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Munger interview WSJ 4/17/20


dpetrescu
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I thought this deserves a dedicated thread.

https://www.google.com/amp/s/www.wsj.com/amp/articles/charlie-munger-the-phone-is-not-ringing-off-the-hook-11587132006

 

What does everyone think? One thing I can’t reconcile - holding a lot of cash while thinking of the fallout of large government intervention. Ray Dalio had the same thoughts in the recent long interview. Is it a matter of not having an option? Or just a matter of timing?

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It's hard to reconcile the "let's see how this plays out" attitude with a complete absence of market timing behavior (vs I'll buy whenever, when the price is right). No?

 

It's hard to conceive (given what's been said over decades) that the secret sauce has soured with a virus episode which, by definition, should be a temporary shock (in the long term scheme of things).

I guess a change of heart for airlines could make sense given the relative white swan virus episode.

 

But the banking system? If JPM, WFC etc were well within the center of the plate just a short time ago why don't they respond to the fat pitches being thrown at them now (with the crowd yelling "Swing, you bum").

 

This is really fascinating.

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I do not think banks are a layup right now. If you line up some scenarios of how virus/economic situation could play out, there is a scenario which involves heavy dilution and/or government bailout to banks. Not likely but a lot more than a zero chance.

 

I would be really shocked if Berkshire backed up the truck on banks at this time.

 

Vinod

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I wonder if WB & CM soured on banks too in addition to airlines given that NIM will be in the toilet for a very long time. We know they sold a slug of Bank of NY, and probably continue to sell WFC.

 

Not sure about this. They always say they have no idea where interest rates will be in 10 years. Also in this interview Munger suggests that all this money printing may lead us to inflation.

 

My take on this interview is that this is just Munger, he tends to be the pessimistic one of the two. After the financial crisis he said he wouldn't be surprised if he had a prolonged Japan style environment.

 

I'd love to hear Buffett's take in a couple weeks.

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Yeah, I think Munger is giving you his own opinion with a 10% tie into BRK and WEB.  He does tend to be more pessimistic.  And he doesn't check with Warren before he says what he says.  Maybe Munger is playing pessimistic Defense while WEB and the other Captains are playing offense.

 

He is also pointing out that due to the conservative nature of BRK with Insurance, and with 90% of some people's wealth tied up in BRK, WEB and CM are not going to throw $125B at the market right now.  It does not seem like a sure thing to him. 

 

But, Munger also probably considers $40B in new common stock positions and BRK share repurchase a trifle.  It is small bananas to him.  He is not saying that they are not buying, he is saying that they are not putting $125B into play.

 

Munger is also not going to tell you/us when they have an advantage.  Why would he?  They are going to keep playing their hand until 5/3/20, and then they are going to lay some of the cards on the table for us to see.

 

Finally, I think we have to take into account what Ajit, Able, Todd and Ted are saying to the old grumpy WEB and CM.  If the younger 4 find value and opportunity, I think many billions will be invested.

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Watch out for the domino effect.  One large company goes down or file chapter 10.  This causes many of it's suppliers to go under because they can't pay bills because they weren't paid by large company.

In the 1980 's depression (state called it recession) in Alaska it took a bit of time to work out.  Over 1/2 of banks and credit unions failed. J

.

Just be cautious as this is just starting.  The sacrifices made to date could be wiped out if the governors and president do something stupid.

jmho

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“[W]e’re like the captain of the ship when the worst typhoon that’s ever happened comes . . . We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity.”

 

To me, that's the key quotation from Munger. WEB and CM have said multiple times that it's the height of foolishness to risk what you have and need for what you don't have and don't need - especially if you're already rich. Although Munger can certainly be acerbic, I don't think he's exaggerating here with the typhoon analogy. It's almost impossible to do any fundamental analysis of most businesses right now because no one has any idea what the revenues will be, much less the earnings. So why would WEB and CM risk what they have and need (their massive cash & equivalents pile) to chase after what they don't have and don't need (companies that you can't currently value with any reasonable degree of accuracy)?

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Buffett/Munger have a ton of insight into the real economy with the data they see daily from their subsidiaries.  Buffett is close friends with Bill Gates--you know, the guy who resigned from Berkshire's board to work on COVID response.

