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

44. DJCO Annual Meeting 2017: Part 4: Lessons 19-24 From The Maestro

Ref: Adam Blum’s Notes

Lesson 19: Destroy Your Own Bad Idea & Don’t Be ‘Too Soon Old And Too Late Smart.’

Ideas he destroyed: “I’ve done so many dumb things – I am busy destroying bad ideas because I keep having them. But I like it. It is my duty. So many people’s main problem is letting old ideas displace new, better ideas. It’s like the German saying, ‘too soon old and too late smart.’ It may be a good thing in marriage but is not a good thing in most fields. It is a good habit and big advantage in life since others are so bad at it – as they spout the bad ideas out, they’re pounding them in. All the person is really convincing is oneself. I don’t spend much time telling the world how to run things I think I can run better like the Federal Reserve, because I know all I’m doing is pounding the ideas into my head and not into others’ heads when I do that.

Young people who are violently convinced of anything is very bad. Some 17-year-old abortion nut or foreign policy crazy is just pounding dumb ideas into his own head, which is bad when he has so much to learn. I pat myself on the back when I get rid of a bad idea. If someone won’t pat me on the back, then sometimes you need to do it yourself, and sometimes several times. The price we pay for [not] being able to accept new ideas is awesomely large – some people die for it.

Lesson 20: Polymath Is Not For Everyone

Responding to an oil and gas question about specialization: “You petroleum people have to get more specialized, because oil is harder to get. We generally have to get more specialized as a people. I am not the example. If you want to get rich like I did, knowing a little bit about a hell of a lot, I don’t recommend it. It’s like the story of the man who goes to see Mozart and says that people think the man is too young to compose symphonies, and the man is asking Mozart for help, because Mozart composed symphonies at age 20. Mozart says ‘but I wasn’t running around asking others how to do it.’ I don’t encourage people to follow my path. If I need a proctologist, I don’t want one who knows Schopenhauer or astrophysics. I want one who specializes. On the other hand, a life devoted solely to proctology isn’t much of a life.”

Lesson 21: A few bets are all you need, but when you find the few, act aggressively.

A question about where to invest small sums since Munger has said in the past he could make 50% with smaller amounts of money: “This guy really wants to learn how to get rich at a rapid rate with specifics. That’s not what we do here. We leave mystery so you can find your own way. A few bets are all you need, but when you find the few, act aggressively.

My mother’s maternal grandfather was an Iowa pioneer who fought in wars. After hardship, he rose to be the richest man in town and owned the bank. He had just a few opportunities that he got that allowed him to be prosperous. He couldn’t lose money leasing a farm to a German in Iowa. Today these people with computer algorithms – it’s not that honorable to outsmart the trading system leeching off the rest of the traders. They have the social utility of rats in a granary. They make money but not by waiting for the precious few opportunities, so they must be very generous, because they have a lot to atone for.”

Lesson 22:  Do the job well that life gives you.

What’s your favorite industry? “My favorite industry is taking care of my own affairs. It’s fun, creative, and it’s the job life gave me. Do the job well that life gives you. It’s hard to make money in a lot of industries because of wild enthusiasms that come into it, so I don’t have a favorite.”

Valeant: “I am worried about monkey business, but I don’t see anything today as extreme as Valeant. That was really something. You people come so far to the cult. I probably shouldn’t have done it [criticize Valeant last year], but I just strayed into it. It was really interesting how many high-grade people that took in. It was too good to be true and so aggressive. That they were messing with drugs people needed. Daily Journal had 80% of the foreclosure notice business during the downturn, and we could’ve raised prices when all these people were losing their houses. The idea that in middle of that bust, we’d just make all the money we could, we just didn’t do it. Capitalism is about being satisfied with less and acting with decency. Valeant was like a zero sum chess match, not reality. All they wanted was money and glory. They didn’t think about anything with decency and stepped way over line. I don’t have a new example like Valeant to share. That one got a lot of publicity out of this meeting. I don’t want this room to have twice as many people in it next year, and I don’t want me not to be here either.”

