Charlie Munger: We're Playing With Fire (Interview)

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Hey guys, welcome back to the channel. We got something really cool to talk about today: Charlie Munger. As you guys know, one of my favorite investors, he recently did a 45-50 minute interview with the California Institute of Technology, which is pretty crazy because Charlie Munger doesn't do that many interviews.

So a lot of the questions were geared towards, you know, his background and technology, but there was also some stuff in there about the stock market investing, where we are in the current investing landscape, the current climate. So what I want to do in this video is kind of draw out the most interesting discussion points and the most interesting clips for those that are interested in the investing side of the discussion, and kind of give my thoughts and opinions as we go along the way.

So with that said, let's get stuck into it! Leave a like on the video if you do enjoy it. But the first clip I wanted to show you is Charlie; it's about the five-minute mark. It's about Charlie's thoughts and opinions on the draw of talent that's been happening in the last decade or two towards the investing field.

So have a listen:

"What's happened in the investment field is, of course, that so many people have gone into it, and people have made so much money, and it's driven almost a frenzy of activity in the investment field. When I was young, there was probably nobody— there weren't very smart. And now almost everybody's smart. Even a Caltech graduate, a good proportion of them are sucked into finance by the money. And so that's been a hugely important development. I don't welcome it myself at all. I don't think we want the whole world trying to get rich by outsmarting the rest of the world in marketable securities. But that’s what's happened. And there's been frenzies of speculation and so on. So it's been very interesting, but it's not been all good."

So I find this interesting because, obviously, Charlie Munger is a great investor, but he doesn't actually think it's a good thing that a lot of the talent these days is just going into finance, trying to outsmart the other person in the field of stocks. The reason for this, and this is kind of Elon Musk's perspective on it too, is that while yes, the talent's going there because in finance you can make a lot of money, you can get rich, but they both don't actually like that happening because it means that a lot of the talent is drawn away from things like science or things like engineering, where, you know, those people that talent is actually put into projects that are driving society forward.

A lot of that talent these days just simply gets drawn into finance because of the money, because the smart people know that they can make a lot of money in finance. So they don't become engineers or scientists, physicists, or, you know, economists or something like that. They just become, you know, investors or money managers. So I find that really interesting.

And then the next clip I want to show you guys is Charlie Munger's thoughts and opinions from his long experience of investing on how the timeline of businesses and the timeline of technology changes as we move forward over the long term:

"The companies of America behave more like biology than they do anything else. In biology, all the individuals die and so do all the species. It's just a question of time. And that's pretty well what happens in the economy too. All the things that were really great when I was young have receded enormously, and new things have come up, and some of them started to die. And that is what the long-term investment climate is. And it does make it very interesting. Look at what's died: all the department stores, all the newspapers, U.S. Steel, John D. Rockefeller's Standard Oil— the pale shadow of its former self. You know, it's just like biology. So they have their little hour, they have their little time, and then they get clobbered."

This is a really interesting perspective from Charlie, who's obviously been an investor for a very, very long time. The guy's 96 years old!

So it's interesting to hear his thoughts and opinions. You know, as technology improves over time, new technologies pop up which make the old technologies obsolete. Same with the business cycle: you know, as business goes on, there are new businesses that pop up that do things better, or in a different way, or more innovative than the last company, and old companies get superseded by these new companies.

So I see this as just a really good reminder for us as investors to never forget about our investments. Even if you've found a great company and you've bought it at a great price, and maybe you've held it for five years and it's made you a ton of money, never stop keeping up with what that company is doing, where they're going, what the industry, what the competitive landscape looks like.

Because, you know, a lot of the companies even in the S&P 500 that were there, you know, 20-30 years ago don't even exist anymore or have been bought out by other companies. So it's just a reminder that we always have to keep our finger on the pulse, and we definitely want to be mindful, always keeping up with our investments. Because otherwise, we could be stuck in a position where we make a whole bunch of money, you know, on paper, and then some company does something better than your investment, and then all of a sudden that profit is wiped away from you because it's going towards this new company before you even have a chance to realize that profit.

And from there, the next clip I wanted to show you guys is Charlie Munger's thoughts and opinions as to what you need to look for in companies when you aren't just investing in the companies that are pushing the boundaries, that are creating the new technologies that are the innovators, you know, on the cutting edge.

