A few weeks ago, Charlie Munger answered questions at the Daily Journal’s general meeting, which is an event that many value investors look forward to.

They do so because Charlie Munger – like his friend and partner Warren Buffett – is one of the best stock market investors the world has seen. He is wise and knowledgeable.

Since his speech at the Daily Journal, Charlie Munger has resigned as chairman of the board where he managed the Daily Journal’s investment portfolio for 45 years.

In other words, it was most probably the last time Charlie Munger went on stage to do a Q&A for the Daily Journal investors.

This week’s blog post reflects on his response and gives you the ten most important takeaways from Charlie Munger’s last talk as chairman of the Daily Journal.

But beware, what Charlie says and what Charlie does reveals a mismatch.

1. Munger Views China as a Society of Modern Capitalism

Charlie Munger’s discussion of China is confusing and contains conflicting messages.

The Daily Journal invested heavily in Chinese Alibaba, but recently it has become public knowledge that they sold half of their shares in Alibaba at a loss.

Why the change of heart?

We don’t know yet.

Yet, at the Daily Journal meeting in February, Charlie Munger only gave green signals about investing in China, even though the big divestment had already begun.

What did he say about China?

He is very impressed with how China has fought poverty and created prosperity in 30 years by introducing their own form of capitalism.

“China is a big modern nation. It’s got this huge population and this huge modernity that has come in the last 30 years,” he said.

He praises the agricultural revolution. The Chinese realized that farmers produced 60% more grain if collective farming was abandoned.

“And they just changed the whole system. I greatly admire what they did. I think Deng Xiaoping is going to go down as one of the greatest leaders that any nation ever had. Because he had to give up his own ideology to do something else that worked better,” he says.

2. He Trusts the Chinese Not to Pull the Rug Away

When you buy shares in China, there are some special risks. You’ll probably be investing through ADR (American Depositary Receipts), which means that you only indirectly own shares. There is a risk that the Chinese government can decide that ADRs are not worth anything.

The Chinese government can also decide to nationalize a whole company – they are communists after all – and your investment will go to zero.

To such threats, Charlie Munger responds:

“When you buy Alibaba, you do get sort of a derivative. But assuming there’s a reasonable honor among civilized nations, that risk doesn’t seem all that big to me,”

Whether the war in Ukraine has changed his view of honor between nations, we do not know yet.

3. He Sees a Greater Risk in Getting Stuck in Cash

The US government has been printing money on a large scale since the coronavirus pandemic shook the world.

High inflation has followed.

The risk of losing money due to inflation is a real risk.

“If you hold a depreciating currency, that’s losing purchasing power. On balance, we prefer the risks we have to those we’re avoiding,” says Munger.

It is of course confusing when he says this while simultaneously making a huge selloff of Chinese Alibaba. Why doesn’t he just say that they are selling Alibaba? Because revealing it could make the stock price drop further, make it hard to get rid of and make the Daily Journal lose more money on it.

“We disclose what we have to under the rules because we don’t want people to know what we’re buying and selling. So we tell everybody what we have to under the rules and we keep it confidential until then. That’s our system,” he says.

The clarification will come later. But for now, take note. They are selling Chinese stock, not buying.

4. Crypto Is (Still) Beneath Contempt

Charlie Munger is notorious for speaking out against crypto and calling it “rat poison.”

That is his clear and official position. That hasn’t changed much.

“Well, I certainly didn’t invest in crypto. I’m proud of the fact I’ve avoided it. It’s like, you know, some venereal disease or something. I just regard it as beneath contempt. Some people think it’s modernity, and they welcome a currency that’s so useful in extortions, kidnappings, tax evasion, and so on.”

He adds that he admires the Chinese government for banning it.

On the whole, he seems very impressed with some of the major brushstrokes that the Chinese government can take because it is a totalitarian regime. Whether it’s to introduce a one-child policy or ban crypto.

5. He Proposes a Tax That Would Make It Difficult to Speculate in Stock and Make Short-Term Gains

Some people use the stock market as a gambling den, he says.

There is a contradiction between that and those who try to think long-term and create security for themselves even in old age.

He would make stock less liquid, probably by a higher tax on short-term gain.

“If I was the dictator of the world, I would have some kind of attacks on short-term gains that made the stock market very much less liquid and drove out this marriage of gambling parlor and legitimate capital development of the country. It’s not a good marriage and I think we need a divorce.”

6. He Steers Clear of Any Predictions

He doesn’t try to guess how an index will develop. He focuses exclusively on good investments in individual companies.

“I don’t have any opinion about which index is better at a given time. I never even think about it. I’m always just looking for something that’s good enough to put Munger money in, or Berkshire money in, or Daily Journal money in. I figure that I want to swim as well as I can against the tides. I’m not trying to predict the tides.”

