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

124. DJCO Annual Meeting 2015: Part 2: Erudition 7-12

Erudition 7. (On Societal Change) Look what happened to Japan. They used to be an export power of Asia, but all of the sudden, China and Korea displaced them. Japanese were better at quality control and the others wanted to get into the game. Then Korea came with nothing into auto business. They worked 84 hours a week with no overtime pay. At the same time everyone in Korea was going to great schools, was having tutors, were raised by Tiger moms, etc. Are you surprised when you see a result like that? Only if you are a total idiot.

What do you think of societal change due to technology?

The world has changed. If you are going to have a free trade and better communication, then people who once dominated will face these new complications. Free trade and technology also hurt hard working people, which is very hard to fix. They tried to do it in Greece, they tried to vote themselves into riches. I think that Greek solution is idiocy. They reality is that if they want to prosper, they have to work. Their whole system doesn’t work because they only use carrots and not sticks. Look what happened to Japan. They used to be an export power of Asia, but all of the sudden, China and Korea displaced them. Japanese were better at quality control and the others wanted to get into the game. Then Korea came with nothing into auto business. They worked 84 hours a week with no overtime pay. At the same time everyone in Korea was going to great schools, was having tutors, were raised by Tiger moms, etc. Are you surprised when you see a result like that? Only if you are a total idiot.

Erudition 8. We bought Wells Fargo stock when it was at $8. (Sic: Current price @ July 2017 is many times that.)

What is DJCO’s money allocation strategy? Are you going to buy another technology company or operate as BRK?

We bought Wells Fargo stock when it was at $8, and I don’t think we will have another opportunity like that. As of technology business, it was a tough experience and I don’t really think we want to try doing it again. Of course, we might buy something that can complement existing business, but we are not looking into venture capital opportunities any more. I don’t even know how we did it in the first place – it was mostly Guerin’s idea (Vice Chairman).

Erudition 8. Posco is the most efficient steel company in the world. It had a pretty close to a local monopoly position in its country for a long time. It is very hard to avoid being commoditized in the modern world. In the places like Dow Chemical with complex chemical process, with 1000 PhDs, it is still hard to not be commoditized. Posco was able to do so.

Do you have comments on Lee Kuan Yew?

Lee Kuan Yew («LKY») is the most important nation builder that ever existed in the history of the World. He turned mosquito squad into the first world country. Then, using that example, utterly changed and transformed China and Vietnam. There was only one person in LKY’s high school who was smarter than he was. It was a female a one year older, so he married her. He just was very rational. Peter Kaufman loves this story: initially LKY was surrounded by Muslims and Hindu, with no army, in a very dangerous position. He realized that the new nation has to have an army and he asked the world to help him. Everyone declined except of Israel. How did he pull this off when most of his population were Muslims who hated Israel? He solved the problem – he accepted help from Israel by telling everyone they were Mexicans. He eliminated corruption by not compromising even when his close friend was accused of bribery. The friend committed suicide and surviving wife asked Lee to cover it up due to low regards for suicide in Chinese culture. Lee declined. He was very tough about getting done what had to be done.

What is your advice for people who try to achieve financial freedom through investing?

In my life time success in investing was easier. If you were rational and disciplined you had a tailwind of 10% per annum. Now, I doubt that the world will be able to get 10%, so it will be more difficult; and it is impossible if you are staying in big stocks.

Could you comment on Posco position that DJCO holds?

Posco is the most efficient steel company in the world. It had a pretty close to a local monopoly position in its country for a long time. It is very hard to avoid being commoditized in the modern world. In the places like Dow Chemical with complex chemical process, with 1000 PhDs, it is still hard to not be commoditized. Posco was able to do so.

Erudition 9. Giving unlimited credit to people who didn’t deserve credit is really a dumb idea.

You have said in the past that the private mortgage insurance is wrong. Could you please elaborate on that?

Private insurance caused the financial crisis. Finance in the US went crazy; crazy and immoral, which is not a good combination. The people who caused the crisis had one thing in common – not one has any shame at all. In fact, they blame others. At the time, they were giving unlimited credit to people who didn’t deserve credit. It is really a dumb idea. You would think that people would know it by now, but I don’t think they really do.

Erudition 10. I think that the auto industry is very difficult and competitive. Everyone is making affordable cars and everyone has an enormous size and wealth. Elon Musk is a genius, and if anyone can do it right he probably is the one. But as we say at Berkshire, when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Do you think American Express’ moat has narrowed recently?

Amex had a long period of achievement and prosperity. It doesn’t look quite so easy going forward as it once did. This is another example of how tough capitalism is. Citi and Visa made a better deal.

You have told Elon Musk many reasons why Tesla would fail. Could you please share those reasons with us?

I think that the auto industry is very difficult and competitive. Everyone is making affordable cars and everyone has an enormous size and wealth. Elon Musk is a genius, and if anyone can do it right he probably is the one. But as we say at Berkshire, when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. I just think it is going to be that tough. To get electric cars off the ground is really hard.

Erudition 11. I don’t take notes. I just read when I feel like reading and I think when I feel like thinking. (Sic: Not for everyone?)

What are your reading habits? How do you retain information?

I don’t take notes. I just read when I feel like reading and I think when I feel like thinking.

Erudition 12. But it is very hard to be a value investor with $200 billion, and one of the reason is that people will start copying you.

What do you think of Robo-advisors and Robo-funds?

Well, Robofunds and Index Funds are beating 98% or something of managed money over long period. If I had to manage $200 billion and were expected to beat the index I would not welcome the job. I think people who have a good chance of performing well are those who are willing to work in less efficient markets. But it is very hard to be a value investor with $200 billion, and one of the reason is that people will start copying you.

Source: http://www.valuewalk.com/2015/04/charlie-munger-daily-journal-2015-meeting-notes/