Link to podcast + transcript | 5 December 2023
Enjoyable rambling podcast covering a range of Charlie Munger’s interests including architecture, politics, why having more kids at a younger age makes you happier, and of course finance and business models.
A few themes which stood out to me with my thoughts on them, and excerpts from the podcast episode below.
Good returns in a good way
It is not easy to make money at scale in the right way, but Munger and Warren Buffett do care. Munger talks about how he doesn’t want to make money the way that Sacklers did w oxycontin sales, or FDR’s family made from selling opium in China, or by owning a toll bridge affording them monopolistic pricing powers (see below). They not only want to make the right returns, but also in the right kind of way. This reminded me of a Ruchir Sharma article contrasting good and bad billionaires.
“Charlie: [00:28:11] We’ve looked at things like that, But I can’t remember — and what we once bought a big position in a bridge.
John: [00:28:19] A literal toll bridge business?
Charlie: [00:28:21] A literal toll bridge, and then we decided that we didn’t want to look like a goddamn monopolist. And besides, we just sold and moved on to something less monopolist. “
“John: [00:23:49] Did you ever look at TransDigm?
Charlie: [00:23:51] Sure. I don’t like that way of making money.
John: [00:23:54] Because the price increases.
Charlie: [00:23:56] It’s too brutal. They figure out something that has a little monopoly due to the defense department regulations, and they raise the price 10 times. And they’re famous for it. I regard that as immoral. “
Circle of competence
They have their circles of competence when it comes to investing, and want to focus on that. Predictability of earnings emerges as a key investment criterion, which is why ideally little to no tech investing (exception: Apple, where they are the largest single shareholders apparently).
“John: [00:14:36] This gets to one question I was wondering about, which is you and Warren famously say that you divide investments into yes, no and too difficult to reason about, and say, much high tech might be in that too difficult to reason about… “
Charlie: [00:15:51] Yes, it’s just that — take, for instance, pharmaceuticals. The American pharmaceutical industry is better than any other pharmaceutical industry in the whole world. And number two is not remotely even close. So we have one of the great achievements in the whole history of the world in science and technology and so forth. At the same time, there’s a fair amount of sleaze in the way pharmaceuticals are distributed… By and large, we haven’t invested in pharmaceuticals because we’ve got no edge. I don’t know enough about biology and medicine and chemistry to have any edge in guessing which new pharmaceutical attempt is likely to succeed and other people who know those things, not that they have perfect knowledge, but it’s way better than mine. Why in the hell would I play against other people in a game where they’re much better at it than I am…”
“…you have to know what you know and what you don’t know. You have to know the edge of your competency. And if you know the edge of your competency, you’re a much safer thinker and a much safer investor than you are if you don’t know it.”
“Partly, Warren and I, we pretty much know what we know and what we don’t know, what we’re good at, what we’re not good at. And one of the things we’re not good at is guessing which new pharmaceuticals. So we don’t even look at it. After all, it’s a big universe out there and if we have to leave a certain kind of investment behind because we lack the capacity to deal with it as well as some other people. That’s all right. We don’t need an infinite number of opportunities. “
Costco, negative working capital and well-run retail ventures
It is interesting how all the best run retail businesses (Trader Joe’s, Costco and even DMart) have a common theme – they have limited SKUs, lower inventory costs (given the lesser SKUs) and faster turns, often with negative working capital, as you see below from the excerpt, not so much because Costco squeezes its suppliers but more from the speed of sales itself.
“John: [00:20:38] Would you agree that this is something that’s much misunderstood in business is people are obsessed with percentage margins, but the capital efficiency of the business is a function of its percentage margins and the inventory turns and either of those can contribute to the capital efficiency? …So what examples do you prefer of businesses driving capital efficiency without squeezing small suppliers?
Charlie: [00:21:43] Well, Costco is one.
John: [00:21:44] By turning the inventory quickly?
Charlie: [00:21:46] Yes and doing that because they have fewer stocking units and they’re way more efficient.
John: [00:21:51] You’re on the board, right?
Charlie: [00:21:53] Yes. I am somewhat the older member. But Costco, it’s an amazing culture. The whole damn culture of the place is so subtle and it just marches from triumph to triumph. It was smart to have a small number of stocking units flowing through with enormous speed. It was right to have a membership system.
There are three things that Costco didn’t want. Didn’t want people who stole merchandise. They didn’t want the people who used bad checks, and it didn’t want people cluttering up his goddamn parking lot without spending a hell of a lot of money in stores. So a membership system, where they accept only a certain kind of a member, all of a sudden now they’ve got nothing but people who buy a lot per trip.
Costco has always had the lowest shrink rate in the world. Tricks the inside too. So the net theft rate at Costco was always below 2/10 of 1%. That’s unheard of.
John: [00:22:46] I hadn’t thought of the parking lot efficiency with the membership system.
