EVERY SPOKEN WORD
60 min read · 11,517 words- 0:00 – 2:07
Dinner with Charlie Munger: setup, why this recording matters
- DRDavid Rosenthal
Ben, when we teased this episode in the email about the Jensen episode that we just released, the guesses that we were getting from folks were amazing!
- BGBen Gilbert
I mean, people were like, "It's Charlie, it's Warren, or it's Taylor Swift," and a lot of people were right.
- DRDavid Rosenthal
Hey, Taylor, you know where to find us: acquiredfm@gmail.com.
- BGBen Gilbert
If you are looking to get more publicity, we're open.
- DRDavid Rosenthal
Have Travis get in touch. [laughing]
- BGBen Gilbert
[laughing] All right, let's do it.
- SPSpeaker
Who got the truth? Is it you, is it you, is it you? Who got the truth now? Hmm. Is it you, is it you, is it you? Sit me down, say it straight, another story on the way. Who got the truth?
- BGBen Gilbert
Welcome to this episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
And we are your hosts. This episode is a very unique one for David and I. Good friend of the show, Andrew Marks, organized a little dinner for us with Charlie Munger and a few other folks at Charlie's home in Los Angeles. You can hear Andrew a few times in the background asking Charlie questions. We are pretty sure that this is the only podcast that Charlie has ever done. Charlie, aside from being one of the most prolific investors of all time, alongside his partner Warren Buffett, is 99 years old. He will turn 100 on January 1st. Of course, our conversation was interesting because he's freaking Charlie Munger, but also because it was interesting to get the perspective of someone who has seen the last 99 years of human history. We talked with Charlie, of course, about Costco, his history investing in retailers over the last 50 years. We also got to hear his views on what it takes to build a great partnership, what's gone wrong in the global securities markets these days, the concept of investing versus gambling, and where investment opportunities remain in the world today.
- DRDavid Rosenthal
Yeah. Ben, this was such a special life experience for you and me, and you and me together to do this, and the fact that we got to record it and now share it with the world for posterity, just icing on the cake, and the whole thing was unbelievable.
- 2:07 – 5:20
Sponsor interlude: Tiny as the “Berkshire of the internet”
- BGBen Gilbert
Yeah, listeners, we knew we were gonna have dinner. We were not sure whether we were gonna be able to record it, and now we get to share it with all of you. With that, join the Slack. There is awesome discussion of every episode and the news of the day at acquired.fm/slack. If you sign up for Acquired emails, you will get episode corrections and follow-up from previous episodes, plus hints at what the next episode will be. That's acquired.fm/email, and we have only one sponsor for this interview.
- DRDavid Rosenthal
Yes, a special conversation deserves a special sponsorship, and longtime listeners will know there's only one company in the Acquired universe that is truly appropriate, because everything they do is modeled after Charlie and Warren, and that's Tiny.
- BGBen Gilbert
Yep. Tiny is the Berkshire Hathaway of the internet. Literally, they are such huge fans that they started a company that makes bronze busts of Buffett and Munger themselves, but more on that in a minute.
- DRDavid Rosenthal
Yeah. So Berkshire, as we know, started as a textile mill in Massachusetts nearly 200 years ago, and almost 20 years ago, Tiny founders Andrew Wilkinson and his partner Chris, took their version of an internet textile mill, the premier design agency Metalab, which designed the UIs for Slack, Uber, Tinder, Headspace, Coinbase, and others, and they asked themselves: What would Charlie and Warren do if they were us? And that led to the realization that just like Berkshire discovered in the physical world, the internet also has wonderful niche businesses with great cash flows. In fact, they tend to be even better than the old days of See's Candies and Blue Chip Stamps, because they require zero capital reinvestment, have software margins, and can build global brands much faster than the, what, 50-some odd years it took See's to expand around the world.
- BGBen Gilbert
Yep. So Andrew and Chris took the extra cash flow from Metalab and their other businesses and created Tiny, the world's first and best permanent holding company for wonderful internet businesses, and boy, did it work.
- DRDavid Rosenthal
Yeah. Fast-forward to today, and thanks to Tiny's success, this opportunity is no longer a secret. Many people have caught on to the idea that this can really work. But just like Berkshire itself, no one else has the combination of experience, temperament, access to capital, and frankly, reputation that Andrew and Chris have built over the past two decades. We're investors in Tiny ourselves, alongside Bill Ackman and Howard Marks, and just like the two of them, Tiny is really the long-term buyer of choice in their niche. Anyone who's looking for a permanent home for their profitable internet business or who needs a capital partner for a co-founder or VC cap table buyout would be lucky to work with Tiny.
- BGBen Gilbert
Yep. For instance, they just bought the premier social network for film buffs, Letterboxd, which has been the founder's baby for 12 years and will stay so within Tiny. And this really reflects Tiny's whole ethos: Work with only the best internet businesses, commit to simple diligence, 30-day deals, and leave the business alone, either for you to operate or bring in new long-term-oriented management. Up to you.
- DRDavid Rosenthal
So thanks to Tiny, this is the only sponsor, as Ben said, that you'll hear on this episode, and just like Berkshire, it'll be here in perpetuity. Tiny just became a public company earlier this year, and they can now do deals ranging anywhere from $1 million all the way up to $250 million. So if you wanna get in touch, just shoot them a note at hi@tiny.com and just tell them that Ben and David sent you.
