October 30, 2023 • 1hr 6min
Charlie Munger
Acquired
Key Takeaways
- Charlie Munger believes the rise of sports betting and retail stock trading is akin to gambling, not investing, and he would tax short-term gains heavily to discourage this behavior.
- Munger credits Costco's success to their laser focus on providing the lowest prices, efficient store operations, and unwavering commitment to not raising the price of popular items like the hot dog.
- Berkshire Hathaway's early investments in distressed assets and insurance companies provided the capital foundation to make their later big bets, like the Japanese trading companies.
- Munger believes most venture capital and private equity firms are more focused on extracting fees than truly partnering with and growing the businesses they invest in.
- While Munger sees limited opportunities today compared to the "cigar butt" era, he believes owning a few high-quality, competitively advantaged companies like Apple can still lead to outsized returns.
Introduction
This episode of Acquired features a rare, in-depth conversation with the legendary Charlie Munger, Warren Buffett's long-time business partner at Berkshire Hathaway. Munger, who will turn 100 years old on January 1st, 2023, shared his perspectives on a wide range of topics, including the state of the investment landscape, the virtues of Costco, the challenges of building great partnerships, and advice for young people.
Hosts Ben Gilbert and David Rosenthal were able to record this conversation thanks to the efforts of their friend Andrew Marks, who organized a dinner with Munger at his home in Los Angeles. The hosts acknowledge this is likely the only podcast interview Munger has ever done, making it a truly unique and valuable recording for posterity.
Topics Discussed
The Rise of Sports Betting and Retail Stock Trading (5:55)
Munger is highly critical of the proliferation of sports betting and retail stock trading, which he sees as akin to gambling rather than true investing. He believes these activities are "not good for America" and would support a heavy tax on short-term trading gains to discourage the behavior.
"Well, of course not. Are the dog tracks and raceracks of America casinos good for America? Of course not. They're just very popular." - Charlie Munger
Costco's Virtues (8:31)
Munger has long been a fan of Costco, crediting their laser focus on providing the lowest possible prices, efficient store operations, and unwavering commitment to not raising prices on popular items like the hot dog. He believes Costco's capital-light business model, where they don't carry inventory on their books, is a key competitive advantage.
"They really did sell cheaper than anybody else in America. And they did it in big, efficient stores. And all the parking spaces were 10ft wide instead of 8ft nine or whatever they normally are. They did a lot of right." - Charlie Munger
Berkshire Hathaway's Early Days (10:08)
Munger recounts Berkshire's early forays into retail, including their disastrous acquisition of a small department store chain in Baltimore that they quickly reversed to avoid going broke. However, this experience allowed them to deploy the excess capital into stocks during the recession, laying the foundation for Berkshire's later success.
"By that time, we'd already financed half of it, covenant-free debt and so forth. And they had all this extra cash, and our own stocks got down to selling it enormous. We just in the middle of one of those recessions, we bought, bought and bought and bought, and all that money went right into those stocks. And of course, we troubled just sitting." - Charlie Munger
The Berkshire-Costco Partnership (9:55)
Munger explains how Berkshire's partnership with Costco came about - Warren Buffett was asked to join Costco's board, but he deferred to Munger instead due to the shorter plane rides to the meetings. Berkshire tried to acquire Costco when the French owners were exiting, but Buffett ultimately declined, as he generally dislikes the retail industry.
"They tried to get Warren to buy out the French when they left. Care for. Ah, Warren wouldn't do it. Warren doesn't like retailing." - Charlie Munger
Building Enduring Partnerships (16:25)
Munger reflects on the keys to his and Buffett's long-lasting partnership at Berkshire Hathaway. He attributes it to their similar attitudes and desire to keep their family and investors safe, as well as their willingness to divide responsibilities based on their respective strengths.
"We were all kind of similar and we were both wanted keep our family safe and take the good job, our investors and so on. We had similar attitudes." - Charlie Munger
The Challenges of Venture Capital and Private Equity (20:49)
Munger is highly critical of the venture capital and private equity industries, which he believes are more focused on extracting fees than truly partnering with and growing the businesses they invest in. He believes the "two and twenty" fee structure attracts the wrong people and that endowments and other large investors should push for lower fees.
"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, irritated. They've looked foolish to their own trustees." - Charlie Munger
The Challenges of Investing Today (46:46)
Munger believes the investment landscape has become much more challenging compared to the "cigar butt" era, with far fewer obvious opportunities and intense competition for the best ideas. He sees the proliferation of capital as a double-edged sword, creating both wealth and the potential for an "unpleasant blowup" if the imbalance between capital and opportunities continues.
"Damn near. Of course it could be possible. It's only possible it's likely that it's actually happened." - Charlie Munger
The Virtues of Owning a Few High-Quality Businesses (41:12)
Despite the challenges, Munger believes owning a small number of exceptional companies like Apple can still lead to outsized returns. He credits Berkshire's large position in Apple to their inability to find many other compelling investment opportunities in recent years.
"Whatever he's learned is that everybody needs some significant participation in the twelve companies to do better than everybody else. And you need two or three them east. And if you have that mindset, Apple is a logical candidate to be on the list for which you're gonna select your companies." - Charlie Munger
Lessons from BYD (53:13)
Munger discusses his investment in the Chinese electric vehicle company BYD, which has been an enormous success. He attributes BYD's success to the founder's exceptional engineering and manufacturing capabilities, as well as his willingness to aggressively pursue growth, even if it made Munger nervous at times.
"He was a genius. He was at a PhD in engineering, and he could look at somebody party. He could make that part. Look at the morning and look at it the afternoon. He could make it. I'd never seen anybody like that." - Charlie Munger
Advice for Young People (46:21)
When asked for his best advice for young people, Munger is characteristically selective, stating that he only gives advice to those he has carefully chosen. However, he emphasizes the importance of developing a good reputation and handling people well, as "you want a good reputation when you're all done. Not a bad one."
Reflections on Turning 100 (57:36)
As Munger approaches his 100th birthday, he plans to celebrate with a party at the California Club, though he jokes that he's "totally maxed out the room" and can't squeeze in any more guests. When asked what captivates him these days, Munger simply replies, "Practically everything is, even politics, bad as it is, is kind of interesting."
Conclusion
This rare, in-depth conversation with Charlie Munger provides a unique window into the mind of one of the most successful and influential investors of all time. Munger's insights on topics ranging from Costco's virtues to the challenges facing the venture capital and private equity industries offer valuable lessons for investors and business leaders alike.
Throughout the discussion, Munger's trademark wit, wisdom, and unwavering commitment to rational, long-term thinking shine through. His reflections on building enduring partnerships, navigating an increasingly competitive investment landscape, and the importance of developing a good reputation serve as a masterclass in business and life. This episode is a must-listen for anyone interested in understanding the principles and mindset that have underpinned Munger and Buffett's extraordinary success over the past half-century.