 

Buffett/Munger have tough days ahead, as they have tons of businesses hard hit:

 

Railroads

Airplane parts manufacturers

Car dealers

Net Jets

Furniture stores

Mobile home makers

Retail candy stores

Stocks in airlines, banks, and Apple, among others

 

The only bright spots are insurance like GEICO, which is likely minting money, and the utilities, which are probably not hurt too badly.

 

Overall though, I think Berkshire is going to have a lot of rough segments and I wouldn't be surprised if there are layoffs across many divisions of the company.

 

Uncle Warren came rushing in to buy in 2008 because nothing was fundamentally broken about most of the economy.  Right now, I don't think that's the case, and one reason I don't think you've seen Buffett buying (in fact, he's been selling at least airlines, which require regulatory disclosure).

 

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I do not think banks are a layup right now. If you line up some scenarios of how virus/economic situation could play out, there is a scenario which involves heavy dilution and/or government bailout to banks. Not likely but a lot more than a zero chance.

 

I would be really shocked if Berkshire backed up the truck on banks at this time.

 

Vinod

Not directed at you, but the general question you raise:

 

 

Well, then what is a good buy? A month ago the entire market tanked. OK - let's say BRK has totally sour views on banking, energy, and anything travel-related.

 

What about the rest of the economy? Surely there were some bargains in unrelated industries?

 

I think if they are holding their breath for desperate business owners to call them up, begging to sell out, then they will go blue in the face before that phone rings. If they can't find bargains as investors in public markets during a viral market rout, then go run a PE shop.

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I do not think banks are a layup right now. If you line up some scenarios of how virus/economic situation could play out, there is a scenario which involves heavy dilution and/or government bailout to banks. Not likely but a lot more than a zero chance.

 

I would be really shocked if Berkshire backed up the truck on banks at this time.

 

Vinod

Not directed at you, but the general question you raise:

 

 

Well, then what is a good buy? A month ago the entire market tanked. OK - let's say BRK has totally sour views on banking, energy, and anything travel-related.

 

What about the rest of the economy? Surely there were some bargains in unrelated industries?

 

I think if they are holding their breath for desperate business owners to call them up, begging to sell out, then they will go blue in the face before that phone rings. If they can't find bargains as investors in public markets during a viral market rout, then go run a PE shop.

 

Indeed I think you hit two major points.

 

1) Any idiot could find SOMETHING to buy a month ago. I just posted on FRP. They sold a PORTION of their business, the warehouses, for $350M+ a couple years ago and sat on the proceeds specifically because they thought the market was overvalued. They still have other business segments easily worth a few hundred mil. Last month, it briefly traded below the value of just the warehouse proceeds... idiot, no-brainer territory. There were plenty others.

2) Cash back in 08 was expensive. Judging by Buffetts refusal to make investments, I'd also imagine he's waiting for deals to fall into his lap that simply won't happen because Berkshire simply is not the lender of last resorts anymore; too many folks have money. Banks have tons of liquidity right now, not so in 08. PE is loaded and ready to go, something heard plenty about as BX and BAM even boasted this a few times. Those guys are getting Buffetts deals.

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“[W]e’re like the captain of the ship when the worst typhoon that’s ever happened comes . . . We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity.”

 

To me, that's the key quotation from Munger. WEB and CM have said multiple times that it's the height of foolishness to risk what you have and need for what you don't have and don't need - especially if you're already rich. Although Munger can certainly be acerbic, I don't think he's exaggerating here with the typhoon analogy. It's almost impossible to do any fundamental analysis of most businesses right now because no one has any idea what the revenues will be, much less the earnings. So why would WEB and CM risk what they have and need (their massive cash & equivalents pile) to chase after what they don't have and don't need (companies that you can't currently value with any reasonable degree of accuracy)?

 

Many smart people are saying the current recession will be the worst recession since the Great Depression. If true we are likely just at the end of the beginning in terms of economic and financial pain. The Great Depression wiped Graham out and provided the basis for the the books he wrote afterwards.

