Incomplete Notes of Charlie Munger’s Comments at the 2019 Daily Journal Shareholder Meeting, February 14 2019
What follows is an incomplete record of the meeting; I skipped questions and answers I didn’t find useful or interesting. Where quotation marks are used, it is a quotation from Charlie. Where no quotation marks are used, it is a paraphrase. Timestamps are approximate.
Source Video: https://www.youtube.com/watch?v=X1Oi3esiry8
5:30 Daily Journal newspaper now earns $1 million per year pretax and shrinking, and Journal Technologies is bigger by far now. Journal Technologies is fighting an uphill battle against bureaucracies and has a lot in the pipeline. Main competitor is Tyler Technologies. Company wouldn’t be where is without Jerry Salzman, anybody else would have failed.
10:00 We stand for some sort of basic combination of basic morality and sturdy common sense. Of course, when people say common sense, they really mean uncommon sense. It’s much harder to have common sense than is generally thought.
11:00 Investment company had lots of smart people, so decided to ask each one for their single best idea and created a formula putting together all their great ideas, it would create a huge advantage. Of course, it failed utterly. So they tried again, and it failed utterly. And again. Failed. WHY? I’m going to leave with that question because I want you perplexed. That’s one you should be able to answer. It shows how hard it is to be rational on something very simple.
15:15 All this money and effort goes into stock picking. Index funds came along and beat everybody. So you have a whole profession paid for accomplishing practically nothing. Very peculiar. Not the case with bowel surgery, that a whole profession with a chosen activity they’ve selected, and they can’t do anything. Some people always had some of this problem. They rationalized that they’re saving their clients from the insurance salesman and the active trading stockbroker, and they WERE. So how are they handling not being able to get better-than-average results? They’re in denial. Horrible problem they can’t fix so they treat it as non-existent. Very stupid way to handle a problem. Problem fairly understood is half solved. Index is virtually certain to do better. So it’s a serious problem and a weird situation, and it’s unpleasant for big investment counseling shops, some shrink, some go out of business. And the value investors who are honorable just quit. But if your business is money management you’ve got to keep going so it’s a real problem. I don’t have any solution. Index investing won’t work if everyone does it. But for another considerable period it’s still going to work.
19:30 Now at Berkshire Hathaway or Daily Journal, we’ve done better than average. There’s a question: why has that happened? The answer is simple: we tried to do less. We never had the illusion we could hire a bunch of bright people and they would know more than anybody about various industries. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. (ha!) We always realized if we worked very hard, we could find a FEW things where we were right. And the few things were enough, and that that was a reasonable expectation. That is a very different way to approach the process. If you had asked Warren Buffett “give me your best idea this year” and had followed his best idea, it would have worked beautifully. Only one or two stocks. Had limited ambitions.
20:45 I had a grandfather who was very useful to me. My mother’s father, who went to Iowa and bought cheap land, nad was aggressive and intelligent and so forth and was the richest man in the town and owned the bank and highly regarded. Very happy life. He had the attitude, having come out to Iowa, with cheap good land, you get a few opportunities if you live to be about 90. Seizing them when they come along is key. Told that story to his grandchildren over and over. His mother, who had no interest in money, remembered the story and told it to Charlie, who took the attitude to prepare himself for seizing the opportunities when the opportunities came. This is NOT THE ATTITUDE of big money managers, who study everything and try to find everything. And the result is almost no one can outperform an index.
22:45 “I sit here with my Daily Journal stock, my Berkshire Hathaway stock, my holdings in Li Lu’s Asian fund, my Costco stock, and of course I’m outperforming everybody. I’m 95 years old and I practically never have a transaction. And the answer is I’m right and they’re wrong. And that’s why it’s worked for me and not for them. And- Now the question is: do you want to be more like me or more like them?”
