Chris Mayer: The First Rule of Compounding

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“The first rule of compounding: Never interrupt it unnecessarily.”

 - Charlie Munger

I love this Munger quote. (h/t to @LiviamCapital). I may have it pinned on my wall. (Right next to another Munger quote I have on  my wall: “The goal of investments is to find situations where it is safe not to diversify.”)

I thought about Charlie’s first rule of compounding the other day when a friend asked if I trimmed a position that has run quite a bit this year.

I haven’t touched it.

Why not? Shouldn’t I trim when something becomes “expensive”? Shouldn’t I put the money in something “less expensive”? Isn’t that what “active managers” do?

Charlie Munger: How to Identify a Resilient Economic Moat

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When considering a company's investment potential, according to Warren Buffett (Trades, Portfolio), it is critical to determine whether it has "a moat around it with a very valuable castle in the middle." While such a moat can take different forms, its function is the same: protecting the company from competitive threats.

"Moats have been breached time after time. Imagine the Eastman Chemical Company going broke. Imagine all these great department stores being on the edge of extinction. Imagine all those monopoly newspapers going down. Look at the strength of the American auto industry compared to what it was, say in 1950. I think the moats are disappearing rapidly. I mean the old classical moats. I think it's probably a natural part of the modern economic system, as in old moats stop working."

"Berkshire owns the Burlington Northern railroad. You can hardly think of a more old-fashioned business than a railroad business. It's an excellent asset. Who is going to create another trunk railroad? We made that a success, not by conquering change but by avoiding it. It helps to have a position that almost can't be taken away by technology. How else will you haul goods across the land, from Los Angeles to Chicago?"

Charlie Munger: CalTech interview 14. December 2020

 

Charlie Munger appeared for the first time since January on a public interview with Caltech faculty.

Charlie Munger: Be Rational, Not Brilliant

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Rationality is a core skill that any value investor should possess. If you are someone who is looking to buy assets when their owners are panic selling because you believe them to be undervalued, then you - by definition - have to be a very rational person. This type of contrarian behavior can only result in success if you are able to really cut through the emotion of the situation and drill down to the core value proposition of an investment.

Munger's advice is to try and avoid confirmation bias. This bias occurs when investors go looking for evidence that supports a belief that they already hold, rather than looking for evidence that challenges that belief.

Charlie Mungers ‘Bag Of Tricks’

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Charlie also revealed how he created near a billion dollars in value for the University of California, Santa Barbara when a friend was struggling to sell her family’s 1,800 acre ocean front ranch. Despite two miles of frontage to the ocean, a perfect climate and great views, draconian planning laws significantly inhibited the use to which the land could be put. Recognising an opportunity to realise value, Charlie donated $70m to the University of California, Santa Barbara to buy the land. Charlie knew the University wasn’t subject to the Santa Barbara zoning laws and could therefore develop needed student accommodation on the site. This outside-the-box thinking effectively created a billion dollars of value for the University and a once unattainable sale price for the friend.

“We all start out stupid, and we all have a hard time staying sensible. You have to keep working at it. Berkshire would be a wreck today if it were run by the Warren I knew when we started. We kept learning. I don't think we'd have all the billions of stock of Coca-Cola we now have if we hadn't bought See’s. Now, you know how we were smart enough to buy See’s. Barely. The answer is barely.”

“I am continuously invested in American equities. But I've had my Berkshire stock decline by 50% three times. It doesn't bother me that much. That's just a natural consequence of an adult life, properly lived. If you have my attitude, it doesn't really matter. I always liked Kipling's expression in that poem called “If”. He said, success and failure, treat those two imposters just the same. Just roll with it.”

Charlie Munger: On the Value of Patience

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Patience is widely seen as a virtue, and for good reason. But it can also be profitable, according to Munger. Indeed, he has claimed publicly that Berkshire's market-beating success can be attributed in large part to his and Buffett's supremely patient approach.

"If you took our top fifteen decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor."

In other words, a few key investment decisions – made over the course of several decades –made the difference between an average performer and a titanic success. By remaining patient and keeping a cool head, an investor is able to both avoid making bad decisions and be ready when rare moments of opportunity emerge.

Meb Faber: Episode #255: Matt Peterson, Peterson Capital Management “We’re In A Global Pandemic; In A Recession…People Are Scared; That Creates Opportunity”

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In episode 255 we welcome our guest, Matt Peterson, Managing Partner of Peterson Capital Management. In today’s episode, we’re getting into concentrated, deep-value investing. We get into Matt’s long-term value based framework and a truly concentrated portfolio of about 12 names right now.

We cover his position entry strategy of writing cash-secured puts, which has helped the fund during periods of heightened volatility like we’ve experienced recently. We explore some interesting insights on Charlie Munger’s Daily Journal Corporation, and jumping on the opportunity to purchase Berkshire class B shares by writing puts as shares came down in price earlier in the year.

We get into some high level thoughts on the economy, the risk of holding cash and bonds, and the need to be prepared for some inflation down the road.

Charlie Munger: 25 Cognitive Biases that Ruin Your Life, Explained

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Want to practice better decision making?

Unfortunately, your natural brain’s pretty dumb and easily tricked. To save energy and make faster decisions, it relies on cognitive heuristics to make fast judgments.

In prehistoric days when we had to avoid getting devoured by lions, these fast heuristics worked pretty well. Now that life is more complex, the decisions you need to make are more complex, and your cognitive biases trick you into making bad decisions.

These 25 cognitive biases come from “The Psychology of Human Misjudgment,” a talk by Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway.

By learning these biases, you’ll guard yourself against people trying to exploit you. Even better, you’ll guard against your worst enemy: your own brain.

Charlie Munger:The Psychology of Human Misjudgement

 

Audio of the often referred to speech by Charlie Munger on the psychology of human misjudgement given to an audience at Harvard University circa Jun 1995. Mr. Munger speaks about the framework for decision making and the factors contributing to misjudgements. c. Jun 1, 1995