Plan like a pessimist and dream like an optimist.

 

Plan like a pessimist and dream like an optimist.

His rule of thumb is described as simply: “Plan like a pessimist, dream like an optimist; save like a pessimist, invest like an optimist.”

- Morgan Housel

Charlie Munger (Audio)

Charlie Munger (Audio)

https://youtu.be/w6qRb171cog?si=x7v8-mLirz0sUgXJ

Most of his advice can be summed up into:

-Read and learn as much as you can.

-Exercise common sense as frequently as you can.

-Be patient.

We sit down with the legendary Charlie Munger in the only dedicated longform podcast interview that he has done in his 99 years on Earth.

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: All right, let's do it. Welcome to this episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: And we are your hosts. This episode is a very unique one for David and I. Good friend of the show, Andrew Marks, organized a little dinner for us with Charlie Munger and a few other folks at Charlie's home in Los Angeles. You can hear Andrew a few times in the background asking Charlie questions. We are pretty sure that this is the only podcast that Charlie has ever done.

Charlie, aside from being one of the most prolific investors of all time alongside his partner Warren Buffett, is 99 years old. He will turn 100 on January 1st. Of course, our conversation was interesting because he's freaking Charlie Munger, but also because it was interesting to get the perspective of someone who has seen the last 99 years of human history.

We talked with Charlie, of course, about Costco, his history investing in retailers over the last 50 years. We also got to hear his views on what it takes to build a great partnership, what's gone wrong in the global securities markets these days, the concept of investing versus gambling, and where investment opportunities remain in the world today.

David: Ben, this was such a special life experience for you and me. You and me together to do this, and the fact that we got to record it and now share it with the world for posterity, just icing on the cake, and the whole thing was unbelievable.

Ben: Listeners, we knew we were going to have dinner. We were not sure whether we were going to be able to record it. Now we get to share it with all of you.

With that, join the Slack. There is an awesome discussion of every episode and the news of the day at acquired.fm/slack. If you sign up for acquired emails, you will get episode corrections and follow-up from previous episodes, plus hints at what the next episode will be, that's acquired.fm/email. We have only one sponsor for this interview.

David: A special conversation deserves a special sponsorship. Longtime listeners will know that there's only one company in the Acquired universe that is truly appropriate, because everything they do is modeled after Charlie and Warren, and that's Tiny.

Ben: Tiny is the Berkshire Hathaway of the Internet. Literally, they are such huge fans that they started a company that makes bronze busts of Buffett and Munger themselves, but more on that in a minute.

David: Berkshire, as we know, started as a textile mill in Massachusetts nearly 200 years ago. Almost 20 years ago, Tiny founders, Andrew Wilkinson and his partner Chris, took their version of an internet textile mill, the premier design agency MetaLab, which designed the UIs for Slack, Uber, Tinder, Headspace, Coinbase, and others. They asked themselves, what would Charlie and Warren do if they were us?

That led to the realization that just like Berkshire discovered in the physical world, the Internet also has wonderful niche businesses with great cash flows. In fact, they tend to be even better than the old days of See's Candies and Blue Chip Stamps because they require zero capital reinvestment, have software margins, and can build global brands much faster than the 50 some years it took See's to expand around the world.

Ben: Andrew and Chris took the extra cash flow from MetaLab and their other businesses, and created Tiny, the world's first and best permanent holding company for wonderful internet businesses, and boy did it work.

David: Fast forward to today, and thanks to Tiny's success, this opportunity is no longer a secret. Many people have caught on to the idea that this can really work. But just like Berkshire itself, no one else has the combination of experience, temperament, access to capital, and frankly, reputation that Andrew and Chris have built over the past two decades.

We're investors in Tiny ourselves alongside Bill Ackman and Howard Marks. Just like the two of them, Tiny is really the long-term buyer of choice in their niche. Anyone who's looking for a permanent home for their profitable internet business or who needs a capital partner for a co-founder or VC cap table buyout, would be lucky to work with Tiny.

Ben: For instance, they just bought the premier social network for film buffs, Letterboxd, which has been the founder's baby for 12 years and will stay so within Tiny. This really reflects Tiny's whole ethos—work with only the best internet businesses, commit to simple diligence 30 day deals, and leave the business alone, either for you to operate or bring in new long-term oriented management. Up to you.

David: Thanks to Tiny. This is the only sponsor, as Ben said, that you'll hear on this episode, and just like Berkshire, it'll be here in perpetuity. Tiny just became a public company earlier this year, and they can now do deals ranging anywhere from $1 million all the way up to $250 million. If you want to get in touch, just shoot them a note at hi@tiny.com and just tell them that Ben and David sent you.

Ben: Oh, and one more thing. The Bronze Charlie Busts, the perfect daily reminder in your workspace to ask what would Charlie do? Just head on over to berkshirenerds.store to buy your own. They also have plenty of some guy named Warren, too.

Okay, now without further ado, this is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only and on to Charlie Munger.

Ben: Charlie, I was watching the NFL games last weekend and it seems like every advertisement now is a sports betting advertisement. Is this good for America?

Charlie: No, of course not. Are the dog tracks, racetracks of America, the casinos, good for America? Of course not. They're just very popular.

David: That's how Warren got his start though, right? At the racetrack?

Charlie: But Warren never gambled. He was only a patron of them. Warren wants the odds in his favor, not somebody else. It's just so simple if you're Warren. You want to be the house, not the punter.

Ben: Listeners, the next topic that came up was retail stock trading and the idea that for many Americans, this is akin to gambling.

Charlie: It’s the way it's organized. They don't really know anything about the companies or anything. They just gamble on going up and down the price. If I were running the world, I would have a tax on short-term gains with no offset for losses on anything. I would just driving this whole crowd of people out of business.

Andrew: What do you think about the algorithms like Renaissance and stuff like that?

Charlie: Well, of course, Renaissance, the first algorithm was so simple. They sifted all this data for the past and what did they decide? Up, up, which were two closing prices, and down, down were more common than down, up, or up, down.

Once they realized that's the way it was for various reasons deeper than the psychology of man, man is a natural trend follower, he's been gambling short-term, and they just program the computers to automatically buy on one thing on the first up day and sell before the end of the second day. It did it day after day after day. Every day the central clearing agent would say, your check today is $8,500,000. Your check tomorrow is $9,400,000.

