Category Archives: Charlie Munger

Munger on Li Lu as One of Buffett’s Successors: “It’s a foregone conclusion”

An article in today’s Wall Street Journal discusses the possibility that Li Lu will eventually be named as one of Warren Buffett’s successors at Berkshire Hathaway. What is newsworthy in this article is that it is the first time to my knowledge that Buffett or Munger has acknowledged that a specific individual is actually a candidate.

Mr. Li, 44 years old, has emerged as a leading candidate to run a chunk of Berkshire’s $100 billion portfolio, stemming from a close friendship with Charlie Munger, Berkshire’s 86-year-old vice chairman. In an interview, Mr. Munger revealed that Mr. Li was likely to become one of the top Berkshire investment officials. “In my mind, it’s a foregone conclusion,” Mr. Munger said.

What is also newsworthy is that Buffett does not rule out bringing a manager such as Lu on board prior to his stepping down.

“I like the idea of bringing on other investment managers while I’m still here,” Mr. Buffett says. He says he doesn’t preclude making a move this year, though he adds that there is no “goal” to bring on an additional manager that quickly either. Mr. Buffett says he envisions a team approach in which the Berkshire investment officials would be “paid as a group” from one pot, he says. “I don’t want them to compete.”

Here is a comment I posted at the Wall Street Journal in response to the article.

I have listened to Lu’s lectures at Columbia and was impressed. The article suggests he could be a one-trick pony: “But hiring Mr. Li could be risky. His big bet on BYD is his only large-scale investing home run. Without the BYD profits, his performance as a hedge-fund manager is unremarkable.”

What impressed me is the way he thinks. He has a very sound investment process, very much grounded in the principles of Buffett and Munger. It’s not just about the outcome – but about how much risk was taken to achieve it. Lu only invests when there is a huge margin of safety and he does an incredible amount of homework before investing. He views himself as a kind of deep-research journalist.

Picking Lu would also be a bet on the person and his track record – which Buffett likes to do as extraordinary people are rare.

Lu is clearly a special guy having risen from poverty to earning three degrees at Columbia and starting a successful hedge fund. Along the way he emerged as a leader in an important human rights campaign within China. On top of that, he managed to impress Charlie Munger, who is not easily impressed.

“When I call Charlie with an idea,” according to Buffett, “and he says, ‘That is really a dumb idea,’ that means we should put 100% of our net worth into it. If he says, ‘That is the dumbest thing I’ve ever heard,’ then you should put 50% of your net worth into it. Only if he says, ‘I’m going to have you committed,’ does it mean he really doesn’t like the idea.”

After meeting Lu, Munger gave him a portion of his wealth to invest.

Finally, here are links to more information about Lu. Berkshire Hathaway shareholders will be particularly interested in understanding all they can about Lu. If you’re not a shareholder, Lu is worth a careful study as he is a deep thinker and a first-rate investor.

  1. Li Lu’s 2010 talk at Columbia.
  2. Transcript of Lu’s 2010 talk at Columbia (courtsey of Street Capitalist)
  3. Lu’s tribute to Charlie Munger
  4. My research articles on BYD (Lu was an early investor and brought the idea to Buffett who invested $230 million (10% stake); current value is approximately $1.5 billion)

Charlie Munger’s 10 Rules for Investment Success

Here’s a very useful article on Charlie Munger from The Motley Fool written by Morgan Housel.

Those of you lucky enough to attend a Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) annual shareholder meeting have undoubtedly heard Charlie Munger say, “I have nothing to add.”

In reality, the guy has quite a bit to add. Thankfully for us, Munger is almost as forthcoming with his investment thoughts as his pal Warren Buffett. In his must-read book, Poor Charlie’s Almanac, Munger puts forth a 10-step checklist that even the most inexperienced investors could benefit from.

1. Measure risk
All investment evaluations should begin by measuring risk, especially reputational.

It’s crucially important to understand that from time to time, your investments won’t turn out the way you wanted. To protect your portfolio, don’t set yourself up for complete failure in the first place. Giving yourself a large margin of safety, avoiding people of questionable character, and only taking on risk when you can be sure you’ll be satisfactorily rewarded are all steps in the right direction. Companies like Chipotle (NYSE: CMG) might have perfectly bright futures, but when their shares are priced for perfection, they might nonetheless prove too risky for savvy investors.

