Munger Says Active Trading is Like Heroin

NYC Meetup Announcement: The Invested Practice is having our first meetup! I will be in New York City and I’m excited to get together and meet those of you in the area. The event will be on Thursday, March 7, 6-8pm, in Manhattan (exact location TBD). Please RSVP to join by emailing danielle@danielletown.com. Please include your full name in your email. Spouses/partners/friends are welcome.

Table of Contents

(Note: It turns out that it’s a lot harder to include internal links within an email than it sounds, but we are working on adding that feature very soon so you can simply click on each heading below to skip to that section.)

i) Charlie Munger’s Daily Journal Meeting
ii) What my newfound financial conscience means for my practice
iii) Why does Munger succeed when other fund managers fail?
iv) What is the most productive investing attitude?
v) What should you do to be happy in your life?
vi) What’s out there now to buy?
vii) How did you find your investing circle of competence?
viii) Let’s Get Practical

Warren Buffett’s Berkshire Hathaway 2018 annual letter came out this week. I’ll have lots of comments on it in the future, but Charlie Munger gets all the attention in this issue.

i) Charlie Munger’s Daily Journal Meeting

Although Charlie Munger sits onstage with his investing partner Warren Buffett every year at Berkshire Hathaway’s shareholder meeting, he rarely speaks. His oft-repeated line, when Warren turns to him, is “I have nothing to add.”

But when Munger is sans Buffett, it turns out he can talk for hours, as evidenced by his shareholder meeting for his company, Daily Journal, which in the last few years has become more and more of a value investing convention. I went with my dad in February 2017, while in the middle of writing our book. After the talk I joined the throng crowding around Charlie, and when a space opened up close to him, I told him I was writing a book about learning to invest based on his principles. He muttered, “uh huh” and took a bite of his enormous muffin. I asked if I could take a picture, he said “uh huh” and my dad snapped the world’s most awkward photo of us.

Awkward, yes, but totally worth it.

ii) What my newfound financial conscience means for my practice

This year, however, I couldn’t fit a trip to LA into my February and plus, I wasn’t entirely sure it was worth the financial cost. Flight from Zurich plus hotel plus incidentals would easily be $2000. Do you find that you notice now, with an active investing practice, that every bit of money you spend is aggressively shouting at you that it could have gone into your investing account and compounded over years for much greater gains than that pair of shoes, or that nice cut of meat, or that trip to the Daily Journal shareholder meeting?

It’s probably a productive mental shift, but honestly, my newfound financial conscience can also be pretty annoying. Leave me alone, voice! A dear friend who is both a stay-at-home mom and an investor kvetched to me that she can barely go shopping anymore because she’s always thinking that instead of buying that dress, she could invest the money in the store from which she was going to buy the dress.

An unexpected consequence of my lovely investing practice – and hers – is that I prioritize my money differently than I used to. It’s not that I’m depriving myself, at all. In fact, I don’t much appreciate constantly denying yourself small pleasures – that “don’t buy yourself a latte” attitude – because I don’t think it’s sustainable long-term. Instead, it’s a true shift in my financial choices where I WANT to move the latte money from my Starbucks consumer spending allotment to my investing allotment. It’s an easy shift because I want it, rather than feeling like I’m on a painful financial diet. I am constantly conscious of my main goal: FIRE – financial independence, retire early.

But thanks to the magic of the internet, I got to watch Charlie’s talk on YouTube for free, from the comfort of my own home.

Charlie Munger and Warren Buffett are the godfathers of the investing world, and following what they say on the rare occasions that they speak publicly is like going to church. I not only take immediate insights from the specific things they say, I also understand the ethos of value investing better. It’s like dying a piece of cloth so that it’s color-fast. You dip the cloth in the dye and then hang it in the sun until it dries. The first time it’s dipped in the dye, most of the color dries away in the sun. But each time you dip, the dye sticks a little more, and a little more, until the color stays. And then nothing can remove that color. It has become part of the cloth.

Hearing Charlie and Warren speak is like dipping the cloth, over and over, to understand more deeply, each time, the value investing principles.

I took pretty detailed notes on his comments, which you can find here.

He said a LOT of interesting things (see below), stonewalled on some other things (succession plan of the Daily Journal, most notably), and generally was the blunt Uncle Charlie we all appreciate. I highly recommend watching the video while you wash the dishes or get dressed in the morning – or with full attention on a Friday night, whatever floats your boat. Transcripts do not do his attitude justice.

I came away with five topic questions that he kept answering, in various ways, during the entire talk.

