Munger likes Wisdom

Another title which pretty much states the obvious for us long-time fans.

This post will simply point to an article about the Oracle of Pasadena, Warren Buffett's right-hand man, Charlie Munger. The article talks about the Wesco meeting, and the man that many of the "cultists" go to hear speak.

A lifetime of practicing what he preaches has made Munger a billionaire: Good businesses are ethical businesses, he tells us. A business model that relies on trickery is doomed to fail.

Munger starts the session with "Socratic solitaire," in which he asks himself a series of questions.

"How serious is the present economic mess?" Munger asks. "Deadly serious. The worst mess since the Great Depression. You can't tell what happens when people get discouraged enough."

...

Today he's negative about the economy, but positive about stocks — a bullish sign. In the late 1990s, Munger complained that he didn't see much to buy. The market quickly proved him right. But, at current market prices, Munger sees many long-term investment opportunities.

"I am willing to buy common stocks with long-term money at these prices," Munger said. "Is Coca-Cola worth what it's selling for? Yes. Is Wells Fargo? Yes." He owns both.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said. "I have no feeling that just because there's more agony ahead for the economy you should wait to invest."

Smart words from a very smart man. After reading the article, if you're wanting more Munger, get the book Damn Right! or Poor Charlie's Almanac.

Buffett's Sidekick Munger

The Wall Street Journal recently published a decent article on Buffett's long-time business partner, Charlie Munger.

It talks about the differences between the two (e.g., one is laconic while the other is loquacious), some of the deals that Buffett made because of Munger (including the latest one), and what they expect for the economy going forward. Here's an excerpt:

The men share a view that the U.S. financial system will change, and criticize past excesses. "People were horribly overpaid for just pouring on leverage," Mr. Munger said. The two investors have repeatedly warned about the systemic risks posed by the abuse of leverage and derivatives.

Mr. Munger thinks regulators may significantly curb the amount of leverage, or borrowed money, that banks can use. That will drive down pay at Wall Street firms, since traders won't be able to make as many big, leveraged bets. This could benefit Berkshire, with its cash hoard of $24.3 billion at the end of 2008. "There's going to be new rules in the game," he said. "For someone like us, that's going to be very interesting."

Near Transcipt of Berkshire Meeting

Read a near-transcipt of the most recent Berkshire Hathaway meeting at Omaha.com.

Here, for your enjoyment, are two excerpts on BYD, the Chinese auto company we mentioned Warren Buffett investing in earlier:

BYD Chinese company is not early stage venture capital company, Munger says. It is a big maker of batteries, for example. Then finally, not satisfied with a couple of miracles it is now in automobile business. With zero start point and very little capital he built best selling model in China. That was against joint ventures in China. Munger says it is a damned miracle, not a speculative activity.

Munger says engineering graduates are being hired at BYD who were at top of their classes. He says it is a remarkable compilation of talent. Munger says lithium batteries are needed in every utility company in America and using power of the sun will need batteries.

Berkshire has invested in BYD and Munger says it is not a crazy venture. Munger says that car to be seen in the Qwest Center Omaha, the company makes almost every part in that car.

Munger says it is a privilege to have Berkshire associated with a company that is trying to do so much. Munger says it is a small company but its ambitions are big. Munger says he will be amazed if great things don't happen.

...

Berkshire is asked about Chinese companies. Buffett says he didn't know he'd be invested in BYD some years back, nor did he know he would have invested in Petro China.

Buffett says in some ways Berkshire will be restricted by ownership limitations, such as in insurance. But Buffett says it is hard to imagine not doing more in China in coming years because it is a huge market.

Buffett says a Chinese officially recently was upset with the Treasury bonds they hold because the value is dropping. Buffett says he believes the Chinese official is right. Buffett says it is a problem, though not the biggest problem in the world.

Munger says he would exactly what China is doing. Munger says China has one of the best financial managing systems in the world. He says China will be very hard to compete with all over the world, and that is exactly the right policy for China. Munger says that is exactly the right policy and he greatly admires the Chinese.

Asking yourself where you can buy some BYD? You're not the only one. Since news of Buffett's investment, the H shares--which are sold on the Hong Kong Stock Exchange--have gone from around 8 per share to around 20.

The stock symbol for BYD on the exchange is 1211. Here is a quote from Google Finance.

When will the Recession End?

From the most recent Leucadia shareholder report:

"Out of prudence we have a pessimistic view as to when this recession will end. To think otherwise would be to gamble about the beginnings of good times whereas by imagining a bleak future we will most likely survive for the good times to arrive."

That last line is worth reading more than once. It reminds me of the part of an old A.E. Housman poem that Charlie Munger often quotes:

The thoughts of others
Were light and fleeting,
Of lovers' meeting
Or luck or fame.
Mine were of trouble,
And mine were steady,
So I was ready
When trouble came.

Is it a surprise that great investors think alike in this regard? Or is there something about being extra cautious about the future that leads to good results over the long term? You decide.

Buffett's Investing in the Auto Industry?

Isn't that a lot like investing in the airline industry--something that Buffett (and Einhorn) have considered anything but wise?

Turns out Buffett is investing in the auto industry, albeit one in a country where there is less and less government control (as opposed to the opposite elsewhere).

