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“I knew after I met Charlie, after a few minutes in the restaurant, I knew that this guy’s going to be in my life forever. [I knew] we were gonna have fun together, we were gonna make money together, we were gonna get ideas from each other [and] we were both going to behave better than if we didn’t know each other." – Warren Buffett
If the most eminent investor of our era, Warren Buffett, finds wisdom in Charlie Munger, then undoubtedly, there is much to gain from emulating his principles.
Charlie Munger's influence extends far beyond the realm of investing. His wit and sagacity possess the potential to elevate us not just as investors, but as thinkers and individuals striving for personal growth.
This rendition of #DSPNetra serves as a tribute to the remarkable wisdom of Charlie Munger. His words have served as a beacon for the authors of this report, inspiring not only comprehension but also practical application in our lives. We extend our gratitude to the various investors and market participants who have contributed to this edition of #DSPNetra, offering insights into how Charlie's teachings have shaped their own journeys.
All quotes in this report are from Charlie Munger, unless otherwise mentioned. The title of each of the following slides is ‘the right stuff’ that Charlie Munger espoused.
Warren Buffett once said: “Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence.“ We aspire to emulate this brevity in our discourse, even as we acknowledge that we are still on a learning curve. We invite our readers to join us in honoring one of the preeminent minds of our time, Charles T. Munger.
“We don’t feel some compulsion to swing. We’re perfectly willing to wait for something decent to come along. In certain periods, we have a hell of a time finding places to invest our money.” …“Patience combined with opportunity is a great thing to have. My grandfather taught me that opportunity is infrequent and one has to be ready when it strikes. That’s what Berkshire is….We’ve got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active—discipline in avoiding just doing any damn thing just because you can’t stand inactivity.”
“’How long can this continue?’ Well, there’s only one way I know to answer that. And that’s to think about why the results are occurring now- and then to figure out what could cause the results to stop occurring.”
In 1993, Berkshire Hathaway bought Dexter Shoe, a Maine-based shoemaker, for $433 million by giving equivalent amount of Berkshire Hathaway shares. They thought Dexter Shoe was one of the best-managed companies they had ever seen, they expected it to continue growing and earning high returns on capital. However, later they realized that they had made a costly mistake because Dexter shoes faced intense competition from lowcost foreign producers, especially Chinese. Dexter Shoe could not keep up with the changing industry dynamics. Berkshire Hathaway's shoe profits plummeted from $85 million in 1994 to -$46 million in 2001, largely due to losses at Dexter Shoe.
The opportunity cost of using Berkshire shares to pay for Dexter Shoe was staggering: the 25,203 Class A shares that Buffett handed over were worth $433 million in 1993 which are now worth $16 Billion.
Lessons to be learned from this mistake: “We learned how awful it is to have somebody who’s really way lower priced [than the business invested in] come in hard and how no amount of managerial skills could protect us.” – Charlie Munger
Source: DSP, Bloomberg; Data as of Apr 2024.
“The penultimate hurdle is myopia (or “hyperbolic discounting,” if you happen to be a geek). This reflects the idea that consequences, which occur at a later date, tend to have much less bearing on our choices the further into the future they fall. This can be summed up as, “Eat, drink and be merry, for tomorrow we may die.” Of course, this ignores the fact that on any given day we are roughly 26,000 times more likely to be wrong than right with respect to making it to tomorrow. Or, if you prefer, this myopic bias can be summed up by Saint Augustine’s plea: “Lord, make me chaste, but not yet.” —James Montier
“Almost all good businesses (and investors) engage in “pain today, gain tomorrow” activities.”
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Most investors will be better off by doing away with all activity and hyperactivity. Often during our interaction with clients and partners we highlight that if you start a SIP (Systematic Investment Plan) and never stop, you don’t have to do anything. You don’t have to listen to experts, nor read any reports (including #DSPNetra). That’s because by averaging your investments over the long term, you accept average valuations, average returns and average volatility. In investing, most investors don’t even make average returns.
So as Charlie says, let’s try and be a little less idiot rather than trying to be the smartest.
Source: DSP, Bloomberg; Data as of May 2024. SIP Real Returns > = 5% shaded in green; SIP Returns > Lumpsum Returns shaded in green
“You can easily see how risk-averse Berkshire is. In the first place, we try and behave in such a way that no rational person is going to worry about our credit. And after we have done that, we also behave in such a way that if the world suddenly didn’t like our credit, we wouldn’t even notice it for months, because we have so much liquidity. That double layering of protection against risk is as natural as breathing around Berkshire. It’s just part of the culture.”
