Charlie Munger: 'Opportunity comes to the prepared mind'

brian zen from china as a coke addict myself i'm excited to report to you our worldwide promoter in chief that the kochs in beijing tastes just as wonderful as in omaha as ex zen monk today i feel like visiting the buddha of the financial world we have an investment club with a name that ends in dot com believe it or not which tells you that the frenzy.com friends even seduced zen monks when we tried to follow you we find that mrs susan buffett used to send zen buddhism books to her sorority sisters that's probably why she always has a peaceful smile due to her low expectation of life which according to buddha is full of sufferings but mr munger would tell me that susan's smile is because you as the husband exceeded her low expectations that's right [Applause] and her father's even lower expectations anyway my question is uh did susan also send those zen books to your office or your bedroom and if you have read those books what are the key ideas that contributed to your investment tau which even made sense to secluded narrow-minded zen monks like me thanks for the financial enlightenment you've given us today thank you i sent those books on to charlie so i'll let him answer actually i tend to be a follower of confucius and i think this room is full of confucian values you know if the first law of confucianism is filial piety particularly toward elderly males you can see why i like that system area 4. [Laughter] good afternoon mr buffett mr munger my name is kevin truitt from chicago i have three questions for you mr munger at last year's shareholder meeting you stated that you didn't feel that the concept of the cost of capital made true economic sense would you explain why you felt this way and what you would do to replace it with anything my second question is to mr buffett you've stated the importance of an occasional big idea how were you able to in fact tell when you had a big idea and my third question mr buffett you have talked about the importance of the franchise and sustainable competitive advantage companies like kellogg and campbell soup are companies that most people would have said had those qualities however over time those qualities were lost as a result of a change in consumer taste what gives you confidence that the same things won't happen to cope or gillette well capital cost of capital first obviously considerations of cost are important in business and obviously opportunity costs which is a doctrine of economics really a doctrine of lifespanship are also very important and we've always had that kind of basic thinking of course capital isn't free and of course uh you configure cost of capital when you're borrowing money or at least you configure cost of loans but the theorists had to develop some theory for what equity cost and there they just went bonkers they they said if you earned 100 on capital because you had some marvelous business your cost of capital was a hundred and therefore you shouldn't look at any opportunity that delivered a lousy 80 that is the kind of thinking which came out of the capital assets pricing models and so forth that i've always considered inanity what is berkshire's cost of capital we have this damn capital it just keeps multiplying and multiplying what does this cost if you have perfectly good old-fashioned doctrines like opportunity cost you know at any given time when we consider an investment we have to compare it to the best alternative investment we have at that time we had perfectly good old-fashioned ideas that are very basic to use but they weren't good enough for these modern theaters so they invented all this ridiculous mathematics which concluded that the companies that made the most money had the highest cost of capital well all i can say is it's not for us now the other half of that question i leave for mr buffa yeah what you find of course is that the cost of capital is about a quarter percent below the return promised by any deal that the ceo wants to do very simple it uh you know we have three questions on capital with capitals around and leaving aside whether we want to borrow money which we generally don't want to do and one is does it make it more sense to pay it out to the shareholders than to keep it within the company the sub question on that is if we pay it out is it better off to do it by our repurchases or buy a dividend the test for whether we pay it out in dividends is can we create more than a dollar of value within the company uh with that dollar than paying it out and you never know the answer to that but so far the answer is judged by results is yes we can and we think that perspectively we can but that's that's a that's a uh you know that's a hope on our part and it's justified to some extent by past history but it's not a certainty once we've crossed that threshold then do we repurchase stock well obviously if you can buy your stock at a significant discount from conservatively calculated intrinsic value and you can buy it in a reasonable quantity that's a use for capital beyond that then the question becomes if you have the capital you think you can create more than a dollar how do you create the most with the least risk and that gets to business risk it doesn't get any calculation of the volatility i don't know the the risk in seized candy is measured by its stock volatility because the stock hasn't been outstanding since 1972 does that mean i can't determine how risky a business sees this because we don't have a daily quote on it no i can determine it by looking at the business and the competitive environment which it operates and so on so once we cross the threshold of deciding that we can deploy capital so as to create more than a dollar of present value for every dollar retained that is just a question of doing the most intelligent thing that you can find and you know that is the cost of every deal we do is measured by the second best deal that's around at a given time including more doing more of some of the things we're we're already in and i have listened to cost of capital discussions at all kinds of corporate board meetings everything else and and you know i've never found anything that made very much sense in it except for the fact that that is what they learned in business school and that's what the consultants talked about and and and most of the board members would nod their head without knowing what the hell was going on and that's been my history with the cost of capital now moving on to the big ideas you know when you've got a big idea and i i can't tell you you know exactly what happens within your nervous system or uh brain at that time but uh we've had a relatively few big ideas good ideas over the years i don't know how many do you think we've had an aggregate career maybe 25 each you took the top 15 out of berkshire hathaway most you people wouldn't be here so roughly one every two years yeah one every year too and sometimes there'll be a bunch of them like in 1973 and four um but the problem is for us is that big now really means big i mean it it has to be billions of dollars to to move the needle very much at berkshire uh but i i would say that when i would turn those pages 50 years ago in the moody's manuals i would know when i hit a big idea i've got a half a dozen of them that i keep the xeroxes from those reports around uh from 50 years ago just because it was so obvious that they they just they were incredible and that happens every now and then when i met when i met warmer davidson you know in end of january 1951 and he spent four hours or five hours with me explaining geico i knew it was a big idea eight months later probably 10 months later i wrote an article for the commercial financial chronicle the security i liked best it was a big idea when i found western insurance securities i knew it was a big idea but you know i couldn't put billion millions of dollars into it but i didn't