Yet Another Munger Masterclass: The 2003 Wesco Financial AGM
"Watchful waiting is painful if you’re action prone," said Charlie Munger. "Fortunately, I don’t believe in being too action prone in life."
Warren Buffett and Charlie Munger made frequent appearances in the pages of Outstanding Investor Digest. I’m especially thankful for that because the now-defunct newsletter preserved some of their lesser-known talks and speeches that would otherwise now be lost to time.
Back in 2003, OID published extensive excerpts from Charlie’s solo Q&A session at that year’s Wesco annual shareholders meeting. And, as always, it featured Charlie at his unfiltered best.
“We highly recommend a careful reading (and re-reading, etc.) of anything and everything [Charlie] has to say,” editor Henry Emerson wrote as way of introduction. “Ignore Munger at your own peril.”
In Charlie’s opening remarks, he touched on what made these meetings so special. They were a chance for kindred spirits — often out of step with the frenetic and avaricious financial world around them — to gather together and learn at the feet of one of the money game’s undoubted masters.
“If you’re Warren Buffett or Charlie Munger,” he said, “you’re a little lonely in one sense — because practically the whole of academia in business schools and in economics departments believe a lot of things that we don’t believe at all. And, with respect to a lot of stuff that we believe, they don’t know quite what to make of it.”
Below, I’ve pulled together some of my favorite quotes and insights from the 2003 Wesco AGM that highlight both Charlie’s contrarian streak and timeless wisdom. And, please, stick around to the end for a special surprise!
(1) “There’s an obvious doctrine in life that all individuals — and all companies, for that matter — have to make decisions based on their own personal opportunity cost. That’s the way wise people make decisions … Most people take into account opportunities in important decisions in life — what job to take, what school to go to, etc. Investments are no different.”
Charlie explained that every new investment opportunity should be measured against the most attractive business that you already own — because, after all, you could just buy more of that. And, as you uncover and accumulate better and better businesses over the years, that naturally raises your opportunity cost bar all the higher.
Back when Warren Buffett was running his partnership, the price of American Express cratered due to the salad oil scandal. With that as his opportunity cost bar, he discarded other ideas that came up short and plowed more and more of his partners’ money into the credit card company — eventually reaching a staggering 40% of assets.
(2) “Watchful waiting is painful if you’re action prone. Fortunately, I don’t believe in being too action prone in life.”
(3) “It’s very easy to shrink from anything unpleasant and just conclude, ‘We don’t really need it.’ And I at least kind of admire the willingness to suffer now in the hope of making the world better. I’m skeptical of the general approach that never finds it necessary to suffer now to make the world better later. The general approach of figuring out — of actually seeking — ways to suffer now to make the world better later… Well, there’s a lot to be said for it. That’s what investment is. You don’t spend the money — even though there are a lot of lovely things you can buy with it. You may even sacrifice something because you’re trying to do better later.”
(4) “If you don’t work hard at trying to remain rational and you’re constantly floating along caring terribly about what other people think, you’re almost sure to be carried to folly by the folly of the crowd. And [you can be sure that] there will always be folly of the crowd.”
(5) “Warren often tells business school students that if he gave each of them a card with 20 punches and told him he was going to be allowed to make 20 investments in his whole lifetime, so when he’d made the last investment of the 20, he’d blown any chance to make an additional investment. On average, with those rules, he would die a lot richer than he would otherwise. Warren wasn’t kidding when he said it. And I’m not kidding when I repeat it. I think it is literally true that you would do better by making only 20 investment decisions in a lifetime — assuming that you’re a smart, disciplined person — because you would really think very hard about each one and you’d be loading up fairly heavily on the ones that you knew the most about. And, therefore, you would do better.”
This call for restraint and conviction might seem out of step in a world hooked on constant action, but Charlie had a room full of proof that it works. The Wesco AGM was full of people who had basically lived out Buffett’s advice by investing heavily in Berkshire (and not much else). The “20-punch card” rule not only curbs the temptation to overtrade — with all of the accompanying frictional costs — but also encourages investors to swing big when a truly exceptional opportunity comes along. Or, as Charlie might put it, to make a big trip to the pie counter.
(6) “Our theory is that getting a real chance to invest at rates way better than the standard return is not all that easy. The minute your ambitions get up to doing five percentage points a year — or something like that — better than the indexes over a long period, you’re talking about a very rarefied achievement. And the only way we know how to do that is to make relatively few decisions and make them pretty aggressively when we do make them.”
(7) “The central idea of a margin of safety when you’re making investments will never be obsolete. And the idea of making the market your servant and not your instructor will never be obsolete, either. Those two basic ideas of Ben Graham are basically reality cubed. The idea of being objective and dispassionate, which was also in Graham, that will never be obsolete. So Graham had a lot of ideas that were wonderful.”
Charlie rarely spoke about Ben Graham in the same reverential way that Buffett does. But, he added, there’s a very good reason for that. “Warren got rich from a standing start near zero by following in the footsteps of Graham, so Warren has a special reason for engaging in Graham hero worship. I liked Graham. He always amused and interested me — and I recognized that he had a formidable mind.”
