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Charlie Munger's FT Interview: The Perfect Start to Berkshire Hathaway's Big Week
"There's a lot of agony out there."
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Last week, I was a tiny bit annoyed with the Financial Times. This (typically) gold-standard financial media outlet dropped the ball in its reporting on Microsoft’s $68.7 billion acquisition of Activision Blizzard, stating that the Competition & Markets Authority was “expected to support” the deal just days before that very same British regulator officially blocked it.
Alas, such slip-ups happen to the best of us from time to time.
On Sunday morning, though, FT got back into my good books in a big way — with an exclusive Charlie Munger interview ahead of Berkshire Hathaway’s much-anticipated annual shareholder meeting.
During this sit-down “on the veranda of [Munger’s] home” in Los Angeles, the Berkshire vice chairman weighs in on a number of hot topics — including the banking crisis, commercial property loans, and what he hopes his legacy will be.
And here I thought it would be a quiet week on the Berkshire front before all of the festivities kick off in Omaha this weekend…
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THE BANKING CRISIS: Just as everything seemed to be calming down after the whole Silicon Valley Bank mess, last week’s collapse of First Republic Bank plunged the beleaguered banking sector right back into crisis.
(Time will tell whether or not JPMorgan Chase’s takeover of First Republic is anything more than a temporary respite from industry-wide anxiety.)
“It’s not nearly as bad as it was in 2008,” Munger says, “but trouble happens to banking just like trouble happens everywhere else. In the good times, you get into bad habits … When bad times come, they lose too much.”
“Berkshire has made some bank investments that worked out very well for us. We’ve had some disappointments in banks, too. It’s not that damned easy to run a bank intelligently. There are a lot of temptations to do the wrong thing.”
Or, as Warren Buffett said last month: “When the tide goes out, you learn who’s been swimming naked. And, you know, we actually ran into a nudist colony here.”
Remember, Munger keeps very close tabs on the banking industry. Over 80% of the Daily Journal’s (U.S.-based) stock portfolio is invested in Bank of America, Wells Fargo, and U.S. Bancorp. And, while Munger hardly ever sells anything at DJCO, he hinted in February that tax considerations — and not unwavering confidence in these august institutions — were one of the reasons for his inactivity.
I think it’s safe to say that Buffett and Munger will field a question or two on this subject at the upcoming annual meeting.
COMMERCIAL PROPERTY LOANS: In the aftermath of the SVB meltdown, many observers expected Berkshire Hathaway to ride to the rescue of beaten-down regional banks with a few of its trademark financing deals. Warren Buffett used this strategy to great effect with Goldman Sachs (2008) and Bank of America (2011), extracting high-yield preferred shares and warrants for future common stock purchases from both.
But, at least so far, Berkshire has remained on the sidelines during this current crisis.
Why is that?
According to FT, Berkshire’s “reticence stems in part from lurking risks in banks’ vast portfolios of commercial property loans”. It’s not entirely clear if that is the reporter’s personal take on the matter or if Charlie Munger directly said something to that effect.
Either way, though, Munger sounds distinctly unimpressed with the state of commercial property loans.
“A lot of real estate isn’t so good any more,” Munger says. “We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.”
“Every bank in the country is way tighter on real estate loans today than they were six months ago. They all seem [to be] too much trouble.”
SEIZE THE DAY: Charlie Munger is a man who has his fingers in many different pies. From law to investing, from psychology to architecture, his disparate interests have combined to form a singular intellect of immense breadth and depth.
Or, in other words, Munger is crazy smart.
But even someone with the wide-ranging intellectual capacity of Charlie Munger only gets a few bites at the apple during a lifetime.
In fact, he told FT that the vast majority of his accumulated wealth has come from just four investments: Berkshire Hathaway (of course), Costco, Li Lu’s Himalaya Capital, and Afton Properties (a property management company operating in California and New Jersey).
“It’s the nature of things that a very intelligent man working hard maybe gets three, four, five really good long-term opportunities of buying good companies at a cheap price,” Munger says. “It happens rarely.”
When one of these infrequent opportunities pops up, don’t get caught sucking your thumb. Or, to paraphrase the Oracle, grab a bucket — not a thimble — when it’s raining gold.
U-S-A! U-S-A!: Warren Buffett famously warned skeptics to “never bet against America”. On numerous occasions, he has eloquently spoken about The American Tailwind at all of our backs and how Berkshire Hathaway’s immense success can largely be credited to America’s economic system.
Charlie Munger’s glasses might be slightly less rose-colored, but he largely agrees with his partner’s outlook. “I do not think that we can take it as a given that American democracy will prosper and flourish forever,” Munger says, “but I think we’ll stumble through pretty well for quite a while yet.”
(That’s surprisingly high praise from the not-easily-impressed Munger.)
But he does worry that, with higher interest rates and increased competition, the road ahead may be rougher than the one he traveled. “[Warren and I] were a creature of a particular time and a perfect set of opportunities,” Munger admits.
“It’s gotten very tough to have anything like the returns that were obtained in the past. [At] the exact time that the game is getting tougher, we’ve got more and more people trying to play it.”
Buckle up. We might be in for a bumpy ride.
LEAVING A LEGACY: Charlie Munger has lived his life looking forward, not back. Searching out the next mountain to climb, rather than reliving past glories or stewing over missed opportunities.
Nevertheless, at age 99, any one of us would be thinking long and hard about what kind of legacy our life and actions will leave behind.
And, not surprisingly, Munger’s wish is that others will follow in his footsteps by embracing rationality and eschewing lesser behaviors.
“I would like my legacy to be a more relentless determination to develop and use what I call an uncommon sense,” he tells FT.
He might not get the same level of media attention as his loquacious business partner, but Charlie Munger is every bit the teacher that Warren Buffett is.
And it is interviews like this one, alongside years of collected wisdom from Daily Journal and Berkshire Hathaway annual meetings, that will ensure his “uncommon sense” lives on long after he’s gone.