Lesson 23: Diversification is for people who don’t know anything

Diversification: “Am I comfortable investing in just three stocks? Of course. I care about the Mungers. The Mungers own Berkshire, Costco, and a stake Li Lu’s fund. The rest of our stuff is dribs and drabs. What are the chances that one of these three will fail? Almost zero. That all three will fail? None. When I started thinking about investing what my piddly savings would be as a lawyer, I did some algebra and found that if I had comfort that I could achieve a 10% advantage over the performance of stocks broadly, I didn’t need much diversification if I was gonna do it for 40 years and hold each position for three or four years, average. Diversification is for people who don’t know anything – by definition, they  just do the average. One name is enough. Paying these professors to teach this crap to our young – the know-nothings just do the average. These professors are paid for dispensing balderdash in corporate finance departments at universities. It helps in the market if other people believe balderdash and you know what the hell’s going on. If your uncle Horace has an immense and stable business that he’s leaving it to you, you don’t need any professors, you just take the damn business. When the market comes with an Uncle Horace, you step up with the pie cart. If you have one cinch, what else do you need in life? Imagine that I learned that from my dead great grandfather. From all the dead people, we can learn a lot, and they’re very convenient to reach. There’re no problems with transportation to visit with the dead. We make friends with eminent dead, and it is enormously helpful. Some of you wouldn’t have helped me, but Adam Smith did.”

Mistake Berkshire made investing in Irish banks in 2009: “You can’t trust figures put out by banking industry. It’s easy to report a little more earnings; the temptations are there. If you’re really good at something, you can lead others who believe in you astray. Ireland went crazy, and we did too in investing there. But this is an English-speaking country with no taxes. And a lot of charm. It was a backward place with a 60-year internal civil war, and the tax changes brought a lot of prosperity. Bill Gates and others were there early when the tax regime changed. They deserve credit for the way the no-tax system advanced the country. If all countries reduce taxes to suck in foreign investment, it won’t work, sure. But Ireland got ahead of it. The Irish are like Scottish – Gaelics are pretty unusual people, and I am very glad I had a Scotch-Irish great grandmother.”

On Lee Kuan Yew and comparison to India: “That’s a very intelligent question and not saying others weren’t – Yew was the best nation builder who ever lived. He took a Malarial swamp with no resources surrounded by a bunch of Muslims who hated him and literally spat out Singapore because they didn’t want the place. There were no assets and tons of corruption. And Yew created modern Singapore. No one has had success like it so fast. He gets a lot of credit for creating modern China. They saw that and said ‘the hell with this. We don’t care if the cat is black or white, we just care that it catches mice.’ Deng Xiaoping copied Yew. I have two busts of someone else in my house – Yew and Ben Franklin. Now, I would rather work with the Chinese than the Indians. The caste system, the overcrowding, there in India. It’s hard to get anything done, and they have taken the worst aspects of democracy that Yew avoided. India is a fabulous people, but the system of poverty and corruption and the crazy democratic thing where anyone who screams can stop all progress – it mires them. The steel giant Posco takes lousy iron and coal and uses it as an input – a province in India had a bunch of lousy iron and coal and agreed to supply Posco, and the contract was canceled because people protested and were screaming in the streets. India is grossly defective, because they took the worst aspects of our culture, allowing a bunch of idiots to scream and stop everything. And they copied it – Malaysia and China and Singapore would’ve done the Posco deal. India forged its own chains and put them on themselves.”

Lesson 24: To get wonderful people is like marriage.  The best way to get good spouse is to deserve one.

On the year 1974 where Wheeler, Munger lost 50%: “I don’t hear as well as I used to. What happened in 1974 when we lost 50% in 1 year? The market went down 40% that year. This has happened to me three times at Berkshire – losing 50% of value, and I regard this as part of my manhood. You better be in it for long pull and handle declines with aplomb and grace. If it doesn’t come, you’re not being aggressive enough.” “They think it’s their last chance.” (Charlie in response to zealous crowd, joking that it may be his last meeting.) On people: “We look smart, because we pick wonderful people. Gerry is not normal. He looks it but is a damn freak. He’s strong across two or three disciplines that are beyond human. He’s another Midwesterner. What is it that comes out of soil there? To get wonderful people is like marriage. The best way to get good spouse is to deserve one; our people make us look a lot better than we are. We have a first or second choice for who to hire, usually, and then it’s like off a cliff. Every search is ‘one is fine and everything else is pygmy.’ You’d tap dance to work too if you were around all these people who love winning. We were a little lucky, but we can’t give you any luck.”