Charlie Munger Caltech 2020 Notes

Yesterday, December 14th 2020, Charlie Munger did a Zoom call with Caltech. I think the last time he formally spoke publicly might have been at the Daily Journal AGM back in February since he didn’t Berkshire’s AGM.

Caltech decided to celebrate 2020 Distinguished Alumnus Charles T. Munger. Munger attended Caltech in 1944 where he studied meteorology. In a year that mixed dramatic social and worklife changes with record-breaking trends in the S&P and the Dow, has there ever been a better time to hear Munger’s perspective? Caltech had a conversation for about an hour.

I didn’t post the video yet. Caltech was supposed to publish it on its Youtube channel but it’s not there at the moment. You can find copies on Youtube but the quality is subpar. If the official Caltech copy ever surface, I will add it.

The notes below are a combination of mine, Tren Griffin, and Nick Henderson. Thank you.


  • Munger sees virus impact dwindling in about a year as the vaccines are widely distributed. “They’ll spread these vaccines over the world so fast, it’ll make your head spin.” Munger actually spoke just hours after some of the first vaccine shots were delivered in the U.S. 
  • Retailers: are under heightened pressure during the pandemic, were already in a tough situation because of the growth of e-commerce. “Certainly it’s been a very difficult place to make money because of what the internet has done,”
  • Future market returns: Munger expects equity-market returns to be lower in the next 10 years compared with the previous decade. “The frenzy is so great and the systems of management, the reward systems, are so foolish,”
  • QE and fiscal deficits: Munger urged caution with the levels of quantitative easing and large government deficits seen in recent years. “We’re in very uncharted waters,”
  • Warning: “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 long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.”
  • Key ingredients for successful investing: “You have to know a lot, but partly it’s temperament, partly it’s deferred gratification, you gotta be willing to wait. 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 about how much you know and what you don’t know. You have to know the edge of your own competency, and a lot of brilliant people think they’re way smarter than they are. And of course that’s dangerous and causes trouble”
  • Charlie has said many times that investing is harder now. He said that again today. When he started out there was lots more stupidity. If investing was as easy as following a formula there would be lots more billionaires who made their fortune investing than there are today.
  • Never stop learning.
  • Try and benefit from a tail wind. People from Harvard and Stanford don’t go to work at Costco, they should think about it, it’s a rising tide (or at least it was) and your competition is not going to be that strong (inside of Costco).
  • On business getting “clobbered” over time: “Over the long term, the companies of America behave more like biology than they do anything else. In biology, all of the individuals die, so do all of the species. It’s just a question of time”
  • Technology: “Technology is a killer as well as an opportunity.”
  • VC tech firm: “The most remarkable investment firm in America is probably Sequoia. That venture-capital firm absolutely fanatically stays right on the cutting edge of modern technology. They have made more money than anybody and they have the best investment record of anybody. It’s perfectly amazing what they have done”
  • Apple: “Think about what Apple is worth compared to John D Rockefeller’s empire. It’s been the most dramatic thing that’s almost ever happened in the entire world history of finance”
  • China: “Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen.”

How to Build a Startup

This is the approach I would try if I was starting an AI software startup from scratch. It’s more of a strategy than a business plan. It doesn’t have to be complicated (easier said than done). Here’s the template. This is the approach I would try if I was starting an AI software startup from scratch. It’s more of a strategy than a business plan. It doesn’t have to be complicated.

It’s easier said than done but it’s easier to play McKinsey and making real decisions. Here’s the template.


Phase 1 – Have a workable product

Have something to show. A prototype. Everybody has good ideas and good intentions (e.g. peace on earth). Executing is the important part. You need to deliver something to demonstrate that the product could  be applied successfully to solve a complex problem (or save money, or to deliver substantial economic value in a short period of time).

“AI-X: Our application address a wide range of predictive analytics use cases. The app is designed to integrate and process highly dynamic data sets from networks (e.g. sensors, satellites, enterprises), and enable advanced machine learning capabilities.”

How do you get started? Do a trial. It’s like those sample stands at Costco or when you take a car out for a test drive. Trial projects typically consist of several phases including project kickoff, design, data integration, configuration, validation and final demonstration.

Not sure where to start? Study your potential client/customer. You have a deep understanding of your users’ needs. Successful startups understand some group of users and can make what they want. Make something people want. It genuinely need to delight its customers. Otherwise it will never get off the ground. In a market economy, it’s hard to make something people want that they don’t already have. That’s the great thing about market economies. If other people both knew about this need and were able to satisfy it, they already would be, and there would be no room for your startup. So you need to address either a new need (possible uncertain need), or a new way to satisfy one. Can’t find a need? Look for problems and solve them.

