RIP Charlie Munger: Investing Giant’s Final Words on China, Apple and Buffett

“Well,
I
don’t
know
who
Charlie
Munger
is,
but
I
like
him,”
Buffett
responded
to
Davis.
Two
years
later,
Davis
arranged
for
the
pair
to
meet,
and
they
hit
it
off
right
away.

Munger
was
originally
a
lawyer
by
trade.
He
started
his
own
investment
firm
in
1962
and
went
on
to
crush
the
market
over
the
following
13
years,
compounding
his
portfolio
at
19.8%
per
annum
compared
to
the
Dow
Jones
Industrial
Average’s
5%.

In
1978,
Munger
became
Vice
Chairman
of
Berkshire
Hathaway,
a
position
he
still
holds
today.
He
is
credited
for
helping
change
Buffett’s
investment
approach
from
buying
cheap,
often
low-quality
companies,
to
purchasing
great
companies
at
reasonable
prices.

At
99,
Munger
retained
a
sharp
mind
and
wit.
Recently,
he
gave
a

rare
interview
to
the
Acquired
podcast
and
offered
some
great
insights
on
a
range
of
investment
topics.

How
do
Buffett
and
Munger
Differ?

Buffett
got
his
first
taste
of
investing
as
a
young
man
at
the
racetrack.
Munger
was
asked
about
this,
and
his
response
gives
a
key
insight
into
the
way
that
Buffett
approaches
the
stock
market:

“…Warren
never
gambled.
He
was
only
a
patron
of
them
[the
racetracks].
Warren
wants
the
odds
in his favour,
not
somebody
else.
It’s
just
so
simple
if
you’re
Warren.
You
want
to
be
the
house,
not
the
punter.”

There
are
many
famous
investors
who
started
out
as
gamblers
–
Edward
Thorp,
Bill
Gross,
and
Jeff
Yass
come
to
mind.
Buffett
is
also
in
this
bracket.
He
took
the
mindset
of
an
expert
gambler
–
betting
when
the
odds
are
overwhelmingly
in
your
favour –
and
parlayed
that
into
investing.

On
his
own
investment
approach,
Munger
gave
a
surprising
answer.
Though
he’s
known
for
liking
stocks
that
earn
high
returns
on
capital
over
long
periods,
Munger
acknowledged
that’s
not
the
only
way
he
invests:

“I
only
study
two
kinds
of
companies.
I’m
enough
of
a
big
Ben
Graham
follower
[…]
so
if
something
is
really
cheap,
even
though
it’s
a
crappy
company,
I’m
willing
to
consider
buying
it.
For
a
while
anyway.
I
do
that
occasionally.
I’ve
done
it
with
great
success
a
time
or
two,
but
unlike
Howard
Marks
I’ve
only
done
it
once
or
twice
in
my
lifetime
for
big
gains,
and
that’s
it.
It’s
not
like
I’ve
done
it
a
hundred
times.
It
isn’t
a
bit
easy.
A
hundred
times
easy
money
is
almost
non-existent…

…great
brand
companies,
of
course,
are
good.
Getting
the
right
price…
the
whole
trick
is
getting
them
on
a
few
rare
occasions
when
they’re
really
cheap.
Buying
Costco
at
its
present
price
[…]
it
may
work
out
all
right
but
that’s
[…]
but
again
it’s
getting
hard.”

Buffett’s
Big
Costco
Error

In
1997,
Costco
[NYSE:
COST] offered
Buffett
a
seat
on
the
board,
which
he
declined.
Buffett
suggested
Costco
ask
Munger
instead,
and
Munger
accepted.
He
sat
on
the
board
until
his
death.
Its
share
price
is
below. 

Munger
tried
to
convince
Buffett
to
invest
in
Costco
early,
though
it
didn’t
work.
The
reason:
“Warren
doesn’t
like
retailing”.
Apparently,
Buffett
had
seen
many
retailers
come
and
go,
including
big
department
stores
like
Sears,
and
thought
it
a
difficult
business
to
make
money
from.

Munger
thought
differently,
and
recognised
early
on
that
Costco
had
an
incredible
business
model:

“They
really
did
sell
cheaper
than
anybody
else
in
America
and
they
did
it
in
big,
efficient
stores.
The
parking
spaces
were
10
feet
wide
instead
of
eight
or
nine
feet
or
whatever
they
normally
are.
They
did
it
all
right
and
they
had
a
lot
of
parking
spaces.
They
kept
out
of
their
stores.
All
these
people
didn’t
do
big
volumes,
and
they
gave
special
benefits
to
the
people
who
did
come
to
the
stores
in
the
way
of
reward
points.”

What
Makes
a
Great
Retailer?

Munger
said
Home
Depot
took
the
Costco
business
model
and
applied
it
to
home
improvements:
“they
copied
everything”. 

Munger
even
believed
there’s
a
more
modern
Costco
imitator
in
a
smaller
company
called
Floor
&
Décor
[NYSE:

FND].
As
the
name
suggests,
the
business
sells
flooring,
offering
a
huge
selection
via
large
warehouses,
and
with
cheap
prices
to
boot.
Its
share
price
is
below.

Munger
was
asked
about
whether
he’d
ever
looked
at
Nike
as
a
business,
and
he
said
he
had,
though
he
rejected
it
because
it’s
a
“style
company”.
Munger
didn’t
elaborate
on
this,
though
I
suspect
what
he’s
alluding
to
is
that
with
“style
companies”,
future
prospects
and
earnings
are
difficult
to
forecast
and
that
is
not
the
type
of
business
that
he
likes
to
invest
in.

