Motley Fool Hidden Gems Investing - Investing and Life Lessons from Charlie Munger

Episode Date: November 29, 2023

We celebrate one of the greatest investors of all time by talking about our favorite Mungerisms and the lessons we’ll carry forward from Poor Charlie. (00:21) David Meier and Dylan Lewis discuss: - Some of their favorite Mungerisms on investing and life. - Berkshire’s incredible performance in his time with the company. - The best thing you can do to celebrate his life today – read a book. Companies discussed: BRK.A, BRK.B, AAPL Check out The Morning Show’s conversation about Charlie Munger here (must be a paid member of a U.S. Motley Fool service to access) Host: Dylan Lewis Guests: David Meier Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. To quote the great man, I think that a life properly lived is just learn, learn, learn all the time. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, David Meyer. David, thanks for joining me. Thanks for having me. It's great to be here. Today, we are going to celebrate one of the greatest investors of all time. This week, Charlie Munger, Vice Chairman of Berkshire Hathaway and Warren Buffett's right-hand man, passed away at the age of 99.

David Munger was a source of wisdom and humor for the investing community and the business world for such a long time. We're going to spend today's show talking through his impact, his legacy, some of the lessons that will carry forward. I feel like the best place to start that conversation is probably his Mungerisms and some of his writings. I gave one in the intro of the show, but he is so notable and so quotable. I'm curious, what is something that has stuck out to you from the past? Yes. For those of you that don't know me, I was actually an engineer before I joined The Motley

Fool. The quote that has always stuck with me from Munger is, invert, always invert. So, why would that be? Well, I can tell you, having tried to solve a lot of engineering problems, many times, the insight always came from, I know what the answer is, let me figure out what I need to do in order to get there. That is exactly what he's talking about, especially with investing. Like, imagine you want a business to be great, right? You don't have to know what all the steps are going forward. Just look forward and say, hey, this business is 10 times as big as it is now. And ask yourself, what would it have to do in order to get there? And what that does is that frees your mind to figure out, okay, from a number standpoint, what does it have to do?

from a competitive standpoint, what might it do? Who do I have to worry about from a competitive standpoint? Who is it going up against? How are its customers going to react? What kind of pricing does it need? Again, it's because of my engineering background that I know that that one resonated with me. But that is so profound, yet so simple. Yeah. I think what is so great about that one, David, is, it's a framework. it's a way of thinking about things. And that is such a large part of how he approached investing and how we really thought about thinking. So, yes. One of the interesting things, at least as I picked up on his personality, is he was never going to give you an answer.

If you ask him a question, what's two plus two? He's not going to tell you the answer is four. He always, always, always wanted to give you the framework to have you think about what the answer should be, right? In his whole life, that was always what he wanted to do. He wanted you to think. Because, look, we're all different, right? We all approach problems in different ways. And so to say that there's one answer in business is sort of ridiculous, right? But here's how he would communicate. Here's how I might think about it. Here's how others might

think about it. So yes, frameworks were his thing. And I have to say, when I was at Wake Forest for getting my MBA, the best class that I had was a strategy class. And that's all the professor taught was, here's a framework for how to think about this problem. Here's a framework. And putting them together and integrating them, which is another thing that Munger thought was very important. One plus one plus one does not equal three if you integrate them together. He would say, it could be six, it could be nine, it could be 1,000. But yes, the integration of frameworks was a big part of his legacy. In that vein, David, I think one of my favorite quotes is, we have three baskets for investing, yes, no, and too tough to understand.

Because, to your point, what someone might think of as too tough to understand is perfectly in the wheelhouse of another investor. It's not overly prescriptive to the point where it says, avoid this, don't avoid that. But it's an easy framework for other people to borrow and then take their own life experiences, their own expertise, and apply to. Sure. And Warren Buffett is the perfect example of that. Warren Buffett, every year that he has ever been alive, has basically said, look, I don't understand technology. Therefore, I'm not going to invest in it. And so many people would say, no, no, no, It's easy, Warren. You just have to think about it. And Warren would be like, no, it's too hard

for me. It's too hard for me. So Warren, that was something definitely that they, as a partnership, they both believed in it. And I can imagine Charlie basically sometimes holding Warren's feet to the fire saying, look, are you sure you understand this business? Are you sure you understand this business. But, yes, there's plenty of ideas in my too-hard pile, which is behind me. Yeah. I think for a lot of investors, especially new investors, it's great advice, because there's this expectation that the more sophisticated you get, the better you understand something, and that you get style points, almost, for finding these novel ideas. And the reality is, no, you don't. No. In fact, you might be taking

on additional risk, which is exactly how I think Munger would think about it. Markets are competitive. If you're going up against someone who has better information than you and can organize it better, he would immediately say, I'm not playing that game. There's no reason for me to play that game. For beginning investors, it's a perfect measure for beginning investors. I love what you just said there. Just be you. Know what you're good at. Hey, you very well might be aligned towards consumers. Maybe you're a foodie and you know about restaurants. Stick there. Learn about those businesses. It's a really good Mungerism. You mentioned the partnership and the back-and-forth between Munger and Buffett,

is incredibly well-documented, as is their success at Berkshire Hathaway. But I thought, just given the opportunity, it might be good for us to put some numbers to what the firm has been able to do with those two at the helm. We count it now as one of the most valuable companies in the world. That is a far cry from where the partnership originally started. I think it's probably one of the greatest investing stories of all time. Yes. So, let me take one half-step back in order to set some context for this. So, one of the things that I think is underappreciated about Munger is, you know, he was stoic and, you know, he didn't talk a lot, but he was definitely a deep thinker.