What happens is that the easiest trade is to front run, but you know what the average is that the index funds have to buy, and you know what it is exactly. They all know that. The way they get their returns year after year is by taking the leverage, that midday leverage, up higher and higher and higher and higher. They're making smaller and smaller profits off more and more volume, which gives them this big peak leverage risk, which I would not run myself. That's the only way they make these big returns, is to have this huge leverage. It would make you crazy if you were already rich.

Ben: I had the good fortune of speaking with someone you know well, Richard Galanti at Costco, and spending a few hours.

Charlie: He knows a lot about it. He's been there all his life.

Ben: It's crazy. It seems like that's everyone on the executive team.

David: They've all been there all their lives.

Charlie: Yeah, I know.

Ben: I'm curious, how did you first come across Costco or Price Club at the time?

Charlie: Rod Hills somehow knew Sol Price and knew what he was doing. He said, you have to go down and meet him. I drove down and went through his store and talked with Sol. Of course Sol was a very intelligent man. Sol was an ordinary lawyer until he was 39 years of age. Then he went out and formed a government employees discount company.

David: Was this in the Fedco days?

Charlie: He was no longer with Fedco. He sold Fedco to the Germans.

Ben: FedMart to Hugo Mann.

Charlie: Yeah.

Ben: Did you get to invest in Price Club before it merged with Costco?

Charlie: Yes, I did. But I just bought my stock from the market. I wasn't getting any favor from anybody.

Ben: How did you eventually meet Jim Sinegal?

Charlie: Sinegal asked Warren to become a director of Costco. He was looking for somebody with a financial reputation.

Ben: As an independent?

Charlie: Yes, and Warren wouldn't do it. He said, why don't you get Charlie to do it? I want shorter plane rides to director's meetings and so forth. That's how that happened.

Ben: Did Berkshire ever try to become a shareholder or acquire Costco?

Charlie: They tried to get Warren to buy out the French when they left (Carrefour) and Warren wouldn't do it. Warren doesn't like retailing.

David: Was it just that he doesn't like retail? Or what was the big objection?

Charlie: Practically everything that was once mighty in retail is gone. Sears Roebuck is gone, the big department stores are gone. It's just too damn difficult as far as he's concerned.

Andrew: You had a bad experience with Diversified retail, right?

Charlie: No, we made nothing but money that Diversified. We didn't exactly make it in retailing, but we made a lot of money.

Ben: Wow, and with Diversified, most of the money was not on the retailing operation. You made a lot of that money through…?

Charlie: What happened was very simple. We bought this little pissant department store chain in Baltimore. Big mistake. Too competitive. As the ink dried on the closing papers, we realized we made a terrible mistake. So we decided just to reverse it and take the hits to look foolish rather than go broke. He just told [name] get us out of this.

By that time we already financed half of it in covenant-free debt, and so forth. They had all this extra cash and our own stocks got down to selling enormous... we just, in the middle of one of those recessions, we just bought, bought, bought, and bought. All that money went right into those stocks. Of course, we tripled it just sitting on our ass.

Ben: That led to Blue Chip?

Charlie: Yeah, it was part of the early success of Blue Chip.

Ben: Wow. You mentioned Warren doesn't like retailers.

Charlie: Blue Chip did something else you both don’t know about. We bought a little pissant savings and loan company for maybe $20 million. When we left that thing, we had taken out of our little $20 million investment over $2 billion in marketable securities, which went into Nebraska insurance companies as part of their bedrock capital. We had some wonderful early years, and that's what everybody needs, those wonderful early years.

Ben: Wow.

David: In our Costco episode, we started with the joke. At one of the Berkshire meetings probably 10 years ago, Warren told the joke about you were on a plane being hijacked, and the hijackers gave you one final request, and you said you'd like to give your speech on the virtues.

Charlie: Warren got tired of me reminding him.

David: Yeah, and he said shoot me first. We were hoping you could give us your speech on the virtues of Costco.

Charlie: Warren was kidding me for being so repetitive on the subject. There aren't many times in a lifetime when you know you're right and you know you have one that's really going to work wonderfully. Maybe five or six times in a lifetime you get a chance to do it. People who do it two or three times early, all go broke because they think it's easy. In fact, it's very hard and rare.

Ben: What was it about Costco that made you realize this is one of those few moments in a lifetime?

Charlie: They really did sell cheaper than anybody else in America and they did it in big, efficient stores. The parking spaces were 10 feet wide instead of eight or nine feet or whatever they normally are. They did it all right and they had a lot of parking spaces. They kept out of their stores. All these people didn't do big volumes, and they gave special benefits to the people who did come to the stores in the way of reward points.

Ben: The executive membership?

Charlie: Yeah. It all worked.

Ben: The capital-light business model, I mean, when we were studying it, the difference between price—

Charlie: They have no investment in inventory. They make the suppliers wait until they've been paid and then they're scheduled to pay only after they're scheduled to sell.

Ben: They've got 900 warehouses around the world full of high-quality merchandise, none of which they have sitting on their books.

Charlie: That's correct.

David: Our understanding is that Price Club went public initially before the merger, they just listed. They didn't raise any capital. They didn't need any capital.

Charlie: Who knows?

Sol liked it. He was a financier. He liked deals. He liked this miscellaneous real estate. But that didn’t made sense! You got an enterprise as big as Costco, you don't want to screw around with your parking lot, get other people clog up your parking lot permanently and stuff. it's not going to pay you very much.

Ben: Right.

Charlie: You don't want them is the answer.

Ben: Have you ever seen another business that takes advantage of the virtue of the low SKU count the way that Costco does?

Charlie: There are lots of them. That little grocery store chain here in Los Angeles, Gelson Brothers. They wanted the high turnovers and low capital costs, and they never made the least effort to earn any money. They didn’t want to share their parking lot with anybody.

Ben: As you reflect back on one of these few great companies in a lifetime that you should bet big on, what advice would you have for David and I as young partners looking for a few of these in our lifetime? Things to look out for?