Munger
prefers
capital-light
retailers
with
predictable
earnings
and
pricing
power:

“…we
were
lucky
enough
to
buy
See’s
candy
for
$20
million
as
our
first
acquisition.
We
found
out
fairly
quickly
that
we
could
raise
the
price
every
year
10%,
and
nobody
cared.
We
didn’t
make
the
volumes
go
up
or
anything
like
that.
Just
made
the
profits
go
up.
We’ve
been
raising
the
price
by
10%
a
year
for
all
these
40
years
or
so.
It’s
been
a
very
satisfactory
company.

It
didn’t
require
any
new
capital.
That’s
what
was
good
about
it:
very
little
new
capital.
It
had
two
big
kitchens
and
a
bunch
of
rental
stores
when
we
bought
it,
and
now
it’s
got
two
big
kitchens
and
a
bunch
of
rental
stores.”

Berkshire’s
Investment
in
Apple

Buffett’s
most
high-profile
recent
investment
is
in
Apple
[NASDAQ:
AAPL].
He
first
purchased
a
stake
in
2016
and
it’s
since
been
a
home
run.
Berkshire
now
owns
5.8%
of
Apple,
worth
around
$164
billion.
Apple
accounts
for
close
to
50%
of
Berkshire’s
stock
portfolio.

Munger’s
take
on
the
lessons
from
Berkshire’s
investment
was
intriguing:

 “What
everybody
has
learned
is
that
everybody
needs
some
significant
participation
in
the
12
companies
that
do
better
than
everybody
else.
You
need
two
or
three
of
them,
at
least.
If
you
have
that
mindset,
Apple
was
the
logical
candidate
to
be
on
the
list
of
which
you’re
going
to
select
your
companies.
It’s
not
very
hard
to
come
up
with
an
idea
that
it
may
be
okay.”

This
seems
to
be
a
recognition
that
when
you’re
a
big
investor
like
Berkshire,
you
must
be
invested
in
some
of
these
great
technology
companies,
or
risk
underperformance.

As
for
why
Berkshire
picked
Apple,
Munger
said
it
was
valuation,
as
the
company
got
down
to
around
10x
earnings
when
Buffett
bought
in.

How
Did
Buffett
Invest
in
Japan?

Buffett’s
other
recent
investment
success
has
come
from
the
unlikely
place
of
Japan.
He
first
started
investing
in
Japanese
trading
companies
in
2020
and
retains
stakes
in
five
of
them
(Mitsubishi
Corp.,
Mitsui
&
Co., Itochu,
Marubeni
and Sumitomo
Corp).

But
Munger
implied
that
there
was
leverage
involved
in
the
purchases.
He
says
at
the
time,
you
could
borrow
in
Japan
at
0.5%
for
10
years,
and
these
stocks
had
cheap
assets
and
dividend
yields
of
5%,
making
them
“no-brainer”
investments:

“It
took
him
[Buffett]
forever
to
get
$10
billion
invested.
It
was
like
God
just
opening
a
chest
and
just
pouring
money.
It’s
awfully
easy
money.”

Did
Munger
Like
China?

Munger
had
been
a
long-time
investor
in
China.
He
persuaded
Buffett
to
invest
in
car
manufacturer
BYD
[HKG:
1211],
in
2008.
Munger
has
since
called
this
one
of
the
best
decisions
that
he’s
ever
made.

Munger
claims
the
BYD
founder,
Wang
Chuanfu,
is
a
genius,
and
says
he’s
better
at
making
things
than
Elon
Musk. 

In
the
interview,
Munger
didn’t
address
his
more
recent
investment
in
online
retailer,
Alibaba
[BABA],
which
hasn’t
worked
out
thus
far.

On
China
itself,
Munger
remained
a
believer:

“My
position
in
China
has
been
that:
(1)
the
Chinese
economy
has
better
future
prospects
over
the
next
20
years
than
almost
any
other
big
economy.
That’s
number
one.
(2)
The
leading
companies
of
China
are
stronger
and
better
than
practically
any
other
leading
companies
anywhere,
and
they’re
available
at
a
much
cheaper
price.

So
naturally,
I’m
willing
to
have
some
China
risk
in
the
Munger
portfolio.
How
much
China
risk?
Well,
that’s
not
a
scientific
subject,
but
I
don’t
mind
whatever
it
is,
18%
or
something.”

Choice
words
for
John
Malone
and
Jim
Simmons

Munger
was
known
for
his
blunt
manner,
and
he
didn’t
hold
back
on
a
few
subjects.
One
was
US
billionaire,
John
Malone,
who
owns
Formula
One
and
the
Atlanta
Braves
baseball
team,
among
other
things.
Malone
is
credited
with
the
rise
of
Ebitda
(Earnings
before
interest,
tax,
depreciation,
and
amortization)
as
a
financial
term
used
by
corporates,
one
that
Munger
long
abhorred.
Munger
said
he’s
never
liked
Malone’s
“extreme
manipulations”,
including
his
famous
methods
of
minimising
tax
at
his
listed
companies.

Munger
also
said
he’s
uncomfortable
with
investors
who
principally
use
algorithms
like
the
famous
hedge
fund
Renaissance
Technologies.
These
funds
essentially
front
run
investors,
he
said.
And
he
maintained
they’re
making
smaller
profits
with
more
volume,
and
the
only
way
that
they’re
still
making
good
returns
is
through
using
greater
and
greater
leverage,
“which
I
would
not
run
myself”.

Charlie
Munger,
1924-2023

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