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Is Munger "On Tilt"?


wabuffo

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17 minutes ago, Thrifty3000 said:

One thing that actually does strike me as a bit "off tilt" for Munger is why he broke from he and WEB's usual approach to betting on an oversold industry (with an unclear winner), which is to buy a basket.

 

It's a waste of time to speculate on the reason, but I can only assume that he has had Baba set in his mind as a long term winner from his prior conversations with Li. And, he probably has overwhelmingly positive China bias after his trips to China and his heroic BYD experience. Munger has a healthy amount of hubris - to put it mildly - so I'd honestly be surprised if he has read more than a handful of pages of the annual reports of any of the Daily Journal's portfolio holdings in recent years.

Well, you got a point there.

 

 

At least he does this kind of stuff: investing without a lot of DD. (this time it worked out quite OK)

 

But maybe he just wanted to show off a bit. Who knows.

 

EDIT:

For those who are interested in the story:

https://www.netnethunter.com/charlie-munger-cigar-butt/

Edited by Aurel
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  • 5 weeks later...
1 hour ago, NnnnotSoSmart said:

 

Am guessing the mystery buy(s):

1. 1658.HK - Li Lu is a substantial shareholder and could of influence Charlie. Plus the share price did trade around the prices Li Lu bought for Himalaya

 

2. 700.HK - Charlie has spoken in the past about how well Tencent has done with Weixin/WeChat.  Given his stake in Baba wouldn’t be surprised if he starts to buy Tencent, as spin-offs and valuations are attractive.

 

Anyone done any detective work?

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To summarize, Charlie Munger, acting as a fiduciary for DJCO shareholders, has over the last twelve months invested $152m in BABA & other foreign securities while using $40m in borrowed money (an astounding 26.6% margin percentage) and has incurred almost $30m in unrealized losses so far. 

 

Meanwhile, both DJCO operating businesses (newspapers, tech) lose money on a cash flow basis.

 

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Bill

Edited by wabuffo
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52 minutes ago, wabuffo said:

To summarize, Charlie Munger, acting as a fiduciary for DJCO shareholders, has over the last twelve months invested $152m in BABA & other foreign securities while using $40m in borrowed money (an astounding 26.6% margin percentage) and has incurred almost $30m in unrealized losses so far. 

 

Meanwhile, both DJCO operating businesses (newspapers, tech) lose money on a cash flow basis.

 

spacer.png

 

Bill

He may feel some "heat" at the meeting on Wednesday.  Gonna be interesting.

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9 hours ago, wabuffo said:

To summarize, Charlie Munger, acting as a fiduciary for DJCO shareholders, has over the last twelve months invested $152m in BABA & other foreign securities while using $40m in borrowed money (an astounding 26.6% margin percentage) and has incurred almost $30m in unrealized losses so far. 

 

Bill

 

For all you know the margin loan is non-recourse.  That can be easily accomplished with a put position on BABA.  Would that require a disclosure?

Edited by ERICOPOLY
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Wait!  Let me get this straight, cuz I'm one of the fanboys:

  • Charlie invested in BABA
  • The stock fell in price and Charlie bought more
  • The stock fell further and Charlie says "Hey this is really cheap!" and bought more
  • Finally, the stock fell to such a lowly amount that Charlie said "F**k, this is crazy!" and bought more on margin
  • He has $30M in unrealized losses right now from his earlier purchases

And you think Charlie is on "tilt"?

 

I've got balls...certainly not as big or steely as Charlie's, but if his analysis has not changed, and the stock is getting cheaper and cheaper, wouldn't you expect him to buy as much as he could?  Especially if this investment and its potential return (again, based on all of Charlie's experience and analysis) puts DJCO into complete financial freedom, since it is a money losing business.

 

Personally, because of the political risk, I would never have made this bet...but then again, I'm not and never will be Charlie Munger!  

 

Cheers!

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6 hours ago, Parsad said:

Wait!  Let me get this straight, cuz I'm one of the fanboys:

  • Charlie invested in BABA
  • The stock fell in price and Charlie bought more
  • The stock fell further and Charlie says "Hey this is really cheap!" and bought more
  • Finally, the stock fell to such a lowly amount that Charlie said "F**k, this is crazy!" and bought more on margin
  • He has $30M in unrealized losses right now from his earlier purchases

And you think Charlie is on "tilt"?

