Bill Gates once said that Charlie Munger is “truly the broadest thinker I have ever encountered.”
The fallout of being an avid reader across disciplines is that one develops a kinetic thought pattern. That was evident when Munger draws parallels between investing and evolutionary biology – destruction is inevitable.
A very recent interview of Charlie Munger is much talked about. Of special interest to me were his thoughts on disruption and technology. I share his views and have liberally padded it up with an earlier speech at USC Business School.
Think biologically when it comes to investing.
Common stock investors can make money by predicting the outcomes of evolution. You can't derive this by fundamental analysis - you must think biologically.
Over the long term, the companies of America behave more like biology than they do anything else. In biology, all the individuals die, so do all the species. It is just a question of time. That pretty much happens in the economy too. All the things that were great when I was young have receded enormously. New things come up and some of them have started to die. That is what the long-term investment climate is.
Look at what has died – department stores, newspapers. If the technology hadn’t changed, newspapers would still be great businesses. U.S. Steel, John D. Rockefeller’s Standard Oil is a pale shadow of its former self. It’s just like biology. They have their time, and then they get clobbered.
When technology moves as fast as it does in a civilization like ours, you get a phenomenon that I call competitive destruction. You have the finest buggy whip factory and all of a sudden in comes this little horseless carriage. And before too many years go by, your buggy whip business is dead. You either get into a different business or you're dead—you're destroyed. It happens again and again and again.
And when these new businesses come in, there are huge advantages for the early birds. And when you're an early bird, there's a model that I call “surfing”—when a surfer gets up and catches the wave and just stays there, he can go a long, long time.
All successful investment involves trying to get into something that is worth much more than you are paying. There are different ways to go about that.
Some are the cutting edge of change. They destroy others instead of being destroyed themselves. And those are the Googles and the Apples and so forth.
Some get on the cutting edge of change. The way Sequoia does. The most remarkable investment firm in America is probably Sequoia. That venture-capital firm fanatically stays right on the cutting edge of modern technology. They have made more money than anybody and they have the best investment record of anybody. It's perfectly amazing what they have done.
(Sequoia Capital has been an investor in Apple, Google, Airbnb, DoorDash, PayPal, Instagram, WhatsApp, YouTube, Oracle.)
Others, like me, do some of that as well as try to avoid big change.
Berkshire owns the Burlington Northern railroad. You can hardly think of a more old-fashioned business than a railroad business. It’s an excellent asset. Who is going to create another trunk railroad? We made that a success, not by conquering change but by avoiding it. It helps to have a position that almost can’t be taken away by technology. How else will you haul goods across the land, from Los Angeles to Chicago?
Burlington Northern has been adept in harnessing technology. Imagine the good fortune in being able to take an existing railroad, double deck all the trains, raise the heights of the tunnels and create twice the capacity at very low incremental cost. Which is what they have done.
In Gillette's case, they keep surfing along new technology which is fairly simple by the standards of microchips. But it's hard for competitors to do. So they've been able to stay constantly near the edge of improvements in shaving.
Retail is not going to go away. After all, it has been around for thousands of years. But it has certainly been a difficult place to make money because of what the internet has done.
A friend recently sent me a blue blazer made in China, bought on the Chinese internet, costing $42. It was not the perfect blazer, but an amazing blazer for $42. He gave an order for a 1,00,000 which have been presold using the internet.
How good is it for Brooks Brothers when somebody can deliver a blazer via the internet for $42? Retail has to cope with such stuff. Retailing has become very tough. Online buying and selling is here to stay here, getting more and more efficient.
These changes are always bad for some and good for others. I am a director at Costco. Its last reporting period saw online sales up 86% over the same quarter last year. That is a significant development. Is it good for other retailers? No. It’s good for Costco, but it isn’t good for them.
Their brick-and-mortar stores are already doing well but have been enormously destructive because of their low prices and efficiency to other retailers. And now they are on the internet too. The last thing I would want to do in retail is to compete with Costco.
New technology will be very disruptive to many people. Retailing, in particular, is facing major threats. It is changing the world. It will hurt a lot of people.
Technology is a killer as well as an opportunity.
The great lesson is to discriminate between when technology is going to help you and when it's going to kill you. And most people do not get this straight in their heads.
When we were in the textile business, we were making low-end textiles - which are a real commodity product. And one day, the people came to Warren and said, "They've invented a new loom that we think will do twice as much work as our old ones."
And Warren said, “Gee, I hope this doesn't work because if it does, I'm going to close the mill.” And he meant it.
He was thinking, “It's a lousy business. We're earning substandard returns and keeping it open just to be nice to the elderly workers. But we're not going to put huge amounts of new capital into a lousy business.”
And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners.
Technology may increase efficiency without increasing profits.
There are all kinds of wonderful new inventions that give you nothing as owners. The money won't come to you. All of the advantages from great improvements are going to flow through to the customers. It's such a simple idea. It's so basic. And yet it's so often forgotten.
I've never seen a single projection incorporating that. Rather, they always read: “This capital outlay will save you so much money that it will pay for itself in three years.” So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you've earned a return of only about 4% per annum. That's the textile business. The cost reductions came through all right. But the benefit of the cost reductions didn't go to the guy who bought the equipment.
An increase in efficiency does not mean an increase in profitability.
For society, the Internet is wonderful, but for capitalists, it will be a net negative. It will increase efficiency, but lots of things increase efficiency without increasing profits. It is way more likely to make American businesses less profitable than more profitable. This is perfectly obvious, but very little understood.