Charlie Munger (Trades, Portfolio) is one of the most legendary investors of all time. As Warren Buffett (Trades, Portfolio)’s right hand man at Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), Munger is among the most successful investors on the planet. Despite being 99 years old, Munger is still practicing his career and recently spent nearly three hours at the 2023 Daily Journal (DJCO, Financial) Meeting on Wednesday to answer questions from investors. In this article, I detail my key takeaways and notes from the session, in which Munger dove into topics such as Alibaba (BABA, Financial), artificial intelligence and even Bitcoin; let’s dive in.
Munger on artificial intelligence
Munger believes AI is a “mixed blessing." He said it has advantages in areas such as insurance underwriting, but thinks it “won’t cure cancer.” Personally, I believe Munger may be wrong on this one as a biotech-focused AI model could potentially, if not cure cancer, at least be a key piece of the puzzle in assisting scientists in doing so. According to cancer.gov, Scientists have already developed AI tools for screening several kinds of cancer, including breast cancer.
Importance of avoiding biases
Keeping on the topic of AI, one viewer used the popular AI platform ChatGPT to come up with a question to ask Munger. The AI model asked “What is the most challenging bias to overcome? And how can one best overcome this bias?"
Munger said that "denial" is a challenging bias, as in, if the truth is unpleasant, people's minds can “play tricks on them."
An example Munger gives is the vast number of investment managers that aim to beat the market. Munger says less than 5% manage to do this, and they also charge people vast fees in the attempt.
Is Bitcoin a good investment?
When asked about it yet again, Munger reiterated his previous comments that crypto and related companies are running a “gambling casino." He also humourously called it “Crypto Crapo."
BYD versus Tesla
In 2008, Berkshire Hathaway purchased a $230 million stake in Chinese electric vehicle maker BYD (HKSE:01211, Financial). This has since increased by over 3,000% and is worth approximately $7.7 billion. Buffett made the investment upon advice from Munger, after he stated BYD’s founder Wang Chuanfu, a chemist turned entrepreneur, was a cross between “Bill Gates (Trades, Portfolio), Thomas Edison and Henry Ford."
Munger also reveals a piece of new information regarding BYD’s founder, who previously awarded employees with stock he personally owned as opposed to using the company’s stock. This type of management, which truly has skin in the game, is what Munger likes to see. Munger even took inspiration and offered a similar compensation scheme for Daily Journal employees with his own personal stock, which avoided dilution for shareholders.
Munger was asked why he chose to bet on BYD over Tesla (TSLA, Financial). He remarked, “that’s easy," because last year Tesla “reduced the price of its cars twice in China," while BYD increased the price of its cars. Munger stated “BYD is so far ahead of Tesla in China… its ridiculous."
He also stated the amount of car manufacturing space BYD has in China is almost the size of Manhatten on a square foot basis. However, Munger does state that BYD is trading at a high price of approximately 50 times earnings. Thus, it's no surprise that Berkshire Hathaway sold $600 million worth of the stock in the second quarter of 2022, during which shares traded at an average price of $71.35 per share. At the time of writing the stock is trading at ~$61.90 per share, thus this looks to have been a profitable sale for Berkshire, but still, it was only a tiny trim compared to the rest of the holding.
Buying and selling Alibaba with leverage?
Munger has for a long time spoken of the dangers of using leverage when investing. However, he has admitted to using “a little bit of leverage” when he purchased Alibaba stock in the second half of 2022.
He made this decision based on the question he always asks himself, “what percentage of my net worth should I put in a stock… If I believe it's an absolute cinch” or a sure thing, then he believes the logical answer is “100%” or 200%." However, Munger admits this goes against traditional finance philosophy.
Munger also revealed he used leverage on “the way up” and Buffett did also at the Buffett partnership.
Keeping on the topic of Alibaba, Munger sold 300,000 shares, or 50% of the Daily Journal's position, in the first quarter of 2022. He said Alibaba was the one of the “worst mistakes” he has ever made. He was “charmed by the internet business” and “forget it was a retailer” and thus operates in a competitive market.
Regarding China risks
Munger believes the odds of a confrontation between Taiwan, China and possibly the U.S. have “gone down not up." I was surprised by this take. Munger said the response to the Russia-Ukraine war, which has included vast sanactions and an exorcism from the global financial system, may actually make China "think twice."
He believes this situation helps the prospects of Chinese stocks. In addition, you can purchase “better strong companies at cheaper valuations” in China relative to the U.S. Munger also believes the Chinese leader Xi Jinping is a “practical person” and is not all bad.
Munger's first instinct is to not be “a fan” of semiconductor stocks as they must reinvest all their capital to “stay in the game” and produce the next generation of chips. However, he believes if a company is “so far ahead” such as Taiwan Semiconductor Manaufacturing (TSM, Financial), a recent Berkshire Investment, “it may be a good buy” at these levels.
The challenge with investing
Munger said the major challenge with investing is identifying great businesses - before everybody else realizes, as once they are known as great businesses, the valuation often goes higher.
Everybody makes mistakes
In life it can often feel like we need to try and be perfect, but Munger states clearly that he has “never met anyone who hasn’t made a mistake.” This simple thought, which is obvious to most people but is overlooked frequently, also helps when dealing with others and setting our expectations, which Munger believes is a key to happiness. Munger said he doesn’t “expect to live in a world where people don’t make mistakes."
A funny irony of life is we “often get good judgements, by making bad judgements." For example, we can lear a lot from Intel (INTC), which made mistakes and fell behind in the world of semiconductors. “We live in a world of sin, sorrow and misdecision," said Munger.
I believe Munger is of the wisest people on the planet. We can learn a lot from him, and I am immensely grateful that he still chooses to spend his time answering investor questions despite being 99 years old. Munger revealed a few real gems in this recent interview, such as his strong thoughts against Bitcoin and his admission of believing he made a mistake with Alibaba.
Munger concludes the interview with what he said is the “secret of life," which is to “climb one inch at a time."