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

63. Charlie Munger’s Pointer For The Day: DJCO 2013: Part 4 Pointer 19-24

https://www.facebook.com/groups/charliemungersays/
http://www.rbcpa.com/DJCO_Meeting_Detailed_Notes_2013.pdf

Pointer 19: Kipling said: Treat those two imposters just the same – success and failure.

Pointer 20: I think the tragedy in life is to be so timid that you don’t play hard enough so you have some reverses.

Shareholder: When Bell Rich Oil goes up 35 times, it’s pretty…I imagine myself have a lot of regret or debilitating. How does one recuperate from something like that? A big missed opportunity?

Munger: Yeah.

Shareholder: How does one recover from that? How do you end up not dwelling on that?

Munger: You know what Kipling said? Treat those two imposters just the same — success and failure. Of course, there’s going to be some failure in making the correct decisions. Nobody bets a thousand. I think it’s important to review your past stupidities so you are less likely to repeat them, but I’m not gnashing my teeth over it or suffering or enduring it. I regard it as perfectly normal to fail and make bad decisions. I think the tragedy in life is to be so timid that you don’t play hard enough so you have some reverses.

Pointer 21:  If You Are A Newspaper, Be Part Of The Warp and Woof Of The Community.

Shareholder: You commented on the challenges that the newspaper industry and other forms of print media. Can you comment on Berkshire’s investments in the newspaper industry as of late?

Munger: Well, sure. I’m glad to. The papers that have the best hands economically are the ones that have a real community acceptance, that are part of the warp and woof of the community, like in the small towns. Those are going down slower and are proving to be better investments than the big city dailies, with the expensive difficulty of carrying great heavy stuff through big cities and so on and so on.

That’s by and large what Berkshire is buying — the entrenched, small, local papers. We’re trying to buy them, and we don’t mind something that is declining. After all, everybody that buys an oil field is buying something he expects to decline in due course to zero. They just expect to make enough money out of it to compensate for the money they’re employing.

That’s the way we feel about most small newspapers. We think we’re very likely to get our money back with a modest rate of return at the worst. And the stuff we’re buying. The reason it’s available is other people just — the idea of a lousy investment. Doesn’t appeal to them. But — we like newspapers.

Who can tell? They have such a wonderful history and make such a wonderful contribution to civilization. I think if you buy them on the basis where you’re very unlikely to get hurt very much. We’ve got a system for managing a lot of very high-grade people, namely the world of people. Let us note. The people were buying you’re perfectly decent people who stay on, so we’re glad to buy newspapers.

But it’s not that newspapers have some fabulous growth, high growth future. Of course, they’re an object Pointer of the hazards of leverage if you get a big technical development that goes against you. When this alternative technology came in, it just destroyed capital values like you can’t believe. Even the New York Times — for which you’ll soon be paying four dollars or five dollars at an airport if you’re not already — has a pretty modest prospect. I think it will continue to make pretty good money as far ahead as you can see, but I don’t it’s going to gallop to the heavens or anything like that. There are very few New York Times, just in terms of that a niche, where people won’t four dollars or five dollars for it in an airport.

I think newspapers as economic entities have way worse prospects than they used to. Believe me, Berkshire’s not buying these things expecting some bonanza. I don’t think there’s any foreclosure boom to create a sudden ton of lovely money for all of Berkshire’s newspapers. It’s a decent investment and it’s responsible behavior. We have tons of money. It’s just costing us zero to borrow. I don’t think there’s anything useful to you in our newspaper purchases.

Pointer 22: If I thought that portfolio needed a lot of management, we wouldn’t be having it. [Value Management It Is 🙂 ]

Shareholder: Yeah. Two quick questions about the investment portfolio of Daily Journal. Who’s going to manage your investment portfolio when you’re not managing it?

And the second question is how come you’ve chosen not to tell us what’s in the investment portfolio?

Munger: Well, look. You can figure it out anyway, but we have a general attitude that, we will tell people what we hold and why we do it, because we don’t want to buy more. We don’t want to sell. We don’t want to be talking about our investments any more than we have to. Berkshire does the same thing. You shouldn’t be surprised. End of the day, it is not…If I thought that portfolio needed a lot of management, we wouldn’t be having it. Like B. B. Robinson’s mom said, “Don’t drink.” That portfolio’s likely to do well when all of us are dead.

Pointer 23: We remember the mistake we made in the hope of not repeating it.

Shareholder: In spite of your comment about not knowing who competes with BYD employees, can you share or do you have to respect the manufacturing …

Munger: Manufacturing what?

Shareholder: Just the manufacturing industry in this country.

Munger: Well, of course, manufacturing has gotten way more competition than it used to have — a lot of it from China. It’s been devastating. One of Berkshire’s greatest mistakes was when we gave two percent of Berkshire for a wonderful shoe business in Maine, which was the wonderful, most trusted supplier of J. C. Penney and so on and so Basically I would say we gave two percent of Berkshire. What we got was hardly anything. It was a big mistake. On the other hand, it just impaired Berkshire’s performance by two percent once in one year out of many, so while we remember the mistake we made in the hope of not repeating it. In the hope of not repeating it, it wasn’t that they could deal in terms of the outcome, even though it was a true opportunity cost loss was enormous.