 

If this recession delivers on expectations (worst since Great Depression) then my guess is most investors will get cleaned out in the coming years. The best example is oil stocks; as a group, they are hated today (as they have been wealth destroyers for many people for many years). Bear markets savage investors equity portfolios and take years to do so. Buffett was taught by Graham. He is old enough to understand what real wealth destruction truly looks like. Not saying anything WILL happen. But the odds of a terrible economic outcome happening are going up with each passing week (for those who are paying attention). Eyes wide open :-)

 

From Wikipedia: Graham's Beginnings

After graduating from Columbia University in 1914, Graham went to work on Wall Street, which enabled him to cultivate a sizable personal nest egg over the next 15 years. Sadly, Graham lost most of his money in the stock market crash of 1929 and the subsequent Great Depression.

 

Those experiences taught Graham lessons about minimizing downside risk by investing in companies whose shares traded far below the companies' liquidation value. In simple terms, his goal was to buy a dollar's worth of assets for $0.50. To do this, he utilized market psychology, turning market fears to his advantage. These ideals inspired him to write "Security Analysis" (published in 1934), which chronicled his methods of analyzing securities.

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At every point over the last decade buffett has said if rates stay low he'd be buying the s&p all day long.  So this virus comes along and we're in a temporary shut down and we suddenly think he changes his tune? Or Munger?  If berkshire can't buy when the market draws down close to 40% while their holdings (especially banks) are getting whack by 50% what's the point in even holding his positions? He might as well go 100% cash.  He must think it recovers at some point.  If he believes that is he willing to just take a round trip and do nothing when he's sitting on 20% cash of market cap and wait for sunny days to start deploying it?  Seems counter to everything these guys have ever preached.

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At every point over the last decade buffett has said if rates stay low he'd be buying the s&p all day long.  So this virus comes along and we're in a temporary shut down and we suddenly think he changes his tune? Or Munger?  If berkshire can't buy when the market draws down close to 40% while their holdings (especially banks) are getting whack by 50% what's the point in even holding his positions? He might as well go 100% cash.  He must think it recovers at some point.  If he believes that is he willing to just take a round trip and do nothing when he's sitting on 20% cash of market cap and wait for sunny days to start deploying it?  Seems counter to everything these guys have ever preached.

 

Graham’s definition of investing starts with ‘safety of principal...’.

 

Buffet’s first rule of investing is: don’t lose what have. Rule 2 is don’t forget the first rule.

 

Bear markets are all about capital preservation.

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So I agree, we hear a lot of folks talking about "worst recession since".... but how is nobody able to differentiate what is extremely obvious? Most recessions, or even depression, happen on their own and are largely unavoidable. This is entirely different than temporarily FORCING everything to stop, and companies to layoff/furlough for the time being. To summarize the sensationalism, I ll point to an example. I saw a headline last week, "biggest wave of unemployment in history!"...and my first thought was, what idiot wrote that headline? The second, not f*** shit, we chose to shut everything down. I guarantee the first day or weeks following things opening back up, we may see the single largest hiring sprees EVA!! Will we get back to normal right away? No, but the sensationalism is just bullshit and a huge distraction.

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I find it hard to believe that buffett and munger who have been buying stocks ever since the great financial crisis and advocated that the s&p is cheap if rates stay low would suddenly stop buying when markets go down 40% and people declare "we're in a bear market".  Bear markets end at some point.  Bear markets also don't force markets to go to zero.  So if berkshire is not willing to buy after a 40% draw down, when are they willing to buy? Also considering theyve been buying since 2016 and most of those purchases are now ALL in the red. 

 

At every point over the last decade buffett has said if rates stay low he'd be buying the s&p all day long.  So this virus comes along and we're in a temporary shut down and we suddenly think he changes his tune? Or Munger?  If berkshire can't buy when the market draws down close to 40% while their holdings (especially banks) are getting whack by 50% what's the point in even holding his positions? He might as well go 100% cash.  He must think it recovers at some point.  If he believes that is he willing to just take a round trip and do nothing when he's sitting on 20% cash of market cap and wait for sunny days to start deploying it?  Seems counter to everything these guys have ever preached.

 

Graham’s definition of investing starts with ‘safety of principal...’.

 

Buffet’s first rule of investing is: don’t lose what have. Rule 2 is don’t forget the first rule.

 

Bear markets are all about capital preservation.

