Wednesday, March 13, 2013

Charlie Munger: Focus Investing and Fuzzy Concepts

Charlie Munger on why more companies don't copy Berkshire Hathaway's (BRKa) approach:

Charlie Munger Speaks

"It's a good question. Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It's not difficult, but it looks difficult because it's unconventional -- it isn't the way things are normally done. We have low overhead, don't have quarterly goals and budgets or a standard personnel system, and our investing is much more concentrated than average. It's simple and common sense.

Our investment style has been given a name -- focus investing -- which implies 10 holdings, not 100 or 400. Focus investing is growing somewhat, but what's really growing is the unlimited use of consultants to advise on asset allocation, to analyze other consultants, etc.

I was recently speaking with Jack McDonald, who teaches a course on investing rooted in our principles at Stanford Business School. He said it's lonely -- like he's the Maytag repairman."

Munger said the above at Wesco's annual meeting back in 2000.

It's worth at least noting that, while Warren Buffett and Charlie Munger both prefer to concentrate their holdings, it's not really practical to do so these days considering Berkshire's scale.

That inevitably -- among other things -- makes generating the kind of results they did in the early days extremely tough.

"I'm not discouraged, but I don't think your money here is going to do anything like what you're used to."

Munger also added this thought at that meeting:

Charlie Munger Speaks - Part II

"It's obvious that if a company generates high returns on capital and reinvests at high returns, it will do well. But this wouldn't sell books, so there's a lot of twaddle and fuzzy concepts that have been introduced that don't add much -- like cost of capital. It's accepted because some of it is right, but like psychoanalysis, I don't think it's an admirable system in its totality."

Investing may not necessarily be the easiest thing to master, but adding unnecessary complexity to make it seem more mysterious and involved is surely no recipe for success. Shrouding what can otherwise be explained in a simple and plain manner with, instead, difficult to understand concepts is distraction from what it takes to get good results over time.

Complexity is fine as long as the benefits of it exceed the costs of that added complexity.

It's difficult enough to do consistently well as an investor over time without the distraction of unneeded and, best case, often useless complexity.

Berkshire's per-share book value* has tripled since Munger said these things back in 2000. A good result, no doubt, but nothing like their historic returns. What he said about future performance back then is certainly no less true today.

The company is even bigger now.

Yet, that Berkshire can't produce quite as exceptional returns** these days doesn't invalidate the usefulness and merits of their core investing ideas and principles. In fact, the good news for most investors is that few have to wrestle with Berkshire's challenges that come from being very large.
(There are naturally some advantages to their size as well but, as far as total returns go, the disadvantages are greater.)

Those who give Berkshire's way of thinking some deserved respect seem unlikely to regret doing so.

There are many variations of ways to apply the ideas and principles in practice so they fit unique circumstances and capabilities. So it's plainly not one size fits all but, no matter how applied, there's generally no shortage of hard work involved.

Warren Buffett: What He Does Is "Simple But Not Easy"

Investing can be simple.


Not at all.


Long position in BRKb established at much lower than recent prices

* Book value, as explained in the Berkshire owner's manual, is an imperfect, significantly understated, but still useful tracking measure for the company's intrinsic value.
** From 1965 up to when that Wesco annual meeting occurred, Berkshire's average annual gain in per-share book value had been ~ 24%.
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