 

I've got balls...certainly not as big or steely as Charlie's, but if his analysis has not changed, and the stock is getting cheaper and cheaper, wouldn't you expect him to buy as much as he could?  Especially if this investment and its potential return (again, based on all of Charlie's experience and analysis) puts DJCO into complete financial freedom, since it is a money losing business.

 

Personally, because of the political risk, I would never have made this bet...but then again, I'm not and never will be Charlie Munger!  

 

Cheers!

I would argue that a lot has changed as far as BABA is concerned since he first bought it.

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6 hours ago, Parsad said:

Wait!  Let me get this straight, cuz I'm one of the fanboys:

  • Charlie invested in BABA
  • The stock fell in price and Charlie bought more
  • The stock fell further and Charlie says "Hey this is really cheap!" and bought more
  • Finally, the stock fell to such a lowly amount that Charlie said "F**k, this is crazy!" and bought more on margin
  • He has $30M in unrealized losses right now from his earlier purchases

And you think Charlie is on "tilt"?

 

I've got balls...certainly not as big or steely as Charlie's, but if his analysis has not changed, and the stock is getting cheaper and cheaper, wouldn't you expect him to buy as much as he could?  Especially if this investment and its potential return (again, based on all of Charlie's experience and analysis) puts DJCO into complete financial freedom, since it is a money losing business.

 

Personally, because of the political risk, I would never have made this bet...but then again, I'm not and never will be Charlie Munger!  

 

Cheers!

 

LOL I agree, and personally I wouldnt be comfortable enough, have strong enough conviction to take such a position but as you said Im not CM. 

 

What cracks me up is that, say Charlie takes the initial position and then it drops...but say that he DOESNT double down...then all the boo birds would come out and say "why isnt he doubling down?!" If he liked it at $250 he should love it at $120!!!

 

So basically Charlie is in a lose-lose position in the eyes of many....take a position and it drops and he doesnt increase, he goofed...take a position and it drops and he doubles down...man he really goofed...and none of it influences him in the slightest. 

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Two comments:

  1. Buffett and Munger have been making concentrated bets since the 1950s. As far as I can tell, neither one has lost more than a few percentage points of equity capital on a single investment. This, from my point of view, is the most impressive thing about their careers. Can you think of any other investors who have done this? I can't.
  2. In the entities he has overseen, Munger has made especially concentrated investments (New America Fund = Lee Enterprises; Blue Chip Stamps = RJ Reynolds and Buffalo News; Wesco = Freddie Mac and Coca-Cola; Daily Journal = TBTF banks). He was often criticized as reckless when he made them (e.g., RJ Reynolds, Buffalo News, Freddie Mac and the TBTF banks), but they have all been massive successes. 

Munger's investments in Alibaba and the undisclosed non-US security (which I suspect is Tencent or some other Chinese company) are large, amounting to 60 percent of Daily Journal's $250 million in equity capital at cost. It's also odd he's taking on additional margin debt to make them. But I'm willing to give him the benefit of the doubt on this one.

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12 hours ago, Blugolds11 said:

 

LOL I agree, and personally I wouldnt be comfortable enough, have strong enough conviction to take such a position but as you said Im not CM. 

 

What cracks me up is that, say Charlie takes the initial position and then it drops...but say that he DOESNT double down...then all the boo birds would come out and say "why isnt he doubling down?!" If he liked it at $250 he should love it at $120!!!

 

So basically Charlie is in a lose-lose position in the eyes of many....take a position and it drops and he doesnt increase, he goofed...take a position and it drops and he doubles down...man he really goofed...and none of it influences him in the slightest. 

 

I would imagine Charlie has more insight into China's political situation than most of us do...especially from his friends like Li Lu, etc.  I don't think he ever even worries about what other people think of his investment strategy...and if something falls in price, he WOULD be a fool not to buy more, including even levering up if he thought it was dirt cheap.  He'll come clean eventually down the road...win or lose...but losing doesn't really seem like Charlie's thing!  Cheers!

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On 1/5/2022 at 4:30 AM, Spekulatius said:

Well, if this was a boxing game,  the first two rounds went clearly to the other side.

 

 

 

I had this thought before this BABA episode and think there is a good chance that Munger would have blown himself up, if he hadn’t met Buffett and basically let him manage the bulk of his money.

His track record in his own partnership was very volatile and he used margin as well. Roll the dices often  enough and chances are high that you get a couple of sixes coming up at once and you are done.

 

Buffett on the other hand is far more risk averse than Munger and that’s what you need to be, if you want to survive for 7 decades. Risk management is far more important than returns in the very long run.

