Wednesday, 20 February 2019

4 Charlie Munger Quotes That Will Make You A Better Investor

4 Charlie Munger Quotes That Will Make You A Better Investor

4 Charlie Munger Quotes That Will Make You A Better Investor
Every investor not living under a rock knows Warren Buffett, Chairman and CEO of Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B), but they might not be as familiar with Charlie Munger, Buffett’s business partner and Vice-Chairman of Berkshire Hathaway. Munger is Buffett’s right-hand man, and has played an important role at Berkshire Hathaway for decades. Together, these two legendary investors built the firm into the investment conglomerate it is today.
Investors can learn a great deal from the wisdom Munger has gained over many years at the helm of Berkshire Hathaway. Here we take a look at some of his best quotes.

A Remarkable Investment Track Record

Munger’s investment performance — both before and during his tenure at Berkshire Hathaway — is nothing short of spectacular. Munger actually managed his own investment partnership before joining Buffett at Berkshire Hathaway, during which he managed annual returns of 19.8 percent from 1962 to 1975, compared to just 5 percent annually for the Dow Jones Industrial Average over the same period.
Munger and Buffett share a similar investment philosophy. In short, they buy great companies trading for discounts to their intrinsic value. The focus here is on high-quality businesses:
“A great business at a fair price is superior to a fair business at a great price.”
Often, the stock market irrationally discounts companies based on short-term factors, such as geopolitical events, rising interest rates and other macro-economic factors. Buffett and Munger try to buy these undervalued stocks when the market does not appreciate their long-term potential.
Great businesses, according to Munger, are those that have durable competitive advantages, and highly profitable business models. Munger particularly likes businesses that do not require a great deal of reinvestment in order to grow. In addition, investors should focus on investments that are not overly complicated. Sometimes, the best long-term businesses operate in industries that do not experience rapid change.
In addition, investors should carefully consider a company’s management team. Even great businesses can be brought to ruin by incompetent managers. Investors should favor companies that do not require geniuses in the executive suite to be run effectively.
Now that investors have selected great businesses with strong management teams, the next best thing they can do is be patient.

Give It Time

Investors tend to react impulsively. With the often-volatile swings of the stock market, it can be easy for investors to think they always need to respond to daily events by trading in and out of their positions. This is a huge mistake, and is one of the biggest reasons why many investors earn weak returns over time. Trading frequently generates trading commissions, and in some cases, tax liability. There is simply no way any investor can know the perfect time to buy and sell stocks.
Because of this, investors should train themselves to ignore the daily fluctuations of the stock market, and instead think for the long-term. Patience is difficult, especially when the market is declining, but is necessary to reap the benefits of long-term investing:
“The big money is not in the buying or the selling, but in the waiting.”
Being patient allows investors to benefit from the magic of compounding interest. Patience is not to be confused with complacency. High-quality businesses do not often trade for significant discounts to their intrinsic values, so when they do come around, investors should pounce. Munger was not a big proponent of diversification. Munger never saw the reason to buy additional stocks just for the sake of diversification, when the best ideas should get the bulk of an investor’s attention:
“Our experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognized as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
Munger’s apathy toward diversification runs contrary to a cornerstone principle of many investors. But given his remarkable investment performance at his own partnership, and then at Berkshire, it is hard to argue with his methodology.

Never Stop Learning

One of the core principles of Munger’s investing philosophy is to learn as much as possible. This is one of the best ways for investors to get better. Munger’s pursuit of knowledge is not necessarily to become more intelligent. It is not always the case that investors with the highest intelligence perform best in the market. Instead, Munger preached wisdom, which can mean different things to different people. To Munger, wisdom is more than simply memorizing facts:
“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience — both vicarious and direct — on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You’ve got to hang experience on a latticework of models in your head.”
The takeaway for investors is that it is entirely possible to do well in the stock market, and you don’t have to be an investment banker or possess an MBA. Investors can generate strong returns over time, simply by following a few simple rules in the investment selection process. If investors buy high-quality businesses trading for less than their intrinsic value, with strong management teams, and are patient to hold for long periods of time, their performance can measurably improve.

Warren Buffett and Charlie Munger discuss intrinsic value at the 1997 Berkshire Hathaway annual meeting.

Warren Buffett and Charlie Munger discuss intrinsic value at the 1997 Berkshire Hathaway annual meeting.

@7.00 Charlie Munger advocates the concept of opportunity cost.

@8.30 Compare with Coca Cola. Compare to Gillette. Is it better than buying Coca Cola or Gillette stock? Always compare to your own preexisting stock. Maybe better off buying more of the preexisting stocks.

@9.40 Concept of intrinsic value was easier in the past. Based on liquidation value. Based on asset value. You can see the discount from intrinsic value. Now, you need to get into Warren's type of thinking on valuation.

@12.00 Part of the process of calculating intrinsic value is the ability to: Walk away from anything that doesn't work? Walk away from anything you cannot understand?

Sunday, 17 February 2019

Buffett doubles down on banks as Berkshire trims Apple stake

15 Feb 2019

NEW YORK (Feb 15): Warren Buffett’s Berkshire Hathaway Inc took advantage of a plunge in bank stocks to pile even further into his bet on financials, while trimming a giant stake in Apple Inc.

Berkshire spent the last half of the year snapping up more shares of banks and insurers, moves that made the company a major shareholder in four of the five largest US banks. The Omaha, Nebraska-based conglomerate boosted its stake in JPMorgan Chase & Co and Bank of America Corp in the last three months of the year.

