Lessons from Charlie Munger’s latest podcast interview: I have added some context to the interview to help you better understand the stories Munger shared.

1. On retail investors gambling in the stock market,

“They don’t know anything about the companies or anything. They just gamble on going up and down in price. If I were running the world, I would have a tax on short-term gains with no offset for losses on anything, and I would just drive this whole car of people out of business.”

2. Why algorithmic-driven trading firms like Renaissance technology are taking excessive risk

“The easiest trade is to front run what you know, what the average is, what the index funds have to buy, and you know what it is. Exactly. They all know that. And they get their returns year after year by taking the leverage, the midday leverage, up higher and higher and higher and higher. So, they’re making smaller and smaller profits on more and more volume, which gives them this big peak leverage risk, which I would not run myself. And that’s the only way they make these big returns, is to have this huge leverage that would make you crazy if you were already rich.”

3. How Warren and Charlie changed their mind quickly with Diversified Retailing after they realized it was too competitive (and how they made a ton of money after changing their mind) Some context: On January 30, 1966, Buffett, Munger, and Gottesman formed a holding company, Diversified Retailing Company, Inc., to “acquire diversified businesses, especially in the retail field.” Buffett and Munger then went to the Maryland National Bank and asked for a loan to make the purchase. The lending officer looked at them goggle-eyed and exclaimed,

“Six million dollars for little old Hochschild-Kohn?”  Even after hearing this, Buffett and Munger—characteristically—did not question their judgment and ran screaming out the door.

“We thought we were buying a second-class department store at a third-class price” is how Buffett describes little old Hochschild-Kohn.

“We made nothing but money at Diversified. We didn’t exactly make it in retailing, but we made a lot of money. What happened was very simple. We bought this little department store chain in Baltimore. Big mistake. Too competitive. We realized we’d made a terrible mistake as the ink dried on the closing papers. So, we decided just to reverse it and take the hits to look foolish rather than go broke. You just told us how to get us out of this. By then, we’d already financed half of it on covenant-free debt. And they had all this extra cash, and our stocks got down to selling at enormous (discounts). In the middle of one of those recessions, we just bought, bought and bought and bought, and all that money went right into those stocks, and of course, we tripled it.”

4. How wonderful early years gave them a good head start. “Yeah, we bought a little savings and loan company for maybe $20 million. And when we left that thing, we had taken out of our little $20 million investment over $2 billion in marketable securities, which went into Nebraska insurance companies as part of their bedrock capital. So, we had some wonderful early years, which everybody needs. It is a wonderful early year.“

5. Charlie Munger’s Costco thesis – They sold cheaper than anyone else in America – Big, efficient stores – Huge parking spaces – Gave special benefits to people who come to the store in the way of reward points – Make suppliers wait (for payment) until they’ve been paid What made Costco so successful?

“Well, it takes a lot of good execution to do it. You have to set out to do it and then do it enthusiastically every day, every week, every year for 40 years. It’s not so damned easy. So, do you think success is the magic of the business model and culture? Yes. Culture plus model. Yes, absolutely. And very reliable, hardworking, determined execution for 40 years.“

Why did it take Costco decades to open its first store in China?

“The first store they tried to open in China, somebody wanted a $30,000 bribe Chinese culture, and they just wouldn’t pay it. And that made such a bad impression on Jim Senegal. He wouldn’t even talk about going into China for about 30 years after that.”

6. Advice for investors on finding great investments A caveat from me: While Munger advocates heavy concentration (and leverage), most investors still need his IQ or emotional control with volatility.

“You may find it five years after you bought it. Knowing these things may work into it, or your understanding may improve, but when you know you have an edge, you should bet heavily. You know, you’re right. And most people don’t teach that in business school. It’s unbelievable. Of course, you got to bet heavily on your best bets.”

7. Why did he and Warren become partners, “Both kind of similar, and we both wanted to keep our families safe and do a good job for our investors and so on. We had similar attitudes. His advice for an enduring partnership is, “Well, it helps if you like one another and enjoy working together. But I don’t use any one formula. Many partnerships that work well for a long time happen because one’s good at one thing and good at another. They just naturally divided, and each one likes what he’s doing.”