Charlie: You may find it five years after you bought it. These things may work into it or your own understanding may get better. But when you know you have an edge, you should bet heavily. When you know you're right. Most people don't teach that in business school. It's insane. Of course you got to bet heavily on your best bets.

Ben: How do you develop that level of conviction to know?

Charlie: You work at it. You do a lot of reading, thinking, and visiting.

David: I'm curious, we wanted to ask you, you've had this beautiful partnership with Warren for half a century, we're a decade into our partnership.

Charlie: There was a lot of low hanging fruit in the early days of our operation. You don't have any low hanging fruit that's easy to recognize.

Ben: You mean in investment opportunities?

Charlie: Yeah, that's right.

David: But your relationship with Warren?

Charlie: We were both somewhat similar. We both wanted to keep our families safe and take a good job for our investors and so on. We had similar attitudes.

David: Did it change over the decades?

Charlie: No. Warren still cares more about the safety of his Berkshire shareholders than he cares about anything else. If we used a little bit more leverage throughout, we'd have three times as much now, and it wouldn't have been that much more risk either. We never wanted to give them the least a chance of screwing up our basic shelter position.

Ben: If you had used more leverage, do you think there's some chance of that?

Charlie: We would have done a little better, sure.

Ben: Do you think there's some chance that it wouldn't exist at all? That it would have cost you the franchise?

Charlie: No, I think it would have worked fine.

David: Does Warren think that?

Charlie: If the situation lends itself to, if you were intelligent, just milking it out.

David: When you leverage, I'm so curious after we did our--

Charlie: It's automatically leveraged! If you open a new store with no capital, of course it's leveraged. Who wouldn't want a business with no inventories?

Ben: Right, that's a good point. By the virtue of you owe a whole bunch of people money on day one for these goods.

Charlie: Which turnover so rapidly.

David: Right. It's interesting, I mean, that leverage, it's not debt leverage. What do you think about debt?

Charlie: A lot of people do it now. A lot of people who manufacture something, they're just terribly strong and they're just forcing the suppliers to carry all the inventory. It isn't like we're the only ones that do it.

Ben: Back to the point on partnership, David and I are coming up on 10 years as partners in this podcast we do together. Different from the investing business, but a compounding one nonetheless. After a 50-year partnership with Warren, what advice would you have for us interpersonally to make for an enduring partnership?

Charlie: Well, it helps if you like one another and enjoy working together.

David: We do.

Charlie: Yeah, but I don't use any one formula. A lot of partnerships that work well for a long time happen because one's good at one thing and one's good at another. They just naturally divide it. Each one likes what he's doing.

Now in Costco's case, they had Jeff Brotman, who's very smart but not a retailer, and Jim Sinegal. They divided it up and they had originally agreed that Brotman would be the chairman and CEO because he founded the whole thing. But Sinegal decided, no, I have to be the CEO. It was a big unfortunate board meeting, a big internal struggle, and Brotman moved aside.

David: Was that after you joined the board?

Charlie: No, before.

David: Do you think you and Warren not living in the same city helped your partnership last so long?

Charlie: Well, it may have helped, but Warren has very close relations with all those people. They have lunch every Saturday at Berkshire headquarters. It isn't like he doesn't have a little quarter of people there who are pals from the ground up.

Ben: Do you think it helps that when you do spend the time together, it's special rather than being common?

Charlie: Of course we used to spend a lot of time together when we were young because we didn't have that much to do. Now we've got more to do but then it's just the other minutiae of life so it's different.

Ben: Yeah.

David: It's funny. I feel like we have a lot to do now.

Charlie: Of course, you do. It's very difficult to invest money well. I think it's all but impossible to do time after time after time in venture capital.

David: We really wanted to ask your thoughts on venture capital.

Charlie: Some of the deals get so hot and you have to decide so quickly. You're all just sort of gambling.

Ben: Do you think the role of venture capital is being properly accomplished in society?

Charlie: No, I think it's very poorly done.

David: Charlie elaborated on this point with a few things that we can't air, but the topic did turn to Bitcoin.

Ben: I've heard many comments you've made on Bitcoin. I'm curious if you have a thought on this particular angle. An easy way to transfer money between countries, especially when those countries don't have a stable store of value within that country. Is it good to have an independent store of value that is not pegged to a nation state?

Charlie: Of course, it's good to the world as a whole to have a way of having some currency. The way that was solved is for a long time, the British pound was the national currency of the investment world. Then it shifted to the dollar, and it's still a dollar. People like China have these enormous reserves of dollars, the money we make. Think of the money people give us where we always just print up these pieces of paper.

Ben: What about the common person in some of these less fortunate countries who don't have access to US dollars?

Charlie: Oh, they do if they ever get any money. The dollar is very fungible, you can always buy one anywhere.

Ben: I'm curious, back to this point of the role of venture capital in a society, if you could design a perfect system to fund innovation.

Charlie: I think it's a very legitimate business if you do it right, if you want to give the right people the power, nurture them, and help them. You know a lot about the tricks of the game, so you can help them run their business, yet not interfere with them so much they hate you.

By and large, having bumped into a lot of people in the businesses with venture capital financing, I would say the ordinary rule is that people in the business doing the work, more often than not they hate the venture capitalists. They don't feel they are a partner trying to help the company, they’re taking care of themselves and so on and so on. They don't like them.

Ben: How could it work differently?

Charlie: That’s not true at Berkshire. Our people know we're not trying to discard them to the highest bid. See if some investment banker offers us 20 times earnings or some lousy business, we don't sell. If it's a problem in a business we've never been able to fix, we'll sell it. But if it's a halfway decent business, we never sell anything. That gives us this reputation of staying with things, which helps us.

Ben: Do you think that buy and hold, not only mentality, but demonstration is the key thing that aligns investors with managers?

Charlie: Well, it's rare, you see. Everybody else has a standard way of doing things and the lawyers have their standard forms. Everybody just has the same standard form and they get the same standard results subject to the vicissitudes of investment life. You don't want to make money by screwing your investors and that's what a lot of venture capitals do.

The world is full of ex-Goldman Sachs partners that formed a private fund and they manage a billion dollars or something like that. They charge two points off the top, plus the […] and that enables them to make very handsome living for themselves, but the endowments are not getting a good return.

