Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) do not meet up as much as they used to, with Munger living in Los Angeles and Buffett in Omaha, Nebraska. In a 2021 interview with CNBC, the two gurus discussed investing and in life. Here are my main takeaways.
What was Buffett' worst investment?
Buffett said his worst investment was acquiring the textile mill Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), which is where the investment conglomerate got its name. The mill had poor returns on capital, so the guru decided to reinvest into different assets such as insurance businesses.
He originally made the investment as it was trading below net asset value, which basically meant the textile machines could be sold in order to gain a small profit. This is the deep-value strategy of investing that was popularized by Buffett’s former mentor Benjamin Graham, who wrote "The Intelligent Investor." This strategy works, but in past talks, Buffett has likened this to the “cigar butt” approach of investing in which he will buy a downtrodden business that has “one last puff” left.
This can be an extremely labor-investive method of investing and can also rack up lots of commissions and taxes due to the continuous buying and selling of stocks. After prompting from Munger, Buffett evolved his style to buying “wonderful businesses” that one could hold for the long term. This is a much more efficient method of investing if you pick the right businesses that will compound earnings over time.
Learning from mistakes
We all make mistakes when investing, and the greats are no different. Sometimes these mistakes can be caused by emotional biases, while other times they could be due to extraneous factors or black swan events.
The gurus elaborated on some of their past mistakes. One was Blue Chip Stamps, which the duo started to buy shares of in the 1970s before increasing their stake to over 60% by 1979. However, it turned out the company was a up against secular industry changes and it eventually failed. Diversified Retailing was another so-called "poor investment." Buffett joked that it was called “diversified retailing, but we only had one department store.” The retailer went out of business in 1986.
Munger said it was like “the mouse which said, 'Let me out of this trap, I don’t like the cheese anymore.' We wised up.” The good news, he said, was “we took enough cash out of the businesses before they failed. Another good point Buffett made is that when you determine a business is going to fail long term, it is best to“sell it” and redirect the capital to other businesses with higher returns on capital.
“If it’s clear something is a mistake, it’s best to fix it quickly,” Munger added.
Buffett said, “The three core businesses we purchased all failed because they no long fit the society.”
How Buffett met Munger
Both gurus were born and raised in Ohama, Nebraska, but they did not know each other in their youth.
Buffess said there was a doctor couple in town named Mr. and Mrs. Davis. In 1955, they heard he managed money and were interested in learning more.
A young Buffett gave his pitch as he “couldn’t talk enough about stocks in those days.” While Mrs. Davis was listening to him carefully, the husband was not really listening too much. But then a surprising thing happened; Davis told his wife he was going to give him $100,000, which was a big deal to Buffett at the time as he was only managing $500,000.
This investment was a shock to Buffett, who said, "With all due respect, Mr. Davis, you haven’t been listening much. I would like to know why you are going to give me the money to invest”. The doctor responded, “You remind me of Charlie Munger (Trades, Portfolio)." Buffett didn’t know who Munger was at the time, but “liked him” regardless.
Two years later in 1959, Munger came back to Omaha after his father passed away. Upon meeting, Buffett and Munger immediately hit it off.
“I’m not going to find another guy like this,” Buffett said. Munger also had positive words to say about Buffett, saying, "What I like about Warren is the irreverence.”
“Charlie was sort of rolling on the floor laughing at his own jokes, which is exactly the same thing I did,” Buffett said.
Munger was a lawyer at the time, but eventually took Buffett’s advice to become a portfolio manager. Munger managed his own partnership in Los Angeles for a few years before joining Buffett at Berkshire.
Take the High Road
Buffett and Munger's midwestern roots and a good upbringing is often credited with giving them both a deep sense of value, both in business and life.
In the words of Munger, “Take the high road, there is usually less traffic.” In both business and in life, we often have two choices to make. The first is to go low when a competitor, customer or business partner does. This may resolve an issue in the short term, and even gain short-term respect, but the “high road” is often much less stressful and “leads to better business outcomes” in the long run.
Another example of taking the high road is paying back money you borrow, which Buffett highlights as a part of his values and something his father did. Again, one could not pay someone back and still benefit from the short-term gain. But longer-term reputational damage and litigation often result in both poor psychological and business outcome.
Surround yourself with high-grade people
As the old saying goes, you are the average of the five people you surround yourself with. Buffett agrees with this and believes you should surround yourself with people who are “better than you” to help “make you a better person."
As for Munger, he said he had a blessed upbringing with regards to the "high grade" people he was around; his father was a lawyer and his grandfather was a judge. They had many friends that were all considered "high grade" people. He added that he thought this was normal until he moved out to California.
Buffett also cited "talking to older people" as a great key to success. In a humorous tone, he said, "We have loved talking to older people our whole life...but now there are no older people.”
Munger also reminisced about a time in his youth when he spoke with a family friend, who said he was "the oldest young man I know.”
It is obvious from these staments that both Munger and Buffett had wisdom from a young age.
Finding the right people to associate with used to be governed a lot by geography, so only those you came into contact with on a daily basis. However, with the internet, we can now virtually surround ourselves with high-quality people through the reading of blog posts or articles on investors and their insights.
Choose business partners wisely
When considering potential business partners and management teams, Buffett and Munger said they look for "intelligence, integrity and energy." Buffett noted that “if a business is losing money with a smart, good manager, it’s best to move them over.”
This relates to some of his other advice: “Good jockeys will do well on good horses, but not on broken-down nags.” In this case, the horse refers to the business.
He also said, “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
This goes back to Buffett’s tendency to invest in simple businesses that have a strong competitive advantage or moat, and thus it is difficult for management to really destroy the business even if they make mistakes.
On success
In regard to their success, Munger and Buffett do not really care about being billionaires as it has not really changed their lifestyles.
For example, Buffett has lived in the same modest house since 1955 and loves to get a McDonald's breakfast on the way to the office. The gurus said they really "wanted independence" more than material possessions. This independence gave them the ability to associate with high-grade people.
Munger on Robinhood
Buffett and Mungeer's investing philosophy focuses on buying businesses and not stocks. As a result, they could care less if the stock market closed for five years as they know what they own. However, the duo noted that Wall street has turned capital raising for businesses into a gambling-style business in which they make money from “activity.”
In the modern age with “free” trading apps like Robinhood Markets Inc. (HOOD, Financial), Munger’s opinions have gotten much stronger.
“Robinhood is a gambling parlor masquerading as a respectable business," he said.
Buffett added, “It is not encouraging people to buy a low-cost index fund and hold for 30 years."
Munger also blasted the "free trade" slogan of the app and said "the commissions are disguised” and it is “beneath contempt.”
Final thoughts
Buffett and Munger are a class act. The duo are geniuses in the stock market and at life. Their wisdom, sense of humor and practical tips are truly inspiring. Despite being 92 and 98 years old, they still have much wisdom to share.
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