Charlie Munger: How Our Simple Method Effortlessly Beats The Market

If you're a young investor and you can sort of stand back and value stocks as businesses and invest when things are very cheap no matter what anybody is saying on television or what you're reading, and perhaps if you wish sell when people get terribly enthused, it is really not a, a very tough intellectual game. It's a very, it's—it's an easy game if you can control your emotions.

Moderator: Let try. Charlie says that he think we've talked about a little bit that the Chinese market may be more—there may be more speculative influences in it even than in the United States—because it's a relatively new development and it may lend itself to greater extremes and that should produce great opportunities.

Charlie: Yeah, well, there's great opportunities for excess and you nasty contractions out after unnatural boom booms and so on. I, I think China is, is wise to damp and the specula booms and, and I think the Chinese—I don't think the value investing will ever go out of style. Who in the hell doesn't want value when you buy something? How can there be anything else that makes any sense except value investing? It never gets that popular though; people are looking for an easier way, yeah, and, and that's a mistake. It looks easier but in fact it's harder and there's a lot of misery to be obtained by misusing stocks. Yeah, nobody buys a farm to make a lot of money next week or next month or—they buy it, get an apartment house—they, they buy it based on what they think the long-term future is, and if they, if they get a, if they make a reasion calculation of that and the purchase price looks attractive, they buy it, and then they don't get a quote on it every day or every week or every month or even every year.

Investor: Investment principles do not stop at Borders. Uh, so if I were, uh, investing in China or any place else—India, UK, Germany, uh—I would, I would, I would apply exactly the same sort of principles that I learned from The Intelligent Investor. I would think of, I would think of stocks as a small piece of a business. I would think of investment fluctuations being there to benefit me rather than to hurt me, uh, and I would, uh, try to focus my attention on businesses that I thought where I thought I understood the competitive Advantage they had and where they would, what they would look like in five or 10 years. So I don't think—I don't think I would change the principles at all. I'm not sure I got all of the question. Char, maybe Charlotte can elaborate on the rest.

Charlotte: Well, the Chinese have a history of being very entrepreneurial and of gambling very heavily when they have the opportunity, and it has created great volatility in the Chinese stock markets. And when things get bouncy and prosperous like our internet craze here in the United States, China looks a lot like Silicon Valley. I think China would be way better to be more value investor minded and less absorbed in waves of speculation, so I think if they—if more, more China copies the way Berkshire operates, I think the better it'll be for China. Yeah, there's a—there's a certain irony in that we will—we would do the best over decades if we operated in a market where people operated very foolishly, and the more people respond to short-term events and exaggerated things or anything that causes people to get wildly enthus—II asically enthusiastic or wildly depressed, actually, is what allows people to make lots of money in Securities. And on the other hand, it's not the greatest thing for a society. And, uh, Charlie and I have benefited enormously by the fact that over a 50-year period there have been a few periods—probably the most extraordinary being 1973 and '74—where you could buy stocks unbelievably cheap, cheaper than happened in 2008 and 2009, and, you know, it—it doesn't make sense to have that much volatility in the market, but humans behave the way humans behave and they're going to continue to behave that way in the next 50 years.

Generally speaking, there is still too much risk in a lot of high finance, and the idea that DOD Frank has removed it all permanently is nonsense and, and people like hanging on to it, you know. Trading derivatives is a principle—if you're shrewd, it's a lot like running a bucket shop in the '20s or a gambling parlor in the current ERA—and you have a gambling parlor that gives a proprietary Edge, and, and you say it's sharing risk and helping the economy and so forth. That's mostly nonsense. The people are doing it 'cause they like making money with their gambling power and they like favorable labels instead of unfavorable labels, so I think there's still danger in the financial system, and I also think our competitors don't like it that they deserve regulation and we don't, and I think there's danger in that too.

One thing that may not be—I haven't read much about it—but my understanding is that DOD Frank actually weakens the power of the, of the fed and to some extent the treasury too to take the kind of actions they took in 2008, primarily, uh, and those Powers were needed to keep our system, in My View, from really going into utter chaos. The ability to say—and have people believe you when you say it, uh—that, that whatever needs to be done will be done, uh, has resided in the, in the Federal Reserve and with the Central Bank, European Central Bank, and the fact that people believed when Hank Paulson said that the money market funds are going to be guaranteed, that stopped a run on 3 A5 trillion of money market funds that had lost 175 billion in deposits in the first three days, uh, there back in September of one week. If that, if people hadn't believed that, you would have seen that 175 billion turn into a trillion very quickly. I mean, the, the system would have gone down.