- 5:20 – 6:23
Sports betting and speculation: gambling vs. investing
- BGBen Gilbert
Oh, and one more thing: the bronze Charlie busts, the perfect daily reminder in your workspace to ask, "What would Charlie do?" Just head on over to berkshirenerds.store to buy your own, and they also have plenty of some guy named Warren, too. Okay, now, without further ado, this is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only, and on to Charlie Munger. Charlie, I was watching the NFL games last weekend, and it seems like every advertisement now is a sports betting advertisement. Is this good for America?
- CMCharlie Munger
No, of course not.
- BGBen Gilbert
[laughing]
- CMCharlie Munger
Are the dog tracks and race tracks of America and the casinos good for America? Of course not.
- BGBen Gilbert
[laughing]
- CMCharlie Munger
They're just very popular.
- DRDavid Rosenthal
But that's how Warren got his start, though, right? At the racetrack.
- CMCharlie Munger
... Well, but Warren never gambled heavily as a patron of a- Warren wanted the odds in his favor, not somebody else.
- BGBen Gilbert
Right.
- CMCharlie Munger
It's just so simple if you're Warren. You want the house, you wanna be the house, not the punter.
- 6:23 – 8:26
Retail stock trading and quant leverage: what’s wrong with markets
- BGBen Gilbert
Listeners, the next topic that came up was retail stock trading, and the idea that for many Americans, this is akin to gambling.
- CMCharlie Munger
Well, that's the way it's organized. They don't really know anything about the companies or anything. [chuckles] They just gamble on going up and down in price.
- BGBen Gilbert
Hmm.
- CMCharlie Munger
If I were running the world, I would have a tax on short-term gains, with no offset for losses on anything, and I would just drive this whole crowd of people out of business.
- SPSpeaker
What do you think about the algorithms, like Renaissance and stuff like that?
- CMCharlie Munger
Well, of course, Renaissance, first, first algorithm was so simple. They sifted all this data from the past, and what did they decide? Up, up for two closing prices, and down, down were more common than down, up or up, down. Once they realized that's the way it was for various reasons deep in the psychology of man, is that man is a natural trend follower. He figure gambling short term, and they, they just, he just programmed the computers to automatically, you know, buy in one thing on the first up day, and then, and sell before the end of the second day. [chuckles] And he just did it day after day after day, and e- just every day the m- machine would, you know, the central clearing agent would say, "Your check today is $8,500,000." [chuckles]
- BGBen Gilbert
It's crazy.
- CMCharlie Munger
"Your check tomorrow is $9,400,000." Well, what happens is, that the ones... The easiest trade is to front run what you know what the average i- what the index funds have to buy. And you know what it is exactly. They all know that. And the way they get their returns year after year is taking the leverage, the midday leverage up higher and higher and higher and higher. So they're making smaller and smaller profits on more and more volume, which gives them this big peak leverage risk, which I would not run myself. And that's the only way they make these big returns, is to have this huge leverage that would make you crazy if you were already rich.
- 8:26 – 10:23
How Charlie found Costco/Price Club and joined the board
- BGBen Gilbert
I had the good fortune of speaking with someone you know well, Richard Galanti, at Costco, and spending a few hours-
- CMCharlie Munger
He knows a lot about it. He's been there all his life.
- BGBen Gilbert
It's crazy. I mean, it seems like that's everyone on the executive team.
- DRDavid Rosenthal
They've all been there their whole lives.
- CMCharlie Munger
Yeah, I know.
- BGBen Gilbert
I'm curious, how did you first come across Costco or, or Price Club at the time?
- CMCharlie Munger
Rod Hills somehow knew Sol Price and knew what he was doing. He said, "You have to go down and meet him," he said. So I drove down and look, went through his store, and talked with Sol. And of course, Sol was a very intelligent man. Sol was an ordinary lawyer until he was 39 years of age, then he went out and formed government employees' discount company or whatever the hell.
- DRDavid Rosenthal
Was this in the Fedco days?
- CMCharlie Munger
He was no longer with Fedco. Him, he sold Fedco to the Germans.
- BGBen Gilbert
Ah, Fedmart to the, um-
- CMCharlie Munger
Yeah.
- DRDavid Rosenthal
Hugo Mann.
- BGBen Gilbert
Hugo Mann.
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
Yeah.
- CMCharlie Munger
Yeah.
- BGBen Gilbert
And did you get to invest in Price Club before it merged with Costco?
- CMCharlie Munger
Yes, I did, but I just bought my stock in the market. I wasn't like I had any favor or anything. [laughing]
- BGBen Gilbert
[laughing] And so how did you eventually meet Jim Sinegal?
- CMCharlie Munger
Well, Sinegal asked Warren to become a director of Costco. He was looking for somebody with a financial reputation.
- BGBen Gilbert
As an independent?
- CMCharlie Munger
Yes, and Warren wouldn't do it. He said, "Why don't you see if you can get Charlie to do it? I want shorter plane rides to directors' meetings and so on." So that's how that happened.
- BGBen Gilbert
And did Berkshire ever try to become a shareholder or acquire Costco?
- CMCharlie Munger
I tried to get Warren to buy out the French when they left Carrefour.
- BGBen Gilbert
Ah.
- CMCharlie Munger
And Warren wouldn't do it. Warren doesn't like retailing.
- DRDavid Rosenthal
Was it just that he doesn't like retail, or what was the big objection?