So this is his thoughts and opinions on that:

"Well, some people try to get on the cutting edge of change, so they're destroying other people instead of being destroyed themselves, and those are the Googles and the Apples and so forth. Other people, like me, do some of that—join things like Apple, and in some ways, we just try and avoid big change that we think is likely to hurt us. And so Berkshire, for instance, owns the Burlington Northern railroad. You can hardly think of a more old-fashioned business than a railroad business. But who in hell is ever going to create another trunk railroad? So it's a very good asset for us. We've made that success not by conquering change, but by avoiding it.

Now Burlington Northern itself has been quite clever at adapting technology to the railroad. Imagine the good luck of being able to take an existing railroad and double-deck all the trains and raise the heights of the tunnels a little and so forth, and all of a sudden you got twice the capacity at very little incremental cost, which is what that railroad has done.

So that is, everybody uses new technology, but it really helps to have a position that almost can't be taken away by technology. How else are you going to carry goods from the port of Los Angeles to Chicago except on our railroad?"

So no real surprises here. Obviously, Charlie Munger says if you're not investing in the people that are pushing the new technology, if you're not investing in the innovators, then that's fine, and a lot of his investing isn't in those companies.

So if that's the case, then you just have to make sure that you find companies with a really strong competitive advantage. It's no surprise that he brings up the topic of moat, and it's really interesting. The example he gives is, you know, BNSF, which is a wholly-owned business by Berkshire Hathaway. You know, they're not creating these amazing new technologies; they're not creating the hyperloop; you know, they didn't invent planes or something. They're just a railroad company.

But at the end of the day, if you've got cargo in the port of Los Angeles and you need to get it to Chicago, then the way you're going to move that cargo is by rail. So the company that connects those two cities together is the company that's going to get the business. So if you're that company, that's obviously a big competitive advantage.

And that's always the way that Warren and Charlie think about their investing: finding companies where there's something about that business which doesn't matter if other things pop up or the industry starts moving this way or that way; then these companies always have their advantage and retain their customers and thus retain their revenues over time, and grow their revenues.

So anyway, that was that clip. Then the next clip I wanted to show is a really interesting one: this is Charlie Munger discussing how to avoid all of the cognitive biases that typically plague investors and, quite frankly, diminish returns.

"I spent a lifetime trying to avoid my own mental biases. Hey, I rub myself—I rub my own nose in my own mistakes. B: I try and keep it simple and fundamental as much as I can. And I like the engineering concept of a margin of safety. I'm a very blocking and tackling kind of a thinker. I just try and avoid being stupid. So I have a way of handling a lot of problems: I put them on what I call my too hard pile, and I just leave them there. I'm not trying to succeed in my too hard pile. What I would say is the single most important thing if you want to avoid a lot of stupid errors is knowing where you're competent and where you aren't, knowing the edge of your own competency. And that's very hard to do because the human mind naturally tries to make you think you're way smarter than you are."

Now, I really love this from Charlie. You know, it's short, and it's nothing we haven't heard before, but it's just good to hear those points reiterated. You know, rub your nose in your own mistakes, aka you don't have to shift blame, okay? Make sure that you own up to your mistakes and you learn from them.

The other thing he talked about: you know, keep it as simple and as fundamental as possible. So don’t go off into la-la land believing jono down at the pub; you know, make sure that your research is grounded in the financials. He also talks about the concept of margin of safety and how important that is to his investing approach—so of course, never buy the shares of a business unless you can get them at a discount to intrinsic value.

He talked about a lot of successful investing simply being about not doing stupid things in the market. And one of the key points in this kind of paragraph that he talked about was to make sure that you know, don’t be afraid to put companies on the too hard pile.

So always make sure you are sticking strictly within what you know, what you understand, your circle of competence. You know, don’t try and fool yourself into believing you’re an expert when you’re not. So that's like a short but kind of good quote to hear, you know? It never hurts to hear that sort of stuff again from Charlie Munger, who's obviously applied these principles for a long time and has been extremely successful in doing so.

Alright, the next clip I wanted to show you is actually Charlie Munger's thoughts and opinions on the pandemic recovery. So what does he think about that?

"My opinion on that is no better than anybody else's, but if you... I think it's quite likely that a year from now the worst of that will be very, very thoroughly behind us. It's amazing. I watched polio get totally killed by the vaccinations, and I think they'll spread these vaccines over the world so fast it'll make your head swim. So I think this horrible COVID thing, it's very likely to shrink to insignificance in the course of the next year."

So there you go—not speaking as an expert, obviously Charlie Munger, but just speaking from his own experience. He thinks that now that vaccines are coming out and being distributed, you know, to citizens, the general public, he thinks that the pandemic will essentially be crushed. He speaks from his experience in seeing polio get crushed from vaccines back when he was younger.

