December 5, 2023 • 1hr 40min

A Conversation with Charlie Munger & John Collison - [Invest Like the Best, EP.355]

Invest Like the Best with Patrick O'Shaughnessy

In this episode of Invest Like the Best, host Patrick O'Shaughnessy interviews legendary investor Charlie Munger. As Warren Buffett's long-time business partner and Vice Chairman of Berkshire Hathaway, Munger is renowned for his wisdom, multidisciplinary thinking, and investment acumen. The conversation covers Munger's approach to business, investing, and life, drawing on his decades of experience and insights from his book "Poor Charlie's Almanack."

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Key Takeaways

Multidisciplinary thinking is crucial for success in business and investing. Charlie Munger advocates learning the big ideas from many disciplines to develop uncommon sense.
Focus on win-win businesses that create value for all stakeholders. Munger believes businesses that benefit customers, employees, and shareholders are more sustainable long-term.
Avoid obvious mistakes and unethical practices. Much of Munger's success came from eliminating common errors and staying away from unethical or destructive business practices.
Invest in high-quality businesses with durable competitive advantages. Munger looks for businesses that can sustain high returns on capital over long periods.
Be patient and wait for exceptional opportunities. Munger advocates sitting patiently and pouncing aggressively on rare, high-conviction investment ideas.
Develop a network of trust and reliable partners. Munger credits much of Berkshire's success to working with trustworthy people and avoiding bureaucracy.
Take a long-term perspective. Munger focuses on businesses and investments that can compound value for decades, not short-term trading.
"Figure out what works and do it. Figure out what doesn't work and avoid it." This simple but powerful approach guided Munger's success.

Introduction

In this episode of Invest Like the Best, host Patrick O'Shaughnessy interviews legendary investor Charlie Munger. As Warren Buffett's long-time business partner and Vice Chairman of Berkshire Hathaway, Munger is renowned for his wisdom, multidisciplinary thinking, and investment acumen. The conversation covers Munger's approach to business, investing, and life, drawing on his decades of experience and insights from his book "Poor Charlie's Almanack."

Topics Discussed

Multidisciplinary Thinking and Mental Models (5:58)

Munger emphasizes the importance of learning big ideas from various disciplines:

He advocates mastering fundamental concepts like probability and decision trees
Understanding ideas from multiple fields helps develop uncommon sense
This approach gives an advantage in business and investing

"I early got the idea I would learn the big ideas in pretty much all the disciplines...And that would give me an advantage in what might be called...uncommon sense."

Ethical Business Practices (10:03)

Munger stresses the importance of ethical business practices:

Avoid working with unethical clients or in unethical industries
Focus on businesses that create value for customers
Win-win transactions are more sustainable long-term

"I think you ought to be quite selective in the clients you take on."

Evaluating Business Quality (13:42)

Munger discusses his approach to assessing businesses:

Look beyond financial statements to understand the underlying business
Consider factors like management quality, competitive advantages, and long-term sustainability
Be aware that many seemingly permanent businesses can be disrupted

"Over a scale, 300 years, practically everything perishes. It's like evolution."

Capital Efficiency and Business Models (20:38)

Munger explains the importance of capital-efficient business models:

Businesses that generate high returns on capital with minimal reinvestment are ideal
Costco is highlighted as an example of an extremely capital-efficient business
Be wary of capital-intensive businesses that require constant reinvestment

"Of course, it's better to have a business that earns large profits without requiring any capital than it is to have one that we have put a lot of capital to make the money."

Challenges in Modern Investing (29:08)

Munger discusses how investing has become more difficult:

More competition and sophisticated players in the market
Historical returns of 8-10% after inflation are unlikely to continue
Harder to outperform index funds for most investors

"Of course it's gotten harder. Way harder. It's gotten so hard that most of the people who are in wealth management have an almost zero chance of outperforming an unmanaged index like the S&P."

Long-Term Success in Business (32:08)

Munger outlines key ingredients for enduring business success:

Self-discipline and skill in avoiding common mistakes
Focus on high-quality businesses with durable competitive advantages
Patience to wait for exceptional opportunities

"You have to just absolutely going flat out all the time, and you have to be leading all the time."

