This is the fourth part of a 4 part series of the interview on Tilson’s understanding of Charlie Munger. The interview was Sept 8, 2009, conducted by Phil Terry.
If you have not started with part 1, I recommend that you start there.
Part 1 can be found here.
Part 2 can be found here.
Part 3 can be found here.
Section 3: Q&A:
Q-01: Charlie said that three things ruin men: Drugs, liquor and leverage. Has Charlie ever been leveraged?
A: In his early days, he used a lot of leverage in his real estate dealings. Buffett was much more conservative than Munger and that is one thing that Munger learned from Buffett. In 1973 and 1974, Mungers partnership was down 32% for two years in a row. It was so painful, as soon as he made his investors his money back and threw away the hedge fund structure and started using a corporate structure that had a permanent capital base.
In a speech to a graduating high school, he warned against drugs and alcohol. Basically saying that they are prescriptions for misery through the change of perception.
Mungers prescription for misery is to do the following:
1) Be unreliable
2) Learn everything from your own experience, minimizing the experiences of others living and dead.
3) When you get knocked down in life, eventually give up.
4) Ignore the story about the rustic saying that all he wants to know is where he is going to die so he never goes there.
Q-02: What does Tilson himself think that are things to avoid.
A:: Tilson paraphrases Buffett. Be sure to choose your profession and spouse wisely. They will be the two most important decisions of your life. There is no number 3 thing. There is no class on this. Nobody teaches this, but it is very important. But in terms of things you can control, be patient. This is an important contributor to the things in your life. Pick a career that you would choose if you weren’t being paid for it. If you won the lottery tomorrow, what would you change. The goal is to make your answer be that you would not change a thing.
The traditional value investing style is to not think about the macro picture. Understand industries and companies. If you spend 10 minutes a year thinking about macro issues, that is 10 minutes that you lost. Big macro pictures are important, like the housing bubble, but you can act after they start busting. It’s not something to worry about for years waiting for a bubble to burst.
Identify the big bubbles and know to stay out of the way.
Q-03: Where are we in the world of mortgage products?
A: Forcasting is an imperfect art. The last two months reported from Case-Shiller, for the first time since housing prices started to decline, prices are starting to increase and existing home sales have bounced off all time lows. There are some green shots appearing.
Some say that we have reached a bottom. Today, we are much closer to a bottom. Tilson’s best guess is that this is a seasonal bounce and possibly one time factors that are propping up the lower end of the market. He expects a further decline when mid-summer to fall 2010 numbers re released. He is hoping that the bottom will be in 2010 and he sees a 10% downside. But this is tied to unemployment and interest rates (which are tied to inflation). And these are hard to predict.
1/3 of all mortgages today are being bought by the FHA, not Freddie and Fannie. The government is propping up the housing market and there will be hell to pay, but in the short term it is stabilizing the entry level housing markets. Default rates are still at catastrophic levels and foreclosure rates are high. These foreclosures will flood the market next year. In some areas, housing prices are legitimately cheap however. Mid to upper end homes still need to correct and that is the next wave of corrections to come. 25% of properly underwritten loans from the 2005, 2006 purchase time frame are now underwater. They owe more than the house is worth. And in California, this is a big problem. A compounding problem is that people can not refinance since they don’t have 20%+ equity. With unemployment becoming a problem, these good loans will turn bad. These prime loans will be the story going forward. It’s hard to predict going forward, but it does not look good. It won’t be as bas as sub prime loans, but even if 7-8% of prime loans go bad, that is going to hurt since those homes are more expensive.
Tilson is hopeful that the economy will turn soon.
Q-04: Now that Munger is proven true about his concerns over derivatives, what are his thoughts going forward? Anything like this on the horizon?
A: The last time he spoke publicly about any of this was at the Wesco meeting in May 2009. Munger is a republican and he as quite complimentary of both the late Bush administration and the current O’bama administration in regards to their handling of the financial crisis. He thinks they are doing a good job. The government did what they had to do given the uncharted waters. Munger believes that we have staved off Armageddon. Tilson assumes that Munger is expecting a long drawn out recession. You can not speed some things up. We are 2 years into the greatest asset bubble in history and this was world wide. It has now burst and it will not be quick to repair.
Tilson believes that the worse is behinds us. He thinks that Buffett and Munger see the same thing. Tilson’s view is that 0-1% GDP growth is in our future for many years. Not 3% or so like in the past. There is no law that says we should expect 3% economic growth at any time. People need to forget what was.
It is appropriate to prepare for an ongoing economic weakness and hope for the best. Patience and perseverance are needed.
