Charles Munger – Sometimes We Sell Stocks Because We Feel Like It!

0
6
Warren Buffett

We’ve just been watching Tom Russo’s recent talk to the folks at Google. Just at the end of his presentation (52:39) Russo recalls a great story about Charles Munger getting a bit peeved when he was questioned by a member of the audience at a Wesco annual meeting about why he had sold a stock that later went up.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Check out our H2 hedge fund letters here.

Here’s an excerpt from the Google presentation:

Russo: I’ll share with you a couple of the things that I think about as I reflect over investments courtesy of these two gentlemen:

Top value fund managers are ready for the small cap bear market to be done

InvestorsDuring the bull market, small caps haven't been performing well, but some believe that could be about to change. Breach Inlet Founder and Portfolio Manager Chris Colvin and Gradient Investments President Michael Binger both expect small caps to take off. Q1 2020 hedge fund letters, conferences and more However, not everyone is convinced. BTIG strategist Read More

So you can look at Charlie Munger’s musings. Invert, invert, invert! Invert is very similar to what Warren said “If something’s not worth doing at all don’t do it!” Invert means go to where you want to end up and then reason backwards the most efficient way to get there. Just don’t go to the other places along the way that tie up most people’s ‘bother’. Figure it out and then work back from the outcome you desire.

Charlie talked once about this. It was very profound! They owned seven percent of Freddie Mac, which was the largest mortgage insurance company government-sponsored entity. I was at the annual meeting for Charlie’s company and someone said why did you sell it? This guy was actually quite a whiner. He was whining at Charlie Munger saying, “the stock was at forty seven when you sold it’s now seventy why did you sell that and should we think about replacing you as the investment officer?”

Charlie was a bit peeved and he looked out at this guy, waited for a long time… He said,”Because we felt like it!”

Simple as that!

It’s such a powerful answer. It turns out that there were reasons. They had put junk bonds in their portfolio. They retained mortgages instead of just securitizing them. They were going into subprime to generate unnatural reinvestment when they should have been patient. All those were going on… but he basically said, “We spend all of our lifetime trying to figure out businesses and when you have a response based on your judgment that you can’t actually put your finger on you’re still supposed to act on it.”

Most people overly value knowledge thinking that it is the trump card when beliefs, well informed, are really what you have to act on.

Basically Charlie said, “they felt uncomfortable” so they sold seven billion dollars worth of stock.

Now most people will be fired if they operated with what seemed so thin a reason. But you spend your life developing judgment and then failure to act on it because you’re still waiting for more information is dangerous.

The world is full of an 80/20 rule and in many instances eighty percent is enough.

Warren and Charlie where asked this year at the meeting why they didn’t do something which was quite dangerous to their capital and they said, “basically it’s because they want to be rational not brilliant”.

Another firm in the insurance business did something which cost them three billion dollars. Warren didn’t and the reason was that the other firm was looking for something that would be brilliant and Warren and Charlie passed because they just needed the very simple test of being rational.

You can watch Tom Russo speaking to the folks at Google here:

Article by Johnny Hopkins, The Acquirer's Multiple

Previous articlePotential GTA 6 Release Date And Setting Leaked
Next articleDissecting Cryptocurrencies: Essential Facts For Investors
The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”