have millions so it didn't make any difference and i we've seen things subsequently and we'll see you know we if we have a normal lifespan we'll see we'll see a few more before we get done uh but i i can't tell you that uh exactly how i i can't tell you exactly what transpires in my mind that that says uh you know flash is a neon sign up that says this is a big idea what happens with you charlie actually one of my what i i have a real system my idea of a truly big idea is one i get and i call charlie and he only says no rather than that's the worst idea i've ever heard of but if he just says no it's a hell of an idea you know the game in our kind of life is being able to recognize a good idea when you rarely get it and or when it rarely is presented to you and i think that's something you have to prepare for over a long period what is the old saying that opportunity comes to the prepared mind and i don't think you can teach people in two minutes how to have a prepared mind but that's the game things we learned 40 years ago though will help and and recognize the next big idea and on opportunity cost going back to that the current freshman economics text which is sweeping the country has write in practically the first page and it says all intelligent people should think primarily in terms of opportunity cost that's obviously correct but it's very hard to teach business based on opportunity cost it's much easier to teach the capital assets pricing model or you can just punch in numbers and outcome numbers and therefore people teach what is easy to teach instead of what is correct to teach it reminds me of einstein's famous saying he says everything should be made as simple as possible but no more simple write that down he asked an interesting question about franchises too and mentioned campbell's soup and kellogg and and you know i i am no expert on that but i would say that that just based on on my general observation over the years is that the problems there came from two different things i think that problems with with cereal ready to eat cereal were not so much changes in taste or consumption patterns but i think they may just push their push their pricing too far to the point that they they lost market share without getting in without having the moat that they thought they had as opposed to the general mills cereals and the general food cereals and all of that sort of thing i mean if your pricing really gets out of whack and people regard uh wheaties or or or agreements in the same categories that regard kellogg's corn flakes you know you're going to lose share and once you start losing share it it's hard to get back problems with soup i think relate more to the lifestyle i think that it's become it's a it's a little less uh it fits in a little less well with with uh current lifestyles maybe than 40 years ago soft drinks the consumption of soft drinks i don't have the figures here but i would wager that in a hundred and ten years the per capita soft drinks has gone up virtually every year uh throughout that history i mean it it's now 30 close to 30 percent of u.s consumption of of liquids so if the average american has about 64 ounces of liquids a day you're talking about say 18 ounces of that being soft drinks and 43 of that 18 or almost 8 ounces a day of being coca-cola products in other words 1 8 of all the liquid man woman and child united states take in it comes from coca-cola products but that has gone up virtually well throughout the world it's gone up on a per capita basis you know almost in soft drinks were discovered that people i would say that that that trend is almost impossible to reverse on a worldwide basis i mean there's so much potential in countries where per capita consumption is like well i think it's maybe eight per capita switches eight out servings they talk in terms 64 ounces a year so you have 1 50th of the consumption per capita on coke products and many in some important countries that you have here i don't i just don't see it as being now it you can push pricing too far i mean there there comes a point depends on the country in which you're doing it but it depends even on areas within the country in which you do it but if you establish too wide a differential between uh coke and and a private label product you will change consumption patterns somewhat not huge but enough so that you don't want to do it but i don't think i don't think you'll see it's interesting coffee has gone down every year people talk about starbucks and all that but if you look at coffee consumption in this country if you look at male consumption of the country you know per capita it just goes down down down down year after year after year after year and uh i think it's pretty clear what people like to drink once they get used to it and and with the price is when i was born in 1930 a six and a half ounce coke cost a nickel and you put a two two cent deposit on the bottle but forget about that just take the nickel now you buy a 12 ounce can or a larger product and you're you're paying and if you buy it on the weekends and the supermarket specialism you're paying maybe a little more than twice per ounce what you were paying in 1930 70 years ago and compare that to the price behavior of almost any product you know that you can find except raw commodities but compared to cars housing anything and it there's been very very little price inflation in it and i think that's contributed of course to the the growth in per capita's over time charlie how about cereals and soup well i think those are examples where the moats got less uh hostile for the competitors part of the trouble was the the buying power got more concentrated and tougher i mean the big grocery chains now have a lot of clout and then you add the walmarts and the costcos and the sams and it just it's a different world faced by the kellogg's than the one they had 30 or 40 years ago yeah there will be a battle always between brands and retailers because the retailer would like his name to be the brand and to the extent that people trust costco or walmart more than they or as much as they trust the brand then the value of having the brand moves over to the retailer from the product itself and that's gone on for a long long time i you know the first i would cases i know about in any real quantity with back with a and p in the 30s and a p i believe was was the largest food retailer in this country and they were also a big promoter of private labels and page i think was was a big private label with them for example and and they felt they could convince the consumer in the 30s that their brand meant more than having del monte on it or or or campbell's or whatever it might be in the different categories and and people will thought they were going to win that war for a while but and who knows i mean i don't know all the variables that went into the anp's decline but it was dramatic i mean it was one of it was a great american success story for a while and then it was a great american failure darling the muscle power of the sam's clubs and the costco's has gotten very extreme a little earlier this morning when i was autographing books a very good-looking woman came up to me and said she wanted to thank me and i said for what and she said you told me to buy this pantyhose i'm wearing from costco and i definitely made some previous comment about how amazing it was that costco could get hanes of all people to allow a co-branded pantyhose haynes dash kirkland in the costco stores that wouldn't have happened 20 years ago she must have been pretty desperate if she was consoling with you on where to buy pantyhose okay

Channel: The Financial Review

Views: 242,026

Keywords: Warren Buffett investment, buffett wisdom, munger wisdom, charlie munger tao, charlie munger zen, investment, charlie munger investment, value investing, buddhism finance

Id: 3yu3UYlI2Y4

Length: 20min 22sec (1222 seconds)

Published: Wed Oct 07 2020