- CMCharlie Munger
He's, he's afraid of retail. Practically everything that was once mighty in retail is gone. Sears, Roebuck is gone. The big department stores are gone, you know. It's just too damn difficult as far as he's concerned.
- 10:23 – 12:11
Early investing lessons: Diversified Retail, Blue Chip, and a savings & loan windfall
- SPSpeaker
And he had a bad experience with Diversified Retail, right?
- CMCharlie Munger
No, we made nothing but money at Diversified. [chuckles] We didn't exactly make it in retailing, but we made a lot of money.
- BGBen Gilbert
Wow, and with Diversified, most of the money was not on the retailing operation. You made a lot of that money through-
- CMCharlie Munger
What happened was very simple. We bought this little pissant department store chain in Baltimore. Big mistake to the bet. [laughing]
- BGBen Gilbert
[laughing]
- CMCharlie Munger
As the ink dried on the closing papers, we realized it would be a terrible mistake. So we decided just to reverse it and take the hits to look foolish rather than go broke. We just told Tiny, "Get us out of this." By that time, we'd already financed half of it on covenant-free debt and so forth, and they had all this extra cash, and our own stocks got down to selling at enormous ve- We just, in the middle of one of those recessions, we just bought and bought and bought and bought. And all that money went right into those stocks, and of course, we tripled it just by sitting on our ass.
- BGBen Gilbert
And that led to Blue Chip?
- CMCharlie Munger
And that... Yeah, yeah, it was part of the early success of Blue Chip.
- BGBen Gilbert
Wow. And so, you know, you mentioned Warren doesn't like retailers-
- CMCharlie Munger
And we did something else that people don't know about.
- BGBen Gilbert
Yeah.
- CMCharlie Munger
We bought a little pissant savings and loan company, for maybe $20 million. And when we left that thing, we had taken out of our little $20 million investment over $2 billion in marketable securities, which went into Nebraska insurance companies as part of their bedrock capital. So we, we had some wonderful early years, and that's what everybody needs, is wonderful early years.
- BGBen Gilbert
Wow!
- 12:11 – 15:20
Why Costco is a once-in-a-lifetime bet: model details and discipline
- DRDavid Rosenthal
... So in our Costco episode, we started with the joke [chuckles] at one of the Berkshire meetings probably 10 years ago. Warren told the joke about you were on a plane being hijacked, and the hijackers gave you one final request, and you said you'd like to give your speech on the virtues-
- CMCharlie Munger
Warren got tired of me kind of reminding him [laughing] .
- DRDavid Rosenthal
Yeah. Yeah, and he said, "Shoot me first." [chuckles] We were hoping, could you give us your speech on the virtues of Costco? [chuckles]
- CMCharlie Munger
No, uh, Warren was kidding me for being so repetitive on the subject, but there aren't many times in a lifetime when you know you're right, and you know you have one that's really gonna work wonderfully. Maybe five, six times in a lifetime you get a chance to do it.
- DRDavid Rosenthal
Mm.
- CMCharlie Munger
And people who do it two or three times early all go broke 'cause they, they think it's easy. In fact, it's very hard and rare.
- BGBen Gilbert
What was it about Costco that made you realize this is one of those few moments in a lifetime?
- CMCharlie Munger
Well, they really did sell cheaper than anybody else in America, and they did it in big, efficient stores, and all the parking spaces were 10 feet wide instead of-
- BGBen Gilbert
[laughing]
- CMCharlie Munger
... 8 feet 9 or whatever they normally are. They, uh, they did a lot right.
- BGBen Gilbert
Yeah.
- CMCharlie Munger
And they had a lot of parking spaces. [laughing]
- DRDavid Rosenthal
[laughing]
- CMCharlie Munger
And they kept out of their stores all these people who didn't do big volumes, you see, and they gave special benefits to the people who did come to the stores in the way of reward points.
- BGBen Gilbert
The executive membership.
- CMCharlie Munger
Yeah. It all worked.
- DRDavid Rosenthal
And the capital light business model, I mean, when we were studying it, the difference between-
- CMCharlie Munger
Oh, yeah, no, uh
- DRDavid Rosenthal
... PriceClub and-
- CMCharlie Munger
They have no investment in them anyway. They make the suppliers wait until they've been paid, and then they're scheduled to pay only after they're scheduled to sell.
- BGBen Gilbert
They've got 900 warehouses around the world full of high-quality merchandise, none of which they have sitting on their books.
- CMCharlie Munger
That's correct.
- DRDavid Rosenthal
Yeah. Our understanding is that PriceClub went public initially before the merger. They just listed. They didn't raise any capital. They didn't need any capital.
- CMCharlie Munger
Who knows? It's all kind of like, it was kind of a fancier.
- BGBen Gilbert
Mm.
- CMCharlie Munger
You like deals, you like this miscellaneous real estate. Like, yeah, but it doesn't make sense. You don't want... You got an enterprise as big as Costco, you don't want to screw around with your parking lot and get other people or clog up your parking lot permanently and stuff that's not gonna pay you very much.
- BGBen Gilbert
Right.
- CMCharlie Munger
You don't want them, is the answer.
- BGBen Gilbert
Have you ever seen another business that takes advantage of the virtue of the low SKU count the way that Costco does?
- CMCharlie Munger
Well, if you... There are lots of them. That little grocery store chain here in Los Angeles, Gelson Brothers.