David: Do you think it's specifically the fee aspect of fund structures?

Charlie: It's just the nature of the wedges, it's the way it works. Of course, you really shouldn't be in the business of charging extra unless you really are going to achieve very unusual results. Of course, it's easier to pretend that you can get good results than it is to actually get them.

It attracts the wrong people. People with investment capital turn up mine and the people who make the most money out of venture capital are a lot like investment bankers deciding which hot new area they're going to get in. They're not great investors or great at anything.

David: What do you think endowments and large pools of capital should do then?

Charlie: Well, they're starting to do it. The endowments have started to say to all these people that charge 3 and 30 or whatever they charge. They said, we'll pay you 3 and 30. We're going to put in twice as much money. Then the next half, you'll get nothing on it. We're just going to ride pari passu on some of your investments.

The fees go down by 50%, that'll take a lot of the fun out of it. Fees down 50% and that's happening all over America. They feel had, misled, and irritated. They've looked foolish to their own trustees.

David: One of the issues I think in investing right now, you mentioned it about venture capital, but I think it's true everywhere, is that there's just so much capital and so much competition. We're so far removed from the cigar bud era. We're in the opposite of the cigar bud era these days. Are there opportunities out there?

Charlie: Somebody will find a few things, but it gets harder and harder. I would argue one of the easiest ones was when they decided on a little group around Home Depot. They would copy the Costco model and home improvements and that was basically a good idea. Think of the money they made doing it.

David: Yeah, Bernie Marcus.

Charlie: Yeah. That was a direct copy of Costco.

Ben: Do you think there are more opportunities to copy Costco?

Charlie: Well, there was another one at Costco. Floor & Decor is the current imitator. It's in wood imitating vinyl flooring. They're running a Costco model and they keep adding miscellaneous stuff to it too.

Ben: It's the miscellaneous stuff that'll eventually kill you, though.

Charlie: Well, it'll be simpler if it was all floor.

David: Home Depot worked so well, but I don't know that it was totally obvious. Part of the appeal of Costco was it was horizontal. It was everything. Consumers could come. They could make a trip, bring their big wagon, and bring their big truck.

Charlie: Home Depot was the same. They copied everything.

David: And famously Bernie Marcus came out to visit Sol before he started.

Charlie: Yeah, he copied everything.

David: Sol was happy to share the playbook with everybody. How do you feel about that?

Charlie: Sol was another crazy person. He was domineering and so on, but he was also very intelligent. But there aren't many opportunities like Home Depot and Costco. There aren't very many.

Ben: Why do you think Walmart hasn't been successful once they saw Costco in competing?

Charlie: They were too weathered by the ideas they already had. That’s everybody’s trouble. They just can’t accept a new idea because the space is occupied by the old idea. They got into the habit of getting real estate for practically nothing, because they went into towns where nothing is valuable. So their occupancy cost are like zero. And they knew how to make big efficient stores. That was their formula.

So it offended them to go against the rich suburbs and having to pay for the good locations. Costco just specializes in the good locations, where the rich people lived. And Walmart just let them do it year after year. It was just a terrible mistake.

David: Did you know Sam Walton?

Charlie: No, never met him. I knew one of the sons. They divided it up about six parts very early.

David: Yeah, Walton Enterprise.

Charlie: They never paid much gift tax.

Ben: The topic then turned into the automakers and the future of the car industry.

Charlie: How hard would it be to go into the auto business, to have some big killing? Who's going to win? Who knows? The whole thing has been thrown way up in the air by all these electric cars, all these big, new capital requirements, different ways of selling cars. Plus they got these tough unions. See I just don’t even look at the auto industry!

Ben: Do you think it's more investible today than it was 50 years ago because of the disruptive innovation of electric?

Charlie: Well maybe for one or two electric cars that are really good, maybe, but certainly nobody else. It's too tough. BYD was a miracle. That guy worked 70 hours a week and has a very high IQ. He can do the things you can't do. You can look at somebody else's auto part and you can figure out how to make the goddamned thing. You can't do that, you see.

Person: Charlie, you invest in a Hyundai.

Charlie: Yes, but they're clever too.

Person: How was that investment for you?

Charlie: I lost money, not much because I was stubborn, I held out until I got back to almost what I paid for when I sold.

Andrew: There's been a lot of discussion about Berkshire's investments in the Japanese trading houses.

Charlie: That is a no-brainer. Something like that, if you're as smart as Warren Buffett, maybe two to three times the century, you had an idea like that. The interest rates in Japan were half a percent per year for 10 years. These trading companies were really entrenched old companies. They had all these cheap copper mines and rubber plantations.

You could borrow for ten years ahead. Probably about a year you could buy the stocks and it's likely at 5% dividends. A huge flow of cash with no investment, no thought, no anything. How often do you do that? You'll be lucky if you get one or two a century. We could do that, nobody else could.

It looked attractive for half a percent, but you couldn't get it. But Berkshire with its credit could, and the only way you could get it was be very patient, just pick away little pieces of the time. It took him forever to get $10 billion invested. It was like God just opening a chest and just pouring money. It's awfully easy money.

Ben: It's interesting that it's paradoxical. You need Berkshire's credit. But at Berkshire scale, it's actually hard to put enough money to work.

Charlie: That's true, but why shouldn’t it be hard to make money? Why should it be easy?

David: Japanese trading companies remind me. We studied another company recently, Nike. That is surprising to me. Have you ever looked at it?

Charlie: That's a very different company. That's a style company. Of course, I've looked at it, but I don't like style companies.

Ben: Too fad-driven?

Charlie: I suppose if you offered me Hermes at a cheap enough price, and I'd buy it. But short of that, I’m not going to buy any style company

Ben: That's a good pick.

Andrew: To the style point, another one that they covered was LVMH. What Arnault has done has been amazing. What do you make of that company?

Charlie: Well, if you're as good as they are at what they've done, you have a lifetime to do it in. Without a lifetime, three or four lifetimes to do it in. You can create another, but it's not easy.

David: Hermes is on the eighth generation, I think, now of the family running it.

Charlie: It's not a bit easy. They have meetings every day and make policy decisions, and they choose the locations one at a time. It's work.