Berkshire got clobbered on a Chinese competition in shoes. Chinese had armies of young people engaged in subsistence agriculture. They were disciplined, organized young people. Sort of a Confucian family ethic and so on. They’re not a crazy bunch of hippies. They came into these factories and they learned rapidly how to do a lot of complicated stuff. The Chinese are very entrepreneurial. For years, they were called the Jews of the Orient. That was a compliment to both people. You take these people who’ve been hobbled by crazy rulers and a Malthusian trap where they had to just keep working like a goat just to stay alive in terms of calories. And unleash them on modern capitalism. You’ve got a very powerful force.

Of course, that’s an interesting force. It’s not easy to make a lot of money in China, just because you have that one insight. After all, all kinds of crazy things can happen. China has its fair share of corruption. It takes talent to do well, but there are powerful forces there that were operating, and that are operating. I don’t think, BYD, anyplace else in the world could have done what it did. To go from no capital and no knowledge, except basic engineering, not related to automobiles. To go from no cars to 600,000 cars a year, I don’t they could have done it any place on earth except China. For the right kind of an operator, China creates some remarkable opportunities. But of course, there are never enough of what I call the right kind of an operator. I don’t think Wang Chuanfu hardly ever has worked a week that doesn’t have 70 hours of labor in it in his whole life. These are not normal people that make these unusual achievements.

American manufacture. Well, American manufacturing, of course, doesn’t sound like Wang Chuanfu, does it? Not that it isn’t good and doesn’t have some talent. It hasn’t had such hardship. It’s a more affluent culture. It’s not the same. I do think there’s a lot of talent in American manufacturers. I looked at some of these companies; take the Otis Elevator company. They are good at the elevator business. The elevators work. They’re serviced and that would be a hard business for somebody to nudge them out of. There’s some great imagination in American manufacturers. I don’t think we’ve lost all of our manufacturing business. Even Boeing, which has made some really stupid mistakes will recover and do well.

You’re doing something that’s difficult. It’s creating new airliners from scratch. It’s easy to have the first in, but I don’t think Boeing is dead as a major manufacturer. They’ll solve all their problems. If you stop to think about it, Boeing has presided in America over a culture that has created whole years, whole series of years, without a single fatality for a passenger on a commercial airliner. That’s a huge technical achievement. The achievement part of Boeing hasn’t gone away, because they got one big glitch (speaking, I believe, of the recent battery problem).

There’s been a lot of renewals in American manufacturing. You’ve even had some that come back from abroad. It’s a great civilization and it has a lot of achievement still in it. But I don’t think we’ll be making many shoes in America.

Pointer 24: So, a lot is wrong in California. On the other hand, a lot is right.

Bonus Pointer: But I don’t think we should torture our whole life to make our children’s life as easy as we can possibly make it.

Shareholder: I’m just wondering what your thoughts might be on California politics and the propositions and maybe the marginal tax rates that we face here.

Munger: Well, I think California’s policies have been insane. For a state in the United

States not to be user friendly to the elderly rich is a massively stupid thing to do. It’s a mistake that’s not made by Hawaii. It’s not made by Georgia. It’s not made by Florida. It’s not made by lots of other places. They want to be very user friendly to the elderly rich. Elderly well to do aren’t committing any crimes. They don’t fill your prisons. They have terrible health, for which the United States government pays. So, you have wonderful employment opportunities for people. They’ve got money that comes in for sure, which they have to spend. They don’t burden the schools, which are very expensive to run.

You’re out of your mind to drive out the elderly well to do and California just keeps thinking that the ideal way for the taxes to drive out the elderly rich. This is insane. I live amid the elderly rich, as you can well imagine. I want to tell you that a lot of them are self-centered and lot of them will leave. They’ve got options. Other elderly rich won’t come. A lot of people won’t come to open manufacturing plants. California has insane tax policies in a world where other people are smart. You take this room. How many people realize California operated more like Florida in terms of being friendly? I don’t like young people committing a lot of crimes. I don’t like huge costs. By and large, I like the elder generation. They behave pretty well so far. I don’t want to force out the elderly rich.

I think our policies are stark raving mad. This idea of constantly having people game the system to get money without effort, which happens in workman’s compensation insurance and lots of other places, just massive fraud. I believe all that stuff should have been squeezed out and un-encouraged. But the people making money out of the system have huge political power. So, a lot is wrong in California. On the other hand, a lot is right. I wouldn’t move across the street to save my children $50 million. They’re entitled to what’s left over, so I’m not going to be chased out by California taxes. I recommend that same course of action to all of you. Let the little darlings have what’s left over. But I don’t think we should torture our whole life to make our children’s life as easy as we can possibly make it. This room, the main difficulty’s going to be we make the children’s lives too easy, not that we make it too hard?