Charlie Munger: The Investment Opportunity of a GENERATION (Last Ever Interview)

Oh boy, do I have a special treat for you guys! Legendary investor Charlie Munger just gave a rare sit-down interview, which is the first new Charlie interview I have seen in years. You're going to want to stick around to the end of this video because Munger covers how you should be investing if you want to become incredibly rich. Let's get into it.

In our Costco episode, we started with the joke. At one of the bricks, should be 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 of me. Kind of reminded you, yeah? Yeah, and he said, "me first." We were hoping, could you give us your speech on the virtues of Costco? 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 going to work wonderfully. Maybe five, six times in a lifetime you get a chance to do it, and people do it two or three times early, they'll go broke because everything it's easy, it's fact, it's very hard and rare.

What was it about Costco that made you realize this is one of those few moments in a lifetime? Well, they really did sell cheaper than anybody else in America. They did it in big, efficient stores, and all the parking spaces were 10 feet wide instead of 8 feet or whatever they normally are. They did a lot of right things, yeah, and they had a lot of parking spaces. 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, the executive membership. Yeah, it all worked.

And the capital-light business model—I mean when we were studying it, the difference between price no investment to them: they make the suppliers wait until they've been paid, and then they're scheduled to pay, pay only after they're scheduled to sell. They've got 900 warehouses around the world full of high-quality merchandise, none of which they have sitting on their books.

That's correct. Charlie M is a billionaire and on the Forbes list of the world's wealthiest people. Naturally, one would assume that Charlie's personal stock portfolio consists of dozens of different stocks; however, this could not be further from the truth. Munger's personal stock portfolio consists of just three stocks: Berkshire, Costco, and the Daily Journal Corporation. Contrary to popular belief, you don't need to be able to come up with a new investment idea every week in order to invest successfully. Instead, Munger says that the key to being a great investor is having the patience and the ability to identify when a truly great opportunity presents itself. If you're lucky, you may just get a handful of these types of opportunities during your life. That is why it is so important to be able to identify one when it does come along.

Use Munger and his investment in the retailer Costco as an example. Munger has been a large shareholder of Costco for decades, having been on the board of directors since 1997. In the spring of 1997, Costco stock was trading at roughly $14 per share; now each share of the company is worth nearly $600 as of the making of this video. Quite the impressive return!

When Munger first invested in Costco, the business was just a fraction of the size it is currently. Costco had just opened its first location a little over a decade ago and had yet to build out its national footprint. However, Munger was still able to identify how great an opportunity Costco stock was because of the strength of the company's moat. A moat refers to a business's ability to maintain a competitive advantage over its competitors in order to protect its long-term profits and market share. Costco's moat is based on its ability to sell products to consumers at lower prices than other retailers.

The entire business model of Costco is built around driving costs down as far as possible and passing those savings on to customers in the form of lower prices. Here's a few ways Costco is able to beat its competitors on price: for starters, Costco only carries about 4,000 different products. The average supermarket, on the other hand, is somewhere around 30,000. This allows Costco to negotiate more favorable pricing with suppliers on the products the business does carry. Additionally, products in Costco aren't sitting on shelves like the average store; instead, Costco sells its products directly from the pallets they were shipped in. As a result, employees don't have to spend time continuously restocking shelves.

Costco is also well-known for selling products in almost comically large sizes, which serves two purposes. The first being cheaper prices for customers on a per-unit basis. This is the most apparent benefit of having these large sizes; however, there is also another massive benefit that's not as obvious. The large size of products at Costco also makes them more difficult to be stolen. As a percentage of sales, Costco has 10 times less theft than the average retailer. All of these things, plus many others, come together to form Costco's moat: cheaper prices than the competition and a unique shopping experience.

When Charlie Munger was first doing research on Costco, he did not have the luxury of the internet and powerful online trading apps like Mumu. Munger had to request a company's financials by mail and wait weeks or even months for a response. Fortunately for us, we have Mumu, the sponsor of today's video. Mumu is a free online trading platform that makes fundamental research incredibly efficient. In fact, I even used Mumu to help research Costco for this video. For example, we can go into the list of Costco shareholders and find Charlie Munger, click on his name, and we can see that he owns nearly 187,000 shares in the company as of this recording. This makes Munger one of the largest individual shareholders of Costco, and this is just the start. We can also go to news on the company and scroll down to Costco's most recent earnings report. Here, we can quickly and easily access the company's financials, helping us get up to speed on the business.

Thankfully, Mumu was kind enough to give my viewers an exclusive huge sign-up bonus. By using my referral link in the description of this video, you can receive up to 15 stocks completely for free just by making a qualifying deposit. This seems like an absolute no-brainer deal to me. Now, let's get back to the video.

While Costco's moat may seem obvious now, it wasn't as apparent when Munger first bought the stock. However, it's not just about being able to identify these attractive opportunities, as Munger is going to explain. It's also about being willing to bet heavily when the odds are in your favor.

As you reflect back on 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? Well, when you find... you may find it five years after you bought it, you know? These things may work into it, or your own understanding may get better. But when you know you have an edge, you should bet heavily. You know you're right, and most people—they don't teach that in business school. It's insane. Of course, you've got to bet heavily on your best bets.

