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.
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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:
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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