- 15:20 – 16:16
Conviction and concentration: when to bet heavily—and how to earn it
- BGBen Gilbert
Mm. As you reflect back on, you know, one of these few great companies in a lifetime that you should bet big on, what advice would you have for David and I as young partners looking for a few of these in our lifetime, things to look out for?
- CMCharlie Munger
Well, you find, well, you, you may find it five years after you bought it, you know?
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
Mm.
- CMCharlie Munger
These things may work into it, or you may... Your own understanding may get better. But when you know you have an edge, you should bet heavily.
- BGBen Gilbert
Mm.
- CMCharlie Munger
You know you're right, and most people, they don't, they don't teach that in business school. It's insane. Of course, you gotta bet heavily on your best bets.
- BGBen Gilbert
And how do you develop that level of conviction to know?
- CMCharlie Munger
You work at it. You do a lot of reading and thinking and visiting.
- 16:16 – 20:39
Enduring partnerships: complementarity, trust, and aligned temperament
- DRDavid Rosenthal
I'm curious, so we wanted to ask you, you know, you've had this beautiful partnership with Warren for half a century.
- CMCharlie Munger
Yeah, but-
- DRDavid Rosenthal
We're a decade into our partnership.
- CMCharlie Munger
There was a lot of low-hanging fruit in the early days of our operation. You don't have any un- low-hanging fruit that is easy to recognize.
- BGBen Gilbert
You mean in investment opportunities?
- CMCharlie Munger
Yeah, that's right.
- BGBen Gilbert
But your relationship with Warren, like, how have you-
- CMCharlie Munger
Well, we were all sim- kind of similar, and we both wanted to keep our families safe and s- take a good job for our investors and so on. We had similar attitudes.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Did it change over the decades?
- CMCharlie Munger
No, Warren still cares more about the safety of his Berkshire shareholders than he cares about anything else. If we used a little bit more leverage throughout, we'd have three times as much now, and it wouldn't have been that much m- more risk either. And we just, we never wanted to give the least chance of screwing up our basic shareholder position.
- BGBen Gilbert
If you had used more leverage, do you think there's some chance that-
- CMCharlie Munger
We would've done a little better, sure.
- BGBen Gilbert
Do you think there's some chance that it wouldn't exist at all, that it would have cost you the franchise?
- CMCharlie Munger
No, I think it would've worked fine.
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
Does Warren think that?
- CMCharlie Munger
Very easy. It, the situation lent itself to, if you were intelligent, uh, just milking it out.
- DRDavid Rosenthal
When you leverage, I'm so curious on, after we did our things-
- CMCharlie Munger
It's automatically leverage. You open a new store with no capital, of course, it's leverage. Who wouldn't want a business with, uh, no inventories?
- BGBen Gilbert
Right, that's a good point. By the virtue of you owe a whole bunch of people money on day one for these goods that, you know-
- CMCharlie Munger
Which is, which turnovers so rapidly.
- DRDavid Rosenthal
Right. It's interesting, I mean, that's leverage. It's not debt leverage. And how do you think about debt? Like, after we did our Berkshire series-
- CMCharlie Munger
A lot of people do it now. A lot of people now do it who manufacture something. They're just terribly strong.... and they're just forcing the suppliers to carry all the inventory. Isn't like we're the only ones that do it.
- BGBen Gilbert
Back to the point on partnership, David and I are coming up on 10 years as partners in this podcast we do together. Different than the investing business, but a compounding one nonetheless. After a 50-year partnership with Warren, what advice would you have for us interpersonally to make for a, an enduring partnership?
- CMCharlie Munger
Well, it helps if you like one another [laughing] and enjoy working together. [laughing]
- DRDavid Rosenthal
[clapping]
- BGBen Gilbert
We do.
- CMCharlie Munger
Yeah. [chuckles] But I don't use any one formula. A lot of partnerships that work well for a long time happen 'cause one's good at one thing, and one's good at another, and they just naturally divide it, and each one likes what he's doing. Now, in Costco's case, they had Jeff Brotman, who's very smart but not a retailer, and Jim Sinegal. Well, they divided it up, and they had originally agreed that Brotman would be the chairman and CEO [chuckles] 'cause he was the idea- he founded the whole thing. But Sinegal said, "No, I have to be the CEO." So there was a big, unfortunate board meeting, a big internal struggle, and Brotman moved aside.
- BGBen Gilbert
Was that after you joined the board?
- 20:39 – 26:06
Venture capital critique, fund fees, and why Berkshire’s reputation is different
- CMCharlie Munger
Well, of course you do. It's very difficult to invest money well, and I think it's almost impossible to do time after time after time in venture capital.
- DRDavid Rosenthal
Yeah, we really wanted to ask your-
- CMCharlie Munger
I, I-
- DRDavid Rosenthal
... your thoughts on venture capital.
- CMCharlie Munger
Some of the deals get so hot, and you have to decide so quickly. Yeah, you're all just sort of gambling.
- BGBen Gilbert
[chuckles] Do you think the role of venture capital is being properly accomplished in society?
- CMCharlie Munger
No, I think it's very poorly done.
- DRDavid Rosenthal
Charlie elaborated on this point with a few things that we can't air, but the topic did turn to Bitcoin.
