In Buffett & Munger - A Study in Simplicity and Uncommon, Common Sense, author Peter Bevelin has done the hard work of poring over Warren Buffett’s and Charlie Munger’s speeches, interviews, annual meetings and shareholder reports. And he has brilliantly distilled it into a conversational format.
In 3 stock analysis insights, we highlighted the wisdom from Warren Buffett. This time, we look at what Charlie Munger has to say.
Be opportunistic.
We are opportunity driven.
If you took our top 15 decisions out, we would have a pretty average record. It wasn’t hyperactivity but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigour.
Through this practice of concentration of investments, we seek to better understand the few decisions we make.
If I were managing $2 million (which, by the way, I once did) I certainly would be looking in a lot of smaller places where I could find more extreme and easy-to-diagnose mispricings.
You don’t get that many opportunities in a lifetime.
When life finally gave me one, I blew it. Many decades ago, I made a big mistake caused in part by subconscious operation of my Deprival-Superreaction Tendency. A friendly broker called and offered me 300 shares of ridiculously underpriced, very thinly traded Belridge Oil at $115 per share, which I purchased using cash I had on hand. The next day, he offered me 1,500 more shares at the same price which I declined to buy, partly because I could only have made the purchase had I sold something or borrowed the required $173,000. This was a very irrational decision. I was a well-to-do man with no debt; there was no risk of loss; and similar no-risk opportunities were not likely to come along.
Within two years, Belridge Oil sold out to Shell at a price of about $3,700 per share, which made me about $5.4 million poorer than I would have been had I then been psychologically acute.
As this demonstrates, psychological ignorance can be very expensive. I could have borrowed. There wasn’t the slightest risk in borrowing money to buy Belridge Oil. The worst that would happen was I would get out with a small profit. It was really a dumb decision.
You’re not going to get that many really good ones – don’t blow your opportunities. They’re not that common, the ones that are clearly recognizable with virtually no downside and big upsides.
Don’t be too timid, when you really have a cinch. Go at life with a little courage.
Own your investments.
Sandy Gottesman, a Berkshire director, runs a large, successful investment firm. When he interviews someone, he asks: ‘What do you own and why do you own it?’ If you’re not interested enough to own something, then he’d tell you to find something else to do.
The number one idea is to view a stock as an ownership of the business and judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash flow than you’re paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favour. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced.
Use common sense, not advanced math and computer models.
You don’t need higher math in business and if you learn it you feel tempted to use it – to your detriment. You really have to understand the company and its competitive positions; that’s not disclosed by the math. There is something to be said for ‘keeping it simple’.
You’ve got a complex system, and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, (yet) there’s not precise numbering you can put to these factors. You know they’re important, but you don’t have the numbers. Well, practically everybody 1) overweighs the stuff that can be numbered, and 2) doesn’t mix in the hard-to-measure stuff that may be more important.
I don’t think we’ve reached a new order of things where the laws of mathematics have been repealed. A wise economist once said, ‘If a thing can’t go on forever, it will eventually stop’ ….and it might even get a lot worse. All man’s desired geometric progressions, if a high rate of growth is chosen, at least come to grief on a finite earth.
Some of the worst business decisions I’ve seen are those that are done with a lot of formal projections and discounts back. And the trouble with that approach is that you get to believing the figures. And it seems that higher mathematics with more false precision should help you, but it doesn’t.
Common sense is an enormously powerful tool. There are huge dangers in getting too caught up in the minutiae of using a computer so that you miss the organized common sense. People calculate too much and think too little.
Think about where the business is going to be in the future – not macro factors.
I have never taken a single course in economics, nor tried to make a single dollar, ever, from foreseeing macroeconomic changes. There’s too much emphasis of macroeconomics and not enough on microeconomics. I think this is wrong. It’s like trying to master medicine without knowing anatomy and chemistry.
If you’re agnostic about macro factors and, therefore, devote all of your time to thinking about individual businesses and the individual opportunities, it’s a way more efficient way to behave.
Macroeconomics people are often wrong because of extreme complexity in the system they wish to understand. The trouble with making all these macroeconomic predictions is that people start to think they know something. It’s much better to just say you’re ignorant.
People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.
It’s kind of a snare and a delusion to outguess macroeconomic cycles. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you’ll have your share of good tides and bad tides.
