{"id":310,"date":"2017-02-05T11:12:56","date_gmt":"2017-02-05T11:12:56","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=310"},"modified":"2017-10-25T00:33:07","modified_gmt":"2017-10-25T00:33:07","slug":"30-djco-2016-annual-meeting-part-iii-lesson-7-12","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/02\/05\/30-djco-2016-annual-meeting-part-iii-lesson-7-12\/","title":{"rendered":"30. DJCO 2016 – Annual Meeting – Part III – Lesson 7 – 12"},"content":{"rendered":"

Excellent Book: Charlie Munger For All Seasons<\/a><\/p>\n

Lesson 7-12: Software Business Is Like The Rest Of Capitalism<\/span><\/strong><\/p>\n

Question: What do you think about the attractiveness of the software business versus industrial franchises?<\/span><\/p>\n

Answer: Software based businesses, some of them have become some of the most profitable businesses on earth.\u00a0 Other software companies are failing and shrinking.\u00a0 So it\u2019s like the rest of capitalism.\u00a0 It has its good spots and its bad spots.\u00a0 And as I\u2019ve said, the one we\u2019re pursuing will be sticky if we succeed in it.<\/span><\/p>\n

Question: Other competing businesses in the journal tech space are growing faster.\u00a0 Why is that? And they seem to be selling for higher multiples.\u00a0 Would you ever consider selling Daily Journal Technologies at a high multiple?<\/span><\/p>\n

Answer: Well, nobody has offered us a high multiple.\u00a0 It\u2019s a peculiar part of the software business involving a lot of agony now for a payoff way later.\u00a0 You can\u2019t judge it as a normal business. \u00a0It\u2019s venture capital.\u00a0 It just happens to be located in a publicly traded company.\u00a0 If venture capital works, it could gradually evolve into a pretty huge business.\u00a0 But of course, everybody\u2019s trying to evolve into a pretty huge business, and only a few succeed.\u00a0 But we\u2019re not like a normal software business.\u00a0 And those little companies were not acquisitions like Berkshire Hathaway makes acquisitions, those were not established companies that were sure to succeed and relatively fool proof.\u00a0 If we were going to make our venture capital type assault on this kind of peculiar part of the software market, we needed momentum from other sales forces and service operations and so forth.\u00a0 So we just bought them.\u00a0 But don\u2019t judge those things by the standards of normal corporate acquisitions.\u00a0 Those are part of venture capital.<\/span><\/p>\n

Lesson 8: For CEO Compensation, We Just Try To Do Whatever Makes Sense Under The Circumstances.<\/span><\/strong><\/p>\n

Question: If you were to design CEO compensation for an insurance company or bank, how would you do that?<\/span><\/p>\n

Answer: Well both Berkshire and the Daily Journal have our own way of doing things and we don\u2019t follow anybody else\u2019s.\u00a0 We just try to do whatever makes sense under the circumstances.<\/span><\/p>\n

Lesson 9: What\u2019s The Trend? BYD is in a position, on purpose, to benefit from this electrification trend in the world.\u00a0<\/span><\/strong><\/p>\n

Question: What\u2019s your expectations about BYD for the next 10 years?<\/span><\/p>\n

Answer: Well, we allow questions on all subjects, and I suppose that one is a legitimate question.\u00a0 BYD has 220,000 employees.\u00a0 That is a big company.\u00a0 That too was venture capital when we went into it.\u00a0 That company has done amazing things.\u00a0 The man who created that company was like the eighth son of a peasant.\u00a0 He went to engineering school, got a PHD, and started off by borrowing $300,000 from the Bank of China.\u00a0 And going into the small batteries for cell phones and so forth which was totally dominated by high-tech Japanese firms.\u00a0 And he succeed in grabbing about a third of that market from a standing start of zero.\u00a0 And he won the intellectual property rights of the litigation.\u00a0 And that litigation happened in Japan. \u00a0He was a very remarkable man doing an almost insanely ambitious thing. \u00a0And out of that, he has 200 and some thousand employees and a huge lithium battery plant.\u00a0 Last month he sold 10,000 electric cars in China which is more than Tesla sold.\u00a0 And of course nobody\u2019s hardly heard of BYD.<\/span><\/p>\n

