Drinking from the well of wisdom.... Charlie Munger unplugged
(Apr 2, 2015)
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In this issue:
» The warning on index funds by Charlie Munger
» Retail investors from which country trade the most
» Round up on Asian markets
» ...and more!
For dyed-in-the-wool value investors, there's simply no event bigger than the Berkshire Hathaway annual shareholders meeting. Indeed, how many would want to pass up an opportunity to see the grand daddies of value investing in skin and flesh and absorb first-hand wisdom on everything from stocks to life. However, it would be fair to say that it is usually Buffett who holds fort during such meetings. Quips from Charlie Munger, his equally erudite right hand man, are few and far between.
Not that we are complaining. But if it is non-stop Munger that you would want to listen to, you need to go somewhere else. And in recent years this place has been the Daily Journal Corporation's annual meeting. It should be noted that Munger is the Chairman at this firm and takes questions from the attendees at the meeting every year.
The annual meeting for the year 2015 was held recently and laid out below are some memorable quotes from a man who Buffett believes has the best 30-second mind in the world.
Please note that these notes have been taken from the web and in particular from an investor who answers to the name of Alex Rubalcava. We have tried to add our comments below each one of Munger's quotes.
"I did not succeed in life by intelligence. I succeeded because I have a long attention span."
This is vintage Buffett-Munger. The reason these two people have succeeded as per their own admission is not because they have been more intelligent than most others but because they have committed fewer errors. One of these is of course not to look at investments from a short term perspective but to look 5-10 years out.
"If the incentives are wrong, the behavior will be wrong. I guarantee it."
For you investors, we believe it is important to understand the motives and incentives of people and organisations you're dealing and investing with. Everyone ranging from the company you're investing in to your stockbroker, your mutual fund agent and your equity advisor (yes, even we) must pass your scrutiny in terms of whether their incentives are aligned with yours or are totally at odds.
"The finance industry is 5% rational people and 95% shamans and faith healers."
Remember the sub-prime crisis of 2007-08? Well, if this isn't one of the biggest examples of irrationality then what is? Sadly, things haven't changed at all and we doubt if they ever will. Consequently, it will help if people don't give in to the views from the financial industry and instead have a fiercely independent thought process. Please note if something looks too good to be true it probably is.
"Before marriage, keep your eyes wide open. After marriage, keep them half shut."
Does this apply to investing? Indeed. Before you buy into a stock, try to get into every possible detail and only then pull the trigger. However, once the stock is part of the portfolio, do not totally fall in love with it. The idea is to keep undergoing a periodic check up and if you notice things going off the rails with no clear sign of getting back on track, then there has to be no hesitation in selling.
"I don't think anything that any average person can do easily is likely to be worthwhile."
Please remember that investing is simple but not easy. It requires one to take a view different from the majority on most occasions and this doesn't come naturally to an average person. Therefore, in order to be successful at investing, you have to fight against most of your natural impulses. And this, an average person would mostly be incapable of doing.
"Nobody survives open heart surgery better than the guy who didn't need the procedure in the first place."
Crises are a part and parcel of life. And therefore the idea is not to run away from it but be prepared in case it strikes. And in matters of finance, this would mean always saving a certain portion of one's income, not having too much debt and always trying to improve one's earnings power by way of remaining a life-long learning machine.
"The way to get rich is to keep $10 million in your checking account in case a good deal comes along."
Remember how Berkshire Hathaway is structured. It always has a huge cash hoard that can be tapped into whenever a great opportunity comes along. Therefore, not having cash to buy stocks in case a fantastic bargain appears on the scene could be worst possible handicap for an investor. As a result it always helps to have a certain percentage of one's portfolio in cash whose quantity can change based on the relative attractiveness of the market. If the markets are expensive have more in cash and vice versa.
"When things are damn near impossible, maybe you should stop trying."
Buffett has many a times pointed out how investing is all about trying to jump over 1-foot bars and not over 7-foot bars. In other words, one should always invest in simple and easy to understand businesses. If it's too complex, it is always a better option to drop it and move on to something that's much simpler.
While there are more comments doing the rounds, we felt these were the most important from an investing point of view. In case you need to read more, there's plenty for you in our archives on Charlie Munger, which can be accessed from here.
What according to you was the most important take away from Munger's quotes and is there any other observation that you may want to make? Let us know your comments or share your views in the Equitymaster Club.
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After having gone through Munger's pearls of wisdom on investing, let us now tell you about his latest warning. And it pertains to investing in index funds. Now, many of Buffett's fans would know of his love for index funds. Buffett has time and again propagated indexing as a simple way to earn healthy returns as beating markets is difficult over longer time frame.
As investors slowly got to know the benefits of indexing, money that chase index funds increased manifold over the last 15 years. However, Munger recently issued a precautionary warning against rapid rise in index funds. And it pertains to index managers not utilizing their voting rights in the best interest of shareholders when due. Let us explain it in more detail with the help of an example.
An index fund typically replicates a stock index. It buys all the shares in the index as per the weight of that share in the index. Now considering that index constituents remain constant over time, an index fund manager would in effect become a permanent owner of those companies that are a part of the index. And this may dilute his decision making powers as far as exercising his voting rights is concerned.
As an example, RIL is a part of BSE Sensex since long. Thus, an index fund manager who replicates Sensex would hold RIL in his portfolio depending upon its weight in the index. Being a large shareholder in the company he can influence management decisions. However, it has been observed globally that index fund managers rarely vote against the incumbent management on important decisions. They choose to remain passive. This is negative for index fund investors as management may not take all decisions favouring minority shareholders. And this is where the role of big investors like index fund managers comes into play. Their job is to oppose and see what is beneficial to their minority investors. However, this is rarely done which is the biggest drawback of index investing.
Time and again we have stated that excessive trading leads to suboptimal portfolio performance and only makes your broker rich. We are sure that Chinese brokers would certainly agree with us on this. As seen in today's chart, 81% of the retail investors in China trade at least once a month, highest by any country on the planet, and in the process fill the coffers of their brokers.
So, what could be the reason for such a high trading statistic figures of China? Well, it indicates poor understanding of equities as an asset class. Chinese probably view equities as a source to earn quick returns rather than viewing them as a long term tool to meet their retirement goals. It also reflects the general short term focus of the people there. Or maybe they are yet to develop trust in equities. If latter is the case then it's a worrying sign for China. Being one of the fastest growing nations, equities are the best proxy to ride the China growth story. Hence, regulators must ensure that the investing environment in the country is conducive and transparent enough to develop investor faith in equities. If not, people will approach equities with a gambling mindset.
This is one area where we reckon India is better placed as SEBI has taken numerous steps in the last few years. Also, Indian markets are more matured and the public awareness with respect to equities is high. Hence, in all likelihood the trading statistic figure in India could be lower than that of China - but to what extent? Do you have any guesses?
Which country's investors trade the most?
The Indian stock markets were shut today on account of Mahavir Jayanti. Most Asian markets were trading in the green at the time of writing. European stock markets, too, opened the day in the positive.
A lot of people think if you just had more process and more compliance - checks and double checks and so forth - you could create a better result in the world. Well, Berkshire has had practically no process. We had hardly any internal auditing until they forced it on us. We just try to operate in a seamless web of deserved trust and be careful whom we trust - Charlie Munger
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