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

79. Wesco 2006: Let’s Learn – Part 5 – Points 25-30

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Point 25. It’s more complicated to make [an investment] decision in a foreign culture. But I think you can discern a great business

Do You Have Difficulty Reading Financial Statements of Foreign Companies?

We’ve been looking at financial statements for a long time. We feel, in some cases anyway, that we know what a foreign financial statement is telling us. Generally, would we would we feel more confident in our own currencies, etc.? Yes. But we feel that we can understand them [foreign financial statements].

Difficulty Investing in a Foreign Culture

Of course it’s more complicated to make a decision in a foreign culture. But I think you can discern a great business in a foreign culture. [But you have to be careful.] I was amused when the dictator of Indonesia said, “What look like embezzlement to you people looks like Asian family values to us.” [Laughter]

Why Doesn’t Berkshire Just Buy 100% of Wesco?

It’s complicated. You people, because you like the value system, have bid the price of Wesco above the liquidating value of the business, so we can’t merge it into Berkshire. There are a lot of irritating conflicts. But I like you and I don’t feel guilty because you can always sell your stock for more than [Wesco’s] liquidation [value]. It has its disadvantages [but they’re not insurmountable].

Comments on Berkshire’s Float

We love having the float at Berkshire. If we didn’t have it, Berkshire would be worth less than it is. It will grow more slowly in the future. There isn’t that much float in the world [for Berkshire to continue growing it at such a high rate] – it’s not a huge market. Float’s very desirable thing. We don’t think it’s a model that will help you in other investment opportunities.

Why Haven’t You Invested More in Foreign Stocks?

We’ve light on foreign stocks for our entire history, but we were still able to get the company [Berkshire] from $10 million [in stock market value] to over $100 billion, so there were worse tragedies that we missed foreign stocks. I don’t know a lot about foreign stocks. I do think that there have been opportunities in some foreign countries that if we’d looked at them closely we would have wanted to invest. But every one that I can think of that looked intriguing was way too small to be of interest for Berkshire – they weren’t the great big ones.

Overall, I don’t have many regrets here – I think the United States has been a better place to be than, say, England for the past 30 years.

Buffett’s Decision to Sell the South Korean Stocks He Bought

Warren’s entitled to do whatever he wants with the sell decisions. Anyway, he was more interested in finding an inefficient market than he was in making the money. [Laughter]

Why Didn’t You Invest in K-Mart or Tyco?

I didn’t think about K-Mart. As for Tyco, I thought about and I passed, but I don’t want to tell you the reason.

Impact of Lead Paint Liability?

Berkshire has one subsidiary, Benjamin Moore, that’s been making paint for a long, long time. But it’s a tiny part of Berkshire and my guess is that this issue is not meaningful.

The Morality of Investing in PetroChina, Which Is Helping the Government of Sudan, Which is Behind the Genocide in Darfur

You’ve raised a subject about which I know absolutely nothing. But all major oil companies that work in the Third World run into the problem of having to work with governments that are doing bad things. This is a classic problem.

I think it would be very hard to invest in oil at all without encountering some of these issues. Under those circumstances, what do you do if you’re the company? Not go in? Or if you’re already in, pull out?

I don’t think, by and large, that passive shareholders of companies need to have fits if a company they’re invested in is doing something somewhere that you and I wouldn’t approve of.

USG

USG of course was a great success story. It benefited greatly from the great construction boom, and it worked out deal to deal with its asbestos agony. They now have a plan to exit bankruptcy. I think management has done a hell of a job.

Point 26. Making your way as a professional poker player in Las Vegas – it pays the bills but is not a great moral beacon.

Do You Think One Has Lived a Better Life If One Builds Wealth By Owning Businesses Rather Than Buying Stocks?

The answer is HELL YES! If all you do is make yourself rich through buying passive stakes, [you haven’t lived much of a life]. Making your way as a professional poker player in Las Vegas – it pays the bills but is not a great moral beacon.

Obviously we think the pattern and life [of owning businesses] is better. Gin rummy behavior [of rapidly swapping] colleagues and businesses changing. No one admires that with wives and many of us spend more time with our businesses than wives. So constantly changing businesses [is nuts]. I don’t consider this as good a life as the one we’re living. Maybe [our behavior] is just serving our personal idiosyncrasies, but I say we’re entitled. [Laughter]

But You Sold US Airways

Yes, but US Airways was not a subsidiary. We had some representation on the board, but did not control it. [That being said,] had we controlled it, we still would have sold it. It was out of control. But the sales we’ve made over the years are tiny and few.

Macro- and Micro-economic Considerations When Buying Companies

Point 27. We buy things below intrinsic value. We’re not making microeconomic forecasts. We predict they’ll swim better while not betting on the tide.

We simply try buy things for less than they’re worth. We’re not making microeconomic decisions or forecasts. We predict they [the companies we buy] will swim better, but we’re not betting on the tide.

