Investment Wisdom

64. Charlie Munger’s Pointer For The Day: DJCO 2013: Final Part 5 Pointer 25-28

https://www.facebook.com/groups/charliemungersays/

Pointer 25: If you’re like me, I believe in giving big trouble a wide berth.

Shareholder: Charlie, in the past the board has offered some book recommendations. I wonder if they might have books that they might recommend. And yourself?

 Munger: Well, I’m reading a physics book that I recommend to everybody. It’s called “Something Out of Nothing,” which is a…It’s one of the most remarkable books I’ve ever read, and something we all ought to know and practically know. But it’s basically…The recent history and outcome in astronomy and astrophysics, and it’s utterly fascinating, at least to me. I think some of you will find it interesting. It is the most remarkable story, and it’s all happened while we were just sitting around securities.

When I was young, they didn’t know why the sun shone. It was Hans Bethe who figured that out. When he did, he figured it out one afternoon. He took his wife out to dinner, and he said, “You’re having dinner with the only guy in the world who knows why the sun shines!” But there have been dozens of those achievements. “Something Out of Nothing.” It’s absolutely fascinating. Of course, what’s happened is fascinating, of how something — how could you have a Big Bang and a whole damn universe appear? I guarantee ya some won’t like this book.

Munger: Well, we ordinarily let these things go on way too long, even though we have a board meeting, because some of you have come a long way, and we’ll do that some, but it won’t be endless.

Shareholder: Lawrence Krauss (author of the book)

Charlie: Lawrence Krauss, yeah.

Shareholder: I have a question about the government involvement in the economy. It’s obvious that with continuation of QE that government’s doing a lot to support the economy and the market and the stock market. What do you think the right role … and involvement, and what do you?

Munger: Well, you just asked one of the most complicated and interesting questions and one of the most important questions in the whole world. Of course, nobody knows the answer — just when too much is too much. We know you can’t just start printing money to run the whole economy and stopping taxation. At some point on that road, you get a backlash, which causes anguish you don’t want to get to. But how far you can go in having these Keynesian benefits and get by with it without risking that backlash, nobody knows for sure. If you’re like me, I believe in giving big trouble a wide berth, so I would try and stop a little short on this. Solving my problems by printing money.

Somebody like Paul Krugman, who’s overdosed on mathematics, and uses the king’s English better than practically anybody alive, so he’s very dangerous. He just thinks there’s no limit to the amount of — he wouldn’t say that, but he thinks the limit is so far away you don’t need to worry about it at all. That is not my view. But nobody knows the answer to that.

Pointer 26: Retailing is tough in the first place. Amazon is not going to make the competition easier.

Shareholder: I wanted to see how you see the retail landscape. The future of retail from your Costco lens, and how it might be affected…?

Munger: Well, that’s a very good question. I think retailing is going to get tougher and tougher and tougher. I don’t think Costco is making it easier on others. I think Costco is one of the winners. I’ll give you an example. I just got a new tube of toothpaste. I didn’t buy it. The man who helps me with the house — a very nice man — bought it for me at Costco. I’ve used the major brands of toothpaste all my life. The brand on this toothpaste is Kirkland.

Costco got one of the major toothpaste manufacturers of the world to make their toothpaste in Costco’s tube at a very low price. This is not good for the Proctors and Gambles and Unilevers of the world, and the Colgates of the world. So, generally speaking, that’s one threat.

Then you add the Amazon threat. Then you add the fact that we have too damn many stores that are the natural over-optimism of both lenders and real estate developers and merchants and so forth. So, I would say retailing looks tough and dangerous to me. Now, that isn’t to say there aren’t some people in it that are so good they’re going to succeed in spite of everything, like Costco, but I think for ordinary people engaged in retailing, it’s a business that’s going to have a lot of head winds.

Shareholder: I think it’s really tough, and it’s …

Munger: Yeah.

Shareholder: I’m almost running out of…

Munger: He wanted to hear somebody else say what he already believes. He should go to the Catholic Church.

Shareholder: You described what seemed to me is an unsustainable situation.

Munger: We know there’s some limit, don’t we? Everybody in the room knows it. Keep pushing that forward and it will eventually blow up in your face.

Shareholder: Most of us admire is how resolute you’ve been with your investment philosophy. Can you talk a little bit on that?

Point 27: Modern Portfolio Theory proponents are crazy. By the way, I’d be glad to have any one of them marry into my family. They’re nice people. They just have the wrong ideas.