Not to be contentious, Spec, but there is so much wrong here. 

  • There is almost no chance that Munger would have 'blown himself up'.  Remember it was Munger not Buffett who was into quality stocks. 
  • Historical note their friend Guerin on the other hand did blow up, but died a very wealthy man; he was on margin a lot.
  • Buffett acknowledges Munger's affect on him, I have never heard Munger say the reverse.
  • Volatility is not risk, that is Buffett and Munger teachings #2 after #1 don't lose money.  They shoot fish in drained barrels.
  • He only used margin on absolute locks, this was when he was younger and did not have no-recourse debt
  • Both of them are risk averse, see shooting fish above!
Edited by netnet
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1 hour ago, netnet said:

Not to be contentious, Spec, but there is so much wrong here. 

  • There is almost no chance that Munger would have 'blown himself up'.  Remember it was Munger not Buffett who was into quality stocks. 
  • Historical note their friend Guerin on the other hand did blow up, but died a very wealthy man; he was on margin a lot.
  • Buffett acknowledges Munger's affect on him, I have never heard Munger say the reverse.
  • Volatility is not risk, that is Buffett and Munger teachings #2 after #1 don't lose money.  They shoot fish in drained barrels.
  • He only used margin on absolute locks, this was when he was younger and did not have no-recourse debt
  • Both of them are risk averse, see shooting fish above!

 

I think the difference is that Spec thinks the first two rounds are over...and my guess is that Charlie doesnt even consider the first round over yet..

 

I refuse to believe that Munger has been "lucky" all these years with Warren pulling back on the reigns to keep him from blowing himself up. Also, the entire culture that BRK is built upon is considering shareholders as partners with a responsibility as caretakers of that capital. Thats not something that just Warren practices, Munger believes that as well, to their core, for BRK shareholders as well as those at the Daily Journal. Just doesnt make sense to me that Munger would have such an impressive career and such an influence on WB and others, only to go down in a ball of flames in the 9th inning...that just isnt logical...and Charlie is probably the most logical person alive. 

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Volatility is risk if you use margin and that is what Munger did. Easy to blow yourself up with quality stocks or things that almost always work, if you are concentrated , leveraged and keep doing it over and over. WEB never did use margin, but as @wabuffo mentioned, he used a personal loan (which might be less risk than using margin ) early on to leverage.

 

As for the Berkshire partnership - one could contemplate that when Munger joined Berkshire, it was simply WEB risk management that took over.  Munger realized that he could better being WEB sidekick than being on his own. In a way, a super smart insight.

 

https://www.gurufocus.com/news/662624/notes-from-charlie-mungers-partnership-

Edited by Spekulatius
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1 hour ago, Spekulatius said:

Volatility is risk if you use margin and that is what Munger did. Easy to blow yourself up with quality stocks or things that almost always work, if you are concentrated , leveraged and keep doing it over and over. WEB never did use margin, but as @wabuffo mentioned, he used a personal loan (which might be less risk than using margin ) early on to leverage.

 

As for the Berkshire partnership - one could contemplate that when Munger joined Berkshire, it was simply WEB risk management that took over.  Munger realized that he could better being WEB sidekick than being on his own. In a way, a super smart insight.

 

https://www.gurufocus.com/news/662624/notes-from-charlie-mungers-partnership-

 

The margin Charlie is using relative to the size of the portfolio is actually very low.  I don't think there is as much risk as people might think.  Also, he's Charlie Munger...someone who for the last 50 years has studied, espoused and practiced extreme risk management...both from a portfolio and insurance perspective.  If anyone understands risk and how it relates to capital loss or outsized returns, it would be Charlie Munger.  Cheers!

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Also, the entire culture that BRK is built upon is considering shareholders as partners with a responsibility as caretakers of that capital. Thats not something that just Warren practices, Munger believes that as well, to their core, for BRK shareholders as well as those at the Daily Journal.

 

It's true that Buffett also used borrowed money in the portfolio during his Buffett Partnership days.   But, in my opinion, there are two key differences between Buffett's stewardship of BPL & Munger's current stewardship of DJCO.

 

1) Buffett had his whole family's net worth invested alongside his partners at BPL.

   Munger owns very little of DJCO (~3%).  Charlie is not "eating his own cooking" here.

 

2) While Buffett used borrowed money at BPL, he clearly laid out the "rules" for when & how much he used.

