Sunday, August 13, 2006

Charlie Munger


For reference: a collection of Charlie Munger Articles

Charlie Munger on common sense, education, models, and investing: Charlie Munger: Art of Stock Picking
And the o­ne thing that all those winning betters in the whole history of people who've beaten the pari-mutuel system have is quite simple.They bet very seldom.

It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it, who look and sift the world for a mispriced bet, that they can occasionally find o­ne.
Buffett in Hindsight and Foresight (w/ J. Scheid), Finacial Analysts Journal, July/August 2002.
Interesting chart on page three about how much Berkshire Hathaway was undervalued for each year compared to the S&P 500 index.

Three Lectures by Warren Buffett - from 1991
But what I did have was an intense interest and I was
willing, when I saw something I wanted to do, to do it. And if I couldn’t see something to do, to not do anything. By far, the most important quality is not how much IQ you’ve got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it.
I find this very useful when I write my annual report. I learn while I think when I write out. Some of the things I think I think, I find don't make any sense when I start trying to write them down and explain them to people. You ought to be able to explain why you're taking the job you are taking, why you're making the investment you're making, or whatever it may be. And if it can't stand applying pencil to paper, you'd better think it through some more.
I've never borrowed a significant amount of money in my life. Never. Never will. I've got no interest in it. The other reason is I never thought I would be way happier when I had 2X instead of X. You ought to have a good time all the time as you go along. If you say "I'm taking this job - I don't really like this job but in three years it will lead to this," forget it. Find one you like right now.
Back to Charlie Munger: The Psychology of Human Misjudgment
In other words, what you think may change what you do, but perhaps even more important, what you do will change what you think.
My favorite analogy I can't vouch for the accuracy of. I have this worthless friend I like to play bridge with, and he's a total intellectual amateur that lives o­n inherited money, but he told me o­nce something I really enjoyed hearing. He said, "Charlie," he say, "If you throw a frog into very hot water, the frog will jump out, but if you put the frog in room temperature water and just slowly heat the water up,
the frog will die there."
Well Feuerstein, [who] was a member of the Harvard Law Review, made an elementary psychological mistake. You want to persuade somebody, you really tell them why. And what did we learn in lesson o­ne? Incentives really matter? Vivid evidence really works? He should've told Gutfreund, "You're likely to ruin your life and disgrace your family and lose your money." And is Mozer worth this? I know both men. That would've worked. So Feuerstein flunked elementary psychology, this very sophisticated, brilliant lawyer. But don't you do that. It's not very hard to do, you know, just to remember that "Why?" is very important.

Last not least here is a link to the famous Shareholder Letters by Warren Buffett.


Another rather long but recent article by Charlie Munger about his view on academic economics: Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs
I don't think it is necessary to spend your life selling what you would never buy. Even thought it's legal, I don't think it's a good idea. But you shouldn't accept all my notions because you'll risk becoming unemployable.
Structured Products anyone?!
In this connection, one of the interesting things that I want to mention is that Max Planck, the great Nobel laureate who found Planck's Constant, tried once to do economics. He gave it up. Now why did Max Planck, one of the smartest people who ever lived, give up economics? The answer is, he said, "It's too hard. The best solution you can get is messy and uncertain." It didn't satisfy Planck's craving for order, and so he gave it up. And if Max Planck early on realized he was never going to get perfect order, I will confidently predict that all of the rest of you are going to have exactly the same result.

The Billion Dollar Consumer Credit

Larry Ellison's spending worries his accountant
1) Life Style -- annual $20m

2) Interest Accrual -- annual $75m

3) Villa in Japan -- $25m

4) New Yacht -- $194m -- over 3 yrs

5) America's Cup -- $80m -- over 3 yrs

6) UAD -- 12m over 3 yrs.

It's not clear what UAD refers to. Since this rough budget, Ellison has reportedly spent $200 million building a Japanese-style estate in Woodside, which includes a reproduction of a 17th-century Kyoto teahouse. He has also bought multiple properties in Malibu -- $180 million worth, by one report.
Larry Ellison's financial adviser, Philip Simon, dated May 3, 2002:
I'm worried, Larry. ... I know you view me as a pessimist. Maybe you're right, though I would disagree. Nonetheless, I think it's imperative that we start to budget and plan. New purchases should be kept to a minimum. We need to establish and execute on a diversification game plan, to eliminate (yes, eliminate) all debt and build up a significant, conservatively structured, liquid investment portfolio. If this means sacrificing 30% of your current holdings in Oracle, so be it. With stock options and Oracle's share repurchases, your ownership percentage has been increasing somewhat over the last year or two.

I do not want you to end up like Carl Karcher, Wang, Bernie Ebbers, and the countless others. Yes, Oracle's a different company; no debt, real cash earnings, clean accounting. But, when the pendulum swings the other way, it can overshoot. PE multiples are driven by market (or should I say, mob) psychology. There's no science or logic in the short or medium term.

I know you don't like to discuss this. I know this e-mail may/will depress you. However, I believe it's my job to address issues you'd prefer not to confront. You told me years ago that it's OK to raise the 'diversification issue' with you quarterly. Well, I'm doing so. View this as a call to arms.
Can you believe that Larry Ellison's private and company financials differ tremendiously? Hmm, quite interesting, as Oracle's second most important product is a financial accounting package.

Enterprise Value

Good explanation of Enterprise Value (EV) and what is the difference to Market Capitalization.

Enterprise Value - How much is a Business worth?
So, Enterprise Value is the sum of Market Capitalization + Net Debt + Minorities at market prices – Non Operational Assets.

NYSE Program Trading

Program Trading Averaged 67.4 Percent of NYSE Volume
Credit Suisse Securities (USA ) LLC. split its activity between its own accounts and those of its customers.

Program Trading Averaged 57.0 Percent of NYSE Volume
Of the five member firms reporting the most program trading activity on the NYSE, UBS Securities, LLC. executed most of its program trading as principal for its own account.

Program Trading Averaged 36.2 Percent of NYSE Volume
Of the five member firms reporting the most program trading activity on the NYSE, Morgan Stanley, UBS Warburg and Credit Suisse First Boston executed most of their program trading as principal for their own accounts.

So the only big banks doing proprietary (with their own money, in contrast to on the clients behalf) program trading at the NYSE seem to be UBS and Credit Suisse, and UBS seems to have pulled the switch as well.

Taking into account my experience from playing against bots in first person shooter games I can imagine that in short term trading it is next to impossible to compete with these programs. And that was 6-7 years ago. Just like in chess, the computer has lightning fast reaction times and makes no simple mistakes, so 99.99 % of humans loose against him. Same in Quake, if you could win against the computer, you were very good. You'd have to stay away from direct fight outs and exploit the predictability of the bot behavior and its limited learning ability.