Ben: It's definitely work. What do you think the durable value is in these, as you say, style companies, of the very best one in the world, the Hermes or the LVMH? What makes them enduring?

Charlie: They just got a brand people trust so much. It took them a century to do it.

Ben: Our conversation then turned to comparing Kirkland Signature as a brand to Hermes.

Charlie: Kirkland is a brand the way Tide is a brand. And Hermes is a… different kind of a brand.

Ben: Yeah, Ferrari doesn't make detergent.

Charlie: No.

David: We've spent a lot of time studying these brands. How do you look at the value of a brand?

Charlie: It's hard for us not to love brands, since we were lucky enough to buy See’s candy for $20 million as our first acquisition. We found out fairly quickly that we could raise the price every year 10%, and nobody cared. We didn't make the volumes go up or anything like that. Just made the profits go up. We've been raising the price by 10% a year for all these 40 years or so. It's been a very satisfactory company.

It didn't require any new capital. That’s what was good about it: very little new capital. It had two big kitchens and a bunch of rental stores when we bought it, and now it's got two big kitchens and a bunch of rental stores.

Charlie See was a playboy, and his brother ran the company, his older brother, and dominated it completely. And when he died, Charlie made his brother as executor, and now he needs a lot of money to pay death taxes. He doesn't have it. It's due eight months or something later. They really wanted to sell it so they can pay the death taxes. See, it was only making $4 million pre tax when we bought it.

Ben: So that buying opportunity only came about because the family needed liquidity to pay the death taxes?

Charlie: Yes, that's right. We only found out about it because Charlie See was on this cruise to Hawaii or something with this guy who was a client… the investment council also worked for Blue Chip Stamps, which is the company that bought it. Anyway, that's how we found out about it. We paid that guy a finder's fee even, we've never paid one since.

Andrew: It was worth it!

Charlie: Of course, but you don't want a bad reputation for paying a finder's fee. Everybody in the world will be bothering you all day long.

Andrew: So, there are categories like See’s or Hermes, where brands lead to pricing power….

Charlie: I think your chances of buying one of them are so low, I wouldn't even look. I only believe in looking at things that I might find. You're not going to get a chance to buy them.

Ben: No curiosity without a return!

Andrew: Why do you think there are extremely well-known brands in other categories, maybe packaged food or something?

Charlie: There are a lot of professional investors who buy nothing but branded goods. They usually start with this Nestle, and […]. They’ve done two or three points better than average, but it's not a bonanza.

David: After that, our conversation turned to Kraft Heinz and why Heinz is able to have pricing power while Kraft is not.

Charlie: It is very interesting. There’s something about the flavor of ketchup on a goddamned fried potato… that you are really willing to change brands over. They want Heinz! And so, you can raise the price of Heinz pretty much. If you try and raise the price of Kraft cheese, everybody’s goes into rebellion, including the final customer, the housewife. They don't care that much about whether cheese is Kraft or not.

Ben: Why do you think that is?

Charlie: Something about the sauce flavor. It’s happened elsewhere. In Korea, one guy, a Chinese guy, controls all the sauces. Every single major sauce, he controls at least 95% of them.

Ben: And it's because sauces have such a particular flavor that no one can imitate the trade secret?

Charlie: Yeah.

Ben: And that gives pricing power?

Charlie: They get used to it, and they like it.

Person: Is that Coca-Cola as well?

Charlie: Yeah, sure.

Ben: Charlie, I'm curious. At age 99, what is something that you believe today that 70-year-old Charlie would have disagreed with?

Charlie: I knew when I was 70 that it was hard. It's just so hard. I know how hard it is now. Always, people who are getting this 2 and 20, or 3 and 30, or whatever, they all talk because oh, it was easy. And they get to believing their own bullshit. And of course, it's not very easy. It's very hard.

David: If you were back 30 or 40 years old again today, would you decide to go into the investment business again?

Charlie: Well, probably because it suits my nature. But I didn't really enjoy the 3 and 30 business. Once I had enough money on my own, I'd rather just operate with my own money. That is a much better way of doing it than being forced to sell, being forced to deal with investment bankers, being forced to deal with investment consultants, being forced to deal with venture capital. To hell with them. Who wants it? You don't need other people. The point of getting rich is so you don't have to need other people, so you don’t have to get along with other people.

Person: Charlie, if you started with Warren today and you were both 30 years old, do you think you guys would build anything close to what Berkshire is today?

Charlie: The answer to that is no, we wouldn’t. We had… everybody that had unusually good results… almost everything has three things: They're very intelligent, they worked very hard, and they were very lucky. It takes all threeto get them on this list of the super successful. How can you arrange to have just […] good luck? The answer is you can start early and keep trying for a long time, and maybe you'll get one or two.

Andrew: If you were starting again today, do you think insurance would still be the vehicle?

Charlie: It depends on your temperament! Insurance would be ideal for a certain kind of a temperament. It takes a very patient person to get rich in insurance. It takes forever to get anything, and it takes forever to push anybody aside. It's very hard to make money.

Ben: I've heard you say, as soon as you're wealthy enough to self-insure, you should.

Charlie: That's [the answer for] practically everything. Think of all the crumbums of the world that drink too much and file a claim to the insurance company, gets on fire or something. Why would you want to pay for your share of their stupidity?

Ben: Not to mention the overhead. Of course, the insurance company needs to pay all the people that work there.

Charlie: Yeah. It's crazy.

Ben: Is there any insurance that you carry today?

Charlie: I carry no fire insurance anywhere.

Ben: Do you carry auto insurance?

Charlie: Yeah, I have to.

Ben: I don't know, Charlie could…

Charlie: No, I have to and I do.

Andrew: Since these guys are very tech-focused, I'm curious about not being a tech person. What did you think about the Apple investment? And what gave you the conviction to be so big?

Charlie: What everybody has learned is that everybody needs some significant participation in the 12 companies that do better than everybody else. You need two or three of them, at least. If you have that mindset, Apple was the logical candidate to be on the list of which you’re going to select your companies. It's not very hard to come up with an idea that it may be okay.