If we found a good business tomorrow, we’d buy it. We’ve been doing that all along. I’m not good at predicting macro things.

Since Size Hinders High Investment Returns, Why Don’t You Focus on Managing Your Own Assets, Rather Than Berkshire Hathaway’s?

Since my own assets are in Berkshire, so I don’t have much choice, do I? [Laughter]

Is Your Salary of only $100,000 Per Year Fair?

Yeah, it’s fair. I like to think that it’s more than fair, but what the hell. [Laughter]

Pont 28. Someone confused Charlie Munger for Warren Buffett – Ha Ha

Berkshire’s Influence as a Role Model

[The questioner addressed him as “Mr. Buffett,” to which Munger replied, “My name is Munger. [Laughter]]

Obviously, with the annual meetings and writing what we write, we’re trying to have some influence on other people. But in terms on changing other people, I think the influence is tiny. It’s very hard to change people when the incentives are in the opposite direction. I know many people who’ve bought lots of copies of Poor Charlie’s Almanack and given it to their children and grandchildren in the hope of influencing them [but I don’t think it’s had much impact]. If that worked, there’d be a line from here to Denver [to attend the Wesco meeting]. [Laughter]

ADVICE ON INVESTING

Lessons from Losing Money in the Munger Partnership in 1973-74

That is a very good question. When I operated a partnership, I got hit in 1973 and 1974, which was the worst collapse since the 1930s. So I got hit with a once-in-50-years-type event. It didn’t bother me with my own money, but it made me suffer the tortures of hell as I thought through the loss of morale of the limited partners who had trusted me. And the agony was compounded because I knew that these assets were sure to rise because they could be liquidated for more than I’d bought them for in due course. But the individual securities were traded in liquid markets so I couldn’t mark them up from the trading price because the opportunity cost for my partners was set by the trading price. I would say that was pure agony. The lesson from that for all of you is that you can have your period of pure agony and live through is for many decades. It’s a test of character an endurance.

I don’t think any fully engaged young man wouldn’t have gotten into the pain that I did in 73-74. If you weren’t aggressive enough and buying on the way down and having some agony at the bottom, then you weren’t living a proper investment life. I wouldn’t quarrel with anyone who was more cautious and less aggressive than I was. But what got me into the agony was buying things for far less than what I was sure I could liquidate them for in due course. I don’t think it was wrong, but it was agony.

Point 27. Generally speaking, shareholder activism is naturally going to be done by a group that many of you won’t admire.

More Comments on Activist Investors

Enormous blocks of stocks are held by employee pension plans with an ax to grind. Other groups of activists [have their own agendas]. It would be nice if the people who would be natural activists would be the type of people we’d want [to act on behalf of all shareholders, but they’re not]. I think the world is better when the Predators’ Ball days waned. Generally speaking, shareholder activism is naturally going to be done by a group that many of you won’t admire.

Point 28. Diversion Of Our Best Minds Going Into Hedge Funds Is Not A Good Thing

Somehow we’ve created a perverse system of incentives. At Samsung, their meeting of engineers is at 11pm. Our meetings of engineers [meaning our smartest citizens] are also at 11pm, but they’re working to price derivatives. I think it’s crazy to have incentives that drive your most intelligent people into a very sophisticated gaming system.

A rich system can endure a lot. If 10% of our people over age 60 want to spend X hours per week playing Texas Hold Em, we can afford it. But it’s not good. But do we want our auto industry to just crumble away and somebody else’s to take over because they do it better? I don’t think it’s a good outcome. I don’t think we can stand a diversion of our best minds to hedge funds.

Point 29. (On Choosing A Good Money Manager) I always prefer a system in which people are eating their own cooking, so look for a money manager who has almost all of his net worth alongside yours in his fund. Avoid High Commissions.

There are a lot of honorable people out there and a lot of charlatans. If you don’t have expertise in the field, it’s hard to do – I don’t have a one-sentence formula for doing that. I always prefer a system in which people are eating their own cooking, so look for a money manager who has almost all of his net worth alongside yours in his fund. This was Warren Buffett’s rule when he ran the Buffett Partnership. Another rule is to avoid things with a high commission: avoid anything sold by anyone on a high commission!

Point 30. Value Investing – Just try to get more value than you’re paying for.

Some people come to our annual meetings to figure out how to many money. We’ve always believed in value investing – just try to get more value than you’re paying for. There are a lot of ways to do this – it could even be investing in another manager. Or you could invest and hold for 30 years.

But nobody could make a living if that’s all they practiced. You need some mumbo jumbo if you’re going to be a witch doctor. You need some song and dance. [Laughter]

http://www.valuewalk.com/wp-content/uploads/2014/05/Charlie-Munger-2005-2013-minus-Harvard-Westlake.pdf

Notes from 2006 Wesco Financial Annual Meeting – By Whitney Tilson