The idea of diversification makes sense to a point, if you don’t know what you’re doing and want the standard result and not be embarrassed, then diversify. No one is entitled to a lot of money by recognizing that because it’s a truism, like knowing 2 and 2 equals 4.
24:00 “An idiot could diversify a portfolio! And- Or a computer for that matter. The whole trick of the game is to have a few times when you know that something is better than average, and invest only where you have that extra knowledge. And then if you get just a few opportunities, that’s enough. What the hell do you care if you own 3 securities and JPMorganChase owns 100? You know. What’s wrong with owning a few securities? Warren always says if you lived in a growing town and you owned stock in 3 of the best enterprises in the town, isn’t that diversified enough? The answer is: of course it is! If they’re all wonderful places. And that fortune’s formula which got so famous, which was a formula to tell people how much to bet on each transaction, if you had an edge. And of course, the bigger your edge, the more close your transaction was to a certain winner, the more you should bet. And of course, there’s mathematics behind it. But of course it’s true. It’s perfectly possible to buy only one thing because the opportunity is so great and such a cinch. Or only two or three. So the whole idea of diversification if you’re looking for excellence is totally ridiculous. It doesn’t work. It gives you an impossible task. What fun is it to do an impossible task over and over again? I find it agony. I just- Who would want to do it?“
25:40 Woman had a mansion and $300K in 1930-something. Which was a lot of money. She divided it into 5 chunks and bought 5 stocks – General Electric, Dow, Dupont and 2 others – and never changed those stocks. Some municipal bonds. By the time she died, she had a million and a half dollars. No costs, no expenses. She thought electricity and chemistry were the coming things. She chunked it all in and sat on her ass.
28:00 “If you make 5% and pay 2% of it to your advisors, you’re not losing 40% of your future. You’re losing 90%. Because over a long period of time, that little difference causes a 90% disadvantage to you. So it’s hugely important for somebody who is a long-term holder not to be paying a big annual toll out of the performance.”
29:00 Li Lu is doing so well because he’s the Chinese Warren Buffett, plus he’s fishing in China, not in the overfished US market.
31:20 “If you take the modern world, where people are trying to teach you how to come in and trade actively in stocks. Well, I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin. It is really stupid.”
34:30 Warren and I tried to make money by buying. If we were selling horseshit we didn’t try to pretend it was a cure for arthritis. Have to get wise enough so you avoid all the people who try to take advantage.
35:45 [NOTE this story is also in Poor Charlie’s Almanack] My father had an awful client and a best friend client. He was always working for the awful client and never for his best friend. I asked why. He said that the awful one always needed legal help. So I spent my life trying to be like the best friend. It works! It really works. Warren always says ‘take the high road, it’s never crowded.’ In the foreclosure boom, Daily Journal published foreclosure notices and could have raised prices, but didn’t. When fellow citizens are losing houses, ‘Charlie Munger, billionaire, raises prices’ would look lousy on the front page of the paper.
39:45 “The Mungers would have twice the assets they now have if I hadn’t made one mistake of omission back in the 1970s. And- Really stupid. And- I blew an opportunity that would have doubled my present net worth. That is a normal life. You get one, or two. And how things work out…We all know people who outmarried, I mean, their spouses are so much better. Think what a good decision that was for them. And what a lucky decision. Way more important than money. And a lot of them did it when they were young, just, they stumbled into it. Now, you don’t have to stumble into it. You can be very careful.”
42:50 If you overspend your income and be full of jealousies and resentments, you can have a lousy unhappy life and die young, like Mozart. There’s always someone who achieves more than you. My attitude is “so what?”
44:00 If you actually figure out how many decisions were made, 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 that in the normal human allotment there are not very many. Now there are many confident people who sell securities who act as if they have an endless supply of opportunities. Those people are the equivalent of a racetrack tout. It’s not a good way to live life to pretend you know things you don’t know. My advice to you is avoid those people. It’s not the right way to make money. This business of controlling costs and living simply, that was the secret. Warren and I always underspent our incomes and invested and if you live long enough, you end up rich. It’s not very complicated.
