I'm always on the lookout for insights into the way Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) think.
To this end, I recently came across notes from the 1999 Wesco shareholder meeting.
During the meeting, Munger shared his thoughts on some of the critical issues of the day, as well as provided some general investment insights.
Good ideas can hurt you
One of these was the notion that "good ideas can hurt you." Munger was referring to the dotcom bubble, which was still playing out at the time. He told his audience that the internet was a lot like railroads, refrigeration, radio, television and air-conditioning when these technologies were first invented. They were great technological advancements, but not necessarily good investments for the first round of investors who approached them.
As it turns out, Munger was correct. The dotcom bubble alerted investors to the potential of the World Wide Web, but it all ended in tears for most companies as the market got ahead of itself. It took more than a decade for the real potential of the internet to be unlocked and profitable businesses to emerge from the ashes. Munger quoted Benjamin Graham, who once said it is not the bad ideas that do you in. Rather, it is the good ideas.
He went on to say that while the internet might have tremendous potential, he thought it was "way overdone" at the time. He said there is always something people go crazy over, and there will be immense losses in the internet space. He told his audience that, for this reason, it pays to have experienced money managers making decisions for you rather than managers who are trying to follow the trend.
Buffett and REITs
Another exciting topic of conversation that cropped up in the annual meeting was real estate investment trust, or REITs.
At the time, there was some speculation that Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) was using its vast cash pile to acquire REIT units. These rumors were, Munger said, not true. It was true, however, that Buffett himself was buying REITs for his personal portfolio, Munger added, mainly because it is more tax effective for an individual to own REITs rather than a company like Berkshire.
According to the notes, after revealing this fact to his audience, Munger teased Buffett for buying REITs, saying he was resorting to cigar-butt investing. This is an interesting, rare glimpse into Buffett's personal portfolio. We don't know a huge amount about where the Oracle of Omaha decides to invest his personal funds (aside from Berkshire Hathaway stock, of course). In the past, he has revealed he owns shares of JPMorgan (JPM, Financial) and more recently, announced he owns an 8% stake in Seritage Growth Properties (SRG, Financial). In 2017, Berkshire swooped in and bought a nearly 10% stake in REIT Store Capital (STOR, Financial).
REITs are an interesting choice for the guru because they are not within the realm of his typical investments. These companies normally require high levels of capital investment and generate relatively low returns, although rental income does tend to rise with inflation, which is something Buffett has always warned investors should protect themselves against.
Still, property is generally seen as an exceptionally safe investment for the long term. As a result, Buffett could be investing in this sector because he is looking for a steady, predictable income for his personal portfolio to support his lifestyle.
It could also be the case that Buffett spotted unmissable bargains in the sector and wanted to act. Whatever the reason, it is notable that he likes real estate and has, at times, held it in his personal portfolio, which is some food for thought for investors and an invaluable insight into how the Oracle of Omaha operates.
Disclosure: The author owns shares of Berkshire Hathaway.Â
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