2. Be independent
Only in fairy tales are emperors told they’re naked.

With stockbrokers often rewarded for activity, not successful investments, it’s critically important to make sure you believe that what you’re doing is right. Chasing others’ opinions may seem logical, but investors like Munger and Buffett often succeed by going against the grain. Big Berkshire investments such as Coca-Cola (NYSE: KO), and more recently Petrochina (NYSE: PTR), were largely ignored by the masses when they were first made.

3. Prepare ahead
The only way to win is to work, work, work, and hope to have a few insights.

It shouldn’t surprise you that the best investments aren’t the ones we typically read about in the paper. The diamonds in the rough are out there, but finding them requires effort. Buffett reads thousands of annual reports to cultivate ideas — even if he only comes up with a few candidates each year. Munger advocates a constant curiosity for nearly everything in life. If you never stop asking the “whys” in what you do, you won’t have trouble staying motivated.

4. Have intellectual humility
Acknowledging what you don’t know is the dawning of wisdom.

Perhaps most crucially to Berkshire’s success, its leaders never stray away from their comfort zones. In investing, a clear idea of what the business will look like in the future counts most. If you struggle to comprehend what the business does today, you might as well be throwing darts. While companies like Google (Nasdaq: GOOG) and Boston Scientific (NYSE: BSX) are certainly titans in their own right today, they might look drastically different in five to 10 years.

5. Analyze rigorously
Use effective checklists to minimize errors and omissions.

The numbers don’t lie. When researching investments, Buffett and Munger like to try to estimate the security’s worth before they even look at its price. They are businessmen, not stock-market junkies. They focus their brainpower on the value of businesses, not convoluted economic forecasts or intricate market-timing techniques. Munger is incredibly brilliant, but the analytical rigor of his investment decisions is based around simplicity, not complexity.” [Continue Reading]

Charlie Munger’s Ten Rules for Investment Success

I have in my files a book review by Joseph Dancy, a law professor at SMU, of the book Damn Right! by Janet Lowe. The book is a biography of Charlie Munger, the Vice-Chairman of Berkshire Hathaway and Warren Buffett’s long-time partner. Dancy’s review includes a useful distillation of Munger’s wisdom in the form “ten rules for investment success”.

Munger is a deep thinker whose interests go far beyond investing. He is largely credited with influencing Buffett to move beyond looking solely for businesses that are statistically cheap by traditional metrics – low P/E, low P/B, etc. – and to look for so called “good” businesses that enjoy high returns on invested capital and strong competitive positions. Graham did not generally invest in these types of businesses because they were not backed by quantifiable hard assets.

CHARLIE MUNGER: BERKSHIRE’S OTHER HALF

Numerous books have been written on Warren Buffett and his investment philosophy, but few journalists have focused on Buffett’s lawyer-investor partner Charlie Munger. Munger played a key role in building Berkshire Hathaway, and provided a significant influence on Buffett’s investment theory and strategy.

Good Investment Ideas

Portfolio volatility does not bother Munger according to Janet Lowe, author of a book on him entitled “Damn Right!” She notes that Munger tends to focus on a few good investment ideas, concentrates his portfolio in these ideas, and lets the long term growth of these firms compound his returns.

Both Munger and Buffett ignore beta – the measure professional investors use to gage volatility and hence “risk” – preferring to focus instead on the risk/reward relationship of the business over the longer term. “Volatility over time will take care of itself” according to Munger, provided favorable odds exist that the business will grow.

In addition to his law practice and the real estate activities, Munger also owned an investment partnership at the firm of Wheeler, Munger & Company. Wheeler Munger was set up as a classic hedge fund, similar to those that have become so popular today – but the returns were very volatile.

During the market decline in the early 1970s an investment of $1,000 in the Munger partnership on January 1, 1973 would have been worth only $467 two years later – and while Munger was not concerned because he knew longer term value would surface, reporting temporary losses to his investors was painful.

Munger’s Ten Rules for Investment Success

Several themes appear in the book help explain Munger’s incredible success accumulating wealth as an investor: [Continue Reading]