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At 99, Charlie Munger is still one of the sharpest minds around.
In the latest 2.5 hours Daily Journal meeting, he discussed mental biases, Chat GPT, Alibaba, BYD VS Tesla, and much more.
Here are my notes:
How will Chat GPT affect Daily Journal & civilization?
AI is important but there’s too much hype and nonsense.
Good for routine work but it’s still way off when it comes to complex work.
“Well, I think artificial intelligence is very important, but it’s also a lot of crazy hype on the subject. Artificial Intelligence, it’s not going to cure cancer, it’s not going to do everything we want done. And, and there’s a lot of nonsense in it too. So I regard it as a mixed blessing all this artificial intelligence. Some people have used it in some things like insurance underwriting pretty well. But a lot of people try and use it in ordinary things like buy office buildings or something and I think that’s way more but I don’t think it’s gonna help anybody by offers really not very much anyway.”
Interestingly, Becky asked a question (one of the best questions asked in my opinion) crafted by Chat GPT 👇
The worst mental bias that leads to bad decision-making
I love this question, so I’m going to copy the exact question: “Mr. Munger, you’ve spoken about the importance of avoiding mental biases in decision making, in your experience, what’s the most challenging bias to overcome? And how do you personally guard against it?”
Denial. If the truth is unpleasant enough, the mind will cover up the truth.
“Most fund managers can’t beat the index but still charges a hefty fee for worthless advice.”
Most people take what they need first (fees) & then rationalize it.
It’s a long response from Munger but it’s well worth the read:
“Well, what.. If I had to name one factor that dominates human bad decisions, you would be what I call denial. If the truth is unpleasant enough, people kind of, their mind plays tricks on them, and they can, it isn’t really happening. And of course, that causes enormous destruction of business where people go out throwing money into the way they used to do things, even if they know this isn’t gonna work at all well, and the way the world is now having changed.
And if you want an example of how denial was affecting things, take the world of Investment Management. How many managers are going to beat the indexes, all costs considered? I would say, maybe 5%, consistently beat the averages. Everybody else is living in a state of extreme denial. They’re used to charging big fees and so forth, for stuff that isn’t doing their clients any good. It’s a deep moral depravity. If some widow comes to you with $500,000, and you charge her one point a year for, you could put her in the indexes. But you need the one point. So people just charge some widow a considerable fee for worthless advice. And the whole profession is full of that kind of denial. It’s everywhere.
So I had to say, and I always quote Demosthenes. It’s a long time ago, Demosthenes, and that’s 2,000, more than 2,000 years ago. And he said, “What people wish is what they believe.” Think of how much of that goes on. And so of course, it’s hugely important. And you can just see it, I would say the agency costs of money management. There are just so many billions, it’s uncountable. And nobody can face it. Who wants to? To keep your kids in school, you won’t quit, you need the fees, you need the broker fees, you need this and that, so you do what’s good for you and bad for them.
Now, I don’t think Berkshire does that. And I don’t think Guerin and I did it at the Daily Journal. Guerin and I never took a dime of salary or directors fees or anything. If I have business, I talk on my phone or use my car, I don’t charge into the Daily Journal. That’s unheard of. It shouldn’t be unheard of. And it goes on in Berkshire. It goes out in the Daily Journal. But we have an incentive plan now in this Journal Technologies, and it has a million dollars worth of Daily Journal stock. That did not come from the company issuing those shares. I gave those shares to the company to use in compensating the employees. And I learned that trick, so to speak, from BYD, which is one of the securities we hold in our securities portfolio. And BYD at one time in its history, the founder chairman, he didn’t use the company’s stock to reward the executives. He used his own stock, and it was a big reward too. Well last year what happened? BYD last year made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion in a brand new auto business for all practical purposes. It’s incredible what’s happened.
And so there is some of this old fashioned capitalist virtue left in the Daily Journal and there’s some left in Berkshire Hathaway. And there’s some left at BYD. But most places everybody’s trying to take what they need, and just rationalising whether it’s deserved or not.“
Why Alibaba was his biggest mistake
He focused too much on its dominance in China but missed out on the fact that retailing is tough, even if its an internet company.
“But I regard Alibaba as one of the worst mistakes I ever made in thinking about Alibaba, I got charmed with the idea of their (dominant) position on the Chinese (market). I didn’t stop to realise it’s still a goddamn retailer. It’s gonna be a competitive business, the internet, it’s not gonna be a cakewalk for everybody.”
What good idea he destroyed in 2022?
Again, Alibaba.
“When the internet came in, I got over charmed by the people who were leading in the online retailing. And I didn’t realise it’s still retailing, you know, it may be online retailing. But it’s also still retailing and I just, I got a little out of focus. And that had me overestimate the future returns from Alibaba.“
Fyi, Alibaba still takes up 15.2% of Daily Journal’s portfolio as of 31 Dec 2022.