45:30 Now there is a part of life which is how do you scramble out of your mistakes without them costing too much? We’ve done some of that too. Think of Berkshire’s founding businesses. A doomed department store. A doomed New England textile company.
Questions from the Audience:
49:30 It’s been very hard to find companies to buy.
“If you’re having trouble at the present time with anything, join the club”
Question about commercial banks. Smaller banks, about 250 in the US up to super-regional level. Good hunting ground for value investors?
51:00 “The answer is yes.”
CEOs should tell shareholders everything they need to know to value a business. But opaqueness about contracts being awarded but not completed creates wide Daily Journal range. Could you provide some detail for us shareholders as far willingness for courts to accept these contracts?
51:30 We have contracts at every stage you can imagine, and I don’t purport to understand each one because I trust Jerry and the people doing it. Generally the trend is favorable. It’s difficult. You would be horrified. But in spite of its difficulties we’re doing pretty well. If I read all the reports in great detail, and spent all my efforts trying to understand it, I wouldn’t understand it very well. So I think your chances are very poor.
53:00 Question: one of my favorite lines from you is that you want to hire the guy with the IQ of 130 who thinks it’s 120, and the guy with an IQ of 150 who thinks its 170 will just kill you.
“You must be thinking about Elon Musk.” HUGE LAUGHTER. How do you assess someone when making a hiring decision?
Answer: Of course I want the guy who understands his limitation. Never underestimate the man who overestimates himself, and these weird guys who overestimate themselves sometimes knocks it out of the park. I’ve had to adjust to it. But I don’t want that, I want the prudent person.
56:00 Li Lu is very talented. I’ve given some Munger money to that one outsider once. Very remarkable but also pretty picky. Once I’ve picked him, who else am I gonna pick? That’s a good way to make decisions. It simplifies life a great deal. So I just sit. It’s amazing how intelligent it is to spend some time just sitting. A lot of people are way TOO ACTIVE.
56:30 When the US adopts single payer healthcare, it’ll be a mess for healthcare companies. Overtreatment of the dying, overtreatment of items best left alone, so much unnecessary expense. Yet in terms of quality at the top, it’s the best system in the world. I find it demoralizing to see. In Singapore they spend 20% of what we spend and their system is way better. But of course it was created by one person, than the outcome of our political process. There’s a lot of be demoralized about.
58:30 Can you tell us about the influence the stoics had on you?
Epictetus who started as a slave is a favorite. I like those old stoics. Part of the secrets of a long life is not to expect too much of human nature. To have your life full of seething resentments and hatreds, it’s counterproductive. Rule of politicians: I always reflect that politicians are never so bad that you don’t live to want them back.
1:05:00 I’m not surprised the Chinese are stealing intellectual property. We used to do it all the time.
1:11:00 Why hasn’t Berkshire’s success as a holding company been copied?
It’s just too hard. There’s too much momentum. One of the reasons Berkshire has been so successful is there’s almost nobody at headquarters, almost no bureaucracy. Having no bureaucracy is a huge advantage if the people running it are sensible people. Think about how poorly all of us have behaved in bureaucracy. Stupid wastes and so forth. Tendency of successful places is to have more and more bureaucracy.
1:13:10 [Matthew Peterson’s Question]: You’ve praised the significance of cultures of certain firms, like at Costco. What is the culture at Journal Technologies? Similar to your Berkshire 50-year essay, can you share a multi-decade vision for Journal Technologies?
Answer: It’s working because Jerry Salzman took ahold of it and worked miracles. Garren talked me into it. I just clap.
1:14:00 What sea would you be fishing in, if you were starting out today?
China. There are others, I’m sure, but it’s hard for me to believe there’s anywhere better. By the way, the water’s fine in China and some smart people are wading in. In due course, more will wade in. The great companies in China are cheaper than those in the US.
