Charlie Munger and Li Lu interviewing with Weekly in Stock August 2018
Charlie Munger is 95 year old.
Long-term value investing instead of gambling
Philosophy: Find a good investment and stay with it for a long time.
The saying in Chinese: it takes 10 years to sharpen one’s sword.
If you invest the way people gamble in casinos, you are not going to do very well. It’s the long term investment that works best.
If you like the actions of investing (sometimes winning, sometimes losing) just like the actions when they gamble in a casino, they are not suited to be value investors.
It’s the long-term investors who figure out something’s going to work over the long term and and buy that.
Ben Graham said that in a short run, the market is a voting/gambling machine, in the long run, the market is the weighing machine.
How Charlie invests:
A lot of people believe that there’s truth in the market and that the market is going to tell you something just by bouncing around. It’s not the way Charlie or Berkshire invest the money.
Charlie and Warren have a view to what the intrinsic value is and what is being traded. They only buy it when they think the stock is worth more than what they are paying.
They are trying to make a long term investment by waiting for something to be underpriced and then buying.
They don’t care nor pay any attention to those gamblers on the market.
Speculating or gambling is a foolish way if you want to get rich.
Li Lu: the truth that Charlie mentioned above is the value of the company itself.
For those who care about price fluctuations and making relevant investments based on such fluctuations are very foolish.
How many companies to invest in?
Over the last 50 years, Hong Kong’s successful investors are not short-term traders and gamblers, they are long-term investors who sought out good long-term investments and stubbornly held for long periods of time.
Charlie bought Berkshire at $16 a share. It’s not selling for $300,000 a share. It takes 50 years and it’s a very good investment. Charlie just sat there for over 50 years.
Li Lu and Charlie have been investing together in China for over 13 years. They bought many companies and sold very few.
Charlie doesn’t have many bad investments.
Charlie has 3 stocks: Berkshire, Li Lu’s partnership, and Costco.
How books does Charlie read?
He skims or reads 20 books per week.
He reads a lot of biography, almost no fiction.
Why Berkshire invested in Apple?
Warren said he could understand consumer electronics better than computer. And they only found few opportunities in American market which exist in consumer electronics and computer. They decided to invest in Apple.
Another thing is that Charlie and Warren keeps learning. As they keep learning and as conditions change, their investment changes.
Warren and Charlie hated airline investments for many years. As the condition changed, they found that airlines were selling very cheap and bought as many as they could.
Charlie: We changed because the world changed.
If reality changes, we will change as well.
Warren and Charlie hated railroad stocks for decades. However, as it got down to only four big railroads, technology changed, they bought railroad stocks and then bought the whole railroad.
They changed their mind because the fact changed.
Li Lu: we are not going to make a large and complete predictions about general market or an industry. That’s not our investment style. That’s not going to do anything for real investment returns. Instead they often play a negative role. It puts you in a pre-conceived state. Therefore, keep your foot on the ground. Analyze each company on specific basis.
How to live your life?
Live one day at a time and do the best you can every day and pretty soon you have a good life.
If you want to be a good person, you want to get one more day being a better person. You do for enough days and pretty soon you become a better person.
Why do masters of value investment enjoy longevity?
If you analyze who live long life, they are: professors, judge, and value investors
Who live short life: journalists, hard drinkers, hard smokers. When you are under a lot of stress, you die young. Traders are the worst of all. Short-term stock traders die the quickest.
The judge just sits there. Court rules go his pace not somebody else’s. There’s nobody over him telling him to do something. Judge lives forever.
How often do you talk to Buffett and what do you discuss?
Buffett and Charlie used to talk a lot.
Berkshire has 30 people at its headquarter. Berkshire added $65 billion dollars to its net worth in 2017 and 0 head count was added.
Why rationality is important?
Rationality is seeing the world the way it is, instead of the way you hope it is.
When you don’t see the world the way it is, it’s like judging something through distorted lens. You think the world is one way and it’s different. That leads to terrible mistakes.
So most people are irrational.
How can we be rational?
You’ve got to work at it and care about it.
If you don’t care whether you are rational or not, you don’t work on it. Then just stay as irrational as you want all your life and take the lousy results you surely get.
You have a moral duty to be as rational as you can.
Human nature in a big bureaucracy makes bad decisions. If you don’t know that, you will give more respect to those decisions than they deserve. So it helps to understand where the human nature is automatically causing bad results, so that you can avoid them.
The reality is that if you deal with a big dumb bureaucracy, it’s very difficult and unpleasant. The sooner you learn that and how to handle that, the better off you are.
The main idea is to understand the world the way it is, instead of the way you hope it is.
This is important than doing researches over the company’s fundamentals.
Rationality is more important than knowledge intelligence and patience.
People will recognize value in time
Crazy traders may do crazy things on the short term basis but over time value will tend to win.
It’s natural for the stock to eventually go to its value.
Ben Graham: in a short-term, the stock market is a gambling machine, in the long term, it is the weighing machine.
In the long-term, the market will figure out what’s really worth.
So the most important thing in the market is time. When there’s enough time, more and more people will see the value. Especially when the value itself is increasing more and more.
This is quite natural. There’s nothing magical about it.
Why buying a great company is better than buying a cigarbutt?
A great company keeps working when you are not. A great company will eventually earn more and more and more while you just sit there and do nothing.
A mediocre company won’t do that. These mediocre companies will cause a lot of agonies and very modest profit. When it goes up a little, you have to sell it and then find another until it works. That’s a lot of work.
Instead, you can just buy one great company at the right price. You can just sit there and do nothing and wait.
A great company will constantly create new value. The value itself grows by accumulating returns.