Don’t try to do too much. You lose focus and important resources. This sells well and attracts attention. Do one thing and do it very well. People are attracted to success and VCs will start replying to emails.

Stripes, Shopify, Square all started with a single product addressing a problem, then expanded to solve other business needs.

Phase 2 – Customer concentration

Get a few high profile clients. You want to focus on “lighthouse” customers. They are a trophy you can display. If bank X likes us, then that’s a seal of approval. Try to get clients from a few different industries (banking, energy, industrial, military, government etc..). Get them as partners if possible. If you are trying to save the planet, it will look good for them in their glossy ESG report. It also gives your product credibility. Having a solid partner sends a signal to the market “hey, this is important, pay attention.”

Phase 3 – Scaling the business

After having a few juggernauts clients and establishing your credibility, start going after middle-sized companies. The business is not a startup anymore. It’s on the path to be structurally profitable and cash flow positive. If you are doing financing round, by this time you should be a hot ticket.

Virtuous Circle – How to Make Flying Cars

Ever heard of the virtuous circle in equity financing? A new startup, let’s call it the Wright Motors Company, has big big dreams. They want to make personal electric flying vehicles (EFVs). Wright Motors believes that in the future EFVs will replace ground vehicles, an old technology. To accomplish these dreams Wright Motors needs a  lot of capital. It will need billions of dollars. 

To raise money Wright Motors decides to sell shares. EFVs chances of success are low and it’s a very risky investment. Wright Motors makes big promises and gets investors super excited. Wright Motors claims that EFVs will unclog our roads, free up crucial real estate taken by parking lots, revitalize the economy, create smart green jobs and provide us more with the commodity we need the most; time. No more dirty polluting clogged gridlocks! If you want a piece of the future, the opportunity is now. Once EFVs gets the attention of the mainstream media, the stocks will be expensive and it will be too late. In five to ten years, you want to look in the mirror and say “look at the wise decision I made. My capital has contributed to a better world and my family is better off.” You want a piece of the American dream don’t you? You don’t want to be left out. You will be the coolest person at barbecues. Electric flying cars beat talking about Treasuries.

Investors are excited and Wright Motors raises a lot of money through selling shares. Now the hard work begins. Wright Motors needs a product, engineers, scientists, smart workers, parts and equipment, and a massive factory. Once it has accomplished these things, it will need a sales team, marketing, accountants, lawyers, customer service, and a service team. And more money.

After all success is never a straight line. But there’s a lot of enthusiasm surrounding the company. The media is hooked on the story and Wall Street is always looking for the next flavor of the month. Wright Motors taps Wall Street and manages to raise billions. Banks pocket millions in fees. And rather than punish the company for diluting its shareholders, the market sends the stock higher. It’s a great story after all.

Finally, Wright Motors announces that they have a working EFV prototype. The stock surge on the announcement and Wright Motor issues more stocks. The money raised goes toward building the factory and production should start soon. The stock is up on the good news and more shares are issued. 

For a company with no revenues for the foreseeable future the stock looks expensive. But valuation is based on the future cash flow, or future projections in the case of Wright Motors. So Wright Motors makes the story more compelling. The better the story the more excited the investors, the higher the stock price. You are investing in a piece of the future after all. 

Wright Motors burns all its cash and needs more money. They follow the script which is the higher the stock price the more money I can raise. Wright Motors announces they will enter the China market. China! That’s a billion plus customers! Now the stock is in complete frenzy and Wall Street goes to work.

A silicon valley technology giant is interested in acquiring Wright Motors and makes an offer. Wright Motors rejects the offer on the basis that the price is too low and opportunistic. After all it doesn’t take into consideration the potential ride-hail service and a future robotaxi launch. The stock surge some more and more shares are issued to make the vision happen.

The latest offering boosted Wright Motors’ market capitalization to over $250 billion, ahead of traditional plane manufacturer Boeing. Wright Motors is now among the world’s most valuable manufacturers in the world. The ascent of Wright Motors’ stock helps shore up the balance sheet and fund endless aspirations. Everybody wants a piece of the action. Wright Motors is now teasing another new factory and governments from all over the world are competing for the prize. Some are offering to foot the bill in addition to massive tax breaks. Here comes the kicker: This new factory will manufacture a flying truck! It will revolutionize the way we work hard!