8. Munger feels that Berkshire could’ve taken on more leverage. “Warren still cares more about the safety of his Berkshire shareholders than anything else. If we used a little more leverage throughout, we’d have three times as much now, and it wouldn’t have been that much more risky either.”

9. Munger’s thoughts on VC: “It’s challenging to invest money well, and I think it’s almost impossible to do time after time in venture capital. Some deals get so hot, and you have to decide quickly. You’re all just sort of gambling. [VC] is a very legitimate business if you do it right. If you want to give the right people the power and nurture them, help them. You know a lot about the game’s tricks, so you can help them run their business yet not interfere with them so much. They hate you. By and large, having bumped into many people in businesses with venture capital financing, I would say the ordinary rule is the people in the business doing the work; they, more often than not, hate the venture capitalists. They don’t feel their partner trying to help them because they’re only taking care of themselves and don’t like them.”

10. How could VCs be better? “[At Berkshire], they know we’re not trying to discard them to the highest bid. See, if some asshole investment banker offers us 20 times earnings for some lousy business we don’t sell. If it’s a problem business we’ve never been able to fix, we’ll sell it. But if it’s a halfway decent business, we never sell anything. And that gives us this reputation of staying with things that help us. You don’t want to make money by screwing your investors, and that’s what many venture capitalists do.”

11. Why Warren’s investment in Japan was a no-brainer: “If you’re as smart as Warren Buffett, maybe two or three times a century, you get an idea like that. The interest rates in Japan were half a percent per year for ten years. These trading companies were entrenched old companies, and they had all these cheap copper mines and rubber foundations so that you could borrow all the money for ten years ahead and buy the stocks, which paid 5% dividends. So, there’s a huge cash flow with no investment, thought, or anything. How often do you do that? You’ll be lucky if you get one or two a century. We could do that [because of Berkshire credit]. Nobody else could.”

12. Why he loves companies with a strong brand—the ability to raise prices: “Well, it’s hard for us not to love brands since we were lucky enough to buy the Sees candy for $20 million as our first acquisition, and we found out fairly quickly that we could raise the price every year by 10%, and nobody cared. We didn’t make the volumes go up or anything like that; we just increased the profits. So, we’ve been raising the price by 10% annually for all these 40 years. It’s been a very satisfactory company. We didn’t acquire any new capital. That was what was so good about it. Very little new capital.“

13. What it takes to build Berkshire from scratch today – Intelligence – Work very hard – Be very lucky

14. His view on China: “My position in China has been that the Chinese economy has better prospects over the next 20 years than almost any other big economy. That’s number one. Number two, the leading companies of China are stronger and better than 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 is China risk? Well, that’s not a scientific subject. But I don’t mind. Whatever it is, 18% or something.”

15. What about BYD that captivated Munger?

“Guy (Wang Chuanfu) was a genius. He was at a Ph.D. in engineering, and he could look at somebody’s part, make that part, look at the morning, and look at it in the afternoon. He could make it. I’d never seen anybody like that. He could do anything. He is a natural engineer and gets it-done type production executive. And that’s a big thing. It’s a big lot of talent to have in one place. It’s advantageous. They’ve solved all these problems on these electric cars and the motors and the acceleration, braking, and so on.” Comparing Elon with Wang Chuanfu, “Well, he’s a fanatic that knows how actually to make things with his hands, so he has to he’s closer to ground zero. In other words, the guy at BYD is better at making things than Elon.”

16. Advice about building families “Well, of course, you’ve got to get along with everybody. You have got to help them through their tough times, and they help you, and so forth. But I think it’s not as hard as it is. Looks. I think half of the marriages in America work pretty damn well. And will it work just as well if both of them had to marry somebody else? And you’ve got to have trust with your spouse when it comes to things like the education of the children and so forth.“

Source:  https://x.com/SteadyCompound/status/1718861611904241789