1. Why does Munger succeed when other fund managers fail?
2. What is the most productive investing attitude?
3. What should you do to be happy in your life?
4. What’s out there now to buy?
5. How did you find your circle of competence?

iii) Why does Munger succeed when other fund managers fail?

Charlie began with a story about an investing company with lots of bright people working there, so they decided to take the best investing idea from each person and invest in all of them. They figured, with so many bright ideas, the company would surely beat the index that year. Nope. Totally failed. They tried the same strategy the next year, investing in all of the best ideas from around the company. Nope. Totally failed.

Why? Charlie thought it was common sense. The reason, Charlie informed us, is that the investing company chose to invest in too many ideas. They diversified themselves into being unable to beat the index, because they essentially became the index.

Berkshire has done better than the average, he explained, because they used the opposite strategy. “We tried to do less,” he added. They never presumed to acquire really useful information on all subjects like Jim Cramer pretends to have. (Ha! The multiple Jim Cramer burns were giving me life during this talk.) I’m sure Charlie knows that Jim Cramer does not do, and isn’t trying to do, long-term value investing. Cramer’s goals are very different from Charlie’s, and his focus (at least from what I understand – I don’t watch him!) is on entertainment and speculation, rather than long-term investing.

The big headline out of his talk was: “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.”

Charlie’s major point is: don’t expect to know about everything. Don’t expect to even know a LOT of things. Know about a few things really well. He went on: he and Warren always realized that if they worked very hard, they could find a FEW things on which they were right. And the few things were enough, and knowing about those few things was a reasonable expectation. That is a very different way to approach the process. If that company had asked Warren Buffett “give me your best idea this year” and had followed his best idea and only that idea, it would have worked beautifully.

Charlie keeps ragging on people who try to beat the index, when he himself tries, and succeeds, because the diversification they use is counterproductive, and he wants us all to sit up and take notice so we don’t make that same mistake. “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,” he announced. “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?”

I want to be more like Charlie.

“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?“

iv) What is the most productive investing attitude?

Charlie reminded us, over and over, that not many great investment opportunities come along in a lifetime, but when they do arrive, you have to seize them. Something I try to keep in mind not only for investing, but for life in general. People who act as if they have an endless supply of opportunities, he warned, are the equivalent of a racetrack tout, pretending they know things they don’t know. It’s not a good way to live life.

I find his reminder incredibly reassuring. Which is probably not a typical reaction, with everyone looking for regular opportunities and worried they’re going to miss one. FOMO is real. Charlie himself lamented missing an investment opportunity in the 70s which clearly still rankles, as he said it would have doubled his net worth. I often feel, though, that others have all these investing ideas and I have very few or none, and that makes me feel inadequate. It’s a voice telling me “look, you’ve been working hard and still, you’re at square one. You’re always going to be behind.”

It’s an interesting thing, coming into this investing world. I’m at the point, after a few years, where sometimes I feel like I know a lot, and other times like I know nothing at all. Both are true, of course. My challenge is to, internally, not take either one too seriously. Stay playful with the feelings that come up.

The other day, I almost fell down the rabbit hole of feeling terribly about my own inexperience. A dear friend came over the other day. She used to work in investments. I was deep in my obsession with Charlie Munger’s talk and then my subsequent wanderings into a very old interview with Mohnish Pabrai and then a recent one with Steve Eisman (more to come about those in future issues!), and when she came over I was watching the beginning of the movie The Big Short to remember exactly what Steve Eisman did before the financial crisis. I was beyond enthusiastic.

“Steve Eisman says that the financial system probably won’t collapse in the next year or two, which is opposite to what pretty much everyone else is saying,” I recapped for her. “And I watched an interview with him, and he’s short Tesla! And BYD is pretty much the Chinese Tesla, have you heard of BYD?”

She half-smiled and nodded, wearily. “Oh yeah, BYD.”

“Oh, you’ve heard of it. Well of course you have.” It suddenly entered my mind everyone who’s been around Buffett and Munger has probably heard of BYD and invested in it back when they invested in 2008. “Well, this was the first I’ve heard of it. I’m new to this!”

She nodded. We moved on.

I immediately thought, somewhat ashamed of myself: Oh, everyone else caught onto this company ten years ago. I’m too late. It will take me too long to review. I’ve missed the boat.

I knew I had the wrong mindset as soon as I finished the thought. It’s a dangerous way of thinking, and could lead me to be less informed, experienced, and prepared than I need to be as a good value investor. Of course it’s possible that I’ve missed the boat on that company, and its price is at or more than its value by now. So what? There’s no promise that it won’t come down. If it does, and if it’s on my Wish List, I’d need to be ready.

