Charlie Munger on "Gold Being Uncivilized" + Berkshire Strategy
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On occasion I get to play basketball with some NBA stars like Byron Scott, Jalen Rose, and Chris Paul, and I always do my best to dissect their games and learn from them, and try to see if I can incorporate their strategies into my game.
Similarly, in investing, I love to understand the strategies and views of people who are highly successful in the field. None are more so than Warren Buffett and Charlie Munger of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Therefore, whenever material comes out by Munger or Buffet, I always eagerly devour the content.
I recently watched a 36 minute interview with Munger on CNBC, and I wanted to share the distinctions I made from listening, and summarize Munger's thoughts for you. I'll be translating for both the investment world, as well as a basketball translation for you jocks out there, attempting to broaden your scope of knowledge.
Munger: "Berkshire doesn’t change much."-
investment world: Don't mess with success. Once you have a strategy that works year in and year out, stick with it.
Basketball world: The pick-and roll hasn't changed in 50 years, but it's still one of the most effective offensive plays in the game.
Munger: I love our portfolio. It's mallaeble at any given moment, but I love it. (Two of Berkshire's biggest holdings are Coca-Cola and Wells Fargo which have been reporting stellar results)
On The Financial Blowout + Housing Crisis:
Munger: When people used to ask us about the crazy consumer credit and massive leverage being taken via derivatives, I would respond: “it’s going to have a bad result, I just can't tell you when."
Mark Twain said, "History doesn’t repeat itself but it rhymes.” The panic that came before the Great Recession had common themes: Crazy greed, leverage, and delusions. If there was justice, we'd have gotten worse as a nation than we did.
Investment World: Look at things objectively and try to see how the current situation might parallel history.
Basketball: Maaannn, you can't be showboating, throwing behind the back passes and half-court alley-oops and expect to win the game. We're lucky to still be in the league.
On The Federal Reserve
Munger: People complaining about central bank activity and easy money: We’d be in way worse shape if both political parties hadn’t backed massive central bank intervention. What was wrong was letting the boom go so crazy, and Greenspan is the only one who admits he was wrong. He's the only one who has done that.
Investment: Munger has no real quarrell with the Federal Reserve system, but on the way up, Greenspan overdosed on Ayn Rand. It would have been a lot easier to fix if we had stepped on the "fake boom" while it was taking place, because it's a lot harder to fix today.
Basketball: Greenspan was a sorry ass coach, who didn't discipline anyone. Shoot, you think that strip-club credit card scandal during the play-offs was just "bad luck?"
On Keynes and Virtue
Munger: What happens is that an economy with a certain basic amount of virtue, like the Germans or Japanese, can use a lot of Keynesian intervention to help themselves. But if your whole cultural system disintegrates, say in Greece where everyone wants an easy living with no work and a lot of make believe and fraud, then the Keynesian stuff won't work. Keynesian tools work best when you have a lot of basic merit, credit in the bank if you will. We have used up some of that credit.
Investors: For those of you unfamiliar with Keynesian economics, the basic theory behind it is that the public sector (government) must often use tools at hand (lowering interest rates, investing in infrastructure, etc.) to spur demand when the private sector goes into one of the inevitable doldrums created by the booms and busts of capitalism. In terms of merit, to whom you rather lend money to- a friend of yours that you know is very hard working and diligent, or the lazy sloth con artist who likes to sit by the pool all day?
Basketball: You want that out of shape ball hog on your squad?! I'll take that little hustling white boy who can't jump any day over him.
On The Contamination of Society's Work Ethic and Honesty
Munger: We have a lot of sin and more than we formerly had. The reason the Keynesian stuff worked so well during World War II is because we had so much virtue to draw on. We have less virtue than we previously did. As your virtue deteriorates, as people seek easy money through the government by using their voting privileges rather than working and producing something, or something like the crooked plaintiff lawyers looking to extract hard earned masses of hard earned money for a petty offense, society begins to disintegrate and the need people feel to work ebbs. People using their voting rights for easy money: That's Greece, and we in the US closer to them than we used to be, we still have a lot of virtue left.
Invesment: The U.S. used up a lot of it's goodwill and credit to the world, and that's not something to be taken lightly. Do it again and we might end up with the dishonest, fraudulent system resembling Greece. Do we really want to sink down to their level, pull up your sleeves and get working.
Basketball: Yeah, Uncle Sam, he burned the paper. I mean, he still has assets on the court, but don't sign him to a long term contract before he proves he can right his wrongs.
Munger: "Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939, but I think civilized people don’t buy gold, they invest in productive businesses."
Investment: How do you translate this comment, and what does Munger mean by civilized? Gold does have some value. Throughout eternity, the metal has been sought after by mankind because of its beauty. It can also be used in some industrial processes, and for things like crowns for teeth, etc. So, if you were a Jewish family in Nazi Germany, with complete uncertainty as to what would happen to you, best to hide away the one thing that will retain some value wherever they went.
However, when there is certainty in the world, when you don't need to worry about being killed or whether you can exchange your hard earned cash for goods and services, gold loses a big part of its value. Thus, in a civilized society, you don't need gold.
Basketball: That bling-bling you got on is a bad investment dude.
On Berkshire's Future Plans
Munger: We've always been opportunistic when the opportunity clearly presents itself. To quote Carlisle, "The task of man is not to see what lies dimly in the distance, but do the duty that lies clearly at hand."
Investment: There is no reason to try to anticipate the vagaries of the future when there's so much low lying fruit ripe for the picking today.
Basketball: We don't need to be jacking threes when we have wide open lay-ups.
On Berkshire's IBM Purchase
Munger: IBM (NYSE: IBM) is a Buffet style play, its simple, and you can see how much IBM is entrenched in certain places, including Burlington railroad. (which Berkshire bought outright)
Investment: When you see how much your business relies on a specific corporation, and how much you pay them, it sure makes it easier to understand the company, its competitive advantages over others, and make a purchase of it as an investment.
Basketball: When I play with the seven footer and see what a nice touch he has, you're damn straight we're going to add him to our squad.
This has been Part I of II, and stay tuned tomorrow, because we'll be publishing the second piece. Charlie Munger might be more boring to watch than Magic Johnson, but he has the same level of understanding of his game.
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