Charlie Munger's 3 Categories of Investment: In, Out & Too Tough

31. DJCO Annual Meeting 2016 – Part IV: Lesson 13-18

Lesson 13: A Cynical Banker Is A Good Banker

Question: Question regarding  Daily Journal and its purchase of Wells Fargo stock.  Wells Fargo was a levered institution and you bought it at a time when banks were failing.  How did you arrive at that decision?

Answer: Well that’s a good question.  I’ll take you back to one time before.   When Berkshire bought Wells Fargo, the world was coming unglued in banking panic, and again real estate lending had been the source of it.  And Wells Fargo had been huge in real estate lending…  But the answer was, we knew that the lending officers at Wells Fargo were not normal bank lending officers.  They had come up, a lot of them, from the garment district, and they had this cynical view of human life.  They were appropriate careful.  And when they needed to intervene strongly they did so because they learned that was the right way to run a garment lending business.   And they were just better.  And so we knew they weren’t going to lose as much money as everybody thought they were with that big real estate portfolio.  Because they had chosen it better and they had managed it better, etc. etc.  So we had an information advantage just based on general thinking and collecting data…We were aware that they had that special capacity.  Well that gave us a big advantage so we bought heavily.  That was one.

Now number two; the Daily Journal Company.  When the world was coming unglued when the Daily Journal bought Wells Fargo stock.  But we again, we knew that the bankers at Wells Fargo were more rational than ordinary bankers.  It was a different kind of superiority and rationality.  It wasn’t this big real estate portfolio on a shrewd way of handling developers.   But it was still a shrewder way of being in banking.

I don’t think anybody could ever buy a bank who doesn’t having a feeling for how really shrewd the management is.  Banking is a field where it’s easy to delude yourself into reporting big numbers that aren’t really being earned.  It’s a very dangerous place for an investor.  Without deep insight into banking, you should (avoid it).

Lesson 14: Have Powerful Mental Models and Multi-Disciplinary Approach But Don’t Be A Chiropodist Who’s Trying To Be A Poet

Question: Two powerful mental models are the concept of specialization, and the multi-disciplinary approach.  Do you have any advice on synthesizing them?

Answer: Saying you’re in favor of synthesis is like saying you’re in favor of reality.  Synthesis is reality because we live in a world with multiple factors and models.  And of course you’ve got to have synthesis to understand a situation when two factors are intertwined.  So of course you want to be good at synthesis.  And it’s easy to say that you want to be good at synthesis, but it’s not what the reward system of the world pays for.  They want extreme specialization.  And by the way, for most people, extreme specialization is the way to succeed.  Most people are way better off being a chiropodist than trying to understand a little bit of all the disciplines.  I don’t want a chiropodist who’s trying to be a poet.  I want somebody who really knows a lot about feet.  And the rest of the world is that way.  And so this model of being good at synthesis across a lot of disciplines it’s very helpful to some people.  But it’s not the correct career advice for most people.  For most people the correct career advice is figure out some clever specialty and get very, very good at it.  The trouble of it is, is if that’s all you do, you make terrible mistakes everywhere else.

So synthesis should be your second attack on the world.  And it’s really defensive.  Without synthesis, you’ll be blindsided in all the other parts of your life that aren’t “chiropity”.

Lesson 15: Be Rational, Start Young At It

Lesson 16: No Self-Pity, Even If You Have Cancer

Question: What advice could you give for a person to improve their own rationality.

Answer: Well start working at it young and keep doing it until you’re as old as I am.  That’s a very good idea, and it’s a lot of fun.  Particularly if you’re good at it.  I can hardly think of anything that’s more fun.

You don’t have to be the Emperor of Japan to get fun out of rationality.  If you can avoid a lot of hopeless messes and you can help other people (avoid) a lot of their messes, you can be a very constructive citizen.  If you’re always rational.

Being rational means that you avoid certain things, it’s like “I don’t want to go where I’m going to die.”  I don’t want to go where the standard result is awful.  Where is the standard result awful?  Try anger.  Try resentment.  Try jealousy.  Envy.  All of these things are just one way tickets to hell.  And yet some people just wallow in them.  And of course, it’s a total disaster for them and everybody around them.

Another one that is just awful is self-pity.  If you’re dying of cancer, don’t feel sorry for yourself.  Just chin up, and suck it up.  Self-pity is not going to improve anything, including (cancer).  Self pity is just…forget about it.  Get it out of your repertoire.

Lesson 17: Marriage Is The Best Practical Alternative and Don’t Lose Family Values

Question: Some people have not found the ROI on marriage to be worth it.  What’s your valuation on the investment of marriage.

Answer: Well, I think different folks can live in different ways, but I think all the evidence is that marriage is the best practical alternative for most people.  And the statistics show it.  They live longer.  When you measure happiness, physiologically and so forth.  Considering how difficult the world is, it’s your best chance for most people.  And of course it should be valued.

That’s one of the things I like about the Asian cultures.  The Confusion idea that the family is really important.  It’s a very sound idea.  If we ever lost the family values, we’d have one hell of a lousy civilization.

Question: Happy belated 29th birthday.

Answer: Yes.  Very belated.

Lesson 18: But we don’t mind owning real estate, it’s part of the business.  And it simplifies life. [Sic – Depending On The Situation]

Question: Why purchase real estate in Utah, rather than deploying it in the technology business?

Answer: We think we’re going to be in Logan, Utah for a long time.  We have a very happy bunch of employees there.  They like their work, they like their community, they like everything about it.  And it’s part of a business operation.  We’ve got customers who come there and it’s a very presentable building.  I’ve never seen it, but it’s got a river that flows by.  Of course we’re glad to own it.  We own this real estate.  We bought it cheaply, we built it cheaply, it’s a nice piece of property.  The neighborhood around it has steadily upgraded and gentrified it as we expected.  Nothing wrong with owning a little real estate.  Our way of getting ahead was not to be real estate operators.  But we don’t mind owning real estate, it’s part of the business.  And it simplifies life.