Charlie Munger: "I wouldn't want any one of them to marry into my family."

Notes from Charlie Munger at Sohn Hearts and Minds 2021

A bit of a different post today. I attended the Australian Sohn Hearts and Minds conference which was held virtually in December 2021. One of the highlights was listening to the great Charlie Munger speak. Charlie was interviewed by local fund manager, Mark Nelson of Caledonia and didn’t disappoint. There is no recording available (that I have seen), and I thought I’d share my notes for those who were interested. Enjoy!

As a side note, Sohn Hearts and Minds is a fantastic initiative that raises money for various medical research institutes. If you ever get the opportunity to go to the conference, I’d encourage you to do so. You can find out more here.

On investing in the current market

Have you ever seen a market like the one we are experiencing now? The dot com boom was crazier on valuations, even worse than what we are experiencing now, but overall, Charlie considers this era even crazier than the dot com area.

Is it possible to invest in the way that Munger likes - identify great companies with long term business with great unit economics? It is still possible but investors have to pay a great deal more which reduces future returns.

Is it possible to predict earnings with confidence 5-10 years from now? It’s hard-to-get better results. Charlie thinks 99% of investment advisers must be lagging the S&P 500.

On millenials

The world has changed, and it’s a very different world than what Charlie is used to.

Charlie is not a fan of US millennials.

"I don't know what they're like in Australia, but here they're very peculiar: very self-centered and very leftist."

On industries going through changes

Energy, banking and automotive are all going through changes. Excited by any of those industries? Charlie speaking for Warren and himself, says they both agree it's interesting. “Warren and I would like to sit and watch the evolution for the next 30 years.” The Internet has changed things drastically. For example, it destroyed the monopoly of the newspapers.

Banking industry? Charlie thinks the industry would have died if it hadn’t been rescued.

On China

Note the below was before he sold a large portion of his Alibaba stake.

Charlie is a strong believer in the future of China (and has made several investments in the region). Recent events have altered his thinking on attractiveness of China, but notes every capitalist is less enthusiastic about China than a year ago. Charlie is not to worried about it though.  In his view, there is not going to be a nuclear war, so its best that China and the US just get along. He thinks that both China and US will be smart enough to see that and will reach an acceptable relationship. Nothing would be more insane for either country than not getting along.

He continues to be supportive on a number of regulatory measures enacted by the Chinese Government.

“The guy who is running China has done a lot right…..They're right to step out, step hard on booms and to not let them go too far. The extent that my country doesn't do that, we're inferior to China. They're acting in a more adult fashion. They were right to step down so hard on corruption."

China has been a huge blessing to Australia’s economy, and Charlie thinks Australia should be using its minerals that it sells to build a better relationship with China.

“I think Australia was very lucky to have China get so prosperous, so it’s been a huge blessing to Australia. I think Australia with its deep involvement in China can be in a constructive position, Australia can encourage the United States and China to be more reasonable.”

On Clean Energy

Charlie is in favour of using a lot more renewables even if there was no global warming. Important to save hydrocarbons for the future

"I love the fact that we're rapidly reducing the burning of coal and the burning of gasoline and diesel. I think that's a smart thing for the world to be doing, and it would be smart even if there were no global warming."

On mental models

Everyone uses mental models. For example, a simplistic way of proceeding would be that all successful investments come from value investing. One could also use a check list for investments.

Charlie himself recommends trying to avoid what could go wrong. For example, a question we might want to solve is, how can I help India? Ask the question what could I do to hurt India? Find ten answers and avoid those things.

On himself and Warren

Charlie’s view is that both he and Warren have been more successful than others because they are better than most people at knowing what they do and don’t know. They know the edge of their own competency.

“Berkshire has done so well because both Warren and I know what we don’t know”

The world is full of insanely overconfident people, and those people make mistakes. Charlie thinks it’s evolved and partly genetic. He clarifies, everything is partly genetic and culture.

On Costco

Costco is so extreme about cost and he “loves Costco”. The organisation is full of people that have the right culture. Trying to get ahead by servicing its customers and employees extremely well. Internal mission to do right by everybody. They have an extreme discipline in being very efficient. Continues to be impressed by their ability to reduce costs and increase purchasing power.

Importance of subscription element of Costco’s business model? Charlie knew Sol Price well. Part of building an intelligent business is knowing the business you don’t want and keeping those customers out. Sol Price did not want people who shoplifted, wrote bad checks or people who used the carpark without buying anything. The subscription element helps solve for that.

Costco vs Amazon? Charlie thinks Amazon has more to fear from Costco in terms of retailing. He also thinks Costco will be a huge internet player.

"Amazon may have more to fear from Costco in terms of retailing than the reverse. Costco will eventually be a huge Internet player. People trust it, and they have enormous purchasing power."