“Every two years I’m part of an informal group that gathers to have fun and explore a few subjects. Last September, meeting at Bishop’s Lodge in Santa Fe, we asked [Ike Friedman, Borsheim’s managing Genius] to come by and educate us on jewels and the jewelry business. Ike decided to dazzle the group, so he brought from Omaha about $20 million of particularly fancy merchandise. I was somewhat apprehensive—Bishop’s Lodge is no Fort Knox—and I mentioned my concern to Ike at our opening party the evening before his presentation. Ike took me aside. “See that safe?” he said. “This afternoon we changed the combination and now even the hotel management doesn’t know what it is.” I breathed easier. Ike went on: “See those two big fellows with guns on their hips? They’ll be guarding the safe all night.” I now was ready to rejoin the party. But Ike leaned closer: “And besides, Warren,” he confided, “the jewels aren’t in the safe.”
—Warren Buffett, 1989 Berkshire Shareholder Letter, 1990
Source: DSP, Bloomberg; Data as of May 2024.
“The wise ones bet heavily when the world offers them opportunity. They bet big when they have the odds. And the rest of the time, they don’t.”
“Good investing requires a weird combination of patience and aggression. And not many people have it.”
In 2002, PetroChina (a Chinese Oil & Gas major) produced ~3% of the world’s oil and earned $5.7 billion in profits. However, the company was trading at a market cap of $37 billion – Price to Earnings of 6.5x. While low valuations do not guarantee good returns, PetroChina’s underlying business fundamentals were very decent. The company had large oil & gas reserves and the leverage levels weren’t high. Plus, it had a dividend policy which distributed 40-50% of profits.
Berkshire had thus far never invested in China, but this one was a no-brainer to Buffer and Munger. They bought 1.3% stake in the company in 2003 for $488 million. By 2007, the company’s market cap soared to $275 billion (helped by high oil prices and good execution by management) and valuation rerating. Berkshire sold its entire holding for $4 billion in the second half of 2007.
Fun Fact: Berkshire paid tax of $1.2 billion on the gains - Warren in 2008 BRK annual report notes that this sum paid all costs of the U.S. government – defense, social security, you name it – for about four hours!
Source: DSP, Bloomberg, Berkshire Hathaway & PetroChina Annual Reports
“It’s amazing how fast Berkshire acts when we find opportunity. You can’t be timid- and that applies to all of life.”
“Knowing what you don’t know is more useful than being brilliant. Acknowledging what you don’t know is the dawning of wisdom.”
“Warren and I only look at industries and companies which we have a core competency in. Every person has to do the same thing. You have a limited amount of time and talent and you have to allocate it smartly.”
Between 2020 and 2021, new-age technology stocks did extremely well, benefitting from the low interest rate environment and stimulus measures in US.
This led to a sharp underperformance of Berkshire Hathaway versus new age portfolio managers such as ARK Innovation ETF. At one point, the underperformance differential was as high as 500%. However, as the interest rate cycle reversed starting 2022, the performance of new age stocks got pulled down by earnings growth (or the lack of it). The old tortoise eventually caught up and surpassed the fad stocks.
A large part of Warren Buffet and Charlie Munger’s success rests squarely on two things:
Source: DSP, Bloomberg, Morningstar Direct. Data as of April 2024. Values rebased to 1000 on 31-Oct-2014 (inception of ARK Innovation ETF).
“If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it.”
Irrespective of where you invest, you are very likely to face a correction of 50% or higher at least once in your investing life.
For example, let’s take the top 10 listed companies (based on free float market cap) in India and US. These stocks become giants due to their consistent business performance across years. But almost all of them have gone through drawdowns of 50% or higher at least once in the last 30 years.
Volatility is not a choice. However, you can manage the extent of pain with your asset allocation.
“The availability of a quotation (stock price) should never be turned into a liability whereby its periodic aberrations in turn formulate your judgments.” – Warren Buffet
Source: DSP, Bloomberg. Data as of May 2024. Top 10 stocks of Nifty 50 and S&P 500 are considered. Maximum drawdown since inception is shown for companies that have been public for less than 30 years.
“Even Einstein didn’t work in isolation. But he never went to large conferences. Any human being needs conversational colleagues”…. “I hardly know anybody who’s done very well in life in terms of cognition that doesn’t have somebody trusted to talk to. Einstein would not have been able to do what he did without people to talk to. Didn’t need many but he needed some. You organize your own thoughts as you try and convince other people. It’s a very necessary part of operations. If you had some hermit sitting on a mountain, he wouldn’t do very well.”
“Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.”
“People calculate too much and think too little.”
It’s no secret that Charlie Munger and Warren Buffett have seen their wealth multiply because they gave it time. Holding on to your investments with a clear focus on margin of safety is a recipe that the two greats have espoused.
For most people who aren’t professional investors or money managers, a financial planner, who can inculcate discipline and make one focus on time can be a source of greatest support.
In the compounding formula, A = P(1 + r/n)^(nt) , its the time (t) that causes compouding rather than just return (r). Unfortunately, most investors are focussed on maximizing returns (r) and not time (t).
