I had the honor and pleasure of attending my third Daily Journal (DJCO, Financial) shareholder annual meeting in Los Angeles earlier this month . It certain looks like it is getting more crowded with each passing year while the wisdom from Charlie Munger (Trades, Portfolio) gets better in a more entertaining environment.
The meeting was scheduled to start at 10 a.m., but I arrived much earlier to get a chance to meet and interact with more like-minded groupies. It is interesting to see that most of this year’s early arrivals were also the early arrivals of last year. I admire all of them. As Warren Buffett (Trades, Portfolio) said in the forward to "Poor Charlie’s Almanack" – “If Ben said be prompt, Charlie said be early.” I think there’s some great value in that attitude.
We exchanged thoughts on Munger, investing and even life in general until Munger walked in at a little before 10 a.m. The room turned quiet immediately.
Someone has already posted the notes of the meetings on this forum. I want to share a few things I’ve learned that are either new or worth repeating.
1. The first thing that struck me as surprising was his view on IBM (IBM, Financial): “Now IBM is a kind of super market, and I don’t really have an opinion about it. I’m neither a believer nor disbeliever in the new business. It could happen, or it could not happen. I do think the old business is very sticky and will die slowly. On the Berkshire (BRK.A, Financial)(BRK.B, Financial) side, we have to play a long game. It may work in a mediocre way; it may work big.”
This comment is different from what he said in an interview with Becky Quick back in May 2012:
I’ve written a few articles on IBM and have received some great feedback from the readers. Munger's comments reminded me of the virtue of humility. If he doesn’t know what could happen to IBM, it is probably too complicated for most amateur investors to understand.
2. Then the notion of punchcard investing is worth repeating. Munger used Wesco’s investment as an example: “They did a lot of transactions. But it was only five or six outcomes that carried most of the freight. Now that is really interesting. To try and do a zillion little things is hard. Try to do a few things well, and it will work out. A few good decisions over a long period of time can lead to great success. You make your money by the waiting. A fair amount of patience is required. Like when we had all this money flowing in from the foreclosure boom, and we deployed it in a day. It wasn’t luck we had the money on hand.”
I think this is one of the most underappreciated notions in investing. We all agree that patience is very important, but how many of us actually have the capacity to suffer from short-term pains of inactivity and capitulate to the deprival super-reaction syndrome? Technology surely makes things worse by conditioning our brain to react to every single distraction caused by text message, email or just a website, so we are less capable of delaying gratification but more addicted to instant rewards. My view is that those who can practice delayed gratification will have a temperament edge in investing within their age cohort.
3. A fellow from China asked Munger a few questions on the discount rate. A few groupies including myself actually spoke to him before the meeting. One groupie suggested that he should phrase the question in a way so that he could get more words from Munger. He took the suggestion, and Munger was very generous with his answers:
"We don’t use numeric formulas that way. We take into account quality factors. It’s like a bridge hand; you have to think about a lot of things. There is never going to be a formula. If that worked, every mathematical person would be rich, but that’s not the way it works. Opportunity cost is crucial, and the risk-free rate is one factor.
"Different businesses need different rates. They all are viewed in terms of value, and they’re weighed one against another. But a person will pay more for a good business than for a lousy one. We really don’t want any lousy businesses anymore. We used to make money betting on reinventing lousy businesses and kind of wringing money out of them, but that is a really painful, difficult way to make money, especially if you’re already rich. We don’t do much of it anymore.
"Sometimes we do it by accident because one of our businesses turns lousy, and in that case it’s like dealing with your relatives you can’t get rid of. We deal with those as best we can, but we’re out looking for new ones."
As a side note, after the meeting, this persistent groupie went to Munger again and asked more questions about the discount rate. Munger was again very nice, explaining to him why he needed to use different discount rates for different businesses and the factors he should consider.
4. The question of how to avoid errors also evoked a great answer from Munger:
"There are two things Warren and I have done. One is that we spend a lot of time thinking. Our schedules are not that crowded, and we sit around and think constantly. In a way, we look more like academics than businessmen. My system has always been to sit quietly for a few hours. I don’t mind if there are long period where nothing happens. Warren’s the same way. He’s sitting on top of an empire now. Sometimes he clears his schedule for a haircut. His calendar will say 'Tuesday: Haircut day.'
"All you people are very good at multitasking, and that’s fine if you are the chief nurse at a hospital. Otherwise, multitasking is bad. Juggling three balls at once is not ideal. Luckily, a lot of you are so obscure you’re not that busy. That advice worked for me, and it should work for you. If it didn’t work for me, I didn’t have a backup plan. I was not going to dance lead in the Bolshoi Ballet.
"But I do think that the constant search for wisdom and the right reactions can help," Munger said. "Being angry will never serve you. You can apply that to your life. But it’s hard to do. The nature of ordinary results is that they’re ordinary."
5. Another question was about Wells Fargo (WFC, Financial), and Munger pointed out two important concepts in investing – your competitive edge as an investor:
“Well I’ll take you back to when Berkshire bought Wells Fargo. The world was coming apart. Real estate was the source of the chaos. Wells Fargo had a huge exposure. But we knew that the lending officers at Wells Fargo were not normal bank lending officers. They were grownups, and they had a somewhat cynical view, and they were appropriately careful and it was the right way to run a bank.
"And we knew they were better, and we knew they wouldn’t lose at much because they chose better and managed better. So we had an informational advantage. We were aware they had that special capacity, so we bought heavily.
"Secondly when the Daily Journal bought Wells we again knew that bankers at Wells were more rational than normal. It’s a different kind of superiority and rationality. I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away."
6. A Cal Tech student asked this really great question about specialization and multidisciplinary approach: "Two powerful mental models are the concept of specialization and taking an interdisciplinary approach. How do you reconcile the two?"
Munger’s response: "You can’t stay alive without synthesis. Synthesis is reality. Of course we need synthesis to understand anything. The question doesn’t make sense. However, the reward system of the world does not favor focusing on synthesis. Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.
"Being good at synthesis is good only for some people, but it’s not great career advice for most people. Most people should get very good at one thing. Even then, synthesis should be your second attack on the world, and it’s also a really good defense. Without synthesis we’d be blind."
7. Last but not least, after the meeting, a very intelligent groupie asked Munger questions that someone has asked Buffett before: "How should one invest with small sums, and would he still prefer quality?" Munger’s response was he would always care about quality, but he probably wouldn’t choose between Exxon (XOM, Financial) and IBM. There are plenty of interesting, small, quality stocks from which to choose.
