As we all know, Warren Buffett and Charlie Munger (Trades, Portfolio) hold the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) shareholder meeting in Omaha, Nebraska, every year. During the past two years there were more than 40,000 people who attended the meeting. Most people attend the Berkshire meeting as an annual pilgrimage as well as a get-together with fellow value investor friends.
By contrast there were only about 400 people who attended the Daily Journal Corp. (DJCO, Financial) meeting, or approximately 1% that of the Berkshire meeting. The DJCO meeting is also held in the middle of the week, not the weekend. Therefore, for those who are not in Los Angeles, it is a very time-consuming effort. For me, it is a rare opportunity to pay tribute to the great Charlie Munger as well as to connect with a very intelligent group of investors.
This year marked my fourth time to participate in the Daily Journal shareholder meeting. All the questions were high quality. After the meeting, Munger unexpectedly and generously stayed for an extra three hours to answer questions with a small group of cult members. Today I’d like to share a few observations and thoughts from the 2017 DJCO meeting.
First of all, and this is almost the theme of this year’s meeting, Munger repeatedly stressed the importance of deferred gratification. For most people, deferred gratification is hard to practice but if you can, your life will be different. Munger's success has a lot to do with deferred gratification. He cited a few examples. For instance, China's success is largely through deferred gratification – when the Chinese were poor, they managed to save half of the income to invest for the future. They rarely got a chance to enjoy anything, but boy did that lead to the prosperity of hundreds of millions of Chinese.
Another example of deferred gratification is how medical students eventually become doctors. We all know that in the U.S. it is a long journey to become a doctor – you have to work hard for many years to become one. Munger said that, compared with derivatives traders, he preferred to be associated with doctors.
Below are a few direct quotes from Munger.
“I lived my whole life with people who have deferred gratification; they don’t have fun, but they get wealthy. You end up with a lot of rich dead people – what good is that? But it does work. Your grave will look nice to outsiders and incite a lot of envy.”
“I have a different feeling than the rest of America. I wish we weren’t producing all this natural gas. I’d be delighted to just have it lie there untapped for decades in the future and pay extra once Arabs use up their oil. Our reserves not going away are like retaining the topsoil of Iowa. You wouldn’t ship the topsoil to Greenland. There’s not enough deferred gratification to sell our oil. Same for chemical feedstocks – use them slowly. I am sure I am right and the other 99% of the people are wrong. Nobody else in America seems to feel my way, but I believe in deferred gratification.
“One good thing about what we’re doing is that it’s slow, but once you succeed it’s very sticky business, and the fact that it’s difficult to do means it’s difficult for people to change much – if you slog through, it’s a big market and the people have no option but to charge ahead – the fact that’s it’s so awful to grind through means people may not want to get in.”
Second, Buffett and Munger are exceptionally rational and adaptive. We all know that Munger gave a speech on human psychological misjudgments. One of the misjudgments is commitment and consistency bias. It is our nature to adhere to our pre-established view and if we shout it out in public, we pound it in. Over the past few decades, Buffett and Munger have consistently expressed the view that the airlines have the worst business model and that technology stocks are outside their circle of competency. But when the situation changed, they changed their point of view by investing heavily in airlines and technology stocks such as Apple (AAPL, Financial) and IBM (IBM, Financial).
What’s more admirable is how their view on airlines and Apple changed. The ideas were brought by Ted Weschler and Todd Combs. They were able to convince Buffett and Munger to take another look at the airlines and Apple from another angle and they did. Munger also said that the investment in airlines is not a cinch but when the competitive environment has changed, they made a decision to adapt.
“If you’re in a game and learning more and honing skills, of course you do better over time. Berkshire would be a very modest company if Warren never learned anything. We went out and bought whole entire businesses – something we’d not have done early on as stock investors. And Iscar at five times book value, Ben Graham would’ve never bought that. We’ve learned better over time, and we can keep learning and are still doing it. He’s changed when he’s buying airlines, and he’s changed when he’s buying Apple. The nice thing about the game we’re in is that we can keep learning. We’re in the press for airline stocks when in 2013 we thought it was a joke, it was such a terrible business. Today, if you put all our holdings together, we own a small airline. It violates the total catechism. It’s the same thing for railroads scaring us away with all this trucking competition – it was a terrible business for 80 years, and then we become a massive owner when they finally got it down to four main railroads. This morning I was with my daughter-in-law, and she bought round-trip tickets to Europe for $400 with taxes – huh [aghast at how cheap it was]? Maybe we shouldn’t be in the airline stocks. I frequently talk to Warren about the old days. We shot fish in a barrel. We even waited until they slowed down and used a shotgun. We get little edges now while before had total cinches. But it isn’t any less interesting. We bought ExxonMobil (XOM, Financial) as a cash substitute – we thought it’d do a little better than cash at the time – but early on we never would’ve done that. Think what changed when we bought Apple with the hooting we’ve done about high tech. ‘Apple and a bunch of airlines’ is now a lead story about us in the press. But we’re just adapting to a business that’s gotten a lot more difficult. I don’t think we’ve gone crazy. I think we’re adapting. Now the odds are just a little in our favor. We’ll take that advantage, but it’s harder. You marry the best person who will have you. Be satisfied with the type of advantage we didn’t used to get, caused by getting so enormously rich – it’s not a bad trade-off.”
Munger also emphasized the importance of patience and being prepared. The best opportunities are rare and transient so we have to be patient and be prepared to seize these opportunities. Munger gave us an inspiring example. He had been reading Barron's magazine for more than 50 years and only found one good idea from Barron's articles. It was a ridiculously cheap auto parts company. Munger bought the junk bond as well as the common stock at the cost of about $1 a share. He held for a few years and sold them at $15 per share for a total of profit of $80 million. And then he met Li Lu and thought Li Lu was very unusual. Li Lu also only invested in China, which is a much less efficient market. Munger gave Li Lu the $80 million profits he made from the auto parts company and Li Lu turned this into $400 million. Essentially through two investments, Munger turned a few million into $400 million. This example illustrates the importance of patience, deferred gratification and concentration.
More to come in my next article.
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