Dear Reader,
Attached is our latest list of stocks passing value screens (low EV/ebit, high returns on invested capital, etc.), which don’t meet our investment criteria - and our reasoning.
This may help you avoid some ‘value traps’, and stocks that aren’t sufficiently attractive compared to opportunities available today.
For reports of stocks that pass our quantitative and qualitative standards:
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Charlie Munger
Charlie Munger passed away a few days ago. Coincidentally, we referred to his 'Psychology of human misjudgment' lecture in the last newsletter.
Following are notes from his last interview with CNBC:
4:15 Ben Franklin/28:15 Robinson Crusoe
Two of Munger's role models with qualities worth emulating.
5:30 Mathematics
Another good investor with numerical talent - suits this profession.
7:00/38:45 Civilizational progress
Munger expresses his admiration for the progress of human civilization - most of which happened during his lifetime. You appreciate it more when you contrast it with how tough life used to be.
8:15 Eastman Kodak
Kodak was on top of its game for decades and still ended up wiping out its shareholders in bankruptcy - dominance in capitalism isn't permanent.
9:30 Low expectations
Munger's consistent advice was to have low expectations - particularly when selecting a spouse. Less chance of disappointment.
11:00 Know your circle of competence
In investing, it's important to figure out the edges of what you're good at - so as not to stray and commit expensive errors. You don't want to play someone else's game, which they're good at.
12:00 Regrets
Munger regrets not starting earlier and compounding longer and better.
"You hit the ground running and you don't look back." - Feech La Manna, Sopranos
12:30 Fancy houses vs. basic houses
Fancy houses may be good for entertaining hundreds of people but most owners end up unhappier after buying them.
13:00 Staying sane/21:00 Invert
Munger's notable suggestion was to avoid "standard stupidities". Avoid things that don't work. By inverting habits of failure, you can dramatically increase your chance of success.
17:15/29:00/41:00 Grab the fat pitches
Munger's view was that the really good opportunities in life don't come that often and when they do, you must grab them by the bucket load.
17:45 Ben Graham/Good Businesses
Ben Graham did well getting as much in assets/share as money could buy. Munger instinctively saw this approach missed out the really big gains from buying good businesses.
Being small investors, the Ben Graham approach suits us best - though we emphasize quality among the bargains we find to pick the best of the lot.
23:30 Focus on your best ideas
Munger mentions John Wooden, the famous basketball coach who spent 90% of playing time with his best seven players.
Try to move in the direction of concentrating on your best ideas where you have the highest conviction.
25:15 Alibaba
Munger recounts Alibaba as one of his big errors (of commission) and adds that your errors shouldn't kill you - live to play another day.
30:15 Ultra-conservative Berkshire
Munger reckons Berkshire would be worth at least double using conservative leverage but didn't want to risk disappointing long-time investors.
Reflecting on individual policy, being fully invested in stocks may be warranted but leverage puts you at the mercy of the market, which can behave inexplicably at any time.
36:00 Unfair advantages
Recognize the unfair advantages in your life and exploit them - it'd be an incredible waste not to.
37:30 Soldiering on
Munger talks about getting through tough moments in his life - particularly losing his 8-year old son to leukemia and advises listeners to never quit and keep pressing on.
39:30 Obituary
Munger advised Buffett to write his obituary and live accordingly - an exercise mentioned in the 7 habits by Stephen Covey. Munger reverse-engineered his life - a wise way to live.
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Munger's nuggets of wisdom are timeless and naturally, this won't be the last we cover them - particularly his contributions in past Berkshire AGMs.
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