Source: DSP. Data as of May 2024.
“To get what you want, you have to deserve what you want. The world is not yet a crazy enough place to reward a whole bunch of undeserving people”
You get return you deserve. Do you have a psychological edge? Can you zig when markets zags? Can you invest in value or Equal Weight Index Fund when market is rallying behind Momentum Investing?
Do you have an analytical edge? It is not a lot to understand a couple of sectors, following them for a few years and make reasonable sized bets when the time is right. Stocks/Sector funds - You don't have to learn it all. Buffett and Munger know few sectors like Financials, Insurance and Consumer/Retail very well. 75% of their bets are just in these few sectors.
Luckily if you don't have any edge, Investing is quite benevolent. You can simply buy and hold Multi-asset fund which gives you a smooth ride to your financial goals.
“If you can’t beat the market, be the market.” - Seth Klarman
Source: Contrarian EPS, Bloomberg, DSP. Data as on May 2024. Data is since 2000. Data taken for Debt - CRISIL Ultra Short Term Debt Index, International Equities – MSCI ACWI TR, Domestic Equities – Nifty 500 TRI. Multi Asset Allocation is 15% Debt, 20% Gold, 15% International Equities, 50% Domestic Equities.
“The first rule of a happy life, is low expectations. With unrealistic expectations, you’re going to be miserable.”
“It’s not possible for investors to consistently outperform the market”
Charlie Munger has often remarked that it is not feasible for every investor to consistently outperform the market. Nevertheless, Munger also emphasized that wealth can be generated through patience and perseverance during challenging times.
We conducted an analysis of active equity funds that have been operational over the past decade, and which have never gone into last quartile. Our findings revealed that only 38 funds out of 151 funds have outperformed the major Large, Mid, and Small cap indices during this period. However, achieving this outperformance has not been straightforward. These funds have experienced significant volatility, ranging from being in the top quartile in one year to falling below average the next.
Ultimately, it is the diligent investor, endowed with the temperament to remain steadfast and committed, who can navigate these fluctuations and achieve long-term success.
Source: Symphonia Wealth Research. Data as of May 2024.
“I figure that I want to swim as well as I can against the tides. I'm not trying to predict the tides.”
“If I had to name one factor that dominates human bad decisions, it would be what I call denial.”
One of Charlie Munger’s favorite stories is about the little boy in a Texas school:
The Teacher asked the class ‘If there are nine sheeps in the pen and one jumps out, how many are left?’ Everybody got the answer right except this boy, who said, ‘None of them are left’ And the teacher said ‘You don’t understand arithmetic’ And the boy said, ‘No teacher, you don’t understand sheep’.
This lesson is equally applicable to markets as it is to sheep. Following the froth of extremely high valuations in the BSE Smallcap 250 Index in 2018, about 90% of the stocks gave negative returns from January 2018 to February 2019.
Returns during that period (Jan 2018 – Feb 2019) S&P BSE Smallcap 250 Index - -28% Average stocks return during that period - -32%
Source: Amit Marathe – Wise Turtle Finserv LLP, DSP. Data as on May 2024. *Period considered is Jan 2018 – Feb 2019.
“You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have the cast of mind, you’re destined for failure even if you have a high IQ.”
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.”
The roaring bull market that ignited on March 23, 2020, post the Covid-19 market downturn, spurred a frenzy of digital apps, services, and platforms reminiscent of the 1999 dotcom bubble. Unlike then, some businesses actually boasted solid earnings and free cash flow growth. However, this surge was short-lived, driven by heightened digital infrastructure usage during lockdowns, shifting market focus from traditional valuation metrics to Total Addressable Market (TAM).
From Mar’20 to Nov’21, euphoria persisted, spawning numerous books and blogs on "making millions" through stock picking, often mistaking luck for skill. Retail investors, riding popular stock picks, outpaced the NASDAQ100. Berkshire had made >3x return on its large Apple purchase in 4 years, but investors in their 20s had begun calling Warren Buffett a washed-up old man.
Yet, as the Federal Reserve raised rates to curb inflation, market momentum waned. The NASDAQ100, climbing from under 6,900 in Mar’20 to 16,440, plunged to 10,440 by Nov’22, a 37.63% decline. Concentrated portfolios in bubble stocks suffered substantial losses, dashing hopes of recovery
Source: Ramneek Kundra, CIO, DSP Pension Fund, Bloomberg; Data as of May 2024.
“I've always believed that nothing was worth an infinite price.”
"The idea of a margin of safety, a Graham precept, will never be obsolete."
Great investors are not rigid in their option. They know markets and factors keep evolving and as such adapt to the same. Stan Druckenmiller with a legendary track record in investing attributes his ability as the main factor behind his success in investing.