7. He Sees a Bubble, a Drunken Party and Socio-Economic Hangovers

He refrains from making predictions, but he still has an opinion about the overall state of the market and what could go wrong. He believes there is a bubble and an excess that drives it all up.

“Everybody loves it because it’s like a bunch of people at a party having so much fun getting drunk that they don’t think about the consequences. We don’t need this wretched excess. It has bad consequences. You can argue that the wretched excesses of the 1920s gave us the Great Depression and the Great Depression gave us Hitler. This is serious stuff.”

8. He Doesn’t Keep Cash

What does a person do when they see a bubble, great dangers and inflation ahead and they don’t believe in crypto?

What is the answer?

Cash?

Charlie Munger rejects this:

“In my whole adult life, I’ve never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find. I don’t think I’m going to change now. The Daily Journal has used up its cash.”

9. The World is Driven by Envy – Not by Greed

There is a huge dilemma: even though people are better off financially, they are not feeling better.

“The world is not driven by greed; it’s driven by envy. So the fact that everybody’s five times better off than they used to be, they take that for granted. All they think about is somebody else having more now and it’s not fair that he should have it and they don’t.”

He says he has conquered envy on a personal level.

“I can’t change the fact that a lot of people are very unhappy and feel very abused after everything’s improved by about 600% because there’s still somebody else who has more. I have conquered envy in my own life. I don’t envy anybody. I don’t give a damn what somebody else has.”

10. Keep It Simple

Many companies and organizations will be more efficient if they trim down.

Generally, there are too many meetings that make it harder to make decisions – not easier.

Companies have become “fat”, and most are more effective on the other side of a serious diet.

“Many places, after they run out 30% of the excess costs, they run better than they did before,” he says. 

He offers the example of Heinz, who has a directors’ table worth 600,000 USD and Costco, who has one worth 300 USD.

“The excess just creeps into these places. Of course, it isn’t good,”

He also snorts at the over-consumption of wealthy individuals.

“Who in the hell needs a Rolex watch so you can get mugged for it?

His advice to young people is simple: “Don’t go there.”

You do not need all those things at all.

“To hell with the pretentious expenditure. I don’t think there’s much happiness in it. But it does drive the civilization we actually have. And it drives dissatisfaction,” he says.

If you want to learn about investing like Charlie Munger, you can download my investment book Free Yourself here.

If you invested with Warren Buffett in 1957, and until his partnership was dissolved in 1969, an investment of 10,000 USD would have grown into more than 160,000 USD.

If, on the other hand, you had invested in the US stock index Dow Jones, it would only have grown to a bit more than 25,000 USD.

Warren Buffett began investing for friends and family in 1957, and he got a stunning 25.9% compounded annual return.

This is referred to as the Warren Buffett “partnership.”

How did his partnership work, and what can we learn from it.

What can be copied? What did he do?

Here are the ten most important takeaways.

1. You Can Start Small

In 1956, he set up his first partnership.

The partners consisted of seven friends and acquaintances: his sister and her husband, an aunt, his father-in-law, an old roommate, the roommate’s mother, and Warren Buffett’s own lawyer.

That’s it.

These seven people put in 105,000 USD, which corresponds to about one million in today’s value. Buffett only put in 100 USD.

More partners were gradually added. His old professor Ben Graham closed down his fund and pointed to Warren Buffett as an option.

In early 1957, the different partnerships he ran amounted to 300,000 USD. This corresponds to around 3 million USD today.

What can we learn from this?

It’s fine to start small with friends and family. People will be attracted when you do well.

2. He Didn’t Have a Track Record

He had studied with and worked for Benjamin Graham, but Warren Buffett had no real track record himself. 

He still had to prove that he was able to manage other people’s money.

Benjamin Graham recommended him, but only one or two took the bait initially because he looked like an 18-year-old kid.

As the money manager Lou Green said at the time (as quoted in Roger Lowenstein’s book Buffett: The Making of an American Capitalist),

“Graham-Newman can’t continue because the only guy they have to run it was this kid named Warren Buffett. And you’d ride with him?”

3. These Were His Terms

One of Buffett’s first outside partners was a urologist named Edwin Davis.

Here’s the deal they cut:

• Davis, as a limited partner, would get all of the profit up to 4%.
• The remaining profit would be shared like this: 75% to Davis and 25% to Warren Buffett.
• Warren Buffett didn’t get any management fee, which was and still is very unusual. A hedge fund today usually takes a 2% management fee of the whole amount and 20% of all profits. This means that Buffett would get no money to cover the costs or nor salary if he didn’t make more than 4%.
• Davis could only withdraw money once a year – on the last day of the year.
• Warren Buffett would only make a yearly summary of the result and disclose nothing about how the money was invested.

4. This Was His Goal

Warren Buffett’s target was set relative to the Dow Jones stock index. In the beginning, his goal was to beat the Dow Jones by 10%.