Ben: Making the list doesn't sound too hard. In fact, there are these acronyms FAANG, MAAMA, Microsoft, Apple, Google, Facebook, but selecting the one and putting tens of billions to create hundreds of billions of value… that to me sounds hard to pick the one! How did you guys pick the one?

Charlie: We're good at anything else.

David: Was it valuation?

Charlie: Yeah, it got cheap. It got to about 10 times earnings when Warren bought in.

Ben: 2015, I believe, was the first.

It's fascinating to me, this concept of if you look at distressed debt, or you look at (I think) Warren in the last Berkshire letter pointed out, it's been a handful of really good decisions…. Or you look at venture capital that's classically power law–distributed. Any of these asset classes comes down to a few really good decisions with high conviction over an entire career.

Charlie: Yeah, that's exactly what worked.

Ben: It's not smoothed. There's no asset class where you can repeatedly just do okay.

Charlie: The low-hanging fruit for the idiot is… it’s not gone, but it's very small.

Ben: You mentioned this idea when we were talking about Apple, that there are a few companies that it's just really important to be in. Do you think these big tech companies being the winners, where all of the pensions, Berkshire, university endowments, and everyone's 401(k) is being concentrated in these companies, do you think that was the natural outcome? Do we have to end up this way?

Charlie: Yeah, it was natural. That's why it happened.

Ben: What causes that?

Charlie: Human nature and competition, that's what causes it.

Ben: Will we eventually have one?

Charlie: Eventually, this craziness in venture capital, when they’re all gone stupid, that's a natural outcome.

Ben: Will we have one $20 trillion company and then the next biggest company is—?

Charlie: I don’t know how the world is gonna. I think… I didn’t know we were gonna have as much as we did. They just happened.

Person: Would you continue investing in China? What's your position on that?

Charlie: My position in China has been that: (1) the Chinese economy has better future prospects over the next 20 years than almost any other big economy. That’s number one. (2) The leading companies of China are stronger and better than practically any other leading companies anywhere, and they're available at a much cheaper price.

So naturally, I'm willing to have some China risk in the Munger portfolio. How much China risk? Well that's not a scientific subject, but I don't mind whatever it is, 18% or something. Whatever its worked out in the Munger family, it's okay with me.

Ben: What about other geopolitical considerations? Would you hold TSMC at this point?

Charlie: Well I don't like that as well as I like something with a real consumer brand of its own like Apple.

Andrew: I'm curious, what major companies that haven't been mentioned do you think people would do well to study the virtues of, like studying the virtues of Costco?

Charlie: I only study two kinds of companies. I'm enough of a big Ben Graham follower… so if something is really cheap, even though it's a crappy company, I'm willing to consider buying it. For a while anyway. I do that occasionally. I've done it with great success of time or two, but unlike Howard Marks I’ve only done it once or twice in my lifetime for big gains, and that's it. It's not like I’ve done it a hundred times. It isn't a bit easy. A hundred times easy money is almost non-existent.

David: One type of company is the cigar butt. What's the other type of company?

Andrew: The companies that people would do well to study the virtues of?

Charlie: Great brand companies, of course, are good. Getting the right price… the whole trick is getting them on a few rare occasions when they're really cheap. Buying Costco at its present price… it may work out all right but that’s… but again it's getting hard.

Andrew: Forgetting the prospects of the stock, how do you think about the next 10 years for the business?

Charlie: I think it’ll do pretty well.

Ben: Charlie, one more question for you in this area. What is your favorite advice to give to young people?

Charlie: I don't give advice to just any young people. I give some, I pick my spots. I don't want to be more of a guru to young people than I already am. It's getting hard out there. There's all this bullshit and craziness. Of course, it's going to be hard.

Ben: Where do the attractive opportunities hang out anymore? It sounds like everything in the whole world is overpriced. Could that be possible?

Charlie: Damn near. Of course, it could be possible. It's not only possible, it's likely that it actually happened.

Ben: How did the world get so rich if we have all this capital for so few opportunities?

Charlie: It's the nature of things. Look, biology produces a very advanced creature like us, consider I can talk intelligently on all these objects. But it does it by killing everybody off with brutal competition one with the other for… hundreds of thousands of years. In other words, the system that nature uses to get smart is kind of unpleasant for the people who are losing.

Ben: So over the last 100 years, we've brutally shifted all this value from labor to capital, and now capital is all competing to get into a very small set of opportunities?

Charlie: It wasn’t as if it was all that easy if you go back a long time. It just was a lot easier.

Ben: And if it continues to get harder, the natural end is that you have...

Charlie: An unpleasant blow up or some kind. God knows what happens after an unpleasant blow up with our modern democracy. You get to a level like Europe which is quite dysfunctional.

Ben: Is it too pessimistic of a view to say that the world seems to be out of good ideas to match the amount of capital out there looking for good ideas?

Charlie: It was never easy. It's thoroughly understood it was never easy, and it's harder now. Those are the two. But it takes time. And you pay attention that you're handling the people you deal with. You want a good reputation when you're all done, not a bad one.

Andrew: I don't think you're saying there are no opportunities whatsoever. I think you're just saying low expectations and fewer bonanzas.

Charlie: The beauty of it is: you only have to get rich once. You don't have to climb this mountain four times. You just have to do it once.

Andrew: Well that’s your philosophy on both sides, you got to be patient for the great opportunities. But you got to recognize them when they come and pounce.

David: We turned off the mics to have dinner and then recorded a little bit more later in the evening about Costco and some life advice from Charlie.

Ben: One Costco question that I've been wanting to ask you is: all the puzzle pieces of the low SKU count, the high inventory turnover… there are just so many things that fit together so beautifully…

Charlie: They're pretty obvious, though.

Ben: But how come no one else can pull it off if they're so obvious?

Charlie: Well, it takes a good execution to do it. You really have to set out to do it, and then do it with fanaticism, every day, every week, every year for 40 years. It's not so damn easy.

Ben: So you think the success is the magic of the business model and culture?

Charlie: Yes, culture plus model. Yes, absolutely. And very reliable, hard working, determined execution for 40 years.

David: I mean, they talk about the story of the ketchup that you could increase the price of ketchup by 3% and nobody would notice, but that would destroy everything if you did that, right?

Charlie: I would say the central norm was: don't raise the market. Get it low and keep it there forever.