And he was a heck of a visionary. If you look at his analysis of Coca-Cola, he projected way into the future about what Coke could become and then worked backwards, i.e. invert, to figure out how it was going to get there. He must have done the same thing with Warren. He must have looked out and said, you know what? Warren is going to be massively successful, and we're going to be investing a lot of money at some point, so let me help develop a framework to scale. Because traditional value investing, which is where Warren came from, the Ben Graham school, that's not scalable. You can't manage very large sums of money playing that game. Let's take you back to 1982. In the 1982 chairman's letter, those two were investing,

the market value of the publicly traded portfolio was $946 million. Now, just under a billion dollars. There's plenty of value funds out there that are doing that. In 1992, the market value of their publicly traded portfolio was almost $11.5 billion. That's getting difficult. Again, you have to take this great company long-term growth mindset in order to scale your portfolio up just over 10X. Fast forward 30 years, 2022, they're managing $350 billion. Munger put together a process that enabled them to go from a billion dollars of capital invested in 1982, to $350 billion, and they're still making investment returns. That is amazing. It's incredible for so many reasons. I think one of them is, the success for this style

and for investing in general gets harder and harder to come by the larger you get. We've heard Buffett and we've heard Munger talk about so much. There are only so many things that move the needle when your portfolio is that size, and yet they continue to find them. They continue to do it. The other piece of this that is very important, and I know Munger had a big influence on this, was the structure of Berkshire Hathaway. Berkshire gets most of its capital from its insurance organizations. People give them money to insure things, they take the money, they invest it. Berkshire Hathaway is not looking to generate huge returns. And the reason is, is because Munger and Buffett structured the company to essentially have a zero

cost of capital. So if my business success is based on the spread between how much my capital costs and how much my capital earns, having zero as your cost of capital, which essentially is what it is, that's a huge advantage if you're going to be an ultra long-term investor. But it's not that I'm going to be safe. They're not parking these in treasuries and trying to get 2%, 3%, 5%. One of the investments that Munger is directly responsible for is company called BYD, which is the battery maker in China. He's been high on this company for a long time. Since they invested in it, it's a 33-bagger, 33X. Again, we're not talking risk-less investing, but even with zero cost of capital, you put 33X on top of $250 million investment at essentially

zero cost. Again, the numbers are astounding. Their returns are incredible. Yeah, they're absolutely incredible. It's a hard model to build for yourself. You need an insurance business or something that gives you that cash at a low or no cost. But if you can find it, it winds up being an incredibly lucrative model. Absolutely. Again, these two together, they fed off of each other. Munger made Buffett a better investor and better businessman. And the reciprocal happened as well. Together, they just made an incredible investment company. I think one of the other investing lessons for me from Munger and really from the duo and the dynamic that they had was his comfort with

concentration, which is a little different than I think where Buffett probably started and certainly very different than how a lot of investors tend to think about concentration, especially when people are getting started early on, really espouse the benefits of diversification, diversification, diversification, because it can save you from a lot of mistakes and from taking on too much risk. But I think Munger kind of perfected this. You learn the rules, you break the rules, and then you become very confident in how you break the rules over time. And his view was so much more, it's okay to be highly concentrated because it's in some ways just a measure of conviction and finding opportunities and acting on them.

For most people, an investment in the S&P 500 index is the right choice because investing is not what they do every day. If you're not in the game, so to speak, every day analyzing businesses, talking with other businessmen and women in the markets, that's what Buffett and Munger did every day. It makes complete sense from that perspective. If this is what you're an expert in and you come across a good idea, you don't put 2% of your portfolio in it. You put 20% of your portfolio in it. Yeah. I mean, just look at their stake in Apple, right? Correct. The concentration can be scary, but again, if this is something that is your passion and that you're an expert at and you do

every day, you can run a concentrated portfolio. I will say, at one point, I had a stock that was 85% of my portfolio. That's high. That's pretty high. That's really high. How did you feel about that? It got there the right way. It got there because I put 15% of my portfolio and it turned out to be a good investment. Sometimes it was a little hard to sleep at night knowing it was that much. But when I would go through and I would reassess, okay, where's the company today? What's it doing? Is the stock price ridiculously overvalued or does it still have some appreciation? you know, again, that's what I do every day. So, for a limited time, I was comfortable with it.