(8) “I’ve picked up Ben Graham’s main ideas and discarded the practices he used that don’t suit me. I don’t want to go around now buying stocks at a big discount from liquidating value, of businesses that are mediocre or worse, run by people I don’t like, and sit there saying no matter how horrible it is to watch, it will bounce by 25%. I don’t think that approach would work very well given our size of capital. So it’s natural to follow my temperamental attraction toward the better businesses.”
(9) “In my whole life, I’ve known no wise person over a broad subject matter area who didn’t read all the time. None. Zero. Now, I know all kinds of shrewd people who by staying within a narrow area can do very well without reading. But investment is a broad area. If you think you’re going to be good at it and not read all the time, you have a different idea than I do.”
What you read depends largely on personal taste and interest — Charlie called business publications like Forbes, Fortune, and the Wall Street Journal “very useful to investors” — but you’ve got to do a lot of it. “You’d be amazed at how much Warren reads,” he laughed. “You’d be amazed at how much I read. If we’re any example of what it takes, you may not want to go there.”
(10) “It’s amazing how difficult these very intelligent people find it ever to change their minds no matter how wrong they are.”
(11) “Suppose any of you knew of a wonderful thing right now that you were overwhelmingly confident — and correctly so — would produce about 12% per annum compounded as far ahead as you could see. If you actually had that available — and, by going into it, you were forfeiting all opportunities to make money faster — there are a lot of you who wouldn’t like that. And, certainly, some of you have actually done better. But a lot of you would think, ‘What the hell do I care if somebody else makes money faster?’ There’s always going to be somebody who’s making money faster, running the mile faster, or what have you. Once you get something that works fine for you in your life, the idea of caring terribly that somebody else is making money faster strikes me as insane.”
Chasing the investment return rabbit, as Charlie called it, is a clear sign that we’re caught in envy’s grasp. “[Envy] is a really stupid sin because it’s one you can never possibly have any fun at,” he said. “It’s a lot of pain and no fun. Why would you want to get on that trolley?”
(12) “A lot of people rise to power in big corporate bureaucracies who are very nice people and good at doing things in a fairly limited way, but whose general powers of capital allocation are inadequate. And, of course, those who are advising them — the investment bankers, the consultants, and so forth — will mislead you 95% of the time.”
(13) “The game we’re playing absolutely requires that you be present and willing to act very rapidly when the opportunities come. Most people won’t operate that way. But we will because we have this idea that desirable opportunities frequently are very ephemeral. Really good investment opportunities are not going to come along too often and are not going to last too long when they come. You’ve got to prepare yourself to act during the brief period — and that takes a prepared mind.”
Buffett made much the same point at this year’s annual meeting. “There are times when you have to act fast,” he said. “In fact, we’ve made a great deal of money because we’re willing to act faster than anybody around.”
(14) “If you could actually sit down and talk to a key manager one-on-one for an hour or so — and if you’re a very smart person — that could be a significant plus. On the other hand, I’m enough of a cynic to believe an intelligent person might be helped 60% of the time and the other 40% of the time he might be misled. So, on balance, whether it’s worth the time, I can’t tell you.”
Charlie then recounted the time that a meeting with an unnamed manager caused Berkshire to run for the exits. “Years ago,” he said, “we were interested in a particular stock and Warren went and talked to the CEO for two or three hours at lunch — and he thought he was the biggest horse’s ass he’d ever seen. So we sold every share. Well, the thing compounded at 15% per annum for about 20 years thereafter. It finally got a big denouement [and dropped in price], but the idea that meeting the management will always help you… Well, that always amused me — to watch that stock galloping upward.” 🤣
(15) “No private individual would feel horribly poor or threatened if he had his money scattered over three wonderful investments — if they were good enough. Suppose, for example, you were a real estate investor with a third interest in by far the best shopping center in town, a third interest in the best office building, and a third interest in some huge apartment complex which was in the right place and managed by wonderful people. Would you feel like a poor, threatened real estate investor? The answer is no, you wouldn’t. But the minute you get into securities, they try and make you feel inadequate if you don’t have 100 names — some of which you can’t pronounce. To some extent, I think the medicine men are just asking you to pay their fees — because I don’t think it’s necessary.”
(16) “Let’s compare pension fund consulting with bass fishing. There are two different ways to make money out of bass fishing: One, you can go to bass fishing tournaments and catch more bass than other people and get prizes. Or, two, you can go into the business of selling tackle and advice to people who try and catch bass. Those are two different skill sets. And the people who are making all the money out of selling the fishing tackle by and large wouldn’t be very good at catching bass.”
Likewise, consultants talk a better game — offering advice and services to those seeking better returns — than they actually play themselves. Warren and Charlie, on the other hand, are in it to put points on the board and win tournaments.
If you’ve read this far — or just scrolled down here right away — I’ve digitized this issue of Outstanding Investor Digest so that everyone can download a copy. It’s not the entire issue — just the Berkshire and Wesco sections — but it’s still well worth a read and a place in your PDF collection. Enjoy!
Wonderful! Like having Charlie in the room. There are great minds and great performers of the past who are alive upon the page or the screen: gone in body but not in spirit. Please keep mining the world for more Charlie!
Thank you, Kevin! The older I get, the more I appreciate the worldly wisdom of Charlie Munger!