Here’s our guide for the 2019 AGM! We’ve been before and it’s a blast (your mileage may vary depending on your hobbies). There’s not just the Saturday morning AGM but a whole little ecosystem has grown out of this thing.Read More
Some spent Valentine’s Day with their partner after winning them over with roses and chocolates. Others (understandably so) went to see our favorite 95 year-old Charlie Munger talk about business, investing, and life for 2 hours. This year, CNBC taped the Daily Journal AGM on February 14, 2019.
Below are some of our notes:
The Daily Journal’s newspaper business is earning approximately $1m pretax but will decline for the foreseeable future. The other side of the business is software that automate courts processes from different jurisdictions around the world. This software business is very difficult because it involves dealing with different bureaucracies and is very customer service centric, but can also be an enormous market. On the flip side, most big companies aren’t interested in it because it is so difficult to do. Main competitor is Tyler Technologies which is a large public company.
In the world of disruption this and innovation that, we thought this quote was notable: “The idea of taking on the whole world when the Chairman is 95, the Vice Chairman is 89, and the Chief Executive is 80 and uses a cane – it’s a very peculiar place.”
Munger discussed a large investment fund company, which created a new fund with every manager’s best idea. While it sounded great in theory, it turned out poorly, even though they tried it many times. Why did it fail? Why wouldn’t an intelligent group of people coming together with their best ideas result in success?
Munger does not answer, but he later gives a hint: if anyone asked Buffett every year for his best ideas, he might only have 1 or 2, and if you followed just those you would do very well.
Our thoughts: An individual’s best idea might not be the best overall idea, particularly since most fund managers specialize in certain industries that might not be attractive altogether (never mind office politics). Therefore, the best ideas get drowned out and watered down.
On education - “By the way, my definition of being properly educated is being right when the professor is wrong. Anyone can spit back what the professor tells you. The trick is to know when they are right and they are wrong.”
Active Investing VS Passive – “If everyone did index investing it won’t work but for another considerable period index investing is going to work better than active stock picking where you try to know a lot. Now a place like Berkshire Hathaway or even the Daily Journal we have done better than average. Why has that happened? And the answer is pretty simple; we tried to do less. We never had the illusion that we could just hire a bunch of bright young people and they would know more anybody about canned soup and aerospace and utilities and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects, like Jim Cramer pretends to have. We always realized that if we worked very hard we could find a few things where we are right and that a few things were enough and that was a reasonable expectation. That is a very different way to approach the process. If you had asked Warren Buffett the same thing that this investment counsel had did, “give me your best idea this year”, you would have found it worked perfectly. He wouldn’t try to know a whole lot, he would give you one or two stocks. He had more limited ambitions.”
Investment management business - Munger thinks most fund managers get basically paid to do nothing vs ETFs. Fund managers might say their job is to save their clients from actively trading. Munger agrees they are probably still saving some people from the “hustling stock broker.” But it is very peculiar that the whole profession is paid to do that. Despite lots of IQ in there, they typically can’t outperform indexes.
Munger views the industry’s rationalization as a state of denial. No solution he can think of, but noted that admirable value investors just quit instead of staying in denial.
Told the story of an old woman in Omaha that sold her soap company in the 30s during Great Depression. She had a big mansion and $300k. She split most of the $300k into 5 stocks, of which 3 were GE, Dupont and Dow, and bought some muni bonds. She just figured electricity and chemicals were an up and coming thing, then just didn’t do anything after that. When she died in the 1950s, she had $1.5m (probably around ~10% CAGR since she was living off the muni bonds).
Peter Kaufman always says “If the crooks only knew how much money you could make by being honest, they would behave differently.” Warren says “Always take the high road because it’s never crowded.”
Daily Journal: Could have easily raised prices during Great Recession because of all the foreclosure notices. Should they have raised prices? No, not the right way to run a business especially if you’re already rich.
Similar to Vitreous Glass when their customers were struggling in from 2008 through the early 2010s.
Someone asked if you look at banks with $1b+ of assets up to the super-regional banks, there are around ~250, and asked are there 1-2 that might be good buys? Munger answered yes.
What made the Buffett/Munger partnership so successful? Two talented people working well together.
China’s stock market: Some very smart people are starting to wade in.
It’s fun to look back in time to compare how people acted 20 years ago compared to today. Today we are doing just that with two old interviews of Warren Buffet and Jeff Bezos. It’s interesting to see how they talked about what they do long before they were famous.Read More
Here at Canadian Value Investors we are big fans of Mohnish Pabrai.
In October of 2018 Mohnish Pabrai gave a talk at Professor Arvind Navaratnam’s class about the Ten Commandments of Investment Management. This is the first time Mohnish has given this talk where he outlined his money management principles. He notes that most participants in the investment management business violate these commandments.
We have summarized his talk to give you a quick reference point to review.
Commandment One: Thou shall not skim off the top
-Skimming is taking some percentage of fees as a fixed fee and in the case of hedge funds typically 1-2% off the top and an additional performance fee.
-Two of the original practitioners were Warren Buffett and Charlie Munger, who practiced the art with no fees off the top. Buffett once he merged his partnerships was 0-6-25 where he took no fees off the top, and instead received 25% of any return over a 6% annual return hurdle. Mohnish believes Charlie Munger was 1/3 of return over 0% but it was a special kind of operation.
-Practice the art with your own assets. With the power of compounding even a small amount of money will become significant over a few years. If you are compounding at anything north of 15-20-25% which you should be able to do with small amounts of capital, your money will be doubling every 4-7 years. This then gives you the ability to in effect live off that base while the assets are growing.