Daily Journal Meeting 2017

This Year's Daily Journal meeting contained lots of wit and wisdom from Charlie Munger, Warren Buffett's partner.  He's got a cracking sense of humour at 93 years young.  

Some of the more interesting comments Mr Munger made where around the evolution of Warren Buffett as an investor.   Buffett has recently purchased positions in airlines and Apple, two things he would never have done in the past given his dislike of the airline industry and his lack of understanding of tech.

Mr Munger also detailed the need for multi-disciplinary thinking, his thoughts on diversification and the need to rely on quality people.

Here are the key points from the meeting ..

On Picking Managers ..

“We are doing something that’s quite difficult. We are judging people because we don’t understand what the people do. And that’s what Andrew Carnegie did. He didn’t know anything about making steel, but he knew a lot about judging whether the people he was trusting making steel were any good at it.  And of course that’s what Berkshire’s done, if you stop to think about it.  We have a lot of businesses in Berkshire that neither Warren or I could tell you much about, but we’ve been pretty good at judging which people are capable of running those businesses” 

 

On Capex …

“If it makes sense over the long term we just don’t give a damn what it looks like over the short term”

On Wells Fargo ..

“They made a business judgement that was wrong. They got so caught up in cross-selling and so forth, they got incentive systems so aggressive that some people reacted badly and did things they shouldn’t.  And then they used some misjudgement in reacting to the trouble they got in.  I don’t think there is anything fundamentally wrong for the long haul with Wells Fargo.  They made a mistake and it was an easy mistake to make”

“I don’t regard getting the incentives a little aggressive at Wells Fargo as the mistake , I think the mistake was when the bad news came they didn’t recognise it.” 

“I don’t think it impairs the future of Wells Fargo, in fact I think they’ll be better for it.  One nice thing about doing something dumb is you probably won’t do it again”

On choosing what to do in life ..

“In terms of picking what to do .. In my whole I life I’ve never succeeded much in what I wasn’t interested in.  So I don’t think your going to succeed if what you’re doing all day doesn’t interest you.  You’ve got to find something your interested in because it’s to much to expect from human nature that your going to be good as something you deeply dislike doing. That’s one big issue.  And of course you have to play in a game where you’ve got some unusual talents. If your 5 foot one you do not want to play basket ball against a guy that’s 8 foot 3.”

About Amex/Payments Systems…

“If you think you understand exactly what’s going to happen to payments systems ten years out, your probably under some state of delusion. It’s very hard to know. They are doing the best they can, they have some huge advantages.  It’s a reasonable bet, but nobody knows...  I don’t think those things are knowable, think about how fast they change.”

On multi-disciplinary learning…

“You have to know the big ideas in all the disciplines to be safe if you have a life lived outside a cave”

“Frequently the problem in front of you is solvable if you reach outside the discipline. The idea is just over the fence. But if you’re trained to stay within the fence you won’t find it.  I’ve done that so much of my life, it’s almost embarrassing.  It makes me seem arrogant because I will frequently reach into the other guys discipline and come up with an idea he misses.. I do not observe professional boundaries”

 On Buffett changing..

“If you’re in a game and your passionate about learning more all the time and getting better and honing your skills etc, of course you get better over time and some people are better at that than others.   It’s amazing what Warren has done.  Berkshire would be a very modest company now if Warren never learned anything...  But what really happened was we went out into fields like buying whole businesses and bought into things like Iscar that Warren never would have bought. 

Ben Graham would never had bought Iscar.  We paid 5X book for Iscar and it wasn’t in the Graham play.  And Warren learned under Graham, he just learned better over time. And I’ve learned better.  The nice thing about the game is you can keep learning. And were still doing that.

Imagine, we’re in the press now for all of sudden buying airline stocks.   What had we said about the airline business.  We thought it was a joke it was such a terrible business.  Now if you put all those stocks together we own one minor airline.  We did the same thing in railroads, we said railroads were no damn good. Too many of them and truck competition, and we were right for about 80 years. Finally they get down to four main railroads and it was a better business. And something similar is happening in the airline business”

On Investing now and the need for change …

“It’s got harder and harder, now we get little edges when before we had golden cinches.  We don’t make the same returns we made when we could pick this low hanging fruit”

“Warren bought Exxon as a cash substitute.  He would never have done that in the old days.  We have a lot of cash and we thought it was better than cash over the short term.   That’s a different kind of thinking from the way Warren came up.  He’s changed. He’s changed when he buys airlines and Apple.  Think of the hooey we’ve done over the years over high tech as outside our competency and the worst business in the world is airlines.  And we now appear in the press with Apple and a bunch of airlines. I don’t think we’ve gone crazy, I think we’re adapting reasonably to a business that has got a lot more difficult.  I don’t think we have a cinch due to those positions, I think we have the odds a little bit in our favour.  And if that’s the best advantage we can get we’ll have to live with it”

On Indexing with a small index …

“When you have a small index and it gets popular it’s a self defeating situation.  When the nifty fifty were all the rage, JP Morgan talked everybody into buying these 50 stocks.  They didn’t care what price the stocks were they just bought those 50 stocks. In time they forced up the stocks to 60X where upon it broke down and everything went down by 2/3rds quite fast. If you get too much faddishness in one sector or one narrow index of course you can get catastrophic changes like they had with the nifty fifty era”

On funds management and big decisions ..

