Archive for the ‘Charlie munger’ Category.

 

Charlie munger (warren buffett’s partner at Berkshire Hathaway) was recently asked about his views on macro and he said something to the following effect (in my own words)

“If thing are bad now, they will get better in time. If they are fine now, something will go wrong in due course. We don’t make money by predicting the timing. At Berkshire, we’re trying to swim well against the tide or with it, we just keep swimming.”

If you have not heard or read about Charlie munger, I would suggest that you read up anything you can find about him. He is one the smartest and wisest person you will ever come across.

Ignoring macro ?

It was fashionable among value investors to completely ignore the macro till the crisis of 2008 – they spoke about it as a badge of honor.

The pendulum has swung the other way since then. I see a lot of investors being cautious about macro, to avoid a repeat of 2008.

I think macroeconomic thinking can be broken down into two elements

– Understanding  industry dynamics and trying to evaluate the long term economics of the company

– Understanding macroeconomic variables such as inflation, interest rates etc and trying to forecast or guess so as to make investment decisions.

The first element is crucial in understanding the company and its profitability in context of its industry. One needs to be aware of the competitive situation in the industry to be able to figure out the long term outlook for the company.

The second element which is generally reported on by media and guessed by an army of pundits, soothsayers, forecasters and talking heads is a waste of time. Very few, if any can forecast any of these variables with any level of accuracy and no one gets it right in the long run (remember oil was supposed to go to 200$ / barrel in 2008 ?)

The comment by Charlie munger should be seen in context of the second aspect of macroeconomic thinking – there are variables such as interest rates, exchange rate etc which can impact your performance, but as they cannot be predicted , it is far better to concentrate your energy on understanding the company and its industry and learn to live with the other aspects of macroeconomics  (interest rates, inflation, exchange rates etc)

The capital goods industry

Lets look at an example. The capital goods industry is going through one of the worst cylical downturns in the last 10 years. The last time the industy went through such as patch was in the 2001-2003 time frame (I remember those times !).

I don’t think anyone can predict with precision when the cycle will turn  (although a lot of people claim to be able to do so), but one can be sure that the cycle will turn eventually.

If you can understand the economics of this industry and can find some high quality firms at reasonable prices, I am sure the returns over the next 2-3 years will be good. Let me give a tip – Look at a company like BHEL or blue star or thermax and ask these questions

– Are these companies likely to go out of business soon ? (current valuations seem to say so)
– Is it likely that these companies will do well once the cycle turns ? (though we don’t know the exact timing ?)
– Are these well managed companies with competitive advantages ? ( I believe they are)

The typical talking head on TV or broker needs to be right in the next 3 months. As an individual investor, I don’t have to play by the same rules. If I can find a company which will do well in the next 2- 3 years, I can ignore the near term outlook.

 
 

Berkshire had their annual meeting on May 5th and 6th. During the Q&A session the following question was asked on how to become a better investor. I have read something similar from warren buffett earlier and could not resist posting the answer to the question again. The reply goes to the heart of becoming a better investor and I try to follow it in an effort to improve myself as an investor. Time will tell if I have been successful at it or not.

What is best way to a become better investor? Get an MBA, is it genetic, read more “Poor Charlie’s Almanac”?

WB: Read everything you can. In my own case, by the time I was 10, I read every book in the Omaha Public Library that had to do with investing, and many I read twice. You just have to fill up your mind with competing thoughts and then sort them out as to what makes sense over time. And once you’ve done that, you ought to jump in the water. The difference between investing on paper and in real money is like the difference in just reading a romance novel and…doing something else. The earlier you start the better in terms of reading. I read a book at 19 that formed my framework ever since. What I’m doing today at 76 is running things in the same thought pattern that I got from a book at 19. Read, and then on small scale do some of it yourself.

CM: Sandy Gottesman, runs a large and successful investment operation. Notice his employment practices. When someone comes in to interview with Sandy, no matter his hage, Sandy asks, “what do you own and why do you own it?” And if you haven’t been interested enough in the subject to know, you better go somewhere else.

WB: If you buy a farm, you’d say “I’m buying this because I expect it to produce 120 bushels per acre, etc…from your calculations, not based on what you saw on television that day or what a neighbor said. It should be the same thing with stock. Take a yellow pad, and say I’m going to buy GM for $18 billion, and here’s why. And if you cant write a good essay on the subject, you have no business buying one share.

 
 

Found this great interview with charlie munger. Some interesting excerpts from the interview

How much of your success is from investing and how much from managing businesses?
Understanding how to be a good investor makes you a better business manager and vice versa.
Warren’s way of managing businesses does not take a lot of time. I would bet that something like half of our business operations have never had the foot of Warren Buffet in them. It’s not a very burdensome type of business management.
The business management record of Warren is pretty damn good, and I think it’s frequently underestimated. He is a better business executive for spending no time engaged in micromanagement.

Your book takes a very multi-disciplinary approach. Why?
It’s very useful to have a good grasp of all the big ideas in hard and soft science. A, it gives perspective. B, it gives a way for you to organize and file away experience in your head, so to speak.

How important is temperament in investing?
A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.

How should most individual investors invest?
Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund. I think that works better than relying on your stock broker. The people who are telling you to do something else are all being paid by commissions or fees. The result is that while index fund investing is becoming more and more popular, by and large it’s not the individual investors that are doing it. It’s the institutions.

What about people who want to pick stocks?
You’re back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you’re talking about a pretty complex body of knowledge.

What do you think of the efficient market theory, which holds that at any one time all knowledge by everyone about a stock is reflected in the price?
I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all. And the difference between being totally efficient and somewhat efficient leaves an enormous opportunity for people like us to get these unusual records. It’s efficient enough, so it’s hard to have a great investment record. But it’s by no means impossible. Nor is it something that only a very few people can do. The top three or four percent of the investment management world will do fine.

What would a good investor’s portfolio look like? Would it look like the average mutual fund with 2% positions?
Not if they were doing it Munger style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn’t make you with a whip and a gun?

Should people be investing more abroad, particularly in emerging markets?
Different foreign cultures have very different friendliness to the passive shareholder from abroad. Some would be as reliable as the United States to invest in, and others would be way less reliable. Because it’s hard to quantify which ones are reliable and why, most people don’t think about it at all. That’s crazy. It’s a very important subject. Assuming China grows like crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock? That is a very intelligent question that practically nobody asks.

Ibbotson finds 10% average returns back to 1926, and Jeremy Siegel has found roughly the same back to 1802.
Jeremy Siegel’s numbers are total balderdash. When you go back that long ago, you’ve got a different bunch of companies. You’ve got a bunch of railroads. It’s a different world. I think it’s like extrapolating human development by looking at the evolution of life from the worm on up. He’s a nut case. There wasn’t enough common stock investment for the ordinary person in 1880 to put in your eye.