 

This is what I feel is being manipulated by the so called "pundits".  This recession is very much a gov't mandated one, which is also why they're more than willing to provide ample stimulus to bridge companies through the pain that THEY'RE forcing upon them.  It's almost lilke a company is writing down a quarter of their earnings but it's a one time write down. 

 

So I agree, we hear a lot of folks talking about "worst recession since".... but how is nobody able to differentiate what is extremely obvious? Most recessions, or even depression, happen on their own and are largely unavoidable. This is entirely different than temporarily FORCING everything to stop, and companies to layoff/furlough for the time being. To summarize the sensationalism, I ll point to an example. I saw a headline last week, "biggest wave of unemployment in history!"...and my first thought was, what idiot wrote that headline? The second, not f*** shit, we chose to shut everything down. I guarantee the first day or weeks following things opening back up, we may see the single largest hiring sprees EVA!! Will we get back to normal right away? No, but the sensationalism is just bullshit and a huge distraction.

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I'd also point out that a long sung tune of failure and caught with your pants down syndrome involves preaching caution and conservatism AFTER THE FACT. When things go down, if you played it right, you should be on offense. When things get wild, defense. Investors probably have a somewhat better excuse because its often subjective where the turning points are. But boy does it piss me off when I hear CEO's and business managers, who several months ago were loading the boat on buybacks, AT THE HIGHS, now preaching "cautiousness" and "taking measured approaches" when their shares are down 30-50%+...Its IMO immediate grounds to fire the asshole.

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I'd also point out that a long sung tune of failure and caught with your pants down syndrome involves preaching caution and conservatism AFTER THE FACT. When things go down, if you played it right, you should be on offense. When things get wild, defense. Investors probably have a somewhat better excuse because its often subjective where the turning points are. But boy does it piss me off when I hear CEO's and business managers, who several months ago were loading the boat on buybacks, AT THE HIGHS, now preaching "cautiousness" and "taking measured approaches" when their shares are down 30-50%+...Its IMO immediate grounds to fire the asshole.

 

 

yet it happens Every market correction...

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It shouldn't happen to the two guys that have always preached to buy and hold and buy when others are fearful..unless they're buying quietly.  If they're sitting on their hands again (they also didn't do anything at the end of 2018) shareholders should be furious that they were willing to buy for years as markets rose but not now and are sitting on ample cash.  What's the point of preserving all that cash if you don't use it when asset prices go down a whole lot?

 

I'd also point out that a long sung tune of failure and caught with your pants down syndrome involves preaching caution and conservatism AFTER THE FACT. When things go down, if you played it right, you should be on offense. When things get wild, defense. Investors probably have a somewhat better excuse because its often subjective where the turning points are. But boy does it piss me off when I hear CEO's and business managers, who several months ago were loading the boat on buybacks, AT THE HIGHS, now preaching "cautiousness" and "taking measured approaches" when their shares are down 30-50%+...Its IMO immediate grounds to fire the asshole.

 

 

yet it happens Every market correction...

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Many smart people are saying the current recession will be the worst recession since the Great Depression. If true we are likely just at the end of the beginning in terms of economic and financial pain. The Great Depression wiped Graham out and provided the basis for the the books he wrote afterwards.

 

Using unemployment rate to define "worst recession", the worst recession since the great depression is 1980-1982. The S&P 500 lost 27.8%.

 

Your "base rate" on this crisis should be -30 to -50. We already hit -35%, so we are in the range. It is probably 50/50 that we have already bottomed.

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Buffett was taught by Graham. He is old enough to understand what real wealth destruction truly looks like. Not saying anything WILL happen. But the odds of a terrible economic outcome happening are going up with each passing week (for those who are paying attention). Eyes wide open :-)

 

From Wikipedia: Graham's Beginnings

After graduating from Columbia University in 1914, Graham went to work on Wall Street, which enabled him to cultivate a sizable personal nest egg over the next 15 years. Sadly, Graham lost most of his money in the stock market crash of 1929 and the subsequent Great Depression.

