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

84. Wesco 2007: Let’s Learn Some More- Part 2- Points 7-12

Lesson 7. There are a lot of things (although legal) that you shouldn’t do because it’s beneath you.

Views on the insurance business and ethical limits

I don’t think the insurance business will be that great for most people in it. I think we will do way better. We have great people. When I was younger, I probably wouldn’t have even tried to get into the game. It’s like a juggler with milk bottles who ends up juggling ten. Before we knew it, Berkshire had 10 insurance businesses. [Munger asked Gen Re CEO Joe Brandon to comment and he said, “We have the best collection in the world.” Munger continued:] That may be an absolutely correct statement. We gradually learned our way into that position. It didn’t happen overnight. If you’re not a learning machine, it won’t happen.

My father had a friend who used to say everyone’s the same over the years, only more so. To some extent we’re more so. We learned good lessons when we were young. We’ve been more selective. I don’t think we’ve ever regretted not making a lot of easy money when we decided it was beneath us.

Warren told the story of the opportunity to buy Conwood, the #2 maker of chewing tobacco. I never saw a better deal, and chewing tobacco doesn’t create the same health risks as smoking. All of the managers chewed tobacco – it was admirable of them to eat their own cooking. Warren and I sat down, said we’re never going to see a better deal; it’s a legal product; and we can buy it at a wonderful price; but we’re not going to do it.

Another fellow did and made a couple of billion easy dollars. But I don’t have an ounce of regret. I think there are a lot of things you shouldn’t do because it’s beneath you.

Lesson 8. Man is too soon old and too late smart. We were too late smart. (German Saying)

Lesson 9. When the situation change, Warren Buffett and Charlie Munger changed their mind about railroad and invested. Guess who figured that out independently earlier?

Bill Gates and he made 800% investing in Canadian railroads. Way to go, Bill!

[This is a good example of how hard it is to change one’s mind and change entrenched thinking, but at last we did change.]

Comments on Gen Re

Joe Brandon has had a job with many unpleasant aspects. There were a lot of problems, he had to do brutal, unpleasant work, and many people resisted. But now Gen Re is enormously improved – in fact, I think it’s now worth the stock we gave to get it. There was a time we weren’t so sure – there was a time before Joe did his work where we weren’t as confident of that as we are now.

Comments on Iscar

It’s not a Ben Graham stock – in fact, it would be the ultimate non-Ben Graham stock. It’s located a few miles from the Lebanese border in Israel. It has a high ROE, doing business all over the earth, using a certain technology to produce carbide cutting tools.

The reason I got so high on it so fast was that the people are so outstandingly talented. The idea of being in business with them just struck me worth straining for. We didn’t know when we were young which things to stretch for, but by the time we reached Iscar, which we never would have bought when we were young, we knew to stretch for the right people. It’s a hell of a business. Everything is right there. Isn’t it good that we keep learning? Better late than never.

Berkshire’s investment in railroads

Railroads – now that’s an example of changing our minds. Warren and I have hated railroads our entire life. They’re capital-intensive, heavily unionized, with some makework rules, heavily regulated, and long competed with a comparative disadvantage vs. the trucking industry, which has a very efficient method of propulsion (diesel engines) and uses free public roads. Railroads have long been a terrible business and have been lousy for investors.

We did finally change our minds and invested. We threw out our paradigms, but did it too late. We should have done it two years ago, but we were too stupid to do it at the most ideal time. There’s a German saying: Man is too soon old and too late smart. We were too late smart. We finally realized that railroads now have a huge competitive advantage, with double stacked railcars, guided by computers, moving more and more production from China, etc. They have a big advantage over truckers in huge classes of business.

Bill Gates figured this out years before us – he invested in a Canadian railroad and made eight hundred percent. Maybe Gates should manage Berkshire’s money. [Laughter]

This is a good example of how hard it is to change one’s mind and change entrenched thinking, but at last we did change.

The world changed and, way too slowly, we recognized this.

Lesson 10.If you think POSCO is a steel company, wrong. It’s a tech company. (Latticework of mental models at work.)

Berkshire’s investment in POSCO

I would argue that what POSCO does is not a commodity business at all – it’s a high-tech business. They learned from Nippon Steel and they’re now even more advanced. I’d argue that if you have the most technologically advanced steel company in the world making unusual, [non-commodity] stuff, then business can be quite attractive for a long time.

Lesson 11. That was a foolish thing to do, but they can’t help it: some of them went to business school.

Should USG [a Berkshire holding] have issued stock to fund a recent acquisition? I’m hesitating because I’m trying to decide whether to duck that question or give the correct answer. [Laughter]

That was a foolish thing to do, but they can’t help it: some of them went to business school. [Laughter and applause]

Lesson 12. We don’t play gin rummy with our businesses. (That’s the Berkshire Way.)

Why don’t you sell Precision Steel?

We have this personality that we don’t sell businesses because they’re a bit on the difficult side. As for Precision Steel, it might even be a decent business. It’s our catechism that we don’t play gin rummy with our businesses. And, averaged out, the catechism has benefited shareholders because people are willing to entrust us with their businesses that we won’t sell. At Precision Steel, there are a couple of good niche businesses. Holding on is a nonevent.

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

Notes from 2007 Wesco Financial Annual Meeting – By Whitney Tilson