Munger: I don’t think I’ve changed my views on any of those subjects in a long, long time. It isn’t like the first time I’ve seen collapses, opportunities, craziness, disappointment. No, I think one of the reasons — we in our old catechism — use your head. Of course, we have nothing but contempt for modern portfolio theory and all of this stuff they teach in business schools. One of the blessings that I have. I never went near those crazy people. By the way, I’d be glad to have any one of them marry into my family. They’re nice people. They just have the wrong ideas.

By the way, all their ideas aren’t wrong. It’s just the ones that are related to portfolio management are wrong. Being a professional money manager is not so easy. It shouldn’t be easy. You’re complaining about not having egg in your face; you say you had. Furrow your brow a little bit, and your plan worked.

Point 28: Having A Little Gumption And Do It.

Shareholder: Hey, Charlie. That gentleman back there on the book recommendation.

Munger: Yeah.

Shareholder: I have a book recommendation, but the story — it has both humor and mystery attached to it. In effect, you’re going to get a Warren Buffet book recommendation here. I’ve got this email the other day from Todd Combs. He said, “Warren gave me a copy of this book yesterday, and I just finished it. And would recommend you read it as well.” The name of the book is The Outsiders. I had a member of my staff buy that. I’ll get to that. Give me a moment. I had a member of my staff buy the book from Amazon, and the book arrived. Rather — how unusual a book for Warren Buffet to recommend, but I thought maybe he’s getting more like Charlie. Charlie is always reading very interesting, unconventional non-business books. Well, this is really an unconventional book. This is about a group of lower class students who are being bullied by very high-class rich students. I thought, Wow! Warren Buffet’s really branching out in his reading. But two days later in the mail, I got a book from the author, Mr. Thorndike. A book called The Outsiders. It’s a book about Henry Singleton and Warren Buffett. All these different business people who operate outside the normal conventional approaches to business. So the mystery was solved. I emailed back the author of the book and I said, “There may be other people who are going to make the same mistake I did. Maybe you should get with your publisher and figure out how to make sure Amazon makes it clear to people looking for The Outsiders that they don’t get confused; By the way, would anybody like this?

Munger: That book by Thorndike is quite an interesting book, because he describes companies and their CEOs who had utterly remarkable records and there’s some common threads.

They were a very unusual bunch of people, many of whom I knew personally. These were not normal people. They were Henry Singleton and Tom Murphy and so on. That is a very good book for you investment types. It’s really very, very interesting. I think that there’s one category that’s not — no, it’s too much, but most people. The ideal investment in many respects is one where anybody who owned it could make a lot more money with no risk simply by raising prices. You say that there can’t be such opportunities lying around anymore than there’d be lots of $100 bills lying around unpicked up on the streets. How could there be?

But if you read that book, you’ll realize that in the early days of network television, it was a cinch. All they had to do was sit there and keep raising the prices. Then you make huge amounts of money. But the main thing was you were sitting in a place where all you had to do was sit there with your network television station, keep raising the prices. And there are such opportunities, and you may find a few of them in your lifetime. If you can identify them, it’s some of the easiest money that there is.

That happened to us with See’s Candy. When we bought See’s Candy, we knew it was a marvelous business — well run and made a nice candy, but we had no idea it was selling at $1.95 a pound. And we had no idea that we could just keep raising the prices, year after year after year by large amounts. And the earnings would keep going up o r staying the same.

And See’s Candy grew — many years it’s yielded more than 300 percent per annum than what we paid for the whole company. Partly, people just don’t care if it goes up an extra 25 cents a pound, because it’s a gift item and they love the candy. There’s no price reference. Warren and I did not realize that pricing power existed. We found out by having a little gumption and doing.

There again, other factors made the company worth what we paid for it, and this extra opportunity we didn’t pay for. It was these little public notice rags that Jerry bought. There was a possibility of having a bonanza if certain things happen. And a given factthat thing had no price resistance to speak of. We could have a bonanza and lo and behold, we did. And of course, I would argue that we wouldn’t have bought Coca Cola as early as we did if we hadn’t had the experience with See’s Candy. We just learn through doing how powerful some brands were. And so, I recommend to you people the same idea.

It probably took some gumption to buy See’s Candy. We didn’t know anything about the candy; we didn’t have anybody that knew how to run it for sure. But the gumption to think of the bonanza that’s been brought. OK, We are going to have a director’s meeting. I have done my duty for you groupies.

http://www.rbcpa.com/DJCO_Meeting_Detailed_Notes_2013.pdf