- BGBen Gilbert
I've heard many comments you've made on Bitcoin. I'm curious if you have a thought on this particular angle: an easy way to transfer money in between countries, especially when those countries don't have a stable store of value within that country. Is it good to have an independent store of value that is not pegged to nations?
- CMCharlie Munger
Well, of course, it's good for the world as a whole to have a way of having some currency. The way that was solved is, for a long time, the British pound was the national currency of the investment world. Then it shifted to the dollar, and it's still the dollar.
- BGBen Gilbert
Yep.
- CMCharlie Munger
And people like China have these enormous reserves of dollars. Think of the money we make by... Think of the money people give us, where we always just print up these pieces of paper.
- BGBen Gilbert
Yep, and what about the common person in some of these less fortunate countries who don't have access to US dollars?
- CMCharlie Munger
Well, they do if they ever get any money. The dollar is very fungible. You can always buy one anywhere.
- BGBen Gilbert
I'm curious, back to this point of, uh, the role of venture capital in a society, if you could design a perfect system to fund innovation-
- CMCharlie Munger
Well, I think it's a very legitimate business if you do it right. If you wanna give the right people the power and nurture them, help them, and you know a lot about the tricks of the game, so you can help them run their business, yet not interfere with them so much they hate you. By and large, having bumped into a lot of people in the businesses with venture capital financing, I would say the ordinary rule is that people in the business doing the work, they more often than not, they hate the venture capitalists. They don't feel they're their partner trying to help them to become... They, they're only taking care of themselves, and so on and so on, and they don't like them.
- BGBen Gilbert
How could it work differently?
- CMCharlie Munger
Yeah, well, I, but, I- but that's not true in Berkshire. You see, everybody, we, they know we're not trying to discard them to the highest bid. See, if some asshole investment banker offers us 20 times earnings for some lousy business, we don't sell.
- BGBen Gilbert
Hmm.
- CMCharlie Munger
If it's a problem business we've never been able to fix, we'll sell it, but if it's a halfway decent business, we never sell anything. And that gives us this reputation of staying with things, which helps us.
- BGBen Gilbert
And do you think that buy and hold, not only mentality, but demonstration is the key thing that aligns investors with managers?
- CMCharlie Munger
Well, it's rare, you see. Everybody else has a standard way of doing things. The lawyers have their standard forms, and every region has the same standard form, and they get the same standard results, subject to the vicissitudes of investment life. You don't wanna make money by screwing your investors, and that's what a lot of venture capitalists do. The world is full of ex-J Goldman Sachs partners that formed a private fund. [chuckles]
- BGBen Gilbert
[chuckles]
- CMCharlie Munger
They manage a billion dollars or something like that, and-... they charge two points off the top, plus this, that, maybe, and that enables them to make very handsome living for themselves, but the endowments are not getting a good return.
- DRDavid Rosenthal
And do you think it's specifically the fee aspect of fund structures?
- CMCharlie Munger
It's just human nature. That's just the way it works. And of course, you really shouldn't be in the business of charging extra, unless you really are gonna achieve very unusual results. And of course, it's more easy to pretend that you can get good results than it is to actually get them. And so it, it attracts the wrong people. People with an investment capital turn of mind, and the people who make the most money out of venture capital are a lot like investment bankers, deciding which hot, new area they're gonna get in. They're not great investors or great at anything.
- DRDavid Rosenthal
What do you think endowments and large pools of capital should do then?
- CMCharlie Munger
Well, they're starting to do it. The endowments have started to say to the- all these people that charge 3 and 30, or whatever they charge, they said, "We'll pay your 3 and 30, but we're gonna put in twice as much money, and then the next half, you'll get nothing on it. We're just gonna ride free pass on some of your investments." So the fees go down by 50%. That'll take a lot of the fun out of it. [laughing]
- DRDavid Rosenthal
[laughing]
- CMCharlie Munger
Fees down 50%, and that's happening all over America. They feel had, misled, irritated. They've looked foolish to their own trustees.
- 26:06 – 29:18
Where opportunities still exist: copying Costco, Walmart’s miss, and scarcity of bonanzas
- DRDavid Rosenthal
One of the issues, I think, in investing right now, you mentioned about venture capital, but I think it's true everywhere. It's like there's just so much capital and so much competition. We're so far removed from the Cigar Butt era. We're in the opposite of the Cigar Butt era these days. [chuckles] Are there opportunities out there?
- CMCharlie Munger
Somebody will find a few things, but it gets harder and harder. I would argue one of the easiest ones was when they decided, a little group around Home Depot, they would copy the Costco model in home improvements. And that was basically a good idea, and think of the money they made doing it.
- DRDavid Rosenthal
Yeah. Bernie Marcus.
- CMCharlie Munger
Yeah. That was a direct copy of Costco.
- BGBen Gilbert
Do you think there are more opportunities to copy Costco?
- CMCharlie Munger
Well, sure, there was another one at Costco. Floor & Decor is the current imitator, and it's just... It's in vinyl, wood-imitating vinyl flooring. They're, they're running a Costco model.
- BGBen Gilbert
Huh.
- CMCharlie Munger
And they keep adding miscellaneous stuff to it, too.
- BGBen Gilbert
It's the miscellaneous stuff that'll eventually kill you, though.