Starting in 1967, when the market was a strong bull market, Buffett became nervous. From then on, he aimed at beating the Dow Jones by 5% or getting 9% in average annual return – whichever he hit first.

5. This is How Well He Did

In his first full year, 1957, he got a return of 10%, while the Dow Jones fell 6%.

I’m curious – so how much did he earn in the first year of investing other people’s money?

The first 4% was “free,” so he only earned 25% of 6% of 300,000.

That means he earned 4,500 USD. In the beginning, running the partnership was not a fat deal.

This is how it went afterwards:

1958: + 40.9% against Dow Jones +38.5%

1959: +25.9% against Dow Jones +19.9%

1960: +22.8% against Dow Jones -6.3%

1961: +45.9% against Dow Jones +22.2%

1962: +13.9% against Dow Jones -7.6%

1963: +38.7% against Dow Jones +20.6%

1964: +27.8% against Dow Jones +18.7%

1965: +47.2% against Dow Jones +14.2%

1966: +20.4% against Dow Jones -15.6%

1967: + 36% against Dow Jones 19%

1968: +59% against Dow Jones 9%

1969: + 7 % against Dow Jones -11 %

If you had invested 10,000 USD in the Dow Jones in 1957, it would have given you a profit of 15,260 USD. If you had, on the other hand, let Warren Buffett invest your savings, it would have given you a return of 150,270 USD – even after Buffett’s pay.

His partnership had an average annual return of 29.5% against Dow Jones 7.4% in the period.

(All data from Roger Lowenstein’s book Buffett – the Making of an American Capitalist)

6. He Was Frugal and Worked From His Bedroom

Warren Buffett was very concerned about keeping the cost of the partnership down.

He did the bookkeeping himself and worked from the family bedroom to save money.

It wasn’t until 1962 that he rented an office and hired a secretary.

Also, Warren Buffett didn’t use many experts.

He probably felt that outside input from experts confused him more than it clarified matters.

He has made major acquisitions without the help of experts. Other funds would conduct due diligence. He did his own due diligence in his mind and settled matters with a handshake.

7. He Educated His Partners

The purpose of the annual letters to his partners seemed to be to keep their interests aligned with his.

As many of the partners were friends, family, neighbors, and acquaintances (plus a growing number of outsiders), the tone was informal.

He spoke to them as one who teaches his disciples. He has said somewhere that he imagined he wrote to his sister.

The original partnership letters are a really worthwhile read even today.

He also invited the partners home for dinners in groups, evenings that the partners looked forward to.

8. His Investment Ideas Were Kept Secret

Benjamin Graham gave all students and co-investors plenty of stock tips, but Warren Buffett didn’t.

He treated his investment ideas as trade secrets.

At one point, he was so secretive that he didn’t even talk about work with his wife Susan.

If a partner showed up at the office unannounced to ask about the investments, they would be thrown out of the partnership.

Just like that.

There were no exemptions.

9. He Saw Stocks as Businesses

He avoided trying to predict how the stock market would do.

He also avoided being influenced by other people’s analyses and opinions.

He analyzed the long-term perspectives of each business – not the stock movements.

He assessed a stock based on whether he would want to own the entire company without being able to sell the stocks again.

He asked himself if he would buy the shares if he were forced to buy the entire business.

He also asked himself whether he would buy the shares if he landed on an island and couldn’t check the stock for ten years.

10. His Portfolio Was Unusual and Concentrated

He sometimes bought entire companies that were not listed on the stock exchange.

This was unusual for a fund manager.

He also invested large amounts in individual companies.

At one point, 40% of the portfolio was invested in one share, American Express.

What about spreading the risk?

Warren Buffett calls diversification “risk management for dummies.” He believes in being thorough and focused.

Knowing what you invest in is better risk management, he says.

Want to learn how to invest like Warren Buffett? Get my e-book right here.

Every year, Warren Buffett publishes an annual letter to investors, and many people look forward to what he has to say about the market.

 It’s that time of the year, and in this blog post, I’ll review the key points from this year’s letter.

 The letter comes as part of Berkshire Hathaway’s annual report, which has recently been released. Berkshire Hathaway is – but you probably know this already – Warren Buffett’s publicly listed company through which he makes all his acquisitions and stock investments.

 Warren Buffett prepares this letter carefully, weighing every word. Everything in this letter is intentional.

 Here are the five most important points:

 1. Value Investing Works

The very first thing in the letter is a comparison of the development in Berkshire Hathaway’s market value compared to the stock index S&P 500.

 The numbers speak for themselves.

Berkshire Hathaway has had a compounded annual return of over 20% since 1965. S&P 500 has had an annual return of 10.5%.

This means that Warren Buffett’s company has had an overall return of over… well, that’s such a large number… 3,641,613% in the period against S&P 500’s 30,209%.

