). This suggestion is useful to me, and it should also be useful to you. If it’s not useful to me, I will definitely prepare a backup plan and won’t go to enjoy the program of the Bolshoi Ballet.
But I believe that constantly seeking wisdom and seeking the right response is helpful. Getting angry is useless. You can apply this mindset to your daily routine, but it’s difficult to achieve. The essence of ordinary results is because they are ordinary.