"It's gotten hard in the United States," Charlie Munger (Trades, Portfolio) said in an interview with Yahoo Finance at the beginning of May, "to find easy value investments because the world is so competitive."
Munger made this statement after the 2018 Berkshire Hathaway annual meeting, which is widely considered to be the largest event on value investors' calendars every year.
What's interesting about this interview is Munger admits value investing has changed over the past several decades. It has been easy to see that Warren Buffett (Trades, Portfolio)'s investing style has shifted since the 1950s and 60s, away from deep-value small-caps toward larger companies that have a more significant competitive advantage and are not necessarily the cheapest stocks around.
This shift in strategy is, according to Munger, based on the factthe world has become more competitive and it's now tough to find value investments that are not value traps.
"That accounts for a lot of what you see in Berkshire, where we buy securities like Apple (AAPL, Financial) that we wouldn’t have bought in the old days when we had more mundane things that were serving us very well," he said.
Berkshire's shifting business
Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) slow decline as a textile business is an excellent example of this trend in action. Even though the company exited this business many decades ago, the fact it transitioned from one of the most prevalent textile producers in the country to nothing between 1950 and 1985 is amazing. As noted in a previous article, Buffett said its competitors didn't fare much better as cheap imports proved to be too much:
"Burlington made a decision to stick to the textile business, and in 1985 had sales of about $2.8 billion. During the 1964-85 period, the company made capital expenditures of about $3 billion, far more than any other U.S. textile company and more than $200-per-share on that $60 stock. A very large part of the expenditures, I am sure, was devoted to cost improvement and expansion. Given Burlington’s basic commitment to stay in textiles, I would also surmise that the company’s capital decisions were quite rational.
Nevertheless, Burlington has lost sales volume in real dollars and has far lower returns on sales and equity now than 20 years ago. Split 2-for-1 in 1965, the stock now sells at 34 -- on an adjusted basis, just a little over its $60 price in 1964. Meanwhile, the CPI has more than tripled. Therefore, each share commands about one-third the purchasing power it did at the end of 1964. Regular dividends have been paid but they, too, have shrunk significantly in purchasing power."Ă‚
Changing with the times
The investment landscape has changed significantly over the past 30 years, and part of the reason why Buffett has been so successful over this time is that he has been able to change with it.
This ability to change stance is, according to Munger, one of the most important traits an investor can have. In the Yahoo Finance interview, Munger told Editor-in-Chief Andy Serwer, "Now there are various ways to look for value investments, just as there are various places to fish. And the first rule of fishing is to fish where the fish are...The first rule of value investing is to find some place to fish for value investments where there are a lot of them."
He went on to say that the team at Berkshire are still value investors, but they've changed their pond. They are now fishing in more fertile areas, chasing the money, so to speak.
This isn't the first time Munger has used his fishing analogy. He last compared investing and fishing at the Daily Journal (DJCO, Financial) Annual Meeting:
"There’s a rule of fishing that’s a very good rule. The first rule of fishing is 'fish where the fish are,' and the second rule of fishing is 'don’t forget rule number one.' And in investing it’s the same thing. Some places have lots of fish, and you don’t have to be that good a fisherman to do pretty well. Other places are so heavily fished that no matter how good a fisherman you are, you aren’t going to do very well. And in the world we’re living in now, an awful lot of places are in the second category. I don’t think that should discourage anyone. I mean life’s a long game, and there are easy stretches and hard stretches and good opportunities and bad opportunities. The right way to go at life is to take it as it comes and do the best you can. And if you live to an old age, you’ll get your share of good opportunities. It may be two to a lifetime, that may be your full share. But if you seize one of the two, you’ll be all right."
Disclosure: The author owns no stocks mentioned.
