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Saturday 27 February 2021

Of course, it's going to be difficult - The wisdom of Charlie Munger

Charlie Munger has been one of the guiding lights in my life. A hero for me. Not in investing but generally on how I should go about leading my life. I have gained immensely over the years from listening to his advice. He is one of the few great thinkers alive. Recently, he spoke at the Daily Journal Annual Meeting. Below are my notes from the talk. Things that resonated with me.

Q. Please share your thoughts on the recent WallStreetBets GameStop short squeeze. It seems to involve a lot of your standard causes of human misjudgment.
A. Well, it certainly does and that's the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on racehorses. That's what we have going in the stock market. The frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. 
I think you should try and make your money in this world by selling other people things that are good for them. If you're selling them gambling services where you rake profits off of the top, like many of these new brokers who specialize in luring the gamblers in, I think it's a dirty way to make money and I think that we're crazy to allow it.

Q. What do you think of all of the SPACs and the promoters pushing them?
A. I don't participate at all and I think the world would be better off without them. I think this kind of crazy speculation in enterprises not even found or picked out yet, is a sign of an irritating bubble. It's just that the investment banking profession will sell shit as long as shit can be sold.

You get crazy booms. Remember the .com boom? When every little building in Silicon Valley rented at a huge price and a few months later, about a third of them were vacant. There are these periods in capitalism and I've been around for a long time and my policy has always been to just ride them out and I think that's what shareholders do.

Well, it's most egregious in the momentum trading by novice investors lured in by new types of brokerage operation, like Robinhood. I think all of this activity is regrettable. I think civilization would do better without it. You'll remember that when the first big bubble came, which was the South Sea bubble in England, back in the 1700s, it created such havoc, eventually, when it blew up, that England didn't allow hardly any public trading in securities of any companies for decades thereafter. It just created the most unholy mess. So human greed and the aggression of the brokerage community creates these bubbles from time to time and I think wise people just stay out of them.

I think everybody is willing to hold stocks at higher price earnings multiples when interest rates are as low as they are now. So I don't think it's necessarily crazy that good companies sell at way higher multiples than they used to. On the other hand, as you say, I didn't get rich by buying stocks at a high price earnings multiples in the  midst of crazy speculative booms, and I'm not going to change. I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower, everybody is.

I think all good investing is value investing, and it's just that some people look for values in strong companies and some look for values in weak companies, but every value investor tries to get more value than her pays for.

I don't think I know exactly what the future of banking is, and I don't think I know how the payment system will evolve. I do think that a properly run bank is a great contributor to civilization, and that the central banks of the world like controlling their own banking system and their own money supplies. So I don't think Bitcoin is going to end up as the medium of exchange for the world. It's too volatile to serve well as a medium of exchange. And it's really an artificial substitute for gold. And since I never buy any gold, I never buy any Bitcoin. And I recommend that other people follow my practice.

I'm constantly making mistakes where I can, in retrospect, realize that I should have decided differently. And I think that that is inevitable because it's difficult to be a good investor. I'm pretty easy on myself these days. I'm satisfied with the way things have worked out and I'm not gnashing my teeth that other people are doing better. I think that the methods that I've used, including the checklist, are the correct methods. And I'm grateful that I found them as early as I did and that the methods have worked as well as they have. And I recommend that other people follow my example. 

It's natural for people to think their own civilization and their own nation is better than everybody else, but everybody can't be better than everybody else. You're right, China's economic record among the big nations is the best that ever existed in the history of the world. And that's very interesting. A lot of people assume that since England led the industrial revolution and had free speech early, that free speech is required to have a booming economy, as prescribed by Adam Smith. But the Chinese have proved you don't need free speech to have a wonderful economy. They just copied Adam Smith and left out the free speech, and it worked fine for them.

If you stop to think about it, business success long-term is a lot like biology and in biology, what happens is the individuals all die and eventually so do all the species and capitalism is almost as brutal as that. Think of what's died in my lifetime. Just think of the things that were once prosperous that are now in failure or gone. Whoever dreamed when I was young that Kodak and General Motors would go bankrupt? It's incredible what's happened in terms of the destruction. 

I think I'm not really equipped to comment on any subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time, if you're looking for disconfirming evidence and putting yourself on a grill, that's a good way to help remove ignorance.

I think Warren and I are better at buying mature industries than we are at backing startups like Sequoia. The best venture capital operation, probably in the whole world, is Sequoia's. They are very good at this early stage investing. I would hate to compete with Sequoia in their field. I think they'd run  rings around me. So I think for some folks, early stage investing is best. For other folks, what I've done in my life is best.

A lot of the old moats are going away, and of course, people are creating new moats all the time. That's the nature of capitalism. It's like evolution in biology. New species are created and old species are dying. Of course it's hard to negotiate in such a field. But there's no rule that life has to be easy on the mental side. Of course, it's going to be difficult.

Well, happy life is very simple. The first rule of a happy life is low expectations. That's one you can easily arrange. And if you have unrealistic expectations, you're going to be miserable all your life. And I was good at having low expectations, and that helped me. And also, if when you get reverses, if you just suck it in and cope, that helps if you don't just fretfully stew yourself into a lot of misery. Always tell the truth and never lied to anybody about anything. 

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