David: Which brings us to the hotdogs. Is it true, the story that when Craig took over as CEO, he did try to raise the price of the hotdogs?

Charlie: I don't know. I had no conversations on thesubject.

David: And Jim forbade him.

Charlie: I'm sure Jim would have forbade it, absolutely.

David: There was no board-level discussion of the hotdog?

Charlie: No. Those two would not have thought it was a board matter to discuss the price of the hotdog.

Ben: One thing that fascinates me about Costco is they seem to only be able to grow 10% per year, because they're not capital-constrained. No amount of money, if they were to access it for free, could—

Charlie: I’ll tell you what is. It's hard to open too many stores a year. New store, new manager, new this, new politics. It's hard, plus a lot of stuff has to be learned, taught, and put in place. They didn't want to do more than they can comfortably handle.

David: To the store openings, you mentioned China earlier. Was it 20 years that Costco had the license to operate in China?

Charlie: The first store, they tried to open in China. The first store, somebody wanted a $30,000 bribe. Chinese culture. And they just wouldn’t pay it. That made such a bad impression on Jim Sinegal. He wouldn't even talk about going into China for about 30 years thereafter.

David: So what changed? Why finally go in?

Charlie: Finally, the board started making enough noises.

David: You started agitating?

Charlie: Yeah.

Ben: Who on the board could be excited about the Chinese market…?

Charlie: Yeah. Who knows?

David: That’s so great.

Ben: One thing I found fascinating about Costco was the fact that even though they're at the lowest possible prices, their audience skews is wealthy. Was that an accident that they figured out over time, or did they know that?

Charlie: No, Sol Price did. They had that figured out […].

Ben: All the way back in the Price Club days?

Charlie: Yes. He always wanted the rich man trying to save money.

David: It's not just that they're the wealthiest customers, they're smart wealthy customers.

Charlie: They're picky.

David: Yeah, they're picky wealthy customers.

Ben: On some topics that are outside of Costco, you mentioned in The Daily Journal annual meeting this year that a young man knows the rules, and an old man knows the exceptions.

Charlie: Yeah, that's an old saying of Peter's.

Ben: Was that of Peter Kaufman?

Charlie: Yeah.

Ben: What are some of the exceptions that you found the most useful in life?

Charlie: Take those goddamned Costco hotdogs. That's an exception. Anybody else would have raised the price of hotdogs a long time ago. They just don't do it. You know how famous it is. You bring your kids, and they know they've got something going there that's worth extra money to them, and they just don’t destroy it.

Ben: A thing that I've never fully understood: I know you're a big fan of the company, BYD, the Chinese company that makes batteries and electric vehicles.

Charlie: I may be a big fan, but I'm hanging out my hat while I lurch around the track. They make me nervous. Just soaggressive.

Ben: Is that dangerous in a company?

Charlie: That's what makes me nervous. Of course it's dangerous.

Ben: Do you think that companies should try to grow at a lower rate than they're capable of in order to be more durable?

Charlie: Of course you do that safer, and its easier, and so forth. But I would argue at Costco, where they've done some of these things that are extreme like the hotdog, it's smart to change their ways on one item or two.

Ben: It seems like there's a spectrum where on the one side there's Costco that is just not a fast-growing company, because it's very difficult to. On BYD, like you're saying, they grew like crazy! I mean, you turned--

Charlie: Well BYD, this year will sell at least two and a half million cars. Most of them are electric, that's unheard of. That's way more than Mercedes, for instance.

David: More than Tesla, right?

Charlie: Yeah, more than anybody. Lots of troubles and losses. They ran into terrible trouble. They created the wrong kind… they made lots of mistakes. They were lucky to be on the cutting edge of this electric car business. It's way more acceleration than most people.

So you have a car with more oomf than most people need. So the young macho male has a real lively car. There are a lot of things, where electric cars really work in some ways that are better! At making a 90-degree turn. You can go right opposite a parallel parking space, you just move the wheels, it turns the wheels 90 degrees and goes in. Nobody's ever done that. If your car goes flat, you could run a hundred miles on three other wheels or soemthing.

Andrew: Do they have better economics, because they don't have nearly as many parts?

Charlie: It's simpler.

Ben: Have you ever had an investment like that before? I think you've invested something like $270 million that's now worth something like $8 billion in BYD.

Charlie: Well, very few people have an investment […]. That's a venture capital–type investment. It happened to be a thinly-traded public company, and we bought it as a venture capital–type company. But it was a venture capital–type play, and they just put the foot right in the floorboard and played it hard.

By the way, both BYD and we tried to talk them out of going into the car business. They were gonna buy a bankrupt car business, and go into the car business. I said that's a graveyard for you, so why would you want to do that? And he paid no attention to us and went right ahead.

Ben: Had you invested already when he told you this plan?

Charlie: Yes, yes. And it worked fabulously well. After huge mistakes! They almost went broke with their early dealership building system, almost went broke.

David: What captivated you about it though?

Charlie: The guy was a genius. He had a PhD in engineering, and he look at some great part… [he could make that park look at the morning and look at it. I didn't know he could make it.] I've never seen anybody like that. He could do anything.

He is a natural engineer and a get-it-done type production executive, and that's a big thing. It's a big lot of talent to happen in one place. It's very useful. He solved all his problems on these electric cars, the motors, the acceleration, the braking, and so on.

David: How would you compare him and BYD to Elon and Tesla?

Charlie: He's a fanatic that knows how to actually make things with his hands if he has to. He's closer to ground zero, in other words. The guy at BYD is better at actually making things than Elon is.

Ben: Charlie, you turn 100, which is an unbelievable statement on January 1st of next year. Do you have any plans?

Charlie: I'm going to party.

David: Where's the party going to be?

Charlie: The California Club. But I've totally maxed out the room, I can’t squeeze another.

Ben: What captivates you these days? What's fun?

Charlie: Well practically, everything is. Even politics, as bad as it is, it's kind of interesting.

David: When you look back at you and Warren's time together, when did you have the most fun?

Charlie: We had about the same amount of fun all the way through. We're having fun now.

Ben: Is there a particular era that you remember the most fondly that feels like the good old days?