It\u2019s an interesting company.\u00a0 Berkshire doesn\u2019t do this kind of venture Capital stuff.\u00a0 And I hope the Daily Journal will work out half as well as I expect BYD to work out.<\/span><\/p>\n

BYD is in a position, on purpose, to benefit from this electrification trend in the world.\u00a0 It\u2019s been very helpful to them that people are dying on the streets of Beijing because they can\u2019t breathe the air.\u00a0 They have to go to electric cars in Beijing.\u00a0 And BYD is ahead in terms of efficient manufacturing.<\/span><\/p>\n

They\u2019re very well located.\u00a0 That\u2019s a very interesting venture capital investment.\u00a0 Now was it an accident?\u00a0 Sort of.\u00a0 Berkshire departed from its standard methods and did that one.\u00a0 I would say that I only wish our prospects were as good as BYD\u2019s.\u00a0 And by the way, they might be, but it\u2019s not the way to bet.<\/span><\/p>\n

Lesson 10: If You Have A Rich Uncle Willing To Sell You A Business at 10% of What It Is Worth, Don\u2019t Talk About Discount Rate. Read On For Gems On Discount Rates<\/span><\/strong><\/p>\n

Question: When you value a company, what discount rate should we use?\u00a0 Warren Buffett has used a risk free rate and sometimes makes some adjustments.\u00a0 And I\u2019ve read that you use an opportunity cost approach of your next best investment.\u00a0 Which one of these are correct?<\/span><\/p>\n

Answer: Well, they\u2019re both correct.\u00a0 Obviously it\u2019s relevant what the return you get on a government bonds is.\u00a0 That affects the value of other assets (in the general climate).\u00a0 And obviously your opportunity cost\u00a0 should govern your own investment decision making.\u00a0 If you happen to have rich Uncle who will sell you a business for 10% of what it is worth, you don\u2019t want to think about some other investment.\u00a0 Your opportunity cost is so great that you forget about everything else.\u00a0 And most people don\u2019t pay enough attention to opportunity costs.<\/span><\/p>\n

Bridge players know about opportunity costs.\u00a0 Poker players know about opportunity costs.<\/span><\/p>\n

Question: When you arrive at the valuation number using the discount rate, does that mean that between the two rates\u2026<\/span><\/p>\n

Answer: We don\u2019t use numeric formulas that way.\u00a0 We take into account a whole lot of factors.\u00a0 It\u2019s a multifactor thing and there\u2019s a trade-off between factors, and it\u2019s just like a bridge hand.\u00a0 You have to think of a lot of different things at once.\u00a0 There\u2019s never going to be a formula that will make you rich just by going through some numerical process.\u00a0 If that were true, every mathematical nerd that gets A\u2019s in algebra would be rich. (laughter)\u00a0 That\u2019s not the way it works.<\/span><\/p>\n

You\u2019ve got to be comfortable thinking about a lot of different things at once, and correctly thinking about a lot of different things at once.\u00a0 You don\u2019t have a formula that will help you\u2026 and all that stuff is relevant.\u00a0 Opportunity cost of course is crucial.\u00a0 And of course the risk free rate is part of a factor that determines how attractive some common stock is.<\/span><\/p>\n

Question: Do you use the same discount rate for different businesses.\u00a0 For example, an IBM or a Coca-Cola?<\/span><\/p>\n

The answer is, no, of course not.\u00a0 Different businesses get different treatments.\u00a0 They all are viewed in terms of value and you weigh one against another.\u00a0 But of course we\u2019ll pay more for a good business than a lousy one.<\/span><\/p>\n

We don\u2019t really want any lousy businesses anymore.\u00a0 We use to make money by (buying) lousy businesses and kind of wringing money out of them.\u00a0 That is a painful difficult way to make money if you\u2019re already rich. (laughter) We don\u2019t do much of it any more.\u00a0 Sometimes we do it by accident because one of our businesses turns (on us)\u2026 and we deal with those businesses the best we can, but we\u2019re not looking for new ones.<\/span><\/p>\n

