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?
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.