The exchange rattled me a little, but I was proud of myself. I had immediately leaned on my practice and remembered I’m always a beginner. I’m never going to know everything. And timing things is simply not part of what I’m trying to do. So a lot of people discovered BYD years ago. That’s great information for me to have as I’m discovering it now. I can only ever be exactly where I am. If I try to be anything or anyone else, I will stumble.

So Charlie saying, hey, don’t worry about missing the boat, makes me feel a lot better. He said that it’s amazing how intelligent it is to spend some time just sitting, not actively investing. A lot of people are way TOO ACTIVE.

“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,” Charlie shrugged. “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.”

v) What should you do to be happy in your life?

Mozart, according to Charlie, always overspent his income and was full of jealousies and resentments, and died young. If you want to have an unhappy life, like Mozart, spend more than you make and keep jealousies and resentments going. If you don’t, let them go. Charlie believes that controlling costs and living simply are the secrets to his wealth. He and Warren always underspent their incomes and invested and if you do that and live long enough, you end up rich. It’s not very complicated.

Charlie noted that he was born with that attitude toward money. I, however, have only recently adjusted my mindset away from immediate gratification and towards investing, and I’m starting to feel the joy of his conservative attitude. It feels secure, and safe. Reliable. Like I have a secret stash. And also…sometimes I let myself spend a little, with consciousness that I’m taking that money out of my investing account. What’s the point of life if not to enjoy the finer things?

As for the jealousies and resentments, which he mentioned multiple times disdainfully, there’s always someone who achieves more than you. Charlie’s attitude is “so what?”

vi) What’s out there now to buy?

It’s been very hard to find companies to buy. “If you’re having trouble at the present time with anything, join the club.” Where, generally, to look? Charlie says China, because the great companies in China are cheaper than those in the US. There was a question about Chinese companies stealing intellectual property and how reliable investing in such companies is, and Charlie’s response was that it’s typical of a developing country and we’re fooling ourselves if we think American companies didn’t at one time steal intellectual property.

Does that make me more confident in a Chinese investment, because it ALSO used to happen in the US? No. I think his point here is that it’s just something to be expected. However, I think it’s important to note, with all of his comments on China and Chinese companies, that he does not invest in China directly himself, he does so through a trusted Chinese intermediary, Li Lu. That’s a huge difference between how Charlie’s protected and his information asymmetry with his Chinese investments from how I would be protected and my, much larger, information asymmetry from my Chinese investments.

vii) How did you find your circle of competence?

Charlie closed the meeting with this gem about the special expertise we each have, which he and Buffett call circle of competence. “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.”

In sum:

• It’s not an expertise if you don’t know where your expertise ends.
• Because of that limit, investing opportunities are few.
• Take advantage of such opportunities when they come.
• Don’t try to do more than that.

Perfect.

After the meeting, he gave an interview to Becky Quick on CNBC. Considering last week’s issue and how much I went off on Jeff Bezos, I have to reprint the portion in which he and Becky discuss the man himself.

BECKY QUICK: Let’s go back to Amazon and the growth that you’ve seen there. I know in the past that you’ve said–
CHARLIE MUNGER: It’s incredible what they’ve done.
BECKY QUICK: Yeah. And you’ve called Bezos ‘ferociously smart’–
CHARLIE MUNGER: Yes.
BECKY QUICK: What do you think about the prospects for Amazon longer term? There– there are some movements in Washington that push back against him, whether it’s because he’s the owner of The Washington Post or whether it’s just– one company getting too big and– and regulators worrying about that.
CHARLIE MUNGER: My guess is he still has a long ways to go. Up.
BECKY QUICK: You’re a lawyer, too. He–
CHARLIE MUNGER: Was.
BECKY QUICK: Well, once a lawyer always a lawyer, correct?
CHARLIE MUNGER: Not really. That was a long time ago.
BECKY QUICK: What do you think about his move that he’s made recently with the the owner of The Enquirer to say, ‘Look,’ he just came out and said, ‘They’re blackmailing me. They’re extorting me.'”
CHARLIE MUNGER: Well, I admire people who simply confront problems head-on. And so I have no quarrel with his confronting The National Enquirer. But I regard it as a little nothing place that the world would be– could well do without. And so– and to the extent they’ve behaved badly, and he’s objecting vigorously– I’m all for it.

Charlie’s also watching Bezos with an approving eye. I feel a bit vindicated!