And how do you develop that level of conviction to know you work out? You do a lot of reading and thinking. Conventional finance theory touts the benefits of portfolio diversification, the thought being that if someone owns a variety of different investments, the winners will help offset the losers and the combined result should be alright. According to Charlie, this approach to investing is foolish.

Throughout his career, Charlie Munger has built his wealth by making big investments when the odds were strongly in his favor, and this approach has worked wonders. In fact, prior to joining forces with Warren Buffett at Berkshire Hathaway, Munger ran his own investment fund. During that fund's 14-year tenure, it generated annual returns of a whopping 19.8% while the Dow index had a return of just 5%. These returns were generated in large part due to Munger's willingness to take big swings when the odds were in his favor.

Even today, Charlie still has roughly 90% of his entire family's wealth in just one stock, Berkshire Hathaway. As vice chairman of Berkshire, Munger's philosophy of taking big swings when you get a great opportunity is a critical part of the investing strategy at the company. Despite Berkshire Hathaway's more than $750 billion market cap, over 50% of its stock portfolio is concentrated in Apple stock. Berkshire was able to acquire 915 million shares in Apple between the years 2016 and 2018 at a PE ratio of just 15 times—an absolute bargain of a purchase, considering Apple's current PE ratio is over 30 times as of the making of this video.

It's important to understand why this opportunity existed in the first place. Back in 2016, Apple was considered what is referred to as a technology hardware company. Apple was getting grouped in a category of stocks that included companies such as Dell and HP. Technology hardware companies tend to operate in very competitive industries. Additionally, shifts in technology and changing consumer preferences mean these companies are always running the risk of becoming obsolete. As a result, technology hardware companies tend to be out of favor with investors, and the stocks tend to be cheap—and usually for a good reason.

Warren Buffett and Charlie Munger viewed Apple differently. They believed that instead of a technology hardware company, Apple actually more closely resembled a consumer company with its sticky customer base and phenomenal brand. Buffett even went as far as to say that if someone had to choose between having a $1,000 iPhone or a private jet, most people would pick the iPhone. Apple's products have become that ingrained in the everyday life of the average person, and Buffett and Munger believed Apple was a far better business than what the market was giving it credit for. Apple was still one of the largest companies in the world and a household name back in 2016. Anyone could have seen what Buffett and Munger did and that Apple stock was undervalued.

What made Buffett and Munger different was that they were willing to take the big swing. This big swing took the form of a staggering $30 billion investment in Apple. This was Berkshire's largest ever investment and represented a meaningful portion of their stock portfolio. This big swing resulted in a home run, generating nearly $150 billion in investment gains for Berkshire.

These types of opportunities aren't just reserved for billionaires like Charlie M. If you, too, want to find these types of investment opportunities, you just have to know where to look. Here's Charlie to explain: "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, 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."

"Do you think it's more investable today than it was 50 years ago because of the disruptive innovation of electric?" "Well, maybe for one or two electric cars that are really good at it, maybe, but certainly nobody else. So you think BYD, TP was a miracle, but that guy works 70 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. He can figure out how to make the goddamn thing. You can't do that, you see?"

"There's been a lot of discussion about Berkshire's investments in the Japanese trading houses. Well, but that is a no-brainer. Something like that: If you're as smart as Warren Buffett, maybe two or 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 weigh 5% dividends, so is 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. But the only way you can get it is be very patient and just pick away at little pieces at a time."

"It took it forever to get $10 billion invested, but it was like having God just opening a chest and just pouring money into it. It's awfully easy money." The key to successful investing according to Munger is to find investment opportunities that he describes as no-brainers. By no-brainers, Charlie means investments that are so obvious it doesn't require luck or some amazing amount of intelligence for it to work out in your favor.

These types of no-brainer investments can take many different forms. While Munger is widely known for his ability to invest in the stock market, he actually made his first large sums of money by doing real estate deals in the 1960s. Charlie was a lawyer based in Los Angeles, California. Munger's first project was brought to him by one of his clients. Charlie was doing the work for a client and in typical Charlie fashion, he couldn't keep himself from giving out business advice.

The client's grandfather owned a property near a large university in the area. The family didn't think they had any use for the property and wanted to sell it. Munger was set to handle the probate settlement but had seen that due to the rapid population growth in Los Angeles at the time, real estate developers were getting extremely wealthy. Munger ran the numbers and realized that the current value of the property plus the cost to develop the apartments was just a fraction of what the building could be sold for at the end of the project. Charlie recommended to his client that instead of selling the property, they convert the building into apartments.

Munger even went in with them on the deal as he knew it was a no-brainer opportunity. Over the next few years, Charlie and his client sure did convert the building into apartments. Slowly but surely, the building got leased up with tenants. Once the building was full of tenants, Charlie and his client sold it and made a fortune. They turned their original $100,000 investment into over $500,000. After factoring in inflation, this comes out to a staggering $4.6 million in today's money.

While it's probably fair to categorize Charlie Munger as a genius, you don't have to have an IQ of 160 to see why this investment had an extremely high likelihood of working out. Charlie will be the first to admit that opportunities like this one were likely more plentiful when he was younger. However, if you follow the principles laid out by Munger in this video, there is a high likelihood that you will be able to do very well for yourself and your family.

So there we have it. Make sure to subscribe to the channel because it's my goal to make you a better investor by studying the world's greatest investors. Talk to you again soon. [Music]