99-year-old Charlie Munger's views on China, Japan, life, and investment
By Wang Ziwei @ Retail Wei Observation
On October 29, 2023, Charlie Munger, the 99-year-old vice chairman of Berkshire Hathaway, made his first appearance on a podcast, being interviewed by the podcast Acquired. He discussed his views on China and Japan, as well as his perspectives, experiences, and lessons learned over the past 99 years.
The entire podcast lasted for 1 hour and 6 minutes. "Retail Wei Observation" summarized the core content and provided additional background information to allow readers to get closer to Munger's wisdom.
- Retail investors are actually gambling in the stock market!
"They know nothing about companies or anything else. Retail investors only chase price fluctuations. If I were in charge of the world, I would impose heavy taxes on short-term traders and drive these speculators out of the market."
- Why are algorithm-driven trading institutions (such as Renaissance Technology) taking on too much risk?
"The simplest trades are the ones you know in advance. They increase leverage year after year to achieve returns. Eventually, their trading volume becomes larger, but the profits become smaller, which exposes them to huge risks. I would never do that myself. Having huge leverage is the only way they can achieve such huge returns. If you are already wealthy enough, this leverage will drive you crazy."
- How did Warren Buffett and I quickly change our mindset and make a lot of money when we realized that Diversified Retailing was under too much competitive pressure?
Background information: On January 30, 1966, Buffett, Munger, and Gottesman established a holding company called Diversified Retailing Company, Inc., with the goal of "acquiring diversified businesses, especially in the retail sector."
At that time, Buffett and Munger went to Maryland National Bank to request a loan for the acquisition.
The loan officer widened his eyes in surprise and exclaimed, "Hochschild-Kohn's wants $6 million for this small Hochschild-Kohn's?" Even after hearing this, Buffett and Munger did not question their judgment or scream and run away.
Buffett described it as follows, "We thought we were buying a second-rate department store at a third-rate price."
"We made a lot of money from Diversified Retailing, but we didn't make money from the retail industry."
"The whole story is very simple. Buffett and I bought this small chain of department stores in Baltimore. It was a huge mistake because the competition was too fierce! We realized this right after signing the deal. So we decided to turn the situation around and bear the seemingly foolish consequences instead of letting it go bankrupt directly. In those recession years, we kept buying, and all the money went into these stocks, and of course, we made them double."
- The early years gave us a good start
"Yes, we bought a small savings and loan company for about $20 million. When we left that company, we got back over $2 billion worth of securities from the $20 million 'small investment,' which became part of the capital base of Nebraska Insurance Company. That's the perfect start everyone needs."
- My favoritism towards Costco
(1) Their prices are cheaper than anywhere else in the United States.
(2) Large and efficient stores.
(3) Huge parking lots.
(4) Special benefits for in-store customers through reward points.
(5) Making suppliers wait (for payment) until Costco receives payment from consumers.
What makes Costco so successful?
"It takes very good execution. You really have to be determined to do it and be passionate about it every day, every week, every year for 40 years. It's not easy. Do you think Costco's success is due to the magic of its business model and culture? Yes, it's culture plus model. Absolutely, and Costco reliably and diligently does all of this for 40 years."
Why did it take Costco decades to open its first store in China?
"When they tried to open their first store in China, someone demanded a $30,000 bribe, and Costco refused. Jim Senegal (former CEO of Costco) was very disgusted by this. In the following 30 years, he didn't even want to talk about it."
- Providing advice on finding quality investments for investors
"When you hold a stock for 5 years, you may gradually become integrated with it, or your understanding of it may deepen. But when you realize that you have an advantage, you should go all-in. You know you are right, but business schools don't teach these things. It's incredible. You have to go all-in on the best investments!"
- Why could I become a partner with Buffett?
"We are very similar. We both want to keep our families safe, do a good job for investors, and so on. We have similar attitudes."
Munger also offered some advice for long-term partnerships:
"It helps if you like each other and enjoy working together. But I don't use any formula. Many long-term successful partnerships continue because one person is good at one thing, and the other person is good at another. They naturally divide the work, and each person enjoys what they are doing."
