Excellent Book: Charlie Munger For All Seasons
Ref: Adam Blum’s 2017 Berkshire Hathaway Annual Meeting Notes – May 6, 2017
Guide 7. A life properly lived is just learn, learn, learn all the time.
Guide 8. The first rule of fishing is to fish where the fish are, and the second is don’t forget the first.
Q5 “At the time we do every deal, I think it’s smart!” AIG transferred to Berkshire Hathaway 80% of the excess of $25B up to $20B limit; Berkshire Hathaway got $10.2B for that. “Ajit has made a lot more for you than I have.” Ajit and team have come to conclusion that they will pay out less money and at a slower rate than the $10.2B received. Ajit does 99% of the thinking and know they may be wrong but they’re conservative. They were wrong on one transaction in the past like this but have done ok overall. Warren was interested in the $10.2B, but it’s hard with $90B+ in cash earning peanuts.
“Earning peanuts” is not an attractive use for the capital. They need to have a use for it, and they will. Charlie thinks this transaction is intrinsically dangerous but there are no two better people in the world to assess it than Ajit and Warren – “get me in a lot more of these businesses, and I’ll accept that worry.”
Berkshire Hathaway is the only business in the world who’d have taken on that business in a way that AIG would’ve accepted.
Q6 What did the most good was his learning experience with See’s Candy, seeing the power of the brand and the unending flow of ever increasing money with no work. He wouldn’t have bought Coke if he hadn’t bought See’s. “A life properly lived is just learn, learn, learn all the time.” Every time they appoint new person who hasn’t had capital allocation experience, it’s a roll of the dice – “if we had stopped learning, you [shareholders] wouldn’t be here – you’d be alive, probably, but you wouldn’t be here – there’s nothing like the pain of getting into a lousy business to find a good one – the first rule of fishing is to fish where the fish are, and the second is don’t forget the first.”
They bought a department store in Baltimore in 1976 with risk of competitors coming into this new market and both failing. They learned over time which things to avoid. “Experience is like eating cockleburs – it really gets your attention.”
Guide 9. Walmart, Amazon & Google: What Do They Have In Common? Cinches Or Near Cinches Not Invested In.
Q7 When they bought IBM 6 years ago, they thought it’d do better than it has; Apple is much more of a consumer products business in terms of analyzing the moats around it; wrong on first but will find out on second – “not apples and apples but not quite oranges.”
They avoided tech companies, because they didn’t want to play where others were better. Their mistake was seeing Google and being impressed but never investing in it. They were close to it and seeing the impact of it with the pay per click stuff but never pulled trigger. Munger added that Walmart was a total cinch, but they didn’t figure it out and blew that one too. It’s harder to predict winners and price competition in tech. It’s remarkable where one person has built extraordinary economic machine in two different industries simultaneously like Jeff Bezos – if a CEO in his industry had a silver bullet and could get rid of one of his competitors as Intel’s Andy Grove used to hypothesize, competitors on both sides would be pointing at Jeff in the cloud and in retailing; Jeff has been involved in the business execution, not just bankrolling it, so it’s even more impressive.
Munger: “We are sort of like the Mellons – old fashioned folks who’ve done right, and Jeff Bezos is a different species.”
Guide 10. Why buy all four airlines instead of one? Because it is hard to distinguish who will do best.
Q8 Their investment has no connection with the railroad business or any other business. Long term, one couldn’t pick a tougher industry ever since Orville went up. “If anyone had ever been thinking about investors, they would’ve had Wilbur shoot him down.” Hundreds of airlines have gone bankrupt. Buffett said the dumbest things he’d ever done was buy USAir, but he made money off it, then the company went bankrupt twice. A number of factors make for terrible economics. The question is if it’s suicidally competitive. The industry has been operating at 80% or better of capacity (seat-miles), and they can see visibility into deliveries. It will be at higher capacity than it was historically, but will they do suicidal things with pricing? It remains to be seen. Today the airlines are earning higher returns on invested capital than FedEx or UPS, but that doesn’t mean it will last when someone cuts prices or fuel prices go up. The conditions have improved, as there’s more labor stability having been through bankruptcy, and now the airlines have an industry pattern of bargaining.
Munger: “The Investment world has gotten tougher. Maybe now we have small statistical advantages when before was like shooting fish in a barrel. It’s ok to have things get a little harder when you’re filthy rich.”
Even if airlines are worth a little less than today, the investments will do well in five years just from stock repurchases. Railroads were a terrible business for decades, and then it got good.
They bought all four airlines, because it is hard to distinguish who will do best. Revenue-passenger miles should be higher in 5-10 years, but the question is what the companies’ operating ratios are, and will they have fewer shares outstanding from buybacks?
Guide 11. There’s something in longevity about feeling happy in your life.
Q9 “That’s marvelous.” “I’ve been eating things I like to eat all my life. I drink about five Cokes a day. It has about 1.2oz of sugar in a can. I happen to believe that I like to get my sugar this way, and it’s enjoyable.”
“If you told me that I’d live one year longer by only eating broccoli and asparagus as my aunt suggested, I’d rather eat what I enjoy.”
“Coca-Cola has been a very positive factor in America and the world for a long time.”
Munger: “I solved my Coke problem by drinking Diet Coke, and I swill the stuff like other people swill I don’t know what. I have breakfast with Warren, and he has nothing but Cokes and nuts.” Buffett: “It’s pretty damn good. There’s something in longevity about feeling happy in your life.”
Guide 12. A lot of other people are trying to be brilliant, and we are just trying to be rational. Trying to be brilliant is very dangerous, particularly when gambling.
Q10. Intrinsic value can only be calculated in retrospect – It’s the cash to be produced between now and judgment day discounted at a reasonable rate. The last 10 years, their stock has compounded about 10% – it is impossible to achieve this return continuing in this interest rate environment – in Japan their interest rates sustained for 25 years, so one can’t just assume rates will change. The chances of a terrible result are as low as one can find and same for sensational result. Buffett’s best guess for the stock in future is a 10% return, assuming some higher interest rates.
Munger: “In the future, with our present size, in terms of rates of return, will be less glorious than the past. We keep saying it, now we’re proving it. But it is still a collection of businesses on average that has a better investment return than S&P 500.”
They have more shareholder orientation than the S&P. Their culture is one where decisions are made as a private owner would make them. This is a luxury that other companies don’t have that have other pressures. Buffett asks CEOs of other companies “what would you be doing differently if you owned it all yourself?” The answer at Berkshire Hathaway is they would be doing exactly what they are doing.
Munger: “A lot of other people are trying to be brilliant, and we are just trying to be rational. Trying to be brilliant is very dangerous, particularly when gambling.”