Cryptocurrency Debate (33:18)

Munger shares his strong views against cryptocurrency:

Believes cryptocurrency should be banned as it facilitates crime and speculation
Prefers gold as a store of value, though he doesn't invest in it
Sees no need for cryptocurrency given existing currencies and payment systems

"I think cryptocurrency is a scumball activity. And I think by and large, the people who promote it are scumballs or delusionary."

Navigating Economic Uncertainty (37:37)

Munger offers advice for dealing with recessions and economic challenges:

Focus on being shrewd and coping with difficulties
Look for opportunities during market dislocations
Maintain a long-term perspective

"I have one standard set of advice for all difficulties. Suck it in and cope."

American Society and Politics (38:56)

Munger shares his thoughts on societal trends:

Concerned about political polarization and primary system
Sees both positive and negative trends in society
Advocates for adapting to changes rather than lamenting them

"I do not like the way politics has morphed in my lifetime in the United States."

Architecture and Design (45:20)

Munger discusses his passion for architecture:

Views architecture as the "queen of the arts"
Criticizes architects for prioritizing novelty over functionality
Advocates for multidisciplinary thinking in design

"I think hardly anything in the arts is more important than architecture."

Win-Win Business Philosophy (54:13)

Munger elaborates on the importance of win-win business practices:

Businesses should create value for all stakeholders
Win-win transactions are more sustainable and ethical
Avoid exploitative or zero-sum business models

"Of course, if both sides want both sides to win, that's more moral than trying to take advantage of other people. Win-win is so obviously the right way to live."

Capitalism and Its Critics (57:53)

Munger defends capitalism while acknowledging its flaws:

Believes capitalism creates prosperity through win-win transactions
Criticizes politicians who don't understand capitalism's benefits
Advocates for a social safety net alongside free markets

"Capitalism in such a system causes this flourishing civilization. Of course, it's the way to go."

Poor Charlie's Almanack Origins (60:42)

Munger explains how his book came to be:

Started as a collection of speeches and writings
Compiled by Peter Kaufman with Munger's permission
Has gained popularity worldwide, especially in India and China

"Peter just rifled through my office and created Poor Charlie's Almanack. It's his creation, not mine, in a very real sense."

Building Productive Partnerships (65:14)

Munger reflects on his partnership with Warren Buffett:

Emphasizes the importance of trust and shared values
Highlights the enjoyment they've had working together
Stresses adapting to each other's strengths and preferences

"Warren and I have not just succeeded in making money or something. We have had a lot of fun, actual fun."

Views on the SEC (68:55)

Munger shares his thoughts on financial regulation:

Believes the SEC is necessary but could be tougher
Advocates for more transparent reporting of investment performance
Criticizes misleading practices in the financial industry

"I would argue that its main trouble is it isn't tough enough."

Investment Concerns (72:22)

Munger highlights areas of concern in modern investing:

Criticizes excessive fees and misaligned incentives in wealth management
Warns against the dangers of speculation and market manias
Advocates for a more patient, long-term approach to investing

"I regard modern venture capital as investment banking in disguise. Just a little different form of investment banking. Same morality, same obsession with a lot of quick wealth."

Optimism About China (76:31)

Munger explains his positive outlook on China:

Impressed by China's economic growth and business opportunities
Believes geopolitical tensions are overblown
Advocates for more win-win cooperation between the US and China

"We should carefully work out a bunch of win-win transactions between us and China and actually work to make them work even better. That is the right policy of the United States."

Unique Aspects of Berkshire Hathaway (92:14)

Munger discusses what makes Berkshire special:

Decentralized structure with minimal bureaucracy
Culture of trust and long-term thinking
Focus on acquiring and nurturing high-quality businesses

"We like a business system that operates as much as possible like a Mayo operating room, and that regards having very good people who are experienced enough with one another to trust one another."

Conclusion

Charlie Munger's wisdom spans decades of business and investing experience. His multidisciplinary approach, focus on ethical win-win businesses, and patient long-term thinking offer valuable lessons for investors and business leaders. Munger's emphasis on avoiding common mistakes, developing trusted partnerships, and constantly learning has been key to his remarkable success. While he acknowledges the increasing challenges in modern investing, Munger remains optimistic about the power of capitalism to create prosperity when practiced ethically. His simple yet profound advice to "figure out what works and do it" encapsulates a lifetime of accumulated wisdom that continues to influence investors worldwide.