 

spacer.png

 

Thus - Buffett used borrowed money only against market-neutral special situations & limited the borrowing to a maximum of 25% of total net worth (though he was usually in the 10-20% range depending on how many workouts were in the portfolio).

 

Munger, on the other hand is already at 26% margin on the Daily Journal's portfolio net worth.   $40m of that borrowing was ostensibly used to invest in a Cayman Island VIE that has a dubious claim on the operating business in China.  The contracts that spell out the legal & financial relationship between said VIE & the operating business may or may not be recognized by Chinese courts.   And as we've seen in the case of NTP (but also BABA itself when it "stole" AliPay from Yahoo & Softbank), if the local management decides to steal the operating assets, the foreign shareholders (even when they control the shares) have a difficult time enforcing their ownership rights.

 

Compared to Buffett's protection of the downside in his use of borrowed money, Munger appears to favor the "heads, I might win some, tails I can lose a shit-ton" approach to margin.   Look, I wouldn't be comfortable even if Munger had used this margin to open a big position in Berkshire Hathaway (a company that is beyond safe in terms of low risk from permanent capital impairment and that he knows the best) much less to buy a stake in a company whose very name is derived from a fable about forty thieves.

 

It will be interesting to see if Munger gets any questions today on this.  I'm sure he will get generic questions on BABA, and he will answer them generically.  But it would be truly interesting if he was asked to explain his view about (1) DJCO's "legal ownership rights" in the BABA investment, and (2) why he is using borrowed money to buy it on behalf of his shareholders.

 

Bill

Edited by wabuffo
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Some say a "true Munger high-conviction stock" must be a large percentage of Munger's "fully diluted" personal portfolio.

 

Using this definition, what are some of Munger's "true high-conviction stock" picks?

Edited by crs223
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Well we don't know how much the Mungers have invested in Himalaya and we don't know what percentage of Himalaya is Alibaba.  But the possibility exists that Alibaba is a significant investment for the Mungers.

 

Obviously Berkshire Hathaway and its predecessors like Blue Chip, etc, would be the big positions Munger held personally.

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21 minutes ago, wabuffo said:

Also, the entire culture that BRK is built upon is considering shareholders as partners with a responsibility as caretakers of that capital. Thats not something that just Warren practices, Munger believes that as well, to their core, for BRK shareholders as well as those at the Daily Journal.

 

It's true that Buffett also used borrowed money in the portfolio during his Buffett Partnership days.   But, in my opinion, there are two key differences between Buffett's stewardship of BPL & Munger's current stewardship of DJCO.

 

1) Buffett had his whole family's net worth invested alongside his partners at BPL.

   Munger owns very little of DJCO (~3%).  Charlie is not "eating his own cooking" here.

 

2) While Buffett used borrowed money at BPL, he clearly laid out the "rules" for when & how much he used.

 

spacer.png

 

Thus - Buffett used borrowed money only against market-neutral special situations & limited the borrowing to a maximum of 25% of total net worth (though he was usually in the 10-20% range depending on how many workouts were in the portfolio).

 

Munger, on the other hand is already at 26% margin on the Daily Journal's portfolio net worth.   $40m of that borrowing was ostensibly used to invest in a Cayman Island VIE that has a dubious claim on the operating business in China.  The contracts that spell out the legal & financial relationship between said VIE & the operating business may or may not be recognized by Chinese courts.   And as we've seen in the case of NTP (but also BABA itself when it "stole" AliPay from Yahoo & Softbank), if the local management decides to steal the operating assets, the foreign shareholders (even when they control the shares) have a difficult time enforcing their ownership rights.

 

Compared to Buffett's protection of the downside in his use of borrowed money, Munger appears to favor the "heads, I might win some, tails I can lose a shit-ton" approach to margin.   Look, I wouldn't be comfortable even if Munger had used this margin to open a big position in Berkshire Hathaway (a company that is beyond safe in terms of low risk from permanent capital impairment and that he knows the best) much less to buy a stake in a company whose very name is derived from a fable about forty thieves.

 

It will be interesting to see if Munger gets any questions today on this.  I'm sure he will get generic questions on BABA, and he will answer them generically.  But it would be truly interesting if he was asked to explain his view about (1) DJCO's "legal ownership rights" in the BABA investment, and (2) why he is using borrowed money to buy it on behalf of his shareholders.

 

Bill

I admire your passion. I just don't think he is reckless nor on tilt. I'll keep an open mind though. 

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