Charlie Munger (Trades, Portfolio) and Li Lu (Trades, Portfolio) are two of the greatest investors of all time. In a rare interview on Chinese TV show “Weekly in Stocks,” the two investors got together to answer questions on investing strategy and investor biases. The original interview was over one hour long and partially in the Chinese language and thus, not easily understandable for all viewers. However, to help the reader out, I have summarized the discussion with real quotes and my own comments for context, enjoy.
Note, the majority of comments are from Munger as he was most vocal. This is part one of a two-part summary, with this part focusing on investment strategy.
How to invest
Everyone would like to know the best investment strategy for building long-term wealth. Munger loves to use the principle of “inversion,” which looks at how to do something bad to find out how to do something good. For example, Munger points out that if you invest like people who “gamble in a casino, you will not do very well.”
“The world is full of foolish gamblers and they will not do as well as the patient investors,” he added.
The guru went on to say a long-term investment strategy works best, but if you “like the action” of investing like “gambling in the casino, you are not my people."
“Gamble less and invest more to do better,” Munger said
Why is rationality so important when investing?
Munger often says a great trait to success in investing and life is to be “rational.” This may seem like common sense, but given the irrational world we live in and humans' bias toward emotion, it can be difficult to stay rational. Munger believes rationality is “seeing the world as it is, instead of the way you hope it is.”
“If you don’t see the world the way it is, it’s like judging something through a distorted lens,” he said. “You think the world is one way and it’s different and of course that leads to terrible mistakes, because you won’t think correctly.”
How to stay rational
With fearful news reports and many opinions circulating, staying rational is not always easy.
“You have to work at it and care about it, if you don’t care whether your rational or not and you don’t work on it. Then you will stay irrational and get lousy results,” Munger said. “I think you have a moral duty to become as rational as you can.”
The madness of the crowds is a common phenomenon that causes market crashes and bubbles. As investors, our goal is to filter the signal from the noise.
“Human nature is a big bureaucracy that makes bad decisions,” Munger said.
The power of patience
Being patient is another key trait Munger, Li and even Warren Buffett (Trades, Portfolio) all point to as the key for successful investments. In the past, Munger has openly admitted to not knowing what a stock is going to do in the short term. But longer term, if earnings grow, so should the stock price.
Munger believes “patience can be learned,” but some of it is part of an investor's character. Having a “long attention span” and the ability to concentrate on one thing for a long time is a "huge advantage”. Li also agrees that focus and patience are key success traits.
Buying wonderful companies at fair prices
It is well known that Munger encouraged Buffett to focus more on investing in “wonderful companies at fair prices” as opposed to cigarette butt investing. Munger elaborated on the reasons for this:
“A great company keeps working when you are not; a mediocre company won’t do that.”
Intrinsic value
Value investing focuses on valuing an asset's true worth and then waiting patiently to buy the stock below its fair value. Munger said,“We don’t focus on the froth of the market. We seek out good long-term investments and stubbornly hold them for a long time.”
What makes price and value converge?
Legendary investor Benjamin Graham could not answer the question of why a stock that is undervalued will see a price change toward its intrinsic value.
He said, “In the short term, the stock market is a voting machine and in the long term, it’s a weighing machine.”
Munger shared his thoughts, saying, “If you keep making something more valuable, then some wise person is going to notice it and start buying.”
He added, “People will recognize value over time, it’s natural."
Li also commented on the use of leverage if you are sure price and value will converge.
“There is no such thing as a 100% sure thing when investing, thus the use of leverage is dangerous,” he said.
Best and worst investments
For his best investment, Munger refers to his Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) stock, which cost him $16 per share. It now sells for around $447,000 per share. Munger casually noted, “It has been a very good investment.”
“It took a long time, it was a long-term investment, I liked the people I invested with and the companies they invested in” he said. “I just sat there for 50 years and it’s worked out very well.”
The guru said he has not made many bad investments. As the time, he only had three stocks: Berkshire, Costco (COST, Financial) and a. investment into Li's partnership.
“You don’t need to own a lot of different things to get rich,” Munger said.
Why does Berkshire Hathaway own Apple despite not investing in technology?
It is well known that Buffett and Munger have said technology is not in their circle of competence, so they typically do not invest in it at Berkshire Hathaway. However, the Chinese interviewer probed Munger about the elephant in the room, which was Apple Inc. (AAPL, Financial). Berkshire is the third-largest shareholder in the company and owns 5.57% of the stock as of 2022. Apple is also one of Berkshire's most successful investments and makes up a staggering 40% of the fund's entire value.
Munger settled the debate once and for all, saying:
“You can argue that Apple is a consumer electronics company and Warren has stated this is an area he understands more than computer science and so that explains Apple.”
He then goes on to talk about the importance of learning.
“You have to keep learning if you want to become a great investor, and as we’ve kept learning and conditions have changed…our investments have changed. We changed because the world changed.”
Li follow up by saying, “That's the basic logic of our investment philosophy. If reality changes, so will we.”
Munger then provided another example: railroad stocks.
“Warren and I hated railroad stocks for decades, but the world changes and pretty soon we got down to just four main railroads," he said. “We changed our mind because the facts changed.”
Final thoughts
Munger and Li are both renowned value investors. The rare interview of the two together offers new insight into both value investing and the best investment strategy to build long-term wealth.
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