- CMCharlie Munger
Well, it would be simpler if it was all floor. [laughing]
- DRDavid Rosenthal
[laughing] Yeah, it's just... Like, the vertical, Home Depot worked so well, but it w- I don't know that it was totally obvious. Like, part of the appeal of Costco was, it was horizontal, it was everything. Consumers could come, they could make a trip, bring their big wagon, bring their big truck.
- CMCharlie Munger
Home Depot is the same. They copied everything.
- DRDavid Rosenthal
And famously, Bernie Marcus came out to visit Sol before he started.
- CMCharlie Munger
Yeah, yeah, yeah.
- DRDavid Rosenthal
Yeah.
- CMCharlie Munger
No, they came out. They copied everything.
- DRDavid Rosenthal
Sol was, like, happy to share the playbook with everybody, right?
- CMCharlie Munger
I know.
- DRDavid Rosenthal
How did Jim and you feel about that?
- CMCharlie Munger
I know. Sol was a... Not a crazy guy. He was domineering and so on, but he was also very intelligent.
- BGBen Gilbert
Hmm.
- CMCharlie Munger
But there aren't many opportunities like Home Depot and Costco. There aren't very many.
- BGBen Gilbert
Why do you think Walmart hasn't been successful once they saw Costco in competing?
- CMCharlie Munger
They were too wedded by the ideas they already had. That's everybody's trouble. They just can't accept a new idea, 'cause the first space is occupied by an old idea. They got in the habit of getting the real estate practically for even nothing, 'cause they went in little towns where nothing was valuable. So there always, their occupancy costs were, like, zero, and they knew how to make big division stores. That was their formula. So it offended them to go against the rich suburbs and to have to pay up for the good locations, and Costco just specialized in the good locations where the rich people lived. And Walmart just let them do it year after year. It was a terrible mistake.
- DRDavid Rosenthal
Did you know Sam Walton?
- CMCharlie Munger
No, never met him. I knew the son, one of the sons, and they divided it up, you know, in about six parts very early.
- DRDavid Rosenthal
Yeah, Walton Enterprises.
- CMCharlie Munger
So they never paid much gift taxes or anything.
- 29:18 – 33:35
Hard-to-analyze industries and style brands: autos, BYD/Tesla, Nike, Hermès/LVMH
- BGBen Gilbert
The topic then turned to the automakers and the future of the car industry.
- CMCharlie Munger
Look how hard it would be to go into the auto business and have some big killing. Who's going to win? Who knows? The whole thing's been thrown way up in the air by all these electric cars-
- BGBen Gilbert
Yeah
- CMCharlie Munger
... all those big, new capital requirements, different ways of selling cars, and plus, they got these tough unions. See, I just don't even look at the auto industry.
- BGBen Gilbert
Do you think it's more investable today than it was fifty years ago because of the disruptive innovation of electric?
- CMCharlie Munger
Well, for maybe for one or two electric cars that are really good, maybe, but certainly nobody else.
- BGBen Gilbert
So you think BYD and Tesla?
- CMCharlie Munger
It's too tough. BYD was a miracle, but that guy works seventy hours a week and has a very high IQ. He can do things you can't do. He can look at somebody else's auto part, and he can figure out how to make the goddamn thing. You can't do that, you see.
- DRDavid Rosenthal
Charlie, you invested in Hyundai.
- CMCharlie Munger
Yes, but they're, they're clever, too.
- SPSpeaker
... How was that investment for you?
- CMCharlie Munger
I lost money. Not much, because I was stubborn. I held out until it got back to almost what I paid for it, then I sold it.
- SPSpeaker
There's been a lot of discussion about Berkshire's investments in the Japanese trading houses.
- CMCharlie Munger
Well, but that is a no-brainer. Something like that, if you're as smart as Warren Buffett, maybe two, three times a century you get an idea like that. The interest rates in Japan were half a percent per year for 10 years, and these trading companies were really entrenched, old companies, and they had all these cheap copper mines and rubber plantations. And so you could borrow for 10 years ahead all the money, and you could buy the stocks, and the stocks paid 5% dividends. So-
- SPSpeaker
Yeah
- CMCharlie Munger
... a huge flow of cash with no investment, no thought, no anything. How often do you do that? You'll be lucky if you get one or two a century. We could do that, nobody else could. It looked attractive at half a percent, but you, you couldn't get it. But Berkshire, with its credit, could, and the only way you could get it was be very patient and just pick away at it, little pieces at a time. It took her forever to get $10 billion invested, but it was like having God just opening a chest and just pouring money into it. [laughing] It was, it was... It was awfully easy money.
- BGBen Gilbert
It's interesting that it's paradoxical. You need Berkshire's credit, but at Berkshire's scale, it's actually hard to put enough money to work.
- CMCharlie Munger
That's true, but why should it be hard to make money? Why should it be easy?
- DRDavid Rosenthal
Japanese trading companies reminds me, we studied another company recently, Nike. That is-
- CMCharlie Munger
That's a very different-
- DRDavid Rosenthal
... was surprising to me.
- CMCharlie Munger
-company.
- DRDavid Rosenthal
Yeah. Did you ever look at it?
- CMCharlie Munger
That's a style company. Well, of course I've looked-
- BGBen Gilbert
[laughing]
- CMCharlie Munger
... I've looked at it, but I don't like style companies.
- BGBen Gilbert
Hmm. Too fad-driven?
- CMCharlie Munger
Well, I suppose if it were to be Hermès and achieve a little price, I'd buy it, but short of that, I'm gonna avoid any style company.
