Charlie Munger held court at the Daily Journal Annual Meeting last week. He answered questions for almost two hours. These were a few lessons to take away from it.
On behavior in market booms.
You get crazy booms. Remember the Dotcom boom? When every little building in Silicon Valley rented at a huge price and a few months later, about a third of them were vacant. There are these periods in capitalism and I’ve been around for a long time and my policy has always been to just ride them out…
In fact, what shareholders actually do is a lot of them crowd in to buying stocks on frenzy, frequently on credit because they see that they’re going up, and of course that’s a very dangerous way to invest. I think that shareholders should be more sensible and not crowd into stocks and buy them just because they’re going up and they like to gamble.
The risk in the ensuing stock crash is that emotions trigger a host of actions that feel just as right as when stock prices were rising but ultimately end up being costly. It’s a story repeated throughout history.
You’ll remember that when the first big bubble came, which was the South Sea bubble in England, back in the 1700s, it created such havoc, eventually, when it blew up, that England didn’t allow hardly any public trading in securities of any companies for decades thereafter. It just created the most unholy mess. So human greed and the aggression of the brokerage community creates these bubbles from time to time and I think wise people just stay out of them.
Bubbles are not easy things to avoid. Unfortunately, many people get caught up in the excitement of rising prices and the appearance of easy money and they learn the lesson the hard way. Bubbles blow up. There’s no real way to avoid it except by not getting caught up in it in the first place. Beyond that…sit back and watch it play out.
On knowing when to sell.
Q: Since we are on the subject of selling potentially overvalued security, could you provide your systems for selling securities?
Munger: I so rarely hold a company like BYD that goes to a nosebleed price that I don’t think I’ve got a system yet, and so I’m just learning as I go along. I think you can count on the fact that if we really like the company and like the management, and that is the way we feel about BYD, we’re likely to be a little too loyal. And I don’t think we’ll change on that.
The selling part of investing is never easy. I doubt anyone ever really masters it. Case in point: even Munger hasn’t quite figured it out.
There are only a few reasons to sell. You might sell because a company isn’t as good you thought it was. Or because management turned out to be fools. Or because the stock price is finally close to the company’s intrinsic value.
Basically, your reason for selling should have something to do with why you bought a stock in the first place. Because the price is rising or falling is not a good reason.
And for anyone facing the situation of seeing a long term investment shoot up to “a nosebleed price,” I’d suggest taking Philip Fisher’s advice after looking back at Motorola: “If I had sold…because I thought it was overpriced…chances are I would not have known when to get back in, and I would have missed a tremendous profit. If one of my stocks gets overpriced, I warn my clients that things may be unpleasant for a little while but it will rise to a new peak later.”
Another option is something Munger suggested. He has a friend in venture capital who always sells half the position anytime a stock gets to irrational heights because that’s what he’s most comfortable doing.
Probably the best answer is to find what works, what’s most comfortable for you, and stick with it.
On the inevitable mistakes.
I’m constantly making mistakes where I can, in retrospect, realize that I should have decided differently. And I think that that is inevitable because it’s difficult to be a good investor. I’m pretty easy on myself these days. I’m satisfied with the way things have worked out and I’m not gnashing my teeth that other people are doing better. I think that the methods that I’ve used, including the checklist, are the correct methods. And I’m grateful that I found them as early as I did and that the methods have worked as well as they have.
Munger mentions a mental checklist he uses when making decisions. A checklist helps you not forget any steps in say, your investment process. It’s a simple tool that helps limit the behavioral mistakes that come with investing. Greed and fear can often push investors into rash decisions while the checklist forces them to slow down.
Of course, one of Munger’s checklists is built around common behavioral mistakes people make so he can better avoid them.
On how to learn about businesses.
The Harvard Business School, when it started out way early, they started out with a history of business and they’d take you through the building of the canals and the building of the railroads and so on and so on and you saw the ebb and flow of industry and the creative destruction of economic changes and so on and so on. It was a background which helped everybody. Of course, what I’m saying is that if I were teaching business, I would start the way Harvard Business School did a long time ago…
But of course you should start out by studying the history of capitalism and how it worked and why before you started studying business and they don’t do that very well. I’m talking about the business schools.
If you stop to think about it, business success long-term is a lot like biology and in biology, what happens is the individuals all die and eventually so do all the species and capitalism is almost as brutal as that. Think of what’s died in my lifetime. Just think of the things that were once prosperous that are now in failure or gone. Whoever dreamed when I was young that Kodak and General Motors would go bankrupt? It’s incredible what’s happened in terms of the destruction. Of course, that history is useful to know.
This was Munger’s reply to a question on how he would build a business school course. It seems like a good place to start for anyone looking to learn on their own.
On seeking disconfirming evidence.
At times in my life, I have put myself to a standard that I think has helped me. I think I’m not really equipped to comment on this subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time, if you’re looking for disconfirming evidence and putting yourself on a grill, that’s a good way to help remove ignorance.
What happens is that every human being tends to believe way more than he should in what he’s worked hard to find out or what he’s announced publicly that he already believes. In other words, while we shout our knowledge out, we’re really pounding it in, we’re not enlarging it.
Of course, changing our minds is a difficult but necessary part of learning.
Except, we humans have to fight against arrogance, stubbornness, laziness, and a host of other behaviors to not only learn a topic thoroughly enough to argue any side but to learn something new. The current environment doesn’t make this any easier — when information is at your fingertips, it’s easy to feel smart without grasping a subject.
On setting low expectations.
The first rule of a happy life is low expectations. That’s one you can easily arrange. And if you have unrealistic expectations, you’re going to be miserable all your life. And I was good at having low expectations, and that helped me. And also, if when you get reverses, if you just suck it in and cope, that helps if you don’t just fretfully stew yourself into a lot of misery.
Investing is a game that requires setting expectations that are usually wrong but hopefully not horribly wrong. We can get away with being off a little bit. Being drastically off is the problem and unrealistically high expectations fall into that horrible category. It always means being surprised on the downside.
- The Inflation Story – Behavioural Investment
- Stuck in the Middle with You – Furball Financial
- The Long Run Is Lying to You – C. Asness
- Good Versus Bad Value Stocks – ETF Stream
- How Do Women Really Invest? – C. Benz
- No Room on the ARK? – B. Johnson
- The Base Rate Is A Hell of A Thing – Commonplace
- Cuttlefish Can Pass the Marshmallow Test – ArsTechnica
- The Rise and Demise of Subway’s $5 Footlong Promotion – Hustle
- The Terrifying Warning Lurking in the Earth’s Ancient Rock Record – Atlantic