And this is after Munger trimming 50% of his Alibaba position in Q1 2022.
Why did he use leverage on Alibaba?
Munger once said that the most destructive 3Ls are: Ladies, Liquor, and Leverage.
So why did he used leverage on Alibaba?
“Well, I use a little bit on my way up and so did Warren by the way. The Buffett partnership used leverage regularly, every year of its life. What Warren would do was he would buy a bunch of stocks and then he borrowed and those stocks, he would buy under these… they used to call them event arbitrage, liquidations, mergers, and so forth. And that was not, didn’t go down with the market – that was like an independent banking business and Ben Graham’s name for that type of investment, he called them Jewish treasury bills. And it always amuses me that’s what he would call them but Warren used leverage to buy Jewish treasury bills on the way up and it worked fine for him…
Berkshire has stock in Activision Blizzard. And you can argue whether that’ll go through or not, I don’t know. But but but that’s the Jewish treasury bill. Well, yeah, so we’ve had arbitrage but we sort of stopped doing it because it’s such a crowded place. But here’s a little Berkshire doing it again in Activision Blizzard, and Munger using a little leverage at the Daily Journal Corporation. You could argue I used leverage to buy BYD, you could argue it’s the best thing I’ve ever done for the Daily Journal. I think most people should avoid it but maybe not everybody need play by those rules. I have a friend who says, “The young man knows the rules of the old man knows the exceptions.” He’s lived right? You know.“
Why Munger chose BYD over Tesla?
“Well, that’s easy. Tesla last year, reduced prices in China twice. BYD increased its prices for direct competitors. I mean, BYD is so much ahead of Tesla in China, it’s like a. It’s just, it’s almost ridiculous. And if you look at BYD which most people never heard of, if you count all the manufacturing space they have in China to make cars, it would it would about to have a (indecipherable) of all over Manhattan Island. Nobody ever heard of them few years ago.”
Why did Berkshire reduced its BYD position?
Largely due to valuations.
For BYD it was 50x earnings. Expensive valuation although they’re likely to grow another 50% this year.
BYD is currently worth more than the entire Mercedes Corporation.
Why did Berkshire sold TSMC?
Semicon industry is capital intensive.
You have to take all the money made and with each new generation of chips, throw it back in.
Intel was once the dominant player.
They invented the business. And then they lost it. It’s a tough business.
“Well, the semiconductor industry is a very peculiar industry. In the semiconductor industry, you have to take all the money you’ve made. And with each new generation of chips, you throw in all the money you previously made, so it’s compulsory investment of everything you want to stay in the game. Naturally, I hate a business like that. In Berkshire, we like a whole lot of surplus money to come into weakness, all the deals with. And, of course, now if you’re another head of it, like Taiwan Semiconductor is, that may be a good buy at these prices. I, it’s not at all clear to me that they’re not going to succeed mightily, but it’s, it’s a difficult, it’s a bit of an enormous promise for the big winner. But it’s a difficult business and requiring everybody to keep increasing the bets on and on with all the money. And so it’s not perfect that semiconductor business. But I remember when Intel won the World, Intel was once the Taiwan Semiconductor business of the world, they invented the damn business. And they dominated it for decades. And it’s not clear to me that Intel is going to have a very decent semiconductor business, getting as far behind as they are. No, it’s my answer is it’s not so damn foolproof as it looked.”
Are there good arguments for crypto?
The person who asked knew exactly what to expect 😂
Question: “In 2007, at the USC law school, Charlie said, I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who are supporting it. The question is, Does this also apply to your Wall Street Journal article on banning cryptocurrencies? And if yes, would you care to share the arguments against your position?“
Woooo… sensational.
Charlie Munger: “Well, I don’t think there are good arguments against my position, I think the people who oppose my position are idiots. So I don’t think there is a rational argument against my position. This is an incredible thing. Naturally, people like to run down and conceals where other people lose. And the people who invented this crypto crapple, which is my name for it. Sometimes I call it crypto crapple. And sometimes they call it crypto shit. And it’s just ridiculous anybody would buy this stuff isn’t. You can think of hardly nothing on earth. There’s no more go to the human race than currency, national currencies. They were absolutely required to turn me on from oh god damn successful ape. Modern, successful humans and human civilization has enabled all these convenient exchanges. So if somebody says I’m going to create something and sort of replaces the national currency, it’s like saying, I’m going to replace the national air, you know, it’s asinine. It is even slightly stupid. It’s massively stupid. And, of course, it’s very dangerous. Of course, the governments were totally wrong, when they permitted (crypto). And of course, I’m not proud of my country for allowing this crap. What I call the crypto shit. It’s worthless. It’s no good. It’s crazy. It’ll have nothing but harm. It’s anti-social to allow it. And the guy who made the correct decision on this is the Chinese leader, the Chinese leader took one look at crypto shit. And he says not in my China. And boom, oh, well, there isn’t any crypto shit in China. He’s right, we’re wrong. And there is no good argument on the other side.”