1:16:00 My advice for a seeker of compound interest is to reduce your expectation. Makes you less crazy. Decide that even if the returns are lower, I can have a happy life. It’s going to be very difficult, and you should work at it, and if all that gets you is 6% instead of 5%, you should be cheerful about that. If you want to know how to knock it out of the park easily, talk to Jim Cramer. (ha!)
1:18:00 Question following up on Matthew Peterson’s question: what is the long-term succession plan for the board at Daily Journal? (asked to the other board members sitting right there)
Answer: “I don’t think we want to go to another speaker.” [Note that later on, Jerry Salzman answered a question.]
How do you think about downside protection and how do you know when to exit?
1:20:00 “Well, you’re not talking to a great exiter. Berkshire, I bought in 1966. Costco… I’ve been a good picker. But, other people know more about exiting. I’m trying never to have to exit. So you’re talking to the wrong… I think there are working styles of investments that work well with constant exits, it just hasn’t happened to have been my forte. So I’m no good at exits. I don’t like even looking for exits. I’m looking for holds. Think of the pleasure I’ve gotten 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 that make me a little – firstly, I’d be less rich, not more, after taxes. And in the second place, it’s a much less satisfactory life than rooting for people I like and admire. So I say, find Costcos, not good exits.”
1:22:58 “Part of our secret is that we don’t attempt to know a lot of things. We have a – 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. Everything goes in the Too Hard pile except for a few easy decisions, which I make. Promptly.”
1:23:30 More emphasis on quantitative decisions like ROIC or qualitative like management or brand?
Varies from situation to situation. We’re just trying to have that uncommon sense. And part of that is to refer a lot of stuff to the Too Hard pile.
1:24:20 How did you maintain the discipline to live the simple life in the face of temptations?
“I was born this way.”
1:24:45 Infrastructure in the US? (question from engineer at BYD)
BYD is super active in China, and it’s going to be huge in electric vehicles, and by the way Daily Journal owns some BYD. Also huge in monorails and in lithium batteries. Big supplier to Apple and others. I am terribly impressed with BYD and it’s been one of the real pleasures of my life to watch Wang Chanfu. His older brother recognized that he was a genius, and he gave up everything and nurtured his little brother. That’s Confucianism – a strong family ethos like that is a really constructive thing. Older brother of Wang Chanfu is a hero. What Wang Chanfu has done is a miracle. Li Lu bought into the company as a VC-type investment and it’s been wonderful investment. I like being part of a company that’s building better batteries and better monorails. You could hardly have a better employer. At least if you like demanding achievement and 80-hour weeks.
1:27:40 Causes of Great Recession:
Hit Munger’s 24 standard causes of human misjudgment. The financial behavior in our leading financial institutions was inexcusably awful, everybody piled in, it was disgusting intellectually and morally and caused a whirlwind that could have taken all of civilization down into a great depression. That’s a pretty major sin. And none of those people have been punished. It’s unusual that I agree so thoroughly with Warren but it was wrong not to punish those people.
How did you find your circle of competence?
1:55:30 “It’s a hugely important thing, knowing the edge of your – It’s hardly a competence if you don’t know the edge of it. If you have a misapprehension regarding your own competency, that means you lack competency, you’re going to make terrible mistakes. So, hardly anything is – I’ve think you’ve got to constantly measure what you achieve against what other people have achieved and have to keep being determinedly rational and avoiding a lot of self-delusion, but after a lifetime of observing it, I think the tendency to be pretty rational about one’s own competency is largely genetic. I think people like Warren and I were just born this way. Now it took a lot of education, but I think we were born with the right temperament to do what we did. And I have no way of taking you back and rebirthing you.”
Afterwards, he gave an interview to Becky Quick: https://www.cnbc.com/2019/02/15/cnbc-transcript-berkshire-hathaway-vice-chairman-charlie-munger-speaks-with-cnbcs-becky-quick.html