2019 Daily Journal Meeting Notes

Last month I had the great fortune and pleasure to hear Charlie Munger (Trades, Portfolio) speak at the 2019 Daily Journal (DJCO, Financial) meeting as well as to meet and converse with many Munger groupies from all over the world. I’ve also greatly enjoyed learning from Peter Kaufman, Chad Rowe, Tom Gayner and a few renowned value investors.

This year it seemed like a record number of groupies showed up at the meeting. Munger, as always, answered questions and dispensed wits and wisdom for almost two hours. The groupies were not disappointed (how could we be?).

As always, Munger started the meeting with a brief overview of Daily Journal’s business. Then he immediately moved on to an interesting situation – years ago a big West Coast investment institution asked its supposedly brilliant analysts, who are Harvard and Wharton MBAs, for their single best ideas to create a formula with the collection of the best ideas. The institution thought it would beat the index by a big amount. It sounded plausible. But it failed three times.

Munger posed this simple question: "Why did this plausible idea fail?" And in a typical Munger-esque way, he added:

“I’ll bet you there’s hardly one in the audience who knows why that thing failed. That’s pretty ridiculous demonstration I’m making. How could you not know that? Now that I’m going to leave you that question because I want you perplexed.”

For those who attended the Daily Journal meeting in the past few years, it shouldn’t be a hard question because Munger already answered it in 2017 – it’s the commitment and consistency bias. Munger’s exact words were:

“When you pound out an idea as a good idea, you’re pounding it in. By asking people for their best ideas they were getting the stuff that people had most pounded in, so they believed. They didn’t know why it didn’t ‘work because they hadn’t read the psychology books.”

This year Munger went a step further and made an analogy of the situation:

“Of course what they were looking for is equivalent of the alchemists of centuries ago who wanted to turn lead into gold. They thought you could just buy a lot of lead and waive your magic wand over and it turned into gold. That would be a good way to make money. Of course it didn’t work.”

The question then becomes, why does Munger think the best ideas of the Harvard and Wharton MBAs are bad? Munger hinted that it might have something to do with the definition of “properly educated.” Munger’s definition of “being properly educated” is being right when the professor is wrong, or knowing when the professor is right and when they are wrong. Those brilliant investment analysts who got fancy degrees may not be properly educated.

The lessons Munger wanted us to glean from this example were:

1. Some combination of basic morality and sturdy common sense (by which he really meant "uncommon sense") is what you really need to succeed.
2. It is very hard to be rational about something very simple.

Munger then went on to explain why Berkshire and Daily Journal have done better than the average – they tried to do less. The trick of the game is to “have a few times when you know that something is better than average and to invest only where you have that extra knowledge. So the whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task. What fun is it to do an impossible task over and over again?”

Later, Munger added, “It’s a game of being there all the time and recognizing the rare opportunities when it comes and recognizing that the normal human allotment is to not have very many.”

This is my sixth year attending the Daily Journal meeting. If I recall correctly, Munger emphasized the importance of “concentrated investing” in all of them. He also chided the diversification camp each year. Concentrating on your best few ideas sounds so simple and rational. But among all the investors I know, only a handful actually do concentrate on fewer than five ideas. Why is that?

Emulating Munger, I’ll leave that question to you.

After a phenomenal Munger speech, the meeting moved on to the questions-and-answers session. This year more than 50 questions were asked. Among them, five or six questions were specifically related to investing in China. Munger’s message was consistent with what he said in the previous meetings – what American investors are missing is that there are more opportunities in China than there are in the U.S. The great companies in China are cheaper than they are in the U.S. And the Chinese market is much less efficient. You "gotta fish where the fish are."

I’ve followed Munger’s advice and moved back to China in late 2017. Since then, I have focused on the Chinese market. I can vouch for the accuracy of Munger’s statement. Perhaps in the future I’ll write an article about my experiences investing in Chinese markets.

One groupie asked Munger about the influence that the Stoics had on him and some of his favorite advice from the Stoics. Here is what Munger said:

“I like those old Stoics. And part of the secret of a long life that’s worked as well as mine is not to expect too much of human nature. It’s almost bound to be a lot of defects and problems. And to have you life full of seething resentments and hatred, it’s counterproductive. You’re punishing yourself and not fixing the world. Can you think of anything much more stupid than trying to fix the world in a way that ruins yourself and doesn’t fix the world? It’s pretty stupid. I just don’t do it.”

Another groupie asked why there’s so little health care in the Berkshire Hathway (BRK.A, Financial)(BRK.B, Financial) portfolio. Munger gave a straightforward answer:

“I think we don’t understand it well enough and we don’t like a lot that we do understand. Those are two pretty good reasons for not investing.”

One other question I found interesting was about balancing the risk of overdoing a good idea versus the risk of potentially foregoing an opportunity. Munger offered the following advice:

“The problem that is thoroughly understood is half solved. The minute you point out there’s a bit tension between good ideas yet over done so much they’re dangerous, and good ideas that still have a lot of runway ahead. Once you have that construct in your head and start classifying opportunities into one category or the other, you’ve got the problem half solved. You’ve got to be aware of both potentialities and the tensions.”

The above are the parts of the meeting that I found most interesting. In the end, I want to thank Mr. Munger again for his generosity in spending time with us and sharing his timeless wisdom and lessons.