Five insights from Charlie Munger at the 2020 Daily Journal Annual Meeting.
Q4 2019 hedge fund letters, conferences and more
- “The current stock market situation is not as crazy as the Nifty Fifty or the Tech Bubble of the late 1990s.”
Many people automatically assume that because the market has been rising for many years that we must be in a bubble. Charlie disagreed. He pointed out that the highly valued companies today (e.g. the big tech companies) are profitable companies not likely to go away. This is different from some of the profitless companies in the 1990s that got to insane valuations or their counterparts in the 1960s.
On the other hand, the markets are presenting few obvious bargains. The credit markets are at or close to bubble levels. Valuations are high for most assets.
So what’s the lesson? The lesson is that each time period is unique, and rather than trying to pattern-match the current environment to some past analogue, it is important to think from first principles. Doing so leads me to proceed very cautiously given the prevailing optimism in the prices for most investments, but to also make investments when I do find those that meet my criteria for margin of safety.
- “The old classical moats are disappearing rapidly. It’s probably a natural part of the modern economic system that the old moats stop working.”
The pace of change has accelerated in recent years. Technology and new business models are making it harder for many incumbent companies to maintain their competitive advantage and continue to generate abnormal profits relative to the capital employed.
Therefore, it’s even more important than usual to not practice “blind” value investing. In blind value investing, an investor just looks backwards at the financial history, assumes that something similar will occur in the future, and considers a company a bargain if it’s cheap relative to historical profits. That is still a good place to start, but a lot more judgement needs to be exercised to guard against adverse fundamental changes to the business.
- “You don’t think of what you want, you think about what you want to avoid and invert.”
Charlie has been a big proponent of solving problems by inverting. The way it works is that if you are trying to succeed at something, you figure out all the ways that you could fail at it, and then pursue a plan that avoids those ways.
Applying that to investing, how would you lose the most money possible? It would be by investing in bad businesses, at high prices, with weak balance sheets managed by dishonest or incompetent people. Avoiding all those attributes in an investment is very likely to improve your investing results.
- “Being able to recognize when you are wrong is a godsend. I actually work at trying to discard beliefs.”
Behavioral biases are all around us. Charlie Munger tries to fight them by consciously seeking out ways in which he can be wrong or looking for beliefs that he holds that are invalid. If he were to not do that intentionally, it’s very likely that his anchoring and confirmation biases would negatively impact his ability to think rationally.
- “It’s no good to pretend to be something you are not, because you eventually become what you pretend.”
Be authentic. If you don’t like something about yourself, try to improve it rather than pretend to be something that you are not. I see all too many people in investing putting on airs to try to impress others. Instead, they should be working on themselves so that they are impressive enough to be able to just be themselves.
Note: An earlier version of this article was published on Forbes.com
- “The current stock market situation is not as crazy as the Nifty Fifty or the Tech Bubble of the late 1990s.”
Many people automatically assume that because the market has been rising for many years that we must be in a bubble. Charlie disagreed. He pointed out that the highly valued companies today (e.g. the big tech companies) are profitable companies not likely to go away. This is different from some of the profitless companies in the 1990s that got to insane valuations or their counterparts in the 1960s.
On the other hand, the markets are presenting few obvious bargains. The credit markets are at or close to bubble levels. Valuations are high for most assets.
So what’s the lesson? The lesson is that each time period is unique, and rather than trying to pattern-match the current environment to some past analogue, it is important to think from first principles. Doing so leads me to proceed very cautiously given the prevailing optimism in the prices for most investments, but to also make investments when I do find those that meet my criteria for margin of safety.
- “The old classical moats are disappearing rapidly. It’s probably a natural part of the modern economic system that the old moats stop working.”
The pace of change has accelerated in recent years. Technology and new business models are making it harder for many incumbent companies to maintain their competitive advantage and continue to generate abnormal profits relative to the capital employed.
Therefore, it’s even more important than usual to not practice “blind” value investing. In blind value investing, an investor just looks backwards at the financial history, assumes that something similar will occur in the future, and considers a company a bargain if it’s cheap relative to historical profits. That is still a good place to start, but a lot more judgement needs to be exercised to guard against adverse fundamental changes to the business.
- “You don’t think of what you want, you think about what you want to avoid and invert.”
Charlie has been a big proponent of solving problems by inverting. The way it works is that if you are trying to succeed at something, you figure out all the ways that you could fail at it, and then pursue a plan that avoids those ways.
Applying that to investing, how would you lose the most money possible? It would be by investing in bad businesses, at high prices, with weak balance sheets managed by dishonest or incompetent people. Avoiding all those attributes in an investment is very likely to improve your investing results.
- “Being able to recognize when you are wrong is a godsend. I actually work at trying to discard beliefs.”
Behavioral biases are all around us. Charlie Munger tries to fight them by consciously seeking out ways in which he can be wrong or looking for beliefs that he holds that are invalid. If he were to not do that intentionally, it’s very likely that his anchoring and confirmation biases would negatively impact his ability to think rationally.
- “It’s no good to pretend to be something you are not, because you eventually become what you pretend.”
Be authentic. If you don’t like something about yourself, try to improve it rather than pretend to be something that you are not. I see all too many people in investing putting on airs to try to impress others. Instead, they should be working on themselves so that they are impressive enough to be able to just be themselves.
Note: An earlier version of this article was published on Forbes.com
Article by Gary Mishuris, Behavioral Value Investor