Charlie: Well remember we were sweating blood on some of those good old days.

Ben: I mean, Salomon Brothers.

Charlie: Yeah, there were a lot of close misses. We got out with a big problem, but we could have had a big loss.

David: You could have had more problems than just a loss with Salomon, right?

Charlie: Yeah.

Ben: Actually, when we examined Berkshire Hathaway on our podcast, our takeaway was that the whole franchise was at risk during Salomon Brothers, the entire Berkshire Hathaway name and future. Would you agree with that?

Charlie: Not so much. We could have survived it.

Ben: If you would let the whole investment in Salomon go to zero, it would have been fine?

Charlie: If it all blown up and went to zero, we would have written it off and gone on. And done pretty well.

David: What do you consider to be your finest hour?

Charlie: Well, we like to remember the close misses that were nearly terrible problems. We had terrible problem with The Buffalo News.

Ben: The Buffalo News / Buffalo Evening News brawl?

Charlie: Yeah. There were two newspapers in that town. We started a Sunday edition. That started a holy war, and the other guy went broke. We could have had a lot of bad publicity over that.

Ben: You were both pretty young and enterprising at that point. You weren't the Warren and Charlie of...

Charlie: No. But I was very aggressive about wanting to have a good Sunday edition. I didn’t want to own the paper for 50 years with no Sunday editions and the other guy had one.

Ben: What made the newspaper business so attractive at that point in history?

Charlie: It was a gold mine at that time, total gold mine.

Ben: That's attractive.

David: The play in particular with The Buffalo Evening News and the Sunday edition was playing for the local monopoly to be the game in town. With newspapers, you could do that.

Charlie: Sure.

David: Newspapers, for decades, had EBITDA margins in the 50%–60% range, right?

Charlie: No, only the little ones.

David: Only the little ones?

Charlie: Yeah, the big ones are less, 30%, 40%, or 25%.

David: I said EBITDA on your presence, I apologize. Cash flow margins.

Ben: Actually, do you still feel that EBITDA is criminal the way that you've demonized it in the past?

Charlie: Yeah, I do. You've got a big truck company and take the depreciation out of the truck’s earnings. You’re lying about the earnings.

Ben: You witnessed its rise with Malone, TCI, and Liberty when EBITDA was invented as a concept. What were you thinking?

Charlie: I've never liked John Malone's extreme manipulations. I don't want to be known as the great manipulator like John Malone is. He paid less income taxes than anybody. He just pushed everything to the ideological extreme.

Ben: In many ways, EBITDA was the community adjusted earnings of its era. Are you familiar with the community adjustment from WeWork?

Charlie: No.

David: Final question to wrap up. What is the set of companies that you think are the greatest that you've ever seen, either that you've owned or that you've not owned?

Charlie: There are a lot of great companies. Hermes is a great company. In its heyday, General Motors was a great company. It just gradually went to hell one contract at the time.

Andrew: What do you think about the predictability of… there were a number of companies back when you started where you could have said this business will be the same in 10 years? Do you think that number is the same today, or do you think it's much higher than that?

Charlie: I think most places have a lot of change and threat in their future.

Ben: Do you think most places had a lot of change and threat in their future even 50 years ago, and this story is over-blown?

Charlie: There’s a difference with some of what I call a specialized industrial company, and Berkshire has a lot of them. We have a lot of companies that are quite insulated from really tough competition, just because they've been so long, and they’re so good at what they do and have a good reputation, high value, and so on.

Andrew: What companies can you see today where you can confidently say, Berkshire aside, Costco aside, you can confidently say the business will be as good as it is today in 10 years?

Charlie: I think a lot of companies are pretty good, but you can't confidently say what's going to happen. Because you may get some guy like Iger in that just wants to push everything and do the right public relations. So no matter how good the business is, it will be phony.

Ben: Charlie, I have a personal question for you. David has a two-year-old, and I'm going to have my first child in a month. What advice do you have for us about building families?

Charlie: Of course, you’ve got to get along with everybody. You got to help them through their tough times, and they help you, and so forth. But I think it’s not as hard. Half of the marriages in America work pretty damn well. And they would have worked just as well if they were both married to somebody else, by the way.

David: You've said that the best way to have a great spouse is to deserve one. As long as both parties feel that way, then it's a recipe for success.

Charlie: Of course it is. You got to have trust with your spouse on things like education of the children and so forth.

Benn: I love that. Charlie, thank you.

David: Thank you, Charlie.

Charlie: Good luck to you.

Andrew: A lot of people are going to benefit a lot from hearing this, and your wisdom, and they're going to learn so much.

Charlie: Well you know if you stop and think about it, it's pretty hard. It doesn't look so damn easy just to go out... if you go to the ordinary person trying to promote himself as an investment advisor of some kind, he just thinks he knows everything about everything and how the Federal Reserve should be run and so on. We don't feel that way.

David: I will say with the people we get to talk to you who've built great things, every single one of them says it was so hard. It's so hard, and you can't build something great without it being so hard.

Ben: Charlie, thanks so much for doing this with us.

Charlie: I'm glad to do it. It'll be an interesting life. You'll do pretty well at it, but it's not going to be that damn easy.

Ben: David, total life experience and complete boondoggle.

David: I can't believe we got to do this. I'm still pinching myself. It's now a couple of weeks after it actually happened.

Ben: I know, with autographed copies of Poor Charlie's Almanack to prove it.

David: As if the podcast wasn't enough. Actually, for those of you who haven't listened back in 2021, two-ish years ago, we did a whole three-part series, just us, covering the whole history of Berkshire Hathaway. Part one is on Warren, part two is on Charlie, part three is on Berkshire and Ted and Todd all the way up through to today. I assume many of you have listened to that, but there probably are a bunch of folks who haven't. If you want another 9 or 10 hours of Acquired content on Berkshire—I really think it's some of, if not our best work—go check those out.

 

 

After you finish this, join the Slack, acquired.fm/slack and discuss with the whole Acquired community. If you want to get some of that sweet Acquired merch that everyone's talking about, go to acquired.fm/store. With that, listeners, we'll see you next time.

David: We'll see you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

 https://www.acquired.fm/episodes/charlie-munger#transcript