Reading through notes from an interview with Charlie Munger is never a waste of time. Even if you are a Wall Street veteran, you can still learn from Munger as few others can offer the investing insights and reasoned responses to questions that he gives.
I recently stumbled across these notes, compiled by Aznaur Midov from the annual meeting (3/25/15) for Daily Journal Corporation, a company that Munger chairs and I thought I’d highlight a few of the comments that I thought were helpful for investors.
Charlie Munger on moats
Charlie Munger is famous for his style of 'moat investing', a style he introduced Warren Buffett to when he first started to work with the Oracle of Ohama at Berkshire. Munger talked about moats a couple of times during the meeting. The first time, he gave examples of some companies which had a wide moat at one point, but due to the nature of capitalism, saw the moat eroded and eventually ended up filing for bankruptcy.
“The perfect example of Darwinism is what technology has done to businesses. When someone takes their existing business and tries to transform it into something else—they fail. In technology that is often the case. Look at Kodak: it was the dominant imaging company in the world. They did fabulously during the great depression, but then wiped out the shareholders because of technological change. Look at General Motors, which was the most important company in the world when I was young. It wiped out its shareholders. How do you start as a dominant auto company in the world with the other two competitors not even close, and end up wiping out your shareholders? It’s very Darwinian—it’s tough out there. Technological change is one of the toughest things.”
Charlie Munger also believes that American Express is facing similar pressures of moat shrinkage:
"Amex had a long period of achievement and prosperity. It doesn’t look quite so easy going forward as it once did. This is another example of how tough capitalism is. Citi and Visa made a better deal."
Charlie Munger and Warren Buffett are undoubtedly the pioneers of moat investing. This style has gained in popularly over the years and is now almost the default style for value investors, buying high-quality companies at attractive prices. Unfortunately, the growing popularity of this trend means that if a company has a durable moat, it shares are often priced perfectly to reflect that, as Munger goes on to explain the Q&A session:
“Everyone has the idea of owning good companies. The problem is that they have high prices in relations to assets and earnings, and that takes all of the fun out of the game. If all you needed to do is to figure out what company is better than others, everyone would make a lot of money. But that is not the case. They keep raising the prices to the point when the odds change. I always knew that, but they were teaching my colleagues that the market is so efficient that no one can beat it. I knew people in Omaha who beat the pari-mutuel system. I never went near a business school, so my mind wasn’t polluted by this craziness. People are trying to be smart—all I am trying to do is not to be idiotic, but it’s harder than most people think.”
The above answer was actually given in response to the question, "how did you get an idea of investing in good quality companies instead of cigar butts?"
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