“The prices for managing really big sums of money are going down down down.  20 basis points and so on.  The people who rose in investment management didn’t do it getting paid 20 basis points.  I would hate to manage a trillion dollars in big stocks and try and beat the indexes, I don’t think I could do it.  In fact if you look at Berkshire and take out 100 decisions, which is 2 a year, the success of Berkshire came from 2 decisions a year for fifty years.  We may have beaten the indexes but we didn’t do it by having big portfolios of securities and having subdivisions managing the drugs etc”

On Books ..

“I just read this new book by Thorp, the guy who beat the dealer in Las Vegas.. then he did computer algorithmic trading.  I really liked the book, I recommend Thorp’s new book”

Destroying old ideas …

"I’m very busy destroying bad ideas.  I actually like it when I destroy a bad idea. I know so many people whose main problem in life is that old ideas displace the entry of new ideas that are better.  That is the absolute standard outcome in life.  There is an old German folksaying “we’re too soon old and too late smart”. That’s everybody’s problem”

“It’s a very important habit getting rid of the dumb ideas.  Everytime I get rid of a much beloved idea I pat myself on the back.  The price we pay for being able to accept a new idea is awesomely large”

Ideas …

“A few good ideas is all you need. And when you find the few of course you have to act aggressively.  That’s the Munger system.  You’re not going to find a million good ideas.”

On Valeant..

“Interesting thing is how many high grade people it took in. It was too good to be true.  There was a lot wrong with Valeant.  It was so aggressive and it was drugs people needed…  I don’t think capitalism requires you to make all the money you can.  I think there times when you should be satisfied with less.  Valeant looked at it like a game of chess, they didn’t think of any human consequences.  They just stepped way over the line and in the end of course they were cheating”

On diversification..

“Am I comfortable with a non-diversified portfolio.  I care about the Mungers.  The Munger’s have three stocks.  We have a block of Berkshire, a block of Costco, a block of LiLu’s fund and the rest is dribs and drabs…  Am I comfortable? Am I securely rich? Your damn right I am… Is three stocks enough? What is the chances that CostCo is going to fail?, Berkshire is going to fail? What are the chances LiLu’s portfolio in China’s going to fail.   Chances of any one is almost zero.”

“I’ve never for one moment believed this boulder-dash they teach about wide diversification. If you are a no-nothing investor of course you should own the average.  If your capable of figuring out something that will work better you’re just hurting yourself looking for 50, when three will suffice, one will suffice if you do it right.  Once cinch, what else do you need in life..  To think we are teaching these professors to teach this crap to our young.  People are getting paid for teaching boulder-dash”

On Banks and the investment in Irish bank investment in 2008..

“That was a mistake we shouldn’t have made.    Both Warren and I know you can’t really trust any of the numbers put out by the banking industry.  People who run banks are subject to enormous temptations.  It’s easy to make a bank report more earnings.   Even if you are really good at something, you can drift into a dumb mistake.”

On India..

“India is grossly defective because they have taken the worst elements of our culture.  They forged their own chains and put them on themselves. I do not like the prospects of India compared to the prospects of China”

 On market declines..

“I regard it as a part of manhood.  If you’re going to be in this game for the long haul which is the way to do it.  You better be able to handle a 50% decline without fussing too much.  Conduct your life so you can handle a 50% decline with aplomb and grace. Don’t try to avoid it.  It will come.  And if it doesn’t come I’d say your not being aggressive enough”. 

On China..

“What I like about China is they have some companies that are very strong and still selling at low prices.  The Chinese are formidable workers and they make wonderful employees and there is a lot of strength in that system.  The Chinese government helps its businesses, it does not behave like the government of India which doesn’t help its businesses at all. That’s what I like about China.  I have to admire taking up a billion and a half people in poverty that fast,  that was never done in the history of the world.  What they have done is just an incredible achievement.  They have taken a poor nation and saved half their income when they are poor.  It was unbelievably admirable and effective”

“Chinese people only have one problem, they believe in luck.  That is stupid.  Your want to believe in odds.  Some reason in the culture too many people believe in luck and gamble.  That’s a national defect”

On adversity..

“The idea that life is a series of adversities and each one is an opportunity to behave well instead of badly is a very very good idea”

On Manager fees..

“If your advising other people you oughta be pretty rich pretty soon.  Why would I take a lot of advice from somebody who couldn’t himself get pretty rich pretty soon.  And if you’re pretty rich why shouldn’t you put your money alongside your investors and go up and down with them.  And if it’s a bad stretch why should you scrape money of the top when they are going down a notch.  I like the Buffett system.”

On being rational ..

 “Rationality is a moral duty.  If your capable of being reasonable it’s a moral failure to be unreasonable when you have the capacity to be reasonable”

 On Complex systems..

“If your dealing with a complex system, the rules of thumb that worked in the complex system in year 1 may not work in year 40.  The laws of physics you can count on, but the rules of thumb in a complex civilisation changes.  Who would want to live in a state of sameness, you may as well be dead”