Tao of Charlie Munger

A Compilation of Quotes from Berkshire Hathaway's Vice Chairman on Life, Business, and the Pursuit of Wealth With Commentary by David Clark

David Clark

• Éditeur: Scribner
• Année: 2017
• ISBN:
  9781501153358
• Sujet: Personal Development
• Sous-sujet: Personal Finance

Words of wisdom from the late Charlie Munger—Warren Buffett's longtime business partner and the visionary Vice Chairman of Berkshire Hathaway—collected and interpreted with an eye towards investing by David Clark, coauthor of the bestselling Buffettology series. Born in Omaha, Nebraska in 1924, Charlie Munger studied mathematics at the University of Michigan, trained as a meteorologist at Cal Tech Pasadena while in the Army, and graduated magna cum laude from Harvard Law School without ever earning an undergraduate degree. Munger was one of America's most successful investors, the Vice Chairman of Berkshire Hathaway, and Warren Buffett's business partner for almost forty years. Buffett says "Berkshire has been built to Charlie's blueprint. My role has been that of general contractor." Munger was an intelligent, opinionated businessman whose ideas can teach professional and amateur investors how to be successful in finance and life.Like The Tao of Warren Buffett and The Tao of Te Ching, The Tao of Charlie Munger is a compendium of pithy quotes including, "Knowing what you don't know is more useful than being brilliant" and "In my whole life, I have known no wise people who didn't read all the time—none, zero." This collection, culled from interviews, speeches, and questions and answers at the Berkshire Hathaway and Wesco annual meetings, offers insights into Munger's amazing financial success and life philosophies. Described by Business Insider as "sharp in his wit and investing wisdom, " Charlie Munger's investment tips, business philosophy, and rules for living are as unique, intelligent, and successful as he was.

PART I

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CHARLIE’S THOUGHTS ON SUCCESSFUL INVESTING

# 1

FAST MONEY

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“The desire to get rich fast is pretty dangerous.”

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Trying to get rich fast is dangerous because we have to gamble on the short-term price direction of some stock or other asset. There are a huge number of people trying to do the same thing, many of whom are much better informed than we are. The short-term price direction of any security or derivative contract is subject to all kinds of wild price swings due to events that have nothing to do with the actual long-term value of the underlying business or asset. Last but not least, there is the problem of leverage: to get rich quickly, one often has to use leverage/debt to amplify small price swings into really huge gains. If things go against us, they can also turn into really large losses. So we take a leveraged position in a stock, thinking we are going to hit it big; then something terrible like 9/11 happens, the stock market tanks, and we get wiped out. In his early days, Charlie did use a lot of leverage on his stock arbitrage investments, but as he got older he saw the grave danger he was putting himself in and now passionately avoids using debt and bets only on the long-term economics of a business, not the short-term price swings of its stock price.

# 2

CIRCLE OF COMPETENCE

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“Knowing what you don’t know is more useful than being brilliant.”

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What Charlie is saying here is that we should become conscious of what we don’t know and use that knowledge to stay away from investing in businesses we don’t understand.

At the height of the bull market bubble in technology stocks in the late 1990s, many very brilliant people were seduced into investing in Internet stocks. Charlie realized that he didn’t understand the new Internet businesses, which were outside what he calls his circle of competence, so he and Berkshire avoided them completely. Most of Wall Street thought he had lost his touch. But when the bubble finally burst and the companies’ stock prices fell, fortunes were lost, and it was Charlie who was left looking brilliant.

# 3

AVOID BEING AN IDIOT

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“People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”

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Charlie’s investment philosophy is predicated on the theory that a shortsighted stock market will sometimes underprice a company’s shares relative to the long-term economic value of the company. When that happens, he buys into the company, holds it for the long term, and lets the underlying economics of the business eventually lift the stock price. The only thing he has to be careful about is not doing something stupid, which in his case are mostly errors of omission, such as not acting when he sees a good investment or buying too little of it when the opportunity presents itself. Which is actually harder to do than one might think.

# 4

WALKING AWAY

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“Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand—you must learn to handle mistakes and new facts that change the odds.”

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Charlie experienced this with the home mortgage lender Freddie Mac. When Berkshire bought shares in Freddie Mac in the 1980s, it was a very well run, conservatively managed, profitable enterprise involved in the mortgage business. As time went on, Freddie’s management branched out into a new line of business in which they were using their quasi-governmental status to aggressively borrow short-term money and then lend it out long term—the same financial equation that eventually put Lehman Brothers into bankruptcy. Seeing the dramatic increase in risk and the change in the attitude of Freddie Mac’s management, Berkshire sold its much-loved investment at a profit in 1999. By 2008 Freddie Mac was in receivership (a kind of bankruptcy), the old management had been fired, and the stock was worth a tiny faction of what it had been when Berkshire sold its shares. Charlie knows when to hold ’em, knows when to fold ’em, and knows when to walk away.

# 5

EASY SHOOTING

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“My idea of shooting a fish in a barrel is draining the barrel first.”

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Sometimes the shortsighted stock market serves up an investment opportunity that is so obvious it is hard to resist. This usually happens when there is a stock market panic and investors are fleeing any and all investments, even the ones with great long-term economics working in their favor. This fleeing of investors is the draining of the barrel—stock prices drop, which makes it easier for Charlie to see the fish: underpriced great businesses.

# 6

REVELATION

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“Once we’d gotten over the hurdle of recognizing that a thing could be a bargain based on quantitative measures that would have horrified Graham, we started thinking about better businesses.”