- BGBen Gilbert
Ooh, that's a good pick.
- SPSpeaker
To the style point, another one that they covered was LVMH. What Arnault has done has been amazing. So what do you make of that company?
- 33:35 – 37:56
Brand power in practice: See’s Candies, Kirkland vs. luxury, and Heinz vs. Kraft
- BGBen Gilbert
Our conversation then turned to comparing Kirkland Signature as a brand to Hermès.
- CMCharlie Munger
Kirkland is a brand the way Tide is a brand, and Hermès [chuckles] is a different kind of a brand.
- BGBen Gilbert
Yeah, Ferrari doesn't make la- uh, detergent.
- CMCharlie Munger
No. [laughing]
- DRDavid Rosenthal
We've spent a lot of time studying these brands. How do you look at the value of a brand?
- CMCharlie Munger
Well, it's hard for us not to love brands, since we were lucky enough to buy the See's Candy for $20 million-
- DRDavid Rosenthal
[laughing]
- CMCharlie Munger
... as our first acquisition. And we found out fairly quickly that we could raise the price every year by 10%, and nobody cared. We didn't make the volumes go up or anything like that, just made the profits go up. So we've been raising the price by 10% a year for all these 40 years or so.
- DRDavid Rosenthal
Wow.
- CMCharlie Munger
And it's been a very satisfactory company. It d- it didn't require any new capital. That was what was so good about it. Very little new capital. We had two big kitchens and a bunch of retail stores when we bought it, and now it's got two big kitchens and a bunch of retail stores. Well, Charlie, he was a playboy, and he- his brother ran the company, his older brother, and dominated it completely. But when he died, Charlie made his brother his executor, and now he needs a lot of money to pay death taxes. He doesn't have it, and it's due, you know, eight months or something later, and, and so they really wanted to sell so they could pay the death taxes. And See's was only making $4 million pre-tax when we bought it.
- BGBen Gilbert
And so that buying opportunity only came about because the family needed liquidity to pay-
- CMCharlie Munger
Yes
- BGBen Gilbert
... the death taxes.
- CMCharlie Munger
That's right. We only found out about it because Charlie Sheen was on this cruise to Hawaii or something, with this guy who was a client of my investment counselor, who also worked for Blue Chip Stamps, which was the company that bought it.
- BGBen Gilbert
Mm-hmm.
- CMCharlie Munger
And any rate, that's how we found out about it. We paid that guy a finder's fee even. We've never paid one cents. [laughing]
- DRDavid Rosenthal
[laughing]
- SPSpeaker
We always said that film was worth it.
- CMCharlie Munger
Of course, but you don't want a bad re- reputation for paying finder's fees. Everybody in the world will be bothering you all day long.
- DRDavid Rosenthal
[laughing]
- SPSpeaker
So what do you think... So there are categories like See's or like Hermès, where brands lead to pricing power?
- CMCharlie Munger
I think your chances of buying one of them is so low, I wouldn't even look. I don't even believe in looking at things that I might find. [laughing]
- SPSpeaker
[laughing]
- CMCharlie Munger
You're not gonna get a chance to buy Hermès.
- BGBen Gilbert
No, no curiosity with a return. [laughing]
- CMCharlie Munger
Waste of your time. [laughing]
- SPSpeaker
Yeah, yeah. So why do you think there are extremely well-known-... brands in other categories, maybe packaged food or something, where the brand-
- CMCharlie Munger
Well, there are a lot, there are a lot of original investors that buy nothing but branded goods, and the one they usually start with is Nestle. And it is filler upper. They, they've done two or three points better than average, but it's not a bonanza.
- DRDavid Rosenthal
After that, our conversation turned to Kraft Heinz, and why Heinz is able to have pricing power while Kraft is not.
- CMCharlie Munger
It was very interesting. It's something about the flavor of ketchup on a goddamn fried potato. [laughs] People are really willing to change brands over.
- 37:56 – 48:46
Late-career reflections: difficulty, luck, insurance temperament, Apple, China, and scarce bargains
- BGBen Gilbert
Charlie, I'm curious, at age 99, what is something that you believe today that 70-year-old Charlie would've disagreed with?
- CMCharlie Munger
I think I, I, I knew when I was 70 that it was plenty hard, but it, it is just so hard. I know how hard it is now. And all these people who are getting this two and 20, or three and 30, or whatever, they all talk as though it was easy, and they end up believing their own bullshit. And of course, it's not a bit easy. It's very hard.
- DRDavid Rosenthal
If you were back 30 or 40 years old again today, would you decide to go into the investment business again?
- CMCharlie Munger
Well, probably, 'cause it suits my nature. But I didn't really enjoy the three and 30 business. Once I had enough money of my own, I'd rather just operate with my own money. That is a much better way of doing it-
- BGBen Gilbert
Hmm
- CMCharlie Munger
... than-
- DRDavid Rosenthal
Because of the freedom?
- CMCharlie Munger
Being forced... Yeah, be forced to deal with investment bankers, be forced to deal with investment consultants, be forced to deal with venture capital. The hell with them. Who needs wants to... You don't want to need other people. The point of getting rich is so you don't have to need other-
- BGBen Gilbert
[laughs]
- CMCharlie Munger
You don't have to get along with other people.
- SPSpeaker
Charlie, if you started with Warren today, and you're both 30 years old, do you think you guys would build anything close to what Berkshire is today?
