When Charlie Munger Calls, Listen and Learn

A self-published author gets an unsolicited call from Warren Buffett’s right-hand man

.. In an interview, Mr. Munger tells me he tends to “skim” or “at least give some cursory attention” to any book that mentions Berkshire Hathaway.

.. “The Rebel Allocator” is the opposite of most business novels. Here, the rich capitalist isn’t an evil genius using genetic engineering to hijack the brains of newborn babies. Instead, he is a hero: an investing mastermind who regards allocating capital as a noble calling that improves other people’s lives.

Blunt and bristly, with zero tolerance for stupidity, Mr. Xavier spouts proverbs and zingers. A mash-up of Mr. Munger and Mr. Buffett, he often invokes their ideas.

.. Taking a shine to Nick, Mr. Xavier asks him to write his biography. Like many young people today, Nick wonders if becoming a billionaire is inherently immoral when poverty is still widespread.

Mr. Xavier teaches Nick what separates great businesses from good and bad ones. He uses three drinking straws, labeled “cost,” “price” and “value,” to demonstrate: When a business can charge a higher price than its goods or services cost, the difference is profit. When the value its customers feel they get is greater than price, that difference is brand or pricing power—the ability to raise prices without losing customers.

As Mr. Xavier moves the straws around, Nick learns that investing decisions can make the world a better place: “Good capital allocation means doing more with less to create happier customers,” says Mr. Xavier. “Profit should be celebrated as a signal that an entrepreneur provided value while consuming the least amount of resources to do so.”

.. “I have known no wise people who didn’t read all the time—none, zero,” Mr. Munger once said. “You’d be amazed at how much Warren reads—and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”

.. The money managers among them are “like a bunch of cod fishermen after all the cod’s been overfished,” Mr. Munger tells me. “They don’t catch a lot of cod, but they keep on fishing in the same waters. That’s what’s happened to all these value investors. Maybe they should move to where the fish are.”

By that, he presumably means not the bargain companies that have become almost an endangered species, but rather the great companies at fair prices that Mr. Buffett has been favoring for the past couple decades under Mr. Munger’s influence.

Muhlenkamp Memorandum: Waiting for the Market to be Rational

As we have said before, there are dozens of ways to successfully invest, but each has its own inherent fl aws, and the investor has to understand his discipline well enough to know what those fl aws are. We have yet to fi nd a fl awless investment discipline. The inherent fl aw of value investing is that it doesn’t work well when markets are irrational or driven by non-economic considerations; and that markets can be irrational longer than we expect.

Our experience is we cannot chase performance, we have to get out ahead of it and wait for it to come to us. We have been waiting longer than we expected, but part of the problem with value investing, if it’s done properly, is the tendency to be early; and being too early can wind up being wrong. However, we think value investing in general, and our particular implementation of it, may soon be rewarded.

The markets since 2009 have been infl uenced to an unprecedented degree by governments and central banks. This was driven in part by central banks pushing investors out of bonds into everything else. Central banks bought government bonds en masse, pushing the former owners into higher-risk assets. Stock picking was less effective than it historically has been when the big money was flowing.

.. Instead of changing our process to take advantage of past conditions, we think conditions are changing to meet us. We continue to focus on bottom-up, fundamental analysis and value-driven stock picking. We own companies that are more profi table, and selling for less, than the companies which have led the market indices to new highs. We haven’t changed what we are doing to try to improve our performance, but by sticking to our discipline we should be ready as the investment “climate” brings our companies back into favor.

.. So, that’s what we are doing. Stock and bond markets have been divorced from underlying economic realities since 2008, which is irrational. Stock and bond markets are rational in the long term, and we think it is more reliable, more conservative, and more productive to invest rationally than to try and predict the next irrational move of the markets. We continue to invest our money and your money according to these principles, even though it has taken longer for the rational to override the irrational then we thought it would.

How a professor of finance seeks to outperform the market

In his view, it is difficult to have an edge in an environment of certainty. For companies “with profit-making histories and a well-established business model in a mature market,” it’s easy to build valuation models – but this ease also means many more investors are in the hunt, making it hard to find true bargains before they are captured by others.