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

34. DJCO Annual Meeting 2016 – Final Part VII – Lesson 31-35

… continue from previous article ….

Lesson 30: Avoiding Areas Outside Your Circle Of Competence Can pave Way For Other Passions

Lesson 31: Beware Of Sleazy Financial Activities. Large amounts of easy money cause regrettable human behavior.

Question: Could you publish a personal book list of the books in your library?

Answer: I don’t want to be a book recommender.  (laughter)  It would be quite time consuming.  So I’m afraid you’ll have to (ask another question).

Question: A lot of people here have the ability to do well, but they don’t have the opportunity to meet the right people.  Ronald Burkle credits you with give him credibility when he was starting to acquire grocery stores at age 30.  Who was your mutual acquaintance and how was Ron Burkle able to meet you in the early 1980s.

Answer: In those days, we (Berkshire Hathaway) had a lot of declining businesses and one of them was trading stamps.  And our last big trading stamp customer was the company that Ron Burkle’s father controlled.  And that’s where I met Ron Burkle.  It was an attempt to preserve that customer.  The last customer we had.  And in due course I failed.  Ron Burkle on the other hand left that occasion and did nothing but succeed.  So maybe you should ask him.

Question: What’s your view on the Unicorn companies like Airbnb, Uber, etc.  Do you think those companies have such high valuations can ever go public?

Answer: Well, my attitude is that I have a circle of competence.  And that does not include correctly predicting which new companies in Silicon Valley, or dependent on Silicon Valley, are going to succeed.  So I tend to avoid the subject entirely.  I’ve paved my way in other passions.  However I will comment on one thing.  Manipulated Finance.

As these venture capitalists, who are part of the finance industry, the constructive ones.  These are the people who make their living more honorable than the rest of the people in finance because they’re actually allocating capital to new businesses.  So the venture capitalists are useful members of finance.  But they don’t escape their share of sin.  What they’ve gotten in the habit of doing is creating these rounds of financing.  And each new one is at a higher value.  But they just sneak a little clause in saying, that nobody who previously bought into the venture gets anything until the new guys are preferred.  Well that is sort of like a ponzi scheme.  It’s a disgusting, tricky, dishonorable thing to do.  Particularly since it’s obscured.  And of course it’s being deliberately obscured.

So even our most reputable part of finance has dirty sleazy activities creeping in.  Large amounts of easy money cause regrettable human behavior.  That’s Munger’s rule.

Lesson 32: Fundamental Value Investing Will Never Go Out Of Style – It’s Mathematical

Question: Apparently the environment that we invest in today is very different from when you started.  With high frequency trading, momentum trading, and all of that, do you think that fundamental value investing is losing relevance?

Answer: I don’t think that fundamental value investing will ever be irrelevant because of course to succeed in investing you have to buy things for less than they’re worth instead of more than they’re worth.  You have to be smarter than the market.  That will never go out of style.  I mean that is like arithmetic it’s always going to be with us.

Now as far as high frequency trading, that is a complicated subject.  I think that high frequency traders of the world, many of whom are personally admirably and honorable people, I think they have all made contributions to the American economy like a bunch of rats do in a granary. (laughter) They’re just sucking some of the resources out for themselves while contributing nothing to the civilization.

Lesson 33: What Kind Of Person Shall I Be? Be The Kind Of People, Other People Name In Their Will To Raise Their children If They Die Unexpectedly.

Question: Do you have a specific approach to spending quality time with your family?

Answer: Well, I don’t think I want to (promote) myself as some wonderful example of family life.  I did the best I could…

Question: Do you think that Coach Nick Saben shares qualities with Sam Walton?

Answer: I don’t know anything about Coaching.  I’m better at Ballet.

Question: Could you name a few people in history that you admire?

Answer: Well of course there’s a lot of historical people that I admire.  One of the advantages of being a reader is that you can consort with some of the best people who have ever lived.  So that’s what I do with a lot of my time.  But I admire a lot of people, take surgeons who get way the hell better than other surgeons…or take some actor who gets to be the best actor in the world, and moves and entertains a lot of people.  And there are a lot of people who are constructive, intelligence, generous and improve the world for the rest of us.  And there are a lot of people who are good examples.  And I spent some time, because he was on the Costco board for a long time, with Dan Evans who was Senator and Governor in the state of Washington.  Generally admirable, sensible, high-grade, politician.  There’s so few politicians like Dan Evans.

But when you do find a Dan Evans you really admire him and like him.  And I think there will always be admirable people.  That’s what we all want to be.  We all want to be admirable.  What you want to be is the kind of people, other people name in their will to raise their children if they die unexpectedly.  When a lot of people are doing that, you’ll know you’re doing something right.  People are very shrewd about guessing who will be good at raising their children.

Lesson 34: Well generally I’ve avoided circumstances which automatically cause people fear. “If at first you don’t succeed, well, so much for hang gliding.”

Question: When you were an attorney, you sold your most important client an hour a day.  And I’m guessing that you spent that time reading and thinking, or did you do some other activity for an hour.

Answer: No, no, that was the most important client, myself, you’re right about that.  It was reading and thinking.  The beauty of doing a lot of reading and thinking is that if you’re good at it, you don’t have to do much else.

Question: Question about fear.  I was once given the advice that it’s really important to conquer fear.  Could you speak to your relationship with fear and whether you’ve conquered it.

Answer: Well generally I’ve avoided circumstances which automatically cause people fear.  My son Philip is in the audience.  When he was young, he had a saying, he would say, “If at first you don’t succeed, well, so much for hang gliding.” (laughter)  And so I don’t seek out fear to get thrills.  I don’t even seek out the appearance of fear when it’s really safe.  Generally I’m not a big lover of danger or even the appearance of danger.  So that’s not my thing.  I don’t think I’ve felt much fear for a long time.  I’ve just lived a long time.  I had fears when I was younger, but they gradually melted away.

Lesson 35: Sweetened beverages sales including full sugar Coke are declining but that doesn’t mean Coca-Cola company is going the same path. But it’s no longer like shooting fish in a barrel.

Question: Question about Coke.  Sweetened beverages are on the decline.  Does Berkshire’s ownership give Coke some leeway about addressing the declining nature of their business?

Answer: Well, that’s an easy one.  Coke for many decades, the basic product, full sugar Coke, grew every year.  It was like the inevitable march of time.  In recent years, full sugar coke is declining.  Now fortunately the Coca-Cola company has amassed distribution infrastructure business in a lot of other products.  Coca-Cola as an individual product is declining some, instead of going up the way it always did before.  The rest of the businesses are on average rising.  So I think Coke is still a pretty strong company and it will be a respectable investment.  But it’s not like it use to be when it was like shooting fish in a barrel.