A recent article from the International Business Times gives some information on BYD--and what attracted Munger (then Buffett) to the company:

...The firm was founded in 1995, and is headed by Wang Chuan-Fu, a man described as a "combination of Thomas Edison and (former General Electric Chairman) Jack Welch- something like Edison in solving technical problems, and something like Welch in getting done what he needs to do," notes Buffet’s business partner Charlie Munger in the article Fortune Magazine. It was Munger who first the idea to invest in the firm.

BYD began with $300,000 that Wang raised from relatives as a manufacturer of rechargeable batteries. By 2000, the company became one of the world's largest producers of cell phone batteries, selling its product to Motorola, Nokia, Sony Ericsson and Samsung. In 2003, BYD acquired a Chinese state-owned car company and began to build cars. By making affordable electric cars, BYD has outpaced much larger rivals such as Toyota's Prius and Chevrolet's Chevy Volt.

Buffett first offered to purchase 25 percent of BYD but Wang rejected the offering which Buffett took as a "good sign."

"I don't know a thing about cell phones or batteries," Buffett admits, "And I don't know how cars work," but he points out: "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary," Fortune reports.

Munger of course was the one who brought See's Candy to Buffett's attention. Will BYD be a cash flow machine like that? It could. While Warren Buffett won't be able to do what he wants with that cash, given that he lacks full control, I bet he'd still be happy. And so would Berkshire shareholders.

Einhorn (and Buffett) on Position Size

Here, from page 19 of Fooling Some of the People All the Time, is Einhorn sharing how he sizes both longs and shorts within Greenlight's portfolio--and why:

It is hard to find long ideas that are ones and twos or shorts that are nines and tens, so when we find them, it is important to invest enough to be rewarded.

Based on this concept, we decided that Greenlight would have a concentrated portfolio with up to 20 percent of capital in a single long idea (so it had better be a [good] one!) and generally would have 30 percent to 60 percent of capital in our five largest longs.

We would size the shorts half as long as we would longs of the same quality, because when shorts move against us, they become a bigger portion of the portfolio and to give us the ability to endure initial losses and maintain or even increase the investment.

Like reading about a company he's invested in, knowing why Einhorn has done something is as (if not more) important than following it without further thought.

Here, he takes big bets on the best ideas he can find. And, as the book from which this quote is taken shows, he knows these companies inside out.

Do you know the companies in your portfolio well enough to write more than a one page introductory statement on them? How about a book? Can you name their top five suppliers, salespeople, or customers with ease?

If not, you may well choose to size your bets differently. And you should. Warren Buffett states both points here better than I, so I'll give him the rest of the post to do so:

We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing. Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There's nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses.

But if you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness.

Buffett's Salary

Before noting that Warren Buffett is (and has been) critical of the lavish executive compensation at other firms, a recent article points out the following:

Buffett, chairman and chief executive officer of the Omaha, Neb., company, received a total of $175,000 in compensation in 2008, the same amount he received a year earlier, according to a regulatory filing made Friday.

Berkshire's chief financial officer, Marc Hamburg, earned the distinction as the highest- paid employee at company headquarters. But even his pay is almost certainly less than that of CEOs at some of Berkshire's subsidiaries, such as Geico, MidAmerican Energy and Berkshire Reinsurance. The salaries of executives at subsidiaries aren't disclosed.

Buffett's base salary remained at $100,000, the same level it's been for more than 25 years. He picked up $75,000 more for director's fees from some outside companies in which Berkshire has significant investments. That pay did not change from 2007.

Buffett and Munger routinely focus on the incentives that other companies have put in place, and that Berkshire needs to in order to achieve greater success going forward.

Are the people running the companies that make up your portfolio paid in such a way that their interests align with yours? I don't know the answer to that question...but I do know it's a good question to ask.

The Non-Flippers

In the comments section of a recent post, fellow blogger Dave in Hackensack points out a number of times Buffett held on to stocks that have since declined markedly.

He owned 20% of Moody's while it was slapping triple-A ratings on CDOs comprised of subprime mortgages; he has ridden down a number of his holdings (both wholly-owned and publicly-traded) that are linked to housing; he didn't seem to suspect the mess BofA was taking on with its acquisitions of CountryWide and Merrill Lynch (or, if he did, he held on to his BofA stock anyway), etc.

He then poses a question about Buffett's strategy and goes a good way towards answering it himself.

While I won't argue with those reasons here I would emphasize a different point. I think the reason Buffett and Munger didn't sell these companies--even though they might have known they'd be better off in a short-term financial sense--is the result of an explicitly-stated aversion to being seen as churners. Quoting Munger at last year's Wesco financial meeting:

We tend not to sell operating businesses. That is a lifestyle choice. We have bought well. We have a few which would be better if we sold them. But net we do better if we don’t do gin rummy management, churning our portfolio. We want reputation as not being churners and flippers. Competitive advantage is being not a churner.

There are a few arguable things about using this quote here. For one, the quote is taken from a slightly different context--one involving operating businesses--but I would say Munger and Buffett apply the same thinking (even if to a lesser degree) in their stock portfolio. And for the same reasons.

Not being seen as churners--and earning their reputation as solid business partners--allows them to get many of the deals that they have gotten (and will get in the future).

The long-term effects of such a strategy are of course harder to point to than horrible-looking charts, and few people have thought to do so as a result, but this I think is one of their main reasons for staying in positions (even if they might find them overvalued at some point after they've been bought).

It's also a good example that in investing, as in economics, you have to look at what is seen and what is not.