In late 2022, Druckenmiller was cautious on US economy as inflation continued to rise much above US Fed target of 2%
On 30th Nov 2022, ChatGPT was launched. Same week, Druckenmiller bought a USD 100 Million position in Nvidia at ~ USD 150/share and continued to buy it for the next six months.
Post Nvidia's rise to $950/share, he has sold 30% stake so far and still netted a gain several times over his investment.
Source: Tariq Hussain, Stockcircle. Data as of May 2024.
"It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities."
"Is there such thing as a cheerful pessimist? That's what I am."
When Buffett and Munger say that their favourite holding period is forever, many people forget that they run an entity which holds these fabulous businesses. The idea behind an investment portfolio is to look at the quality of the businesses versus the opportunity cost.
"Everything should be done in terms of opportunity cost. Opportunity cost is so simple. If you're gonna make a new investment, your opportunity cost of the new investment is whatever the next best choice you have available is. Now, you go through life like that instead of with this gibberish, all I can say is it works better.“ – Charlie Munger
Optically, the ace investors may appear more active than they say, but on an ongoing basis they have the ability to hold businesses for unusually long period of time, as long as they fit their opportunity cost framework. That’s being logical.
Source: Kumar Saurabh, Founder, Scientific Investing
“Life is just one damn relatedness after another.”
Charlie Munger championed a multidisciplinary approach to learning, advocating for the acquisition of fundamental 'Mental Models' from various disciplines—a concept that deeply resonates with us.
Mark Twain once said: “The man who doesn’t read good books has no advantage over the man who cannot read them.”
If you think about it carefully, lollapalooza effects, the really big effects, come from the confluence of factors. Embracing a multidisciplinary approach, wherein one grasps the basics of physics, biology, probability, mathematics, psychology, and other fields, can provide the insight needed to recognize when one is amidst a lollapalooza. And what better way to acquire this foundational knowledge than through reading?
To read, is to have self respect to grow. It’s the passion to know. “What matters most: passion or competence that was born in? Berkshire is full of people who have a peculiar passion for their own business. I would argue passion is more important than brain power.”
If there is one overarching lesson from Charlie that serves as a gateway to acquiring all other lessons, it is reading. “Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”
My most valuable lesson from Charlie Munger is the principle of inversion. Instead of asking where I can make money, I now ask where is the risk, so I can avoid adding risk to my capital. This framework has guided my decisions in both business and investing. It has steered me away from asset classes or funds nearing their peak cycles. For instance, it prevented me from investing in longduration debt funds when policy rates were at 4% two years ago. Furthermore, I've learned that stocks rarely make money when price-to-sales ratio surpasses tenfold. This insight spared me from investing in popular tech names in 2020. When considering what causes losses in equities, I've come to realize that it's often due to either poor companies or overpaying for good ones. This understanding led me to invert my approach and design a value fund focused on acquiring good companies that are not excessively priced. My team and I conceptualized this fund with inspiration drawn directly from Charlie Munger's inversion principle.
- Kalpen Parekh (MD & CEO, DSP Mutual Fund)
Charlie lived deliberately. He consistently shaped the future he wanted. Carefully choosing where he lived, vacationed, who he worked with - he manifested his intentions with each decision. He knew why he wanted to be rich ("I thought it was undignified to have to send invoices to other people."). He even designed and funded buildings and boats he believed the world deserved. We are often scared to even ask, “what do I want from life”? It’s a scary question. Charlie asked it. Acted on it. I guess that is the most important lesson I have learnt from him. I have slipped in the past, but I hope I always have the courage to ask that question. And follow through.
- Abhishek Singh (Fund Manager, DSP Mutual Fund)
Source: Vishal Khandelwal, https://www.safalniveshak.com/
Source: Raunak Onkar – PPFAS Asset Management
"No one survives open heart surgery better than the person who did not need in the first place"
What does this imply in investing wisdom:
- Buying at reasonable valuations to protect any chance of heart palpitations in the future due to market volatility and down moves.
- Operating in your circle of competence to know exactly why a company or a fund is moving the way it is and knowing this allows you to not pull the plug and continue on your investment journey.
“I'm optimistic about life. If I can be optimistic when I'm nearly dead, surely the rest of you can handle a little inflation”
- Investing implies that you are optimistic about something and only by being optimistic can you stick to that investment thesis long enough beyond most of the macroeconomic noise that will keep playing its hand across.
- More often than not, pessimists sit on the side lines and miss out on progress while the optimists have skin in the game working towards something or believing in something.
Source: Ankush Datar
3 Investing Lessons from Munger that I always keep in mind –
3 Life Lessons from Munger that I always keep close to my heart –
Source: Vishal Sarda - SKCL Capital Pvt Ltd
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Mutual fund investments are subject to market risks, read all scheme related documents carefully. © DSPAM 2024.
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