- CMCharlie Munger
The answer to that is, no, we wouldn't. We had... Everybody that has an unusually good result, almost everything, has three things: They're very intelligent, they worked very hard, and they were very lucky. It takes all three to get them on this list of the super successful. How can you arrange to have two of the answers of the good luck? Well, the answer is you can start early and keep trying a long time, and maybe you'll get one or two.
- SPSpeaker
If you were starting again today, do you think insurance would still be the vehicle?
- CMCharlie Munger
It depends on your temperament. Insurance would be ideal for a certain kind of a temperament.
- BGBen Gilbert
Hmm.
- CMCharlie Munger
And it takes a very patient person to get rich in insurance. Takes forever to get anything, and it's, it takes forever to push anybody aside. It's very hard to make money.
- BGBen Gilbert
I've heard you say, "As soon as you're wealthy enough to self-insure, you should." Is there any insurance that-
- CMCharlie Munger
Well, that's it, but practically everything. Think of all the crumb bums of the world that drink too much and then file big claims with the insurance company when the place gets on fire or something. Why would you wanna pay the, your share of their stupidity?
- BGBen Gilbert
Not to mention the overhead.
- CMCharlie Munger
Yeah.
- BGBen Gilbert
Of course, the insurance company needs to pay all the people that work there.
- CMCharlie Munger
Yeah, yeah. No, no, I... It's crazy.
- BGBen Gilbert
Is there any insurance that you carry today?
- CMCharlie Munger
I carry no fire insurance anywhere.
- BGBen Gilbert
Do you carry auto insurance?
- CMCharlie Munger
Yeah, I have to.
- SPSpeaker
Well, you're legally mandated. [laughs]
- CMCharlie Munger
Yeah, yeah.
- BGBen Gilbert
Yeah. [laughs] I don't know, Charlie could-
- CMCharlie Munger
No, I have to, and I do.
- 48:46 – 1:06:54
After-dinner addendum: Costco execution, China entry, hot-dog ‘exceptions,’ BYD founder quality, and family advice
- DRDavid Rosenthal
... We turned off the mics to have dinner, and then recorded a little bit more later in the evening about Costco and some life advice from Charlie.
- BGBen Gilbert
So one Costco question that I've been wanting to ask you is, all the puzzle pieces of the low SKU count and the high inventory turnover, and there's just so many things that fit together so beautifully.
- CMCharlie Munger
They're pretty obvious, though.
- BGBen Gilbert
But how come no one else can pull it off if they're so obvious?
- CMCharlie Munger
Well, it takes a lot of good execution to do it. You really have to set out to do it, and then do it with fanaticism every day, every week, every year for 40 years. It's not so damned easy.
- BGBen Gilbert
So you think the success is the magic of the business model and culture?
- CMCharlie Munger
Yes and yes, culture plus model. Yes, absolutely, and very reliable, hardworking, determined execution for 40 years.
- DRDavid Rosenthal
I mean, they talk about the story of the ketchup, that you could increase the price of ketchup by 3% and nobody would notice, but that would destroy everything if you did that, right?
- CMCharlie Munger
I would say the, the central norm was, "Don't raise the margin. Get it low, and keep it there forever."
- DRDavid Rosenthal
Which brings us to the hot dogs. Is it true, the story, that when Craig took over as CEO, he did try to raise the price of the hot dogs?
- CMCharlie Munger
I don't know. I had no conversations with him on that subject. [laughing]
- DRDavid Rosenthal
[laughing] And Jim forbade him.
- CMCharlie Munger
Well, I'm sure Jim would have forbade it. Absolutely.
- DRDavid Rosenthal
There was no board-level discussion-
- CMCharlie Munger
No
- DRDavid Rosenthal
... of the hot dog?
- CMCharlie Munger
No, no. Those two would not have thought it was a board matter to discuss the price of hot dogs.
- BGBen Gilbert
The one thing that fascinates me about Costco is they seem to only be able to grow 10% per year, because they're not capital constrained. No amount of money, if they were to access it for free, could help them-
- CMCharlie Munger
I'll tell you what it is. It is hard to open too many stores a year. New store, new manager, new this, new politics, new... It's hard. Plus, a lot of stuff has to be learned and taught and put in place, and so they didn't want to do more than they could comfortably handle.
- DRDavid Rosenthal
To store openings, you mentioned China earlier. Was it 12 to 20 years that Costco had the license to operate in China and didn't-
- CMCharlie Munger
Well, I'll tell you what happened there. The, the first store they tried to open in China, the first store, somebody wanted a $30,000 bribe, you know, Chinese culture.
- BGBen Gilbert
Whoa!
- CMCharlie Munger
And they just wouldn't pay it, and that made such a bad impression on Jim Sinegal. He wouldn't even talk to going into China for about 30 years thereafter.
- DRDavid Rosenthal
Ah. So what changed? Why finally go in?
- CMCharlie Munger
Well, finally the board started making enough noises. [laughing]
- DRDavid Rosenthal
[laughing] You started agitating.
- CMCharlie Munger
Yeah, yeah.
- BGBen Gilbert
Yeah, but, um, who on the board could be excited about the Chinese market?
- CMCharlie Munger
Yeah. Well, who can't? Who knows? [laughing]
- DRDavid Rosenthal
[laughing] Oh, that's so great.
Episode duration: 1:06:54
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