Hi Guys,
A close friend asked for my thoughts on a Charlie Munger interview a few days ago. I replied. I thought you guys might be interested in my response so I’ll share. Here are my comments to my buddy without editing.
I don’t know if you addressed it in earlier MFO exchanges. The interview that I reference is at the following Link:
http://25iq.com/2013/01/16/charlie-munger-on-investment-concentration-versus-diversification/The Charlie Munger interview is wide ranging and is terrific. It provides many opportunities for comment, both positive and negative. I love the opportunity.
Charlie Munger is Warren Buffett’s Tonto. Just as Tonto was the Lone Ranger’s faithful and trusted companion, Charlie Munger is Warren Buffett’s faithful and trusted companion.
There is both a positive and a negative aspect to that relationship. The good part is that each partner contributes and adds gravitas to the other’s investment views. The bad part for Charlie is that he will always be remembered as Tonto-like, not the senior partner. Regardless, Charlie Munger is smart and wise enough to tower tall among the investment redwoods.
Everyone touts consistency, yet many fail to satisfy this idealized behavior rule, especially in the investment world.. Buffett and Munger are no different in this regard.
I see no problem in their investment morphing history. I surely have done so, As John Maynard Keynes stated: “ When the facts change, I change my mind. What do you do, Sir?”
Buffett, in particular, has not been a paradigm of consistency throughout his legendary financial career. In his early days, he brutally cannibalized newspapers and suffered no qualms when firing staff to secure a positive cash flow. That’s just good hardnosed business.
Please read Buffett’s cumulative letters to investors. Over decades, his investment ideas and concepts certainly morphed from (a) a buying dirt cheap small stocks preference based on statistical criteria to (b) a buying large firms with a strong management team in place game plan.
Perceptions and preferences change. Buffett now advocates a hold forever business philosophy. For a time he abandoned, but again reverted to the buy cheap criterion. A while ago he jumped on the Index style bandwagon for most investors. It was not always so. But that’s what successful investors do; they accommodate a changing market environment. They learn from experience.
Sir Francis Bacon remarked in the 17th century: “By far the best proof is experience”. He also cautioned that “Half of science is putting forth the right questions.”
Ken Fisher, in his 2007 book “The Only Three Questions that Count”, is on Bacon’s wavelength in his Question One. He cautioned that what we thing we know is not really so. Fisher’s resolution to this fault is to examine the historical market using statistical correlation coefficient tools to test for suspect truisms.
Buffett and Munger represent the miniscule apex of money managers. They are much more intuitive than most. With occasional missteps, their intuition is spot-on. Most of us are not blessed with that great faculty so a more orderly, disciplined, and statistically-based approach is our default operational mode.
Munger often takes deadly aim at academia in his many writings. That’s okay, since academia has its share of faulty studies and shady participants. But I propose that these are few in number, much fewer than in many other disciplines. Unfortunately, incompetence and fraudulent practices find their way into highly prized professions like in medicine and in the law. The buyer must forever be skeptical when seeking opinions.
Charlie Munger recognizes these limitations in all his pronouncements. Note that he constantly uses terms like “almost” and “some” as his qualifiers. He never makes a ubiquitous “all inclusive” statement.
There is another side to Munger’s academic scorecard. It’s a mixed bag. Munger often acknowledges the many contributions made by the academic community when he cites the merits of limited diversification and some elements of the Efficient Market Hypothesis (EMH). Remember, it’s merely a hypothesis. Most everyone accepts the fact that, carried to an extreme, the practical guidelines discovered by academic research can turn South.
As Munger observed in the interview: “I think it is roughly right that the market is efficient, which makes it very hard to beat merely by being an intelligent investor. But I don’t think it’s totally efficient at all.” Most folks recognize that the market is not perfectly efficient.
Given the behavioral biases of all investors, and the hyper-complexity of the interwoven, interactive market parts, no investment theory or correlation is ever perfect. Even if it is attractive for some period, it is subject to future refutation, again caused by an evolving marketplace.
By the way, Gene Fama is the likely academic not identified in the article who has consistently increased his standard deviation estimate when characterizing the success story of Berkshire-Hathaway. Since he formulated the EMH, Fama himself is a 3-sigma supporter of it. Over the last year or two, Fama has softened his position on this matter just a tad – a very slight tad.
Munger is spot on-target when he cites his race track analogy. An investor need commit his money only when he perceives an edge; that’s true in both the stock world and the race track realm. Buffett noted that a batter need not swing at every pitch, especially when it's not in his comfort zone.
I knew a successful horse player who decided his favorites well before the race began. He never wagered immediately. He only placed a bet if the odds on the horse he selected increased before the closing bell; otherwise he abstained. Sometimes he spent the whole day at the track without ever committing a single dollar, but he earned his living with that discipline.
Strange bedfellows, but Charlie Munger’s investment philosophy and rules are very similar to those recommended by the previously cited Ken Fisher. To oversimplify, buy when you uncover an edge that tilts the odds, and punt to an Index-like approach if an edge can not be uncovered. Of course, this unlikely pair part company in numerous other financial areas.
The overarching presentation on EMH is a bit unfair. It presupposes an EMH goal that simply doesn’t exist. In so doing, it constructs a straw-man that is easily attacked. The false premise is that EMH is a market predictive tool. It is definitely not.
EMH only proposes universal (or almost universal) market knowledge and its price determination. It says nothing about the interpretation or use of that information for future price discovery. It does not project pricing movements as suggested in the Munger article. That claim is a mischievous straw-man.
Buffett observed that “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Munger observed that “index funds make the most sense for almost all investors. Whether they know it or not most all investors should be passive investors.” I trust the wisdom of these two investment giants.
Well, that’s my scattered comments on this excellent interview. Charlie Munger always has simple market insights that an investor can exploit. What do you think?
So ended my comments to my investment buddy.