- I believe Berkshire Hathaway can use more leverage
"Buffett is still more concerned about the safety of Berkshire Hathaway shareholders than anything else. If we had used a little more leverage from the beginning, our current leverage would be three times what it is now, and the risk wouldn't be that great."
- My views on venture capital
"For VCs, it is very difficult to make good investments. I think it is almost impossible to consistently make good investments in venture capital."
"Some projects can become very hot, and you have to make quick decisions. Everyone is just gambling."
"VCs can do well, and it is a legitimate business. If you want to give the right people rights and nurture them, you have to help them. You know the tricks of the game, so you can help them do business well without interfering too much. They will hate you. Overall, after interacting with a large number of people from the VC industry, people in companies often dislike VCs."
"They don't see VCs as their partners, and they don't think VCs are helping them. On the contrary, they think VCs only care about themselves, so they don't like VCs."
- How can venture capital be improved?
"At Berkshire Hathaway, they know that we won't try to sell them at the highest price. You see, even if some idiot investment banker offers us a 20 times price-to-earnings ratio for some of our bad businesses, we won't sell them."
"However, if it's a business that we have been unable to solve, we will sell it. But if it's a decent business, we won't sell it. This gives us a reputation for 'sticking to what is helpful to us.'"
"You don't want to make money by deceiving investors, and that's what many venture capital firms do."
- Why is Buffett's investment in Japan a no-brainer?
"If you are as smart as Buffett, maybe once or twice in a century, you will have such an idea. The interest rates in Japan have been only 0.5% per year for the past ten years. And these companies are indeed deeply rooted old companies. They have all these cheap copper mines and rubber bases, so you can borrow all the money ten years in advance, buy stocks, and pay a 5% dividend."
"You don't need to invest or think, you have a lot of cash flow. How long does it take for you to find such an opportunity? If you can have such an opportunity once or twice in a century, you are lucky enough. We can do this because of Berkshire Hathaway's credit, but others can't."
- I like companies with strong brands - they have strong pricing power
"Well, it's hard not to like brands because we were lucky enough to acquire See's Candy for $20 million. As our first acquisition, we quickly realized that we could raise prices by 10% every year, and no one cared."
"We didn't increase sales or anything like that, just increased profits. So, for 40 years, we raised prices by 10% every year. It's a very satisfying company. We didn't get any new capital. That's the benefit of it, very little new capital."
- If we were to start building Berkshire Hathaway from scratch today, what should we do?
Three things: intelligence, hard work, and being very lucky.
- My views on China
"My view on China is that the Chinese economy has better prospects in the next 20 years than almost any other large economy. That's one. Second, Chinese giant companies are stronger and better than giant companies anywhere else, and they are much cheaper. So, naturally, I'm willing to take some risks from Chinese companies in my investment portfolio."
- Why do I keep thinking about BYD?
"This guy (referring to Wang Chuanfu) is a genius. He has a Ph.D. in engineering. When he sees other people's parts, he can manufacture those parts: look in the morning, look in the afternoon, and he can make them. I have never seen anyone like him. He can do anything. He is a natural engineer, a production manager who can make everything."
"This is a huge wealth: gathering so many talented people in one place is very valuable. They have solved all the problems of electric vehicles in terms of motors, acceleration, braking, and so on."
Comparing Wang Chuanfu with Musk:
"Wang Chuanfu is a fanatic who knows how to personally make things, so he is closer to the source. In other words, BYD's Wang Chuanfu is better at actually manufacturing things than Musk."
- My advice on building a family
"You have to get along with everyone. You have to help them through difficult times, and they will help you. But I don't think it's as difficult as it seems. I think about half of marriages in the United States work quite well."
"If two people have to marry someone else, the situation will be the same."
"You have to establish trust with your spouse, especially in educating children."
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"Retail Wei Observation" focuses on the latest strategies, tactics, and thinking in the field of new retail and new consumption from a global perspective. The platform's founder, Wang Ziwei, is an independent retail analyst.