Lesson 11: Multiple Models, Many Different Models \u2013 That\u2019s The Way Aha Aha.<\/span><\/strong><\/p>\n

Question: I have a mental models question for you.\u00a0 You talk about these quick, cut to the chase, algorithms that you use, do you arrive at that fluency only after having gone through your entire mental model checklist over a long period of time?\u00a0 Or is it simply a matter of, for example, knowing you\u2019re looking at a social situation and so the psychology checklist might be appropriate.<\/span><\/p>\n

Answer: Well, if you\u2019re talking about multiple models, that means you\u2019re thinking about many different models.\u00a0 That\u2019s the nature of reality particularly if you are an investor with a wide variety of human activities, and there\u2019s no way to make that easy.<\/span><\/p>\n

Look, you all are in the business, do you find it easy? (laughter) Anybody who finds it easy is wrong.\u00a0 You\u2019re living in a delusion.\u00a0 It\u2019s not easy.\u00a0 You occasionally will get an easy one.\u00a0 But not very many.\u00a0 Mostly it\u2019s hard.<\/span><\/p>\n

How many people find it hard to make those investments right now?\u00a0 (Most people raise their hands)\u00a0 Yeah, yeah, it\u2019s an intelligent group of people.\u00a0 (laughter)\u00a0 We collect them.<\/span><\/p>\n

Lesson 12: Most of you are not going to get five opportunities to marry some wonderful person. So, If You Find The Right One, Go For It. The Same Goes For Investments.<\/span><\/strong><\/p>\n

Question: You talk about making an effort to reduce standard errors and doing so by not taking part in auction processes.\u00a0 In terms of your daily habits or life habits, what you do that most people don\u2019t, to reduce standard errors.<\/span><\/p>\n

Answer: Well, there are two things Warren and I have done, and Rick Guerin has done too.\u00a0 One is that we spend a lot of time thinking.\u00a0 Our schedules are not that crowded.\u00a0 And we\u2019re constantly\u2026We look like academics more than we do like businessmen. \u00a0So our system has been to sift life for a few opportunities and seize a few of them.\u00a0 And we don\u2019t mind long periods in which nothing happens.<\/span><\/p>\n

And Warren is exactly the same way.\u00a0 Warren\u2019s sitting on top of an empire, and you go to his schedule sometimes and there\u2019s a haircut! (laughter) \u201cOh, there\u2019s a haircut today.\u201d \u00a0That\u2019s what created one of the most successful business records in history. \u00a0He has a lot of time to think.<\/span><\/p>\n

And that brings me to the subject of multi-tasking.\u00a0 All of you people have got very good at multi-tasking, and that would be fine if you were the chief nurse in a hospital, but as an investor, I think you\u2019re on the wrong road.\u00a0 Multi-tasking will not give you the highest quality of thought that man is capable of doing.\u00a0 Juggling two or three balls at once where people come at you on their schedule, not yours, is not an ideal thinking environment.<\/span><\/p>\n

But I do think that the constant search for wisdom, and the constant search for the right kind of temperamental reaction towards opportunity, I think that will never be obsolete.\u00a0 And you can apply that to your personal life too.\u00a0 Most of you are not going to get five opportunities to marry some wonderful person.\u00a0 Heck, most of you aren\u2019t going to get one.\u00a0 (laughter) You\u2019re just going to have to make do with an ordinary result.<\/span><\/p>\n

www.facebook.com\/groups\/charliemungersays\/<\/span><\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Excellent Book: Charlie Munger For All Seasons Lesson 7-12: Software Business Is Like The Rest Of Capitalism Question: What do<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[1,3,4],"tags":[],"class_list":["post-310","post","type-post","status-publish","format-standard","hentry","category-charlie-mungers-3-categories-of-investment-in-out-too-tough","category-investment","category-wisdom"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/comments?post=310"}],"version-history":[{"count":2,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/310\/revisions"}],"predecessor-version":[{"id":906,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/310\/revisions\/906"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=310"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}