So when you have a panic, uh, you have to have someone somewhere who can say and be believed and be correctly believed, uh, that he or she will do whatever it takes, uh, and you saw what happened in Europe when Dragi finally said that and you saw what happened in the United States when Bernan and Paulson, more oress together, said it. And if you don't have that, uh, panics will—they will, uh, accelerate like—you cannot believe, you know, in the old days the only way you could stop a run on a bank was basically for somebody to come and pile up gold. I mean, they used to raise it to the, the branches that were having a problem. I remember reading the history of the Bank of America on that and how they would put out runs before the Federal Reserve existed and the, the only thing that stopped it was to pile up gold. I mean, if the CEO of the bank came out and said, you know, "Our basil 2 ratio is 11.4%," the line would just lengthen. I would not get the job done. Gold got the job done, banki got and pulson got the job done, but the only way they got it done was saying, "We're guaranteeing new commercial paper, we're guaranteeing that the money market funds won't break the bank. You know, we're—we're going to do whatever is necessary." I think DOD Frank weakens that and I think that's a terrible thing to weaken.

Cocacola sold more cases of beverages last year than any year in their history, and they'll sell more this year. I mean, it, it—it's, uh, a strong brand is really potent stuff. I mean, take hin ketchup or something of the sort—it's 60% brand share in the United States, but it's much higher in many other countries—so you'll always have the fight between the retailer and the brand, and the retailer is going to use all the pressure they've got and, and therefore the brand has to stand for something in the consumer's mind because in the end the retailer may want to shift to, to a house brand, uh, private label; but, and they private labels have been around forever in the soft drink field. I mean, I—I can remember when I was looking at cot beverage and all of those and thinking, you know, "What will it do to us?" I remember when, when, uh, Sam Walton sent me the first six-pack—he told me it's the first six-pack of Sam's Cola 20 years ago—and believe me, W W has plenty of power, but so does Coca-Cola and the, the brand. You've got to nourish them, you know; you've got to take very, very, very good care of them. They have to stand for the promise that's in people's mind about them. But a lot of people have tried to—I, I don't know how many dozens or maybe hundreds of cola beverages there have been over the years—uh, RC Cola, you know, they came up with the first diet product back in the early '60s and, uh, uh, that looked like a big, big maneuver. Wilkinson came up with a blade back in the '60s after Gillette and, uh, but Gillette ends up with 70% by dollar value worldwide of razor blades after 100 years. So there's—all you've got to do is protect a brand. You've got to enhance it in every way. You've got to get a promise in people's minds that gets delivered that way.

But that's the question Charlie and I faced in 1972 when we looked at, at C's. C's was selling for $1.95 a pound; Russell St was selling a little cheaper and he had to decide how much damage could a Russell Stover do if they came after C's and they copied our shops and all that sort of thing. Uh, if you protect a brand—if you got a terrific brand and you protect it—it's a fabulous asset, but you'll always have trouble dealing with Costco and Walmart and the rest of the guys, Kroger and you name it, you know—they're, they're, they're, they're tough too. But the great Brands Will Survive; the great retailers will do well.

Mr. Buffett: After all these years of interviews and meetings, what is the one question that you've never been asked that you would like to answer? [Music] Now, well, I can think of the question I haven't been asked, but I'm not sure I want to answer it now. It—I, I, I think I've been asked almost all of them and, um, and many, uh, many of them, time after time, after time.

Charlie: Do you have anything that you're just dying to be asked?

Paula: Well, this lady will first tell us the worst thing she ever did in her life—those secrets are not, Paulo, I wish we could help you if you got another question you'd like to throw at us.

Charlie: Yeah, I could— I could ask you another question.

Paula: Good, can I buy you lunch?

Charlie: I think she's talking to you, Charlie. He always wins—saw in the movie he always gets the girl.

Paula: Yeah, I'm so heavily involved with those girls in the movie, I just don't have room on my list. Thank you, Paula. Yeah.