Notes from the past week below including bargain preferreds, option pricing rule-of-thumb, and more:
Charlie Munger Daily Journal AGM 2023
We were treated to Munger's expositions on various subjects a few days ago - notes below:
42:00 Jewish Treasury Bills
Munger was asked why he used leverage on his Alibaba purchase, and he referred to Buffett borrowing money to buy into special situations or 'workouts' in his early days. Ben Graham referred to these situations as "Jewish Treasury Bills", which we've never heard before.
The idea is to focus on corporate events such as acquisitions, bankruptcies, litigation, etc. - that are relatively independent of stock market movements. If investors know their way around this field, it makes sense to borrow money to invest in them.
When asked about the geopolitical risks of investing in China, Munger is of the opinion that the extra value is worth running the extra risk.
He may be overly influenced by his positive experiences with Li Lu, BYD, etc. - and he makes a fair point. But investors need to ask themselves if they can take a Russia-like freeze on their Chinese assets. Perhaps this risk can be handled by controlling exposure. In our view, peace of mind is of ultimate importance.
Munger says he hasn't shorted for over 30 years despite making millions on his last short. The experience of constantly posting collateral and being at the mercy of Mr. Market is a headache intelligent investors don't need.
Buffett said once that if you have enough ideas on the long side, you don't need to short - as small investors, we don't see the 'long' well drying up in the foreseeable future.
1:06:45 Higher taxes
Munger say there's likely to be greater anti-business sentiment in the big democracies and to expect higher taxes in general, which will make investing harder.
Apart from financing higher social security/pension payments in an aging society, military expenditures are also on the rise. For example, Japan is expected to raise its already high corporate tax rate (over 30%) to fund its military.
Investors probably need to just lower their expectations of after-tax returns in general.
1:10:30 Know Thyself
You lose ability as you age, but you can become shrewder in adapting to your limitations. This ties into the 'circle of competence' concept Buffett talks about - knowing the edge of your limitations clearly is powerful; makes you focus on your strengths, and become more effective as an investor.
1:36:45 Climate Change
Munger says climate change will likely be less important than most people think.
It's usually worthwhile to be skeptical when extreme positions are taken - bordering on dogma and resulting in cultish behavior. While the problem may be real, the effects may not be extreme. It's likely that oil, for example, will be in demand far longer than the political establishment would like.
Eventually demand cannot be suppressed, and excessive focus on ESG criteria will produce investment opportunities for the value hunter.
2:04:30 Delayed Gratification
Munger talks about delayed gratification in his design of apartment houses. He makes the point that you get more enjoyment out of life with this approach. For a man who practices this at 99, this insight is gold - in investing and life.
2:13:45 Running a Utility From a Regulator's Perspective
Munger mentions that Greg Abel, CEO of Berkshire's utility operation, runs the business as if he's the regulator. Simple and remarkable application of 'Do Unto Others as you would have them do unto you'. Can't miss with this approach.
2:18:45 All Businesses Die
Munger says he didn't realize when he was younger that just as in life, businesses are destined to die. Investors need to soberly assess the risks of business 'death' when they're optimistic about business prospects. Even once-impregnable Google is facing questions in its search business over the rise of ChatGPT - while this risk may not materialize, this possibility was unthinkable even a few months ago.
2:26:30 Just Don't Be Crazy
Munger boils down his success to rationality. He's a champion of inversion - just don't do stupid things and you'll do better than 95% of people.
2000 Berkshire AGM Notes
Notes at timestamps below:
1:33:45 Book Value is not important
Book value represents cash put into the business, what matters to investors is cash that can be taken out.
There's no arguing against this logic - but tangible book provides some downside protection (in particular cases), and it's useful when future earnings can't be predicted with confidence. (Of course Buffett used this focus on tangible assets very profitably in the 50s and 60s with his biggest investments including Sanborn Map, Dempster, and Berkshire Hathaway.)
Smaller investors are probably better off not ignoring tangible book value because that's still the way banks lend to businesses, and also because such opportunities are readily available among smaller stocks.
Nevertheless, Buffett's point highlights the importance of getting a sense of future cash flows - this can only come with practice, experience, and judgment.
3:11:30 One foot in front of the other
Talking about the growth of the insurance business, Buffett says Berkshire wanted to push their edge as hard as they could, show up everyday, answer the phone/read the paper, and do something sensible once in a while.
As small investors, we apply that philosophy by: finding our margin of safety (edge) in stocks, buying as many stocks as we can, sticking to this philosophy over a lifetime, and keeping at it. The results should be satisfactory.
Thumb-rule for valuing options
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