Charlie: [00:22:49] You can’t go to Costco just to buy bottle of iodine, just drop in. You got to be a member and then you got to pay enough, so to an ordinary person, they’re not going to pay an extra $100 to buy a bottle of iodine or something. We keep the peach pickers, the little buyers out.
Sol Price used to say “A business should be careful in the business it deliberately does without”. Of course, that’s straight out of a Munger book. You figure out what you want to avoid. And they want to avoid theft losses, embezzlements, bad checks and cluttering up the parking lot without buying much. And their system caused all those effects at once.
John: [00:23:27] It’s like your first speech in the book, start with the business you don’t want, work backwards. “
Berkshire invests in businesses whose competitive advantage holds for very long periods
One reason why they dont invest in tech businesses, is because they are constantly getting disrupted like Kodak or Intel. They love consumer brands or utility businesses like railroads for a reason. Even with railroads, he describes how they purchased it only because the US railroad system had consolidated into two, and there was scope for even more efficiencies to be wrung (by stacking containers atop each other).
John: [01:13:22] In evaluating a business like Stripe, what questions would you want to answer for yourself?
Charlie: [01:13:26] Is it likely to remain forever as a money generator? And that’s a more complicated subject. It’s hard to know how the world is going to evolve. If Kodak could suddenly be obsoleted away, maybe it’s not utterly unthinkable if Stripe could.
Charlie: [00:15:32] You’ve got to recognize the tech changes do cause some new businesses to flourish and other businesses that looked impregnable to fail. And that’s one of the realities you have to understand.
John: [01:14:00] That does seems to be a remarkable aspect of Berkshire is just the duration of the investments, where it’s very hard to pick out companies in the Berkshire portfolio that you don’t feel good about 50 years from now.
You get very few big opportunities in life
“Charlie: what do I have relative to investments in life? I’ve got Costco stock, Berkshire stock, Li Lu’s China fund and Avi’s apartments. So I have four investments, basically, after 60 years or something — by the way, I feel perfectly adequately diversified. Nobody teaches that’s adequate diversification.
And they’re dead wrong. Simple fact is that it’s easier to find four things that are above average than it is to find 40. It’s not that damned easy to find. You find something that’s almost sure to work because you figure — you’re asking to finding a gold mine in your backyard. When it works, is that easy? How many gold mines are you going to find in your backyard? You shouldn’t expect to have all that many
opportunities that are clearly identifiable.
It’s going to be very hard and you’re lucky if you get only a few in a lifetime. And then you have to be a combination of very patient and very aggressive. You have to sit patiently waiting, watching, surveying, hunting and pounce very occasionally. You get four pounces in a lifetime that really work big time, and that’s a very successful lifetime. And other people think — like that guy on TV, he’s an expert in every company every time. That’s crazy. He’s an expert in saying something that’s mildly plausible. That’s not being an expert investor. “
Incidentally the section on architecture is quite entertaining. Munger calls it the queen of the arts (gives it equal billing with music) and his views on how architects don’t think from first principles is illuminating. Munger designed the infamous windowless dorms at University of Michigan, which were loathed by architectural critics but appreciated by the students / residents. The windowless dorms could only finally come about because of the shifting firecodes. That entire section is a good read for anyone wanting to understand first principles thinking and reasoning out what users want.
Lee Kuan Yew
Munger is a big fan of LKY who transformed Singapore. He reveals he has two busts of people in his house – one is Ben Franklin and the other is Lee Kuan Yew!
“Munger: When you stop to think about it, Poor Charlie’s Almanack is a lot like the guy who created modern Singapore. And what he always said was figure out what works and then do it. Figure out what works and then do it. He just did that more relentlessly than anybody else and more intelligently. And he was probably the greatest nation builder that’s ever exists in terms of quality of leadership. He’s probably the greatest nation builder that ever existed, including Pericles and everybody in all history.
And it’s very much like Poor Charlie’s Almanack. Figure out what works and do it. Figure out what doesn’t work and avoid it. And he just was relentless. That’s all he did. And he started as left-wing labor lawyer. At the start, he was a left-wing labor lawyer, end up creating modern Singapore just by figure out what works and do it, and figure out what doesn’t work and avoid it.
Just keep doing that over and over again. So as far as I’m concerned, the politician who looks the most like Poor Charlie’s Almanack is Lee Kuan Yew. And I’m not surprised that he got ahead better than any other nation builder that ever lived. That was all he did. It was pretty goddamn simple.
John: [01:36:53] Maybe a good example of that, that I love from Lee Kuan Yew’s life of “find out what works and then do that” is about the deliberate choice of English as the national language, where Chinese would have been…
Charlie: [01:37:01] Of course. He made zillions on decisions like that, that were totally correct. And not everybody has a political leader that tells the people to change their goddamn language. But when the logic required that he just figured out it would work better for Singapore, then he did it. Of course that’s admirable. And of course it works. Everybody ought to study Lee Kuan Yew. In this house, I’ve got 2 busts of other people. One’s a Benjamin Franklin, one of them is Lee Kuan Yew. That’s all I have. “