Now, interestingly, the interviewer also probed him on what he thought—what his thoughts are on retail—whether we are going to see a big bounce back in retail or what's going on there. So this is what Charlie Munger said to that question:

"Well, I don't think retailing is going to go away. After all, it's been around for thousands of years. But certainly, it's been a very difficult place to make money because of what the internet has done. I recently had a friend send me a blue blazer made in China, bought on the Chinese internet, and it cost $42 delivered. And it was—it may not have been a perfect blazer, but it was an amazing blazer for $42. The person who created that blazer gave it to some little factory in order to for a hundred thousand at once, and those have been pre-sold using the internet, and it's the most extreme kind of kill-all-the-competitors type of reason of selling I've ever seen.

Of course, retailing hasn't coped with something like that. How good is it for Brooks Brothers when somebody can deliver a thing to the internet from China for $42? It didn't look like that bad a blazer to me either. Retailing has gotten very tough, and I think this online stuff is here to stay, and we'll get more and more efficient."

And I think that kind of is probably in sync with what most of us think about retail. Yes, there's going to be some bounce back. Yes, there's always going to be a place for retail. But the bigger thing to think about is the whole idea of online shopping, e-commerce, right? Online retailers, and they will, in Charlie Munger's opinion, continue to gain more and more market share, which will continue to put pressure on traditional retail. But I think most of us would probably be on the same page when it comes to that.

So that was the end of the actual formal kind of presentation between the interview, or that was the end of the formal interview. But then they chucked it over to Q&A, and there were actually a couple of interesting Q&As, some of which weren't really relevant for us investors. But one of the interesting things that we did get out of the Q&A is actually Charlie Munger's thoughts and opinions on climate change.

So have a listen to this:

"Well, we're actually trying to make some progress in having better predictive model over the long-run evolution of the climate of the globe—everybody is—but it's proven very difficult. It's better than nothing, don’t misunderstand me, but it's proven very difficult. My attitude on that is that the worst that can happen in terms of global climate can be coped with by the advanced civilizations. If you had to erect sea walls to protect the entire present United States, that wouldn't take that much of GDP per capita for that many years, and it could be done quite safely if we had to. So I don't see that as the worst tragedy that man could get."

So I do have to say I was a little bit disappointed with Charlie's response here. You know, he definitely gives the impression that, you know, climate change is not something that we necessarily have to worry about, you know, that the future generations, the future civilization will be able to deal with the effects just fine. Like, it'll only take a couple of percentage points of GDP to build a massive ocean wall to keep out the massive sea-level rise that we're going to see.

Was a little bit disappointing to this—I thought with his kind of experience in business decisions he would obviously know that why don't we just avoid the issue getting critical now by devoting a couple of percentage points of say GDP right now to stopping climate change from getting any worse or getting much worse, getting to a critical point?

Yeah, anyway, that's just my opinion. I was a little bit disappointed to hear that he kind of just almost brushed it off in a way. But the next question, which was really interesting, he got asked about whether he believes the next ten years of equity market returns will be as good as what we've just seen over the past ten years.

Have a listen to this:

"You expect the next ten years to have lower returns in the equity markets than the last ten? It doesn't give us an idea why?"

The answer is yes. Could you give us a hint as to why that might happen?

“Yes, because so many people are in it and the frenzy is so great, and the systems of management, the reward systems are so foolish that I don't think it's going to work at all. I don't think—I think the returns will go down. Yes, in real terms, the returns will be lower.”

So there you go! Charlie sees euphoria; he sees craziness in the stock market. He also sees management being compensated in very strange ways that maybe long-term shareholders wouldn't be too thrilled with. Of course, we're talking about all the buy-back programs we've been seeing, massive dividend payouts, etc.

So for Charlie, he definitely doesn't believe that the next ten years will look like the previous ten years. And I think that's an important point to touch on too if you're someone that's just getting into the stock market. What we've been seeing over the past maybe five years particularly is wild—like you definitely shouldn't expect to see even the S&P 500 give, you know, annual growth and annual returns of say 15 to 20 percent. You should definitely not get used to that.

So maybe just a little word of warning! And definitely, Charlie Munger doesn't see the next ten years looking like the last ten years. In fact, we might catch up to ourselves in the next ten years and realize that maybe some of the decisions we've been making, you know, just generally with public companies haven't been the best for the long term. But we will have to wait and see.

Anyway, next up, Charlie was asked about massive QE and large fiscal deficits and where he thinks that that is going to lead us.

