Friday, March 27, 2015

Notes From Munger's Q&A Session After The Daily Journal Annual Meeting

  • I didn't hear a single person admit to owning and DJCO shares. Everyone was there to hear Munger.
  • On a question about the Daily Journal software business and the operating losses as it grows, he said "I think of it like Jeff Bezos," which implies that he is bullish on Amazon, because the bullish case is that they are unprofitable because of growth investments.
  • His thought about product development: "make a list of everything that irritates the customer" and work on eliminating those things.
  • He seemed really depressed about capitalism, in the sense of opportunities to make easy money being arbed away. I've noticed really rich investors get that way late in the market cycle before [pdf]. He gave the example of "widow and orphan" stock Kodak, which made it through the Great Depression only to be disrupted many years later, "wiping out shareholders". He, Buffett, and Gates believe that this is a unique risk of "technology". Of course, everything is technology: RadioShack disrupted by Amazon, electric utilities disrupted by distributed solar.
  • It seemed like he was saying he doesn't even really try to make money investing anymore; it's too hard in this market. He did say that real value investors need to be small and focused on the least efficient markets; something we obviously agree with.
  • Speaking of utilities, somebody asked about Berkshire's huge investments in electric utilities. He was absolutely confident that solar would not hurt their business, but basically brushed off the question and articulated no actual explanation.
  • Speaking of entrepreneurs that Munger name-dropped, he surprised everyone by saying that he had a meal with Elon Musk and told him he thought Tesla would fail, just because of how difficult the automobile business is.
  • Charlie Munger was very impressed with Lee Kuan Yew. It was all he could talk about. Here's a funny take on LKY: "I had an idea once for a recurring sketch comedy bit called 'Korean Mother-in-Law' about a nice white liberal guy who has to live with his Korean mother-in-law who cackles mercilessly at all his nice white liberal delusions. The late Lee Kuan Yew, founder of the Singaporean state, was like the world’s Korean mother-in-law, if the Korean mother-in-law was male, hyper-intelligent, a native English-speaker, and an extraordinarily successful statesman." Munger talked about "commissioning a bust" of Yew and "sticking it someplace" in his house.
  • Pessimistic about the future: "I think that someone my age has lived through the best and easiest period in the history of the world." Thinks the next 50 years will be more difficult than last 50 (no kidding). "Be prepared for adjusting to a world that's harder."
  • He was "pleasantly surprised by the lack of consequences of bouts of inflation" this century. But he says you can "count on the purchasing power of money to go down over time".
  • He had no thoughts or interesting theories about low-to-negative interest rates throughout the world. Unlike Credit Bubble Stocks, he did not predict the big bond rally last year
  • He said the way to get rich is to "keep $10 million in your checking account in case a good deal comes along". People always ask him how to get rich quick. There's no way to do that, plus he says getting rich slowly "protracts a pleasant process."
  • There was lots of discussion of 3G and it's ability to generate returns by firing people at consumer packaged goods companies. My observation is that they are able to reverse Parkinson's Law of Multiplication of Subordinates.
  • One other good subject was indexation: "Index funds will be permanent owners who can never sell. That will give them power they are not likely to use well."
I can't see paying more than book value for DJCO, which is $136 million - 50% downside to current price.


Nathan said...

One other good subject was indexation: "Index funds will be permanent owners who can never sell. That will give them power they are not likely to use well."

Index investing has performed fantastically recently, but like the quote above I worry that people are demanding too much of the idea. I'm willing to believe that the vast majority of people should get their equity exposure via low-cost index funds. However, advocates seem to extend the principles of index investing into higher degrees of passivity that don't generalize.

For example, "you can't time the market" is often taken as corollary of "stock picking has negative expected value", so people are encouraged to buy indexes at arbitrary P/E multiples. I'm not sure how to quantify it, but if a lot of people invest this way, it seems like equity prices will just follow demographic trends of saving and dissaving. Even worse, entrepreneurs will respond to these indiscriminate investors with increasingly unreasonable IPOs. Adherents of passive investing seem to think active investors will keep these threats at bay, but it's not clear how active participants are supposed to compete with the firehose of cash coming in every month via Vanguard et al. What if active traders prefer not to fight?

Similarly, passive investors feel entitled to the same quality of management in the firms they invest in, while at the same time diminishing the checks and balances on misbehavior. When even CALPERS, with ~$3 trillion on the line, decides activism is passe, one has to believe there will be an effect on management decisions.

It's simply not possible to go from a world where equities are predominantly held by a relatively sophisticated sliver of society to one where the marginal investor is an indiscriminate buyer / seller, effectively timing transactions around their life cycle, and expect returns to be the same.

Anonymous said...

FWIW, here's some Fed research on the relationship between demographics and P/E multiples.

CP said...

CP said...