Last week, we received word that Charlie Munger had died.
Now, Charlie was about a month away from his hundredth birthday, so I couldn’t describe his passing as a surprise. It was, however, a cause for reflection.
Everyone pays attention to what Munger’s business partner, Warren Buffett, does and says when it comes to business and investing. It would not be fair to say that Charlie has been ignored, but he was never followed as closely as Warren—except by those of us who are also getting older, always a little grouchy, want high returns on our capital, and really wish those damned kids would stay off our lawns.
Rather than tell the same dozen or so Munger stories everyone else will tell, let’s try to use his philosophy to uncover some ideas with the potential to become one of the 100 baggers that helped Munger get rich in the first place.
Munger was far blunter than Warren. He called out crypto as garbage (using much stronger language) that is almost certain to end badly. He compared most active traders to casino gamblers and suggested that many of them would likely meet the same fate; there is a mountain of empirical evidence to suggest that he is right about that. He pointed out that the widely used term “EBITDA” was best replaced with the term, in his words, “Bullshit Earnings.” Any business that does not account for depreciation today will pay for double tomorrow.
Munger loved to buy when everyone else was puking up stocks as fast as possible. He favored concentrated positions.
Munger was worth about $2.5 billion—almost all of it was in shares of Berkshire Hathaway (BRK-A), Daily Journal (DJCO), Costco (COST), and the hedge fund.
Several years ago, Munger was asked what he would do if he were investing smaller sums of money. He suggested that investors should search inefficient markets for fantastic businesses at great prices.
Most of the market is efficient, except at the major turning points.
There are so many eyeballs on the larger companies that almost everything is known, so almost everything is reflected in the current price. You and I cannot gain an edge by studying the financial statements of Apple or by talking to their vendors and retailers.
But a few thousand other people are doing the same thing. Hundreds of those work for major Wall Street firms and have Tim Cook’s cell phone number. The data they gather is crunched by massive computing power. Without these contacts and this technology, there is only one way for you to gain an advantage when it comes to investing in larger companies.
But, unlike those better-connected traders, you and I do not have to act every single day. We have no outside investors looking over our shoulders telling us what we must buy and sell.
We can sit and, as Munger did, do nothing much of the time.
When markets collapse, and career risk demands those same fund managers sell at any price, we can act. Their acts of self-preservation will lead to great businesses selling at attractive prices.
Smaller, even tiny companies, are the real hunting ground of inefficiency in the markets. Few, if any, analysts are covering these businesses, and nobody is talking about these companies on TV or across the interwebs.
None of the wannabe billionaire day traders banging away at their…
Continue reading at INVESTORSALLEY.com