 

Graham was very candid about his poor performance during the Depression. I recently re-read an article (https://www.capitalideasonline.com/wordpress/benjamin-graham-and-the-great-crash/) where Graham recounts his experiences following the Crash of 1929. The whole thing is worth reading, but in particular, I found one story related by Graham from the Winter of 1930 to be especially compelling:

 

 

Hazel had met a man named John Dix, who was ninety-three years old. His father had founded the John Dix Uniform Company of Long Branch, New Jersey, and I had often passed their large factory on the way to Deal. I visited this Mr. Dix at his home in St. Petersburg and found him surprisingly alert for one so close to the century mark. He asked me all about my business, how many clients I had, how much money lowed to banks and brokers, and innumerable other questions. I answered them politely but with smug self-confidence. Sud­denly John Dix said, with the greatest earnestness: “Mr. Gra­ham, I want you to do something of the greatest importance to yourself. Get on the train to New York tomorrow; go to your office, sell out your securities; payoff your debts, and return their capital to your partners. I wouldn’t be able to sleep one moment at night if I were in your position in these times, and you shouldn’t be able to sleep either. I’m much older than you, with lots more experience, and you’d better take my advice.”

 

I thanked the old man, a bit condescendingly no doubt, and said I would think over his suggestion. Then I hastened to put it out of my mind. Dix was not far from his dotage, he couldn’t possibly understand my system of operations, his ideas were preposterous. As it happened he was 100 percent right and I 100 percent wrong. ... The stock market in early 1930 had a nice recovery from the previous year’s collapse. By April, the DJIA had reached 279, marking a gain of some 41 percent from the low point of 198 on November 13, 1929. But soon the entire economic picture clouded over because of the Credit Anstalt failure, and a sec­ond major decline set in which was to continue, with relatively short interruptions, until the DJIA reached the abysmally low level of 42 in June 1932. ... Our loss for 1930 was a staggering 50½ percent; that for 1931 was 16 percent; but that for 1932 was only 3 percent – a com­parative triumph. The cumulative losses for 1929 through 1932-before the tide turned-were thus 70 percent of our proud 2½  million capital of January 1929.

 

 

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Guest cherzeca

simple question:  is the $125B cash BRK has in excess of required capital/liquidity needed for insurance operations?  how much of that $125B is real firepower?

 

I wonder whether warren has buyer's remorse on the OXY deal, and is now holding fire.  OXY looked like a smart deal and still may be so, but I think warren may think it's best to let things play out for awhile

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simple question:  is the $125B cash BRK has in excess of required capital/liquidity needed for insurance operations?  how much of that $125B is real firepower?

 

I wonder whether warren has buyer's remorse on the OXY deal, and is now holding fire.  OXY looked like a smart deal and still may be so, but I think warren may think it's best to let things play out for awhile

 

I thought it's almost all in excess of required? Buffett's personal requirement is $20 billion minimum, so maybe $105 b to deploy. From my understanding, the insurance companies have massive statutory surplus given a lot of what BRK owns (such as the railroad) is held within the insurance companies. I could be wrong.

 

Buffett probably regrets the OXY deal. They received shares in lieu of cash dividend yesterday and immediately filed a prospectus to sell all 17+ million shares received:

 

https://www.sec.gov/Archives/edgar/data/797468/000114036120008880/nt10010921x1_424b7.htm#sSS

 

If he was such a big believer why would he sell at 1/4 the price of where it was when the deal was made?

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Many smart people are saying the current recession will be the worst recession since the Great Depression. If true we are likely just at the end of the beginning in terms of economic and financial pain. The Great Depression wiped Graham out and provided the basis for the the books he wrote afterwards.

 

Using unemployment rate to define "worst recession", the worst recession since the great depression is 1980-1982. The S&P 500 lost 27.8%.

 

Your "base rate" on this crisis should be -30 to -50. We already hit -35%, so we are in the range. It is probably 50/50 that we have already bottomed.

 

Every bear market has its own unique characteristics. What makes this one so fascinating is how unique it is (pandemic versus more usual boom time excesses). As a result, we are flying a little more blind than usual and as a result the tails (on both sides) are wider than normal. We could get a vaccine early which would be a game changer. Or we could get wave 2 of the virus in Sept (mutated and this time killing young people). And there are many more possible outcomes on both ends.

 

There is so much we do not know. All i am saying is investors should understand how much they do not know and invest accordingly so they meet their objectives and sleep well at night. May we live in interesting times :-)

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