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Benjamin Graham was the dean of value investing. He was also Warren Buffett’s teacher and mentor, and in his world value investing meant buying a stock at below its intrinsic value—which to Graham meant half of book value or at a very low price-to-earnings ratio. One could readily do that in the period of 1933 to 1965 if one worked hard enough at finding those kinds of bargains. The problem with Graham’s investment philosophy was that it required an investor to sell the stock once it rose to its intrinsic value. There was no such thing as owning a company for twenty years or longer and letting the underlying economics of the business grow the company and lift the stock price.

Charlie and Warren realized that some businesses have exceptional economics working in their favor that will cause their intrinsic value to increase over time. The common stock of these amazing companies really is a kind of equity bond that has an increasing rate of interest (earnings) attached to it. For example: When Berkshire started buying Coca-Cola stock in 1988 (figures are adjusted for splits), the company had earnings of $0.18 a share and was growing its per share earnings at a rate of approximately 16% a year. Berkshire paid approximately $3.24 a share, which equates to a P/E ratio of 18, way too high for the likes of Graham. But Charlie and Warren could see something that Graham couldn’t: that the long-term economics of the business made it a bargain at a P/E ratio of 18. They saw Coca-Cola’s stock as a kind of equity bond, which was paying an initial rate of return of 5.55% ($0.18 EPS divided by $3.24 = 5.55%), which would continue to increase as Coke’s per share earnings continued to grow; and that over the long term, the market would advance Coke’s share price as the company’s earnings grew.

So how did Berkshire do? Its $1.299 billion original investment in Coke in 1988, over the last twenty-seven years, has grown to be worth $17.184 billion, giving Berkshire an average annual compounding rate of return of 10.04% for the twenty-seven years, which doesn’t even include all the dividends that it received in that time period. In 2015 alone, Coca-Cola paid to Berkshire $528 million in dividends, giving Berkshire a current annual dividend rate of return of 40% on its initial investment of $1.299 billion. Over the next five years Coca-Cola will pay Berkshire approximately $2.64 billion in dividends. Things really do go better with a Coke, including our money.

# 7

GRAHAM’S ERROR

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“Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him. . . . It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.”

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The crash of October 29, 1929, was hard on Graham, and the ensuing crash in 1932 was devastating. After the crash of 1929, stock prices started to rise, increasing by 30% by 1931. The crash of 1932 was completely unexpected and the worst in the twentieth century. It drove stock prices down by 89%. If you had $1,000 invested in the Dow on September 3, 1929, it would have gone down to $109 by July 8, 1932.

To protect himself in the future, Graham developed the concept of the margin of safety, a quantitative approach to valuation that he adapted out of bond analysis and the fear of bankruptcy. He looked for companies that were selling on a per share basis for less than their book value. Thus he developed the buying-the-whole-business approach. He’d value the whole business at, say $10 million, and then he would figure out what the company was selling for on the stock market. If it had a million shares outstanding and was selling at $6 a share, he could see that the stock market was valuing the entire company at $6 million. But its intrinsic value was $10 million, which gave him a margin of safety of $4 million. So even if the stock market crashed, the company’s $10 million intrinsic value would eventually pull its stock price back up.

Where this hurt him was that his system required him to sell an investment once it reached its intrinsic value. There was no such thing as holding a stock for thirty or forty years, as Charlie and Warren do. If he had bought Berkshire Hathaway in 1974, when it was selling at half its book value, he would have sold it in 1980, when it was selling above book value. There would have been no riding it to $210,000 a share in 2016. His investment philosophy was designed to make him money and to protect him from losses, but it also stopped him from ever benefiting from the compounding effect that a great business can generate over a period of ten, twenty, or more years.

# 8

SITTING ON YOUR ASS

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“Sit on your ass investing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.”

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This important investment philosophy assumes that one is better off buying a business with exceptional business economics working in its favor and holding it for many years than engaging in a lot of buying and selling, trying to anticipate market trends. Constantly buying and selling means constantly being taxed. If one holds an investment for twenty years there is only one tax to pay, which, according to Charlie, equates to an extra 1 to 3 extra percentage points of profit per year.

Though the 3 extra percentage points may not seem like much, consider this: a million-dollar investment compounding at 4% a year will have grown in year twenty to $2,191,123. Add three percentage points (4% + 3% = 7%), so that the million-dollar investment is compounding for twenty years at 7%, and you will end up with a sum of $3,869,684 in the twentieth year.

Charlie knows that time is a good friend to a business that has exceptional economics working in its favor, but for a mediocre business time can be a curse.

# 9

THE DAWNING OF WISDOM

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“Acknowledging what you don’t know is the dawning of wisdom.”

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The smarter we get, the more we realize how little we actually do know. By acknowledging what we don’t know, we are putting ourselves into a position to learn more; thus, the dawning of wisdom.

In Charlie’s world of investing there is what he calls a “circle of competence,” which consists of all the companies he is capable of understanding and valuing. But it also includes all the companies outside the circle that he doesn’t understand and is unable to value. By acknowledging what he doesn’t know, he can either avoid an investment or learn more about the business and see if he can understand it to the point that he can value it, which would put it within his circle of competence. Over the course of Charlie’s life he has increased his circle of competence to include the insurance business, banking, newspapers, television, candy companies, airlines, the toolmaking business, boot makers, underwear manufacturers, power companies, and investment banking. Charlie’s road to all this wisdom began by acknowledging what he didn’t know and then doing something about it.

# 10

ANALYSTS

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“In the corporate world, if you have analysts, due diligence, and no horse sense, you’ve just described hell.”

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I think what Charlie is saying is that when analysts from a ratings company such as Moody’s Corporation issue a new rating on a bond, while being paid millions by the Wall Street investment bank that requested the rating, we should probably be a little suspicious. The ratings companies have a very strong incentive to provide the investment banks with the highe...