So have a listen to this:

"What do you think of the combinations of quantitative easing and large fiscal deficit, and where are they going to lead us?"

“Well, there I've got a very simple answer, and that is it's one of the most interesting questions anybody could ask. And we're in very uncharted waters. Nobody has gotten by with the kind of money printing we're doing now for a very extended period without some trouble, and I think we're very near the edge of playing with fire. It is remarkable how much we've expanded the money supply, how low interest rates are, and how little initial response there's been—unremarkable, not too strong a word—astounding would be more. I like it; I will let you choose the adjective.”

Charlie, it's unbelievably extreme!

"European government borrowed money recently for some tiny little fraction of one percent for a hundred years. Now that is weird! Somebody's kind of a lunatic would loan money to a European government for a hundred years for less than one percent."

So listen to that. Nobody has gotten away with the money printing that we're doing now for an extended period of time without some trouble. So Charlie is not really telling us, you know, as investors, what we should be looking out for right now, but he's just kind of giving a broad word of caution that we haven't seen this sort of money printing before without, you know, pretty big inflation.

So maybe we should just keep an eye on things, what's coming around the corner—so interesting one there. And he also got asked about what he thinks the current state of the stock market is now, particularly the Nasdaq. Is the Nasdaq in a bubble, and will it blow up?

"Nobody knows when bubbles are going to blow up, but just because it's Nasdaq doesn't mean it'll have another run like this one very quickly again. This has been unbelievable! Again, there's never been anything quite like it if you stop to think about it. Think what Apple is worth compared to John D. Rockefeller's old oil empire. It's been the most dramatic thing that's almost ever happened in the entire world history of finance."

So nothing much to add there apart from, yes, I definitely agree. And again, this goes back to the point where we shouldn't, if you're a new investor now, you shouldn't definitely be getting used to these sorts of massive monster returns and expect that as a new normal out of the stock market.

But yeah, something again—you don’t know when these bubbles are going to burst; you don’t know what’s going to happen; but again, it’s one of those things where you've just got to watch out; you've just got to play the game with a little bit of caution now because of where we are.

And then the last clip I wanted to show you is timeless advice from Charlie Munger, simply discussing what makes a good investor.

So have a listen to this:

"I think great investors to some extent are like great chess players. They're almost born to be investors, and that's because of the tolerance for risk. Is it the patience? What are the traits? Obviously, you have to know a lot, but partly it's temperament, partly it's deferred gratification. You've got to be willing to wait, and it’s a weird—good investing requires a weird combination of patience and aggression, and not many people have it. It also requires a big amount of self-awareness and how much you know and how much you don't know. You have to know the edge of your own competency, and a lot of brilliant people are no good at knowing the edge of their own competency. They think they're way smarter than they are, and of course that’s dangerous and causes trouble.

So I think Caltech would have a hard time teaching everybody to be a great investor, but could it help people discover that they have that temperament, or is this something that you mostly should try on your own?

"I think you find out whether you got the qualities to win at poker by playing poker."

So again, nothing we haven't heard before, but it's just stuff that's really good to hear repeated even in 2020 from one of history's most successful investors. You know, you have to have the right temperament; you have to stay within your circle of confidence and know the edge of your circle of competence. You have to have that delayed gratification, but most importantly, you have to stay rational. You have to know when to be patient, when the time is not right to be, you know, sinking a lot of money in. But you also have to have the guts and the understanding of the investments that you want to make to be able to strike quickly when you have to.

And that's where he's talking about, you know, it’s an important game: investing of knowing when to be patient, knowing when to be aggressive.

So again, nothing that we probably haven't heard before from Charlie Munger, but it's just nice to hear it reiterated, especially with all that's going on in the world at the moment. One of the most rational investors in the world, Charlie Munger.

So overall, they're the clips that I took out of this interview. I'd love to hear your thoughts and opinions on the interview and what you think of Charlie Munger and his investing strategy. He's obviously an investor that I look up to and I try and study. I think he's just got so much wisdom when it comes to investing that we can all learn from.

So anyway, guys, let me know all that stuff down in the comment section below. Leave a like on the video if you enjoyed, and that will do me today. If you're interested in learning about my personal investment strategy, which is modeled off of people like Warren Buffett, Charlie Munger, and Monash Prabhakaran and all these great value investors of the world, then check out the profitable links down in the description below.

But that'll do me for today, guys. Thanks for watching, and I'll see you guys in the next video. [Music] [Applause] [Music] [Applause] [Music] [Applause]