[It would be a] “Sentence from hell if I had to compete with Costco.”

On inflation

Charlie doesn’t trust any currency issued in the whole world. It’s natural to reduce purchasing power of currency.

"So over 100 years, I don't trust any currency issued in the whole world. It's natural to reduce the purchasing power of currency. If you're a government, the best you can hope for is the inflation will be slow."

Costco pays its suppliers for merchandise after its customers have paid for them. In his view, Costco is as as well positioned as any of its customers to deal with inflation

On crypto

Would never buy it, wish it was never invented. In his view the Chinese have made the right decision, and banned them. Everyone wants to pile in and people are taking advantage of this. Charlie’s attitude is that he wants to make money by selling people things that are good for them. He wouldn’t want anyone who is into Crypto marry into his family.

"I wish they'd never been invented. And again, I admire the Chinese – I think they made the correct decision, which is to simply ban them. In my country, English-speaking civilization has made the wrong decision. I just can't stand participating in these insane booms, one way or another... Believe me, the people who are getting in cryptocurrencies are not thinking about the customer, they're thinking about themselves. Just look at them. I wouldn't want any one of them to marry into my family."

"I want to make my money by selling people things that are good for them, not things that are bad for them."

On interest rates

Not made his way in life by predicting interest rates.

“Your guess is good as mine”

Try and operate in a way in that whatever happens he will do it okay.

On compounding returns

Charlie references (Roman philosopher) Senica - “time discovers truth”.

“Time is the friend of a great business in investment and enemy of poor business. Of course, it’s true, great business will be the only ones that succeed over time.”

Is compounding still great? Not as good as the past. In the past investors had the growth plus the multiple expansion (10x earnings to 35x). Its hard to do when everything is trading at 35x.

On regulation

Charlie likes certain types of regulation. Like making banks be sensible when everyone else goes crazy, but doesn't feel that way about people trying to sell kitchen utensils. He also supports safety regulations like regulating pharma (where people are desperate).

Points to Rockefeller and Carnegie gave the US modern medicine and changed the laws of the US. Made every medical school imitate John Hopkins (a good thing). On the other hand think of the temptation and when Purdue (Pharma) yielded to temptation. Charlie thinks Purdue are “scum balls that belong in the lower circles of hell”.

On venture capital (and Sequoia)

Charlie by his own admission would not be well suited to venture capital. Pointed to Sequoia who in his view has one of the best venture track records globally.

“If I was at Sequoia, I wouldn’t have done as well- they have the best investment record in the world. I don't know how to do what they do. I regard it as a minor miracle."

He also notes Sequoia is helped by their own reputation as they see all the good deals and that recent venture capital returns have helped university endowments do extremely well.

On his investment philosophy

Investment philosophy has not changed. They are still looking for the great companies, but concedes they are harder to find now given pricing.

On the lollapalooza system

The lollapalooza is an extreme outcome of any kind. Its multiple causes bearing toward the same results. Examples of of the lollapalooza system in action include Coke, Sequoia and Costco (he also mentioned Amazon later on).

On Elon Musk and Jeff Bezos

Radically different people, but both are very talented.

Bezos: was valedictorian of his class in high school and at Princeton. He is abrilliant man, worked hard and is a fanatic. Caught a big wave (the internet) on purpose and played it harder than anyone else. Charlie reflects that Amazon is another interesting example of lollapalooza effect. Wouldn’t have been an example if there wasn’t an internet wave to get on board.

Musk: also very able, but thinks he is more able than he is - but then warns to never underestimate the man who overestimates himself

"He thinks he's even more able than he is, and that's helped him. Never underestimate the man who overestimates himself."

On democracy

Charlie’s view is that direct democracies are not working and historical experience suggests sticking to some form of hierarchal system works better. He points to the most admired institutions in the world (the Mayo Clinic, Harvard), which are are not democracies. Only a few places that have made democracy work well. Charlie points to the democracies of LATAM and India, which in Charlie’s view are also not working well. Reiterates that the historical record would not suggest that direct democracy is way to go.

On what makes a high-quality company?

“You want companies that have high earnings on capital and have a durable competitive advantage, and if you can add to that they've got a good management instead of a bad one, that's a big plus too. But what you'll find is that the great companies of the world have been discovered, so they're very expensive to buy. That is particularly hard for me because... you have to pay a great deal for good companies, and that reduces your future returns."

Kodak and the high valuation of good companies making it expensive if an investor makes a mistake. The company was blindsided by tech change.

"Kodak was a very admirable company and led the world for a long time. Basically, that your shareholders' claims went to zero. They got blindsided by technological change."

Other questions

Would you rather own an airline or airport? The airport. An airline suffers from competition, but the airport is protected

Views on commodity businesses? Had had one or two flutters but basically avoids them.