Through Munger, I don't have a problem with concentration when it's warranted. I think the key with that is, it's a lot of concentration paired with the discipline of when it makes sense for that concentration. You have to have both. You have to have both. They talk about that. There's a quote that I'll pull up here that I think is relevant. You mentioned the game of investing earlier. It says, the whole trick of the game is to have a few times when you know something is better than average and invest only where you have that extra knowledge. It gets to the expertise point you were talking about earlier. I think the idea here is, we are not heavily concentrated all the time. We're heavily concentrated

during those generational moments where we see an opportunity. Yes. The business school adage of, with more risk, you should expect more return, I mean, okay, directionally, that's correct. But if you have a massive opportunity and the risk is low, your concentration in that opportunity should go up. It's a risk management game at that point. Yeah, 100%. It's something I've borrowed as well. You talked about using it a little bit in your own portfolio. I have a company that's not 85%, 25% of my individual stock portfolio. I think in the abstract, probably too much. But I take a look at the business and where it's positioned, and I say,

I just don't see how this company gets disrupted. I just don't see how this opportunity goes away. That gives me the confidence to maintain the position. It has been one of those positions that's grown and grown over time for all the right reasons. I've just continued to let it go there, Munger style. Very good. You're borrowing his knowledge and wisdom perfectly there. I think one of the things I like about his knowledge and wisdom is, it's investing in business advice, but a lot of it is life advice through the lens of investing and business. I think, as we wrap, it probably makes sense to talk a little bit about some life lessons from Munger, because I see so many in his quotations.

Absolutely. I really appreciate the one that you brought to the beginning of the show. which is learn, learn, learn. Not only did he say that, but he lived it, and he has also been charitable. He does a lot of work with universities. Learning is at the absolute center of his entire ethos. In some respects, I don't think he really cares that he's a billionaire. It's great, but that's not who he is. He's much more comfortable being a person who helped make the world a little bit of a better place, helped people get smarter, influenced people to make better decisions. I have to say, along those lines, Again, as an engineer, when I came to The Motley Fool and I came into investing,

I came in with the attitude of, look, I'm really good with numbers. I should be able to find opportunities and I'll be able to suss them out better than other people can and I'll make a lot of money. Then I read his analysis of Coca-Cola and I'm like, yeah, there's like 5% numbers, 95% qualitative analysis, psychology and competitiveness and aftertaste versus no aftertaste. And I'm like, yeah, I'm doing this wrong. I am totally doing this wrong. And I changed my style as a result of that while I was here at The Motley Fool, which is another benefit of working for our company. You're going to grow. You need to have a learning mindset because that is something that is important to the Gardner brothers as well.

I think to your point there earlier about the way that he viewed money, I think Munger primarily viewed money and wealth as really just an opportunity for him to spend his time the way that he wanted to. And in his case, so much of that was deciding to read, deciding to learn. I think he made a joke at one point that his grandchildren probably see him as a book with legs because he's so often just sitting there in the chair reading a book. And I think that learning mindset for him is such a large part of what I take away from his career. And I think one of the things that kind of sticks out to me in that vein is like, we talk so much about Buffett and Munger together. The formal partnership of Buffett and Munger didn't actually start until

Munger was in his 50s. They had known each other for a little while before that, I think about a decade and a half before that. But so much of what we know of this man and his legacy was something that didn't start until he was halfway through his life. He'd been investing before that, but not with Warren Buffett. I think it's an apt reminder that there is so much in front of you, no matter what stage you're at in life, if you're embracing the learning mindset, if you're embracing whatever life will continue to throw at you. I completely agree. For those of you who may not know, he's a lawyer by training. had a law firm. He was a partner in a big law firm, actually, and he switched careers.

I would like to think that I had a similar epiphany, if you will. The reason I changed careers, one, I realized I'm making actually more money as investing my portfolio than I am as an engineer, and I love it. It was at that point that I'm like, you know what, I just need to make a switch. I had no plans to do this ever. The reason I came to The Motley Fool as a reader was I had just gotten married, we had just moved, I just had my first job and I was like, you know what, we're going to want to buy a house, we're going to want to have kids, I need to start learning about investing. The more I learned, the more I was just completely taken with the subject. Basically, for about seven years, I became a

personal investor, prepped through The Motley Fool before I landed a job here in 2005. We talked a little bit about this on the morning show, but if there was one thing that if you wanted to pay homage to Munger today, which we're doing here because we appreciate everything that he's taught us over the years, go read a book on a topic that you don't know anything about and you just want to learn. That is what would make Charlie Munger so much happier than one of of us making a good investment decision. He would rather us read a book and learn something. That seems like a perfect way to wrap today's show. David Meyer, thank you so much for joining me today. Thanks, Dylan. Really appreciate it.

Listeners, we mentioned a few of our favorite mongerisms and stories. We'd love to hear yours. Podcasts at fool.com is where you can send them. David mentioned more monger homages on the Morning Show. That's our daily program on our premium live stream, Motley Fool Live. We'll put a link to that conversation in the show notes so our U.S. members can check that out, too. As always, people on the program may own stocks mentioned, and Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.