PART 1, PART 2, PART 3, PART 4
If you have not started with part 1, I recommend that you start there.
Part 1 can be found here.
Part 2 can be found here.
Part 3 can be found here.
Section 3: Q&A:
Q-01: Charlie said that three things ruin men: Drugs, liquor and leverage. Has Charlie ever been leveraged?
A: In his early days, he used a lot of leverage in his real estate dealings. Buffett was much more conservative than Munger and that is one thing that Munger learned from Buffett. In 1973 and 1974, Mungers partnership was down 32% for two years in a row. It was so painful, as soon as he made his investors his money back and threw away the hedge fund structure and started using a corporate structure that had a permanent capital base.
In a speech to a graduating high school, he warned against drugs and alcohol. Basically saying that they are prescriptions for misery through the change of perception.
Mungers prescription for misery is to do the following:
1) Be unreliable
2) Learn everything from your own experience, minimizing the experiences of others living and dead.
3) When you get knocked down in life, eventually give up.
4) Ignore the story about the rustic saying that all he wants to know is where he is going to die so he never goes there.
Q-02: What does Tilson himself think that are things to avoid.
A:: Tilson paraphrases Buffett. Be sure to choose your profession and spouse wisely. They will be the two most important decisions of your life. There is no number 3 thing. There is no class on this. Nobody teaches this, but it is very important. But in terms of things you can control, be patient. This is an important contributor to the things in your life. Pick a career that you would choose if you weren’t being paid for it. If you won the lottery tomorrow, what would you change. The goal is to make your answer be that you would not change a thing.
The traditional value investing style is to not think about the macro picture. Understand industries and companies. If you spend 10 minutes a year thinking about macro issues, that is 10 minutes that you lost. Big macro pictures are important, like the housing bubble, but you can act after they start busting. It’s not something to worry about for years waiting for a bubble to burst.
Identify the big bubbles and know to stay out of the way.
Q-03: Where are we in the world of mortgage products?
A: Forcasting is an imperfect art. The last two months reported from Case-Shiller, for the first time since housing prices started to decline, prices are starting to increase and existing home sales have bounced off all time lows. There are some green shots appearing.
Some say that we have reached a bottom. Today, we are much closer to a bottom. Tilson’s best guess is that this is a seasonal bounce and possibly one time factors that are propping up the lower end of the market. He expects a further decline when mid-summer to fall 2010 numbers re released. He is hoping that the bottom will be in 2010 and he sees a 10% downside. But this is tied to unemployment and interest rates (which are tied to inflation). And these are hard to predict.
1/3 of all mortgages today are being bought by the FHA, not Freddie and Fannie. The government is propping up the housing market and there will be hell to pay, but in the short term it is stabilizing the entry level housing markets. Default rates are still at catastrophic levels and foreclosure rates are high. These foreclosures will flood the market next year. In some areas, housing prices are legitimately cheap however. Mid to upper end homes still need to correct and that is the next wave of corrections to come. 25% of properly underwritten loans from the 2005, 2006 purchase time frame are now underwater. They owe more than the house is worth. And in California, this is a big problem. A compounding problem is that people can not refinance since they don’t have 20%+ equity. With unemployment becoming a problem, these good loans will turn bad. These prime loans will be the story going forward. It’s hard to predict going forward, but it does not look good. It won’t be as bas as sub prime loans, but even if 7-8% of prime loans go bad, that is going to hurt since those homes are more expensive.
Tilson is hopeful that the economy will turn soon.
Q-04: Now that Munger is proven true about his concerns over derivatives, what are his thoughts going forward? Anything like this on the horizon?
A: The last time he spoke publicly about any of this was at the Wesco meeting in May 2009. Munger is a republican and he as quite complimentary of both the late Bush administration and the current O’bama administration in regards to their handling of the financial crisis. He thinks they are doing a good job. The government did what they had to do given the uncharted waters. Munger believes that we have staved off Armageddon. Tilson assumes that Munger is expecting a long drawn out recession. You can not speed some things up. We are 2 years into the greatest asset bubble in history and this was world wide. It has now burst and it will not be quick to repair.
Tilson believes that the worse is behinds us. He thinks that Buffett and Munger see the same thing. Tilson’s view is that 0-1% GDP growth is in our future for many years. Not 3% or so like in the past. There is no law that says we should expect 3% economic growth at any time. People need to forget what was.
It is appropriate to prepare for an ongoing economic weakness and hope for the best. Patience and perseverance are needed.
PART 1, PART 2, PART 3, PART 4