 It’s no coincidence that he decided to make that comparison and that he sets it up so clearly and looks at such a long-term period.

 It’s his way of showing that value investing (by his method) definitely works – especially if you’re thinking long term.

 2. Pick Companies, Not Stocks

Warren Buffett writes that Berkshire Hathaway invests in whole companies – and occasionally in pieces of a company – but never in stocks.

 “Whatever our form of ownership, our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO. Please note particularly that we own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers,” Warren Buffett writes. Charlie is, of course, Charlie Munger, his longtime partner.

Warren Buffett’s point here is that you should not invest on the basis of short-term considerations of whether a stock goes up or down.

You need to assess a company and its long-term potential.

Among other things, you must decide whether you trust the management and whether the company has competitive advantages that protect their service and products and make it possible for them to retain their customers.

You can learn more about how to assess a company’s long-term potential in my e-book here.

3. He Has a Lot of Cash Because We are In a Bubble

Berkshire Hathaway aims to hold around 30 billion USD in cash and cash-like instruments (such as short-term bonds) to make sure Berkshire Hathaway can withstand any crisis.

“We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well,” he writes.

However, by the end of 2021, Berkshire Hathaway had 144 billion USD in cash and equivalent.

Why almost five times more cash than they aim to hold? The explanation is that they can’t find anything to invest in.

He says he and Charlie are having a hard time finding anything which meets their criteria for long-term holding. They say they would like to make acquisitions or even just buy publicly traded stocks.

“From time to time, such possibilities are both numerous and blatantly attractive. Today, though, we find little that excites us,” he writes.

What does that really mean?

Surely there are plenty of wonderful businesses out there?

Yes, but not at the price they want to pay. Which is another way of saying that everything is priced at a very high level compared with the value of the company.

“Long-term interest rates that are low push the prices of all productive investments upward, whether these are stocks, apartments, farms, oil wells, whatever. Other factors influence valuations as well, but interest rates will always be important,” he writes.

So what can we learn from this?

Warren Buffett and Charlie Munger are very careful these days about what they pick. They are not afraid of staying in cash.

As a private investor, I would also be careful about what I invest in, and like them, I wouldn’t be afraid of staying in cash for a while as I wait patiently for the right investment.

Because one thing is for sure. At some point, it will change.

“Charlie and I have endured similar cash-heavy positions from time to time. These periods are never pleasant. They are not permanent either.”

4. He is Buying Back Berkshire Shares

In the absence of better investment opportunities, Berkshire Hathaway has made share buybacks in 2021 of 27 billion USD.

He also writes that they have bought back shares in early 2022 for 1.2 billion USD. He doesn’t write at what price level they had bought them back, but he does stress that they are not willing to make share buybacks at any share price.

“I want to underscore that for Berkshire repurchases to make sense, our shares must offer appropriate value. We don’t want to overpay for the shares of other companies, and it would be value-destroying if we were to overpay when we are buying Berkshire,” he writes.

The smart thing to do would be to match buying Berkshire Hathaway’s stocks to the level that Warren Buffett decides is a good price.

The lowest price level for Berkshire B-shares last year was 230 USD. I would personally be pretty comfortable buying Berkshire at that level again.

The lowest level in the first two months of 2022 was 292 USD per share, which, however, is above the 2021 share price.

5. You Learn From Writing and Teaching

Warren Buffett expresses his gratitude that he has been able to write and teach for many years.

He says it has helped him develop and clarify his own thoughts.

“Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly,” he writes.

I can only agree. I appreciate blogging and teaching value investing. I would have just skimmed the annual letter if it hadn’t been for this blog. Now, I’m really absorbing the lessons in it.

But how can you use that knowledge if you are sitting at home by yourself?

It’s easy: take notes.

When reviewing a business, remember to write down why you want to invest in it. Save your notes so you can review them if you have any doubts about whether or not to sell later on. Make it a priority to write to and explain to the future you.

In the value investing courses that I run, I also make sure that the students have to review companies for each other. That’s the best way to learn it: by actually doing the work and explaining your analysis to others. It will stick forever.

Is This a Goodbye?

Warren Buffett is 91 years old, and Charlie Munger is 98 years old.

After all, no one lives forever.

I got the feeling that the letter was a goodbye.

Especially when Warren Buffett expressed his gratitude for all the years he has been able to write and teach. It gave me the feeling that this is the last annual letter we see from him (or with Charlie).

But it may well be that I read too much into it.

In any case, the annual meeting will be held in Oklahoma from Friday, April 29th through Sunday, May 1st.

This is the first time in two years.

It’s hard not to think about if it’s going to be our last chance to see Warren Buffett and Charlie Munger onstage together.

I was supposed to go for the first time in 2020. Now it may be the first and only time I go. 

Don’t forget to download my e-book Free Yourself where you’ll learn to invest like Warren Buffett. You can download it here.