Key Insights

Berkshire reduced its Apple stake by 1% in a period that marked its first holiday quarter sales decline in 18 years and saw shares plunge 30% . It’s still the biggest holding in Buffett’s portfolio, and the stock has rebounded about 8% this year.

Buffett didn’t enjoy his time investing in International Business Machines Corp, but he may have made quite a haul on its latest purchase.

Berkshire owned 4.2 million shares of Red Hat Inc at year-end, though it’s unclear if they were bought before IBM’s purchase of the company sent the stock up 45% on Oct 29.

Berkshire also boosted its stakes in regional lenders, including PNC Financial Services Group Inc and US Bancorp. That could be a bet on consolidation in the industry, as this month’s announced merger between SunTrust Banks Inc and BB&T Corp has led to speculation that more deals are coming.

Market Reaction

Oracle shares dropped 1.3% at 4:56pm in New York, after the end of regular US trading. Apple was down as well, losing about 0.5%.

Get More

Buffett had long praised JPMorgan’s Jamie Dimon even as Berkshire Hathaway didn’t invest in the stock. Berkshire eventually plowed in when the timing aligned, according to Vice Chairman Charles Munger. “As investment has gotten harder and the banks have done better and better, we’ve finally reached a crossing point where he was willing to act,” Munger said Thursday in an interview after the Daily Journal Corp meeting in Los Angeles.

Berkshire’s dalliance with Oracle Corp was short-lived. After taking a US$2.1 billion stake in the software firm in the third quarter, Berkshire had sold out by year-end. Buffett has typically taken a more cautious approach to technology companies, given his lack of familiarity with the space.
Buffett likes to take advantage of what he views as fear in the markets, and that certainly hit banks last quarter. The S&P 500 Financials Index dropped 14% in the fourth quarter, the worst period in more than seven years.

- Bloomberg

EPF declares 6.15% for conventional savings, 5.9% for shariah

KUALA LUMPUR (Bernama): The Employees Provident Fund (EPF) has declared a dividend rate of 6.15% for Conventional Savings 2018, with payout amounting to RM43bil and 5.9% for Shariah Savings 2018, with a payout amounting to RM4.32bil.

In total, the payout for 2018 amounts to RM47.32bil, a marginal decrease of 1.7 per cent from 2017.

"With a real dividend of 3.93 per cent for Simpanan Konvensional and 3.68% for Simpanan Shariah on a rolling three-year basis respectively, the EPF has exceeded its mandate of delivering a dividend of at least 2.5% on a yearly basis and at least 2.0% real dividend on a rolling three-year basis," the EPF said in a statement on Saturday (Feb 16).

"We are very grateful and pleased that we have been able to consistently meet our two strategic investment targets. Beyond the anticipated nominal dividends, more importantly is that we consistently deliver above-inflation returns so that we are able to preserve and enhance the value of our members' savings over the long term and help them achieve a better retirement future," its chairman, Tan Sri Samsudin Osman said.

"Nonetheless, we remained focused on our long-term strategy and our portfolio diversification has provided resiliency and delivered commendable returns to our members," he said.

Gross investment income for 2018 was RM50.88bil, out of which a total of RM4.62 billion was attributed to Shariah Savings, proportionate to its share of total Shariah assets, while RM46.26bil was attributed to Conventional Savings.

The lower income for EPF's Shariah portfolio in 2018 was due to the underperformance of the telecommunications, construction and oil and gas sectors in the domestic portfolio.

The dividend payout for each account was derived from total gross realised income for the year after deducting the net impairment on financial assets, unrealised gains or losses from intercompany transactions, investment expenses, operating expenditures, statutory charges, as well as dividend on withdrawals.

The payout amount required for each 1.0% of the dividend in 2018 was RM7.72bil, which is higher compared with RM7.02bil in 2017.

In accordance with the implementation of the Malaysian Financial Reporting Standards 9 (MFRS 9), which came into effect beginning Jan 1, 2018, capital gains on disposal of equity amounting to RM18.21bil for 2018 will flow directly to Retained Earnings from the Statement of Other Comprehensive Income, instead of the Statement of Profit and Loss as under the previous MFRS 139.

In addition, under MFRS 9, the EPF will no longer recognise any impairment on its listed equity holdings, he added. - Bernama


Saturday, 2 February 2019

To avoid falling into a value trap, an investor must always keep asking, "why"?

Once you find an undervalued security trading at a substantial discount to your estimate of intrinsic value, your job is not over. 

"Why is the stock trading at this level and what catalysts will lead to its eventual reversal?" 

If you cannot answer this question, you should not be investing in the stock. 

This is second level thinking (Howard Marks) and it will keep you from falling into a value trap. 

An investor must always keep asking, "why"? 

  • Why is this occurring? 
  • What is the overarching reasoning or justification behind this particular scenario or occurrence? 

When you have those answers, you have to ascertain why the other side may (or may not) be wrong. 

  • Is there are mispricing here? 
  • There was a major disconnect between perception and reality - between the stock price and the intrinsic value of the business. Why? 

There can be from any number of reasons. Usually one or the other side is wrong from psychological or analytical misjudgements (sometimes both).

Friday, 1 February 2019

This is opportunity cost at its finest action.


What do you do if there are multiple bargains at the same time?

How do you distinguish which ones offer better value than the other ones?

One stock is trading at 40% below its intrinsic value and another at 70% below its intrinsic value.


Note: The best absolute value may not always be your best investment choice.

As a focused value investors, we want no more than a few investments in the portfolio at any one time.

As the number of investments in the portfolio build up, every decision make will be based on whether it is a better investment in comparison to any of the current holdings.

This is opportunity cost at its finest action.