“When you’re dealing with something as awful as crypto, it’s just unspeakable. It’s an absolute horror, and that I’m ashamed of my country, that so many people believe in this kind of crap. And what the government allows it to exist is totally absolutely crazy, stupid gambling, with enormous house odds for the people on the other side, and they cheat in addition to the cheating and the betting. It’s just crazy. So that is something that there’s only one correct answer for intelligent people. Just totally avoid it. And avoid all people that are promoting it.”
Why Charlie doesn’t short stocks anymore
It’s miserable.
“No, I don’t short. I have made three short sales in my entire life. And they’re all more than 30 years ago. And one was a currency and there were two stock trades. The two stock trades, I made a big profit on one, I made a big loss on the other and they cancelled out. And when I ended my currency bet, I made a million dollars, but it was a very irritating way to me. I stopped. It was irritating. They kept asking for more margin. I kept sending over Treasury notes. It was very unpleasant. I made a profit in the end, but I never wanted to do it again.“
Why he strongly oppose against taxing stock buybacks
It’ll encourage management to do stupid stuff with the money when the right thing to do is buy back stocks.
“Well, I’m strongly opposed. Because I think if you’re a good culture has a lot of people that are good fiduciaries. And it is, is like telling you do something dumb with the corporate money…And I like encouraging morality and decency and honour and some of your dealings with the people you’re the fiduciary for. And so I agree with our president on some things, but this is not one of them.”
Impact of inflation and interest rates on stocks
Hostile to stock prices.
But it should have gone up.
Can’t keep them at zero.
It’s normal to deal with headwinds in investing.
And inflation is one of them.
That’s why Daily Journal owns securities instead of bonds.
“Well, there’s no question about the fact that interest rates have gone up. It’s hostile to stock prices. And they should go up and we couldn’t have kept them forever at zero. And I just think it’s just one more damn thing to adapt to. In investment life, there are headwinds and there are tailwinds.
And one of the headwinds is inflation. And I think more inflation over the next 100 years is inevitable, given the nature of democratic politics, politics and democracy. So I think we’ll have more inflation. That’s one of the reasons the Daily Journal owns common stocks instead of government bonds… Trump ran a deficit that was bigger than the Democrats did. All politicians in a democracy tend to be in favour of printing the money and spending it and that will cause some inflation over time. It may avoid a few recessions too so it may not be all bad, but it will do more harm than good, I think from this point forward.“
If Berkshire sold its bank stocks, why is Daily Journal holding them?
Charlie bought them right at the bottom of the subprime crisis.
If they sell now, 40% will be paid in taxes.
Although Charlie don’t think that the banks are cheap now.
“Well, I might have different ideas. If you own securities, marketable securities within a corporation, located in California, you pay huge state and federal taxes and you sell things in a big game. And that affects our willingness to sell some of those bank stocks I bought on the bottom tech in the foreclosure crisis. It literally was the bottom pick. And they’re practically all game.”
On capital allocation, feed the business with the highest ROE
The future of Daily Journal is not in publishing.
The monopoly they once enjoyed is over.
The future is in journal technology.
Hence, they’ve funnel resources into journal tech accordingly.
“Well, it’s all very simple. We made a lot of extra money out of the publishing business in its heyday. And that was about $30 million. And that was all made in the foreclosure boom. And of course, in the old days, we had information in monopoly on publishing the appellate Court’s decisions baleia newsprint, and the internet came along, it destroyed our, our position, our circulation went way down, and so forth. So we’ve had a drastic change in good fortune and our publishing business. “
“The future. This business is not in the publishing side. It’s on the It’s on the general technology side. And the good news is that we’re in a huge market because all the courts of the world are in the stone age still, in terms of automating with modern technology. And so it’s a big market.”
On whether Daily Journal is undervalued
He don’t think that people should regard DJCO as a mini Berkshire and that DJCO is reasonably priced at the moment.
“You know. It’s not a crazy valuation considering what everything else is selling for these days. ..Some people thought, t’s a small Berkshire, it’ll double like rabbits, you know. And of course, it’s not a small Berkshire. I’m 99 years old guys.”
That’s all I have for you today! If you like to read the entire transcript and watch the interview, click here.
excellent, as always.
Thanks Freddy!