Wright Motors follows the script and lets the virtuous circle roll! As long as investors are believing in the vision, the capital market will be generous. Excitement drives the stock price up, a higher stock price raises more money, which drives production, which drives a higher stock price, which raises more money. 

Rinse, repeat.

Capital Allocation – How to think about excess cash?

This is a snap shot taken from Quality Shareholders by Lawrence Cunningham. The book elaborates on the actions management can take to attract high quality shareholders. These are the shareholders you want. They load up and stick around.

There is a section in the book on capital allocation. Capital allocation is most important decision management has to make. A lot has been written on the subject. Maybe I will write a post on the subject soon.

I like the figure above. I’m visual in nature. The framework highlights the capital allocation decision making process.

A business generates excess cash. What action you take with excess cash will often determine the future returns of the business.

  1. Do you re-invest in the business?
  2. Do you pay down debt?
  3. Do you repurchase shares?
  4. Do you distribute a dividend?
  5. Do you make an acquisition?

Making the right decisions is not always straightforward. But having a structure framework in place can guide management towards better decision making. And better decision making can led to superior returns.

The Big Shift: The Future of Renewable Energy

Covid-19 is the current global crisis taking center stage and we will prevail. However there is another global crisis that has been decades in the making and that is climate change. Climate change is one of the world’s biggest, if not the biggest problem that we are facing. And it’s coming real soon to a theater near you. Climate change is hard to quantify and with so many variables it’s quasi impossible to predict any events. However we don’t need another study to remind us the “once in a century fire” is now the “once a multiple times a year fire”. The “fire season” is now a permanent part of the calendar. Climate change impacts everything. From the food we have on our plate every day, the air we breathe, our quality of life, and our national security. It’s a generational challenge with no quick fix.

On a more positive note we are closer to responding effectively to it. This post is about the notion that the oil era is winding down and that renewable energy would soak up the bulk of the entire energy industry’s investment dollars. The trend to move away from fossil fuels is real. And it’s renewable energy that’s taking shares of the pie. The global shift to renewable energy is a big step in the fight against climate change. Renewables are a form of “disruption” and I apologized for using a word that has been so overused.

Producing clean energy is not a novel topic. Thanks to innovation we are at a turning point. The technology has improved and cost has fallen. Innovation solves problems. Economics is central. Great innovations see their cost decline over time, creating real demand. The cost to produce renewable energy has fallen dramatically in recent years, to the point where it has become attractive next to fossil-fuel generating assets, particularly coal and oil. According to Lazard, the costs of solar panels and batteries have dropped by more than 89% in the past decade. Solar is substantially cheaper than it was even five years ago. The wind and solar power in Arizona that Fortis generates now costs less than 3 U.S. cents per kilowatt hour.

Continue reading “The Big Shift: The Future of Renewable Energy”

The Big Four

Here’s my post on the big four U.S. banks: JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America. I go over third quarter results and what’s happen for the big banks.

Reposted from Seeking Alpha. The full article is available here.

Preview:


The Big Four

Summary

  • The big banks are hated. The negative sentiment creates an good entry point.
  • Once dividends and buyback restrictions are lifted, the space could attract more investors.
  • Q3 numbers suggest that banks are well-positioned to operate in an uncertain environment.
  • If the economy improves and the banks can release some of the reserve set aside.

This is a brief article on the four main big U.S. banks and its recent results. Earnings season has come and gone for America’s biggest banks. The results were better than expected but the sentiment is still negative. There’s no love for banks and to be fair they are hard to love. The combination of ultra-low rates, the pandemic, a recession, credit issues, the election, and regulations is not the cocktail that attracts investors. The Feds has also announced that it was extending restrictions on share repurchases and dividends for the largest banks—those with more than $100 billion in assets—for at least one more quarter. Buybacks historically accounted for roughly 70% of the banks’ capital return to shareholders.

The shares of Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) fell after earning release. 2020 hasn’t been a good year for bank investments. The KBW Bank index (BKX) is down 30% year-to-date. To summarize, earnings have surprised to the upside as robust trading activity helped offset lower net-income margins, and profits weren’t crimped by having to add billions to reserves to protect against bad loans. But the problem with banks is often what you don’t see. Trust is important. Insurance companies and banks are often considered black boxes. You don’t know with certainty if you can trust the balance sheet. Accounting and disclosures are opaque. Deutsche Bank (DB) trades at a paltry 0.3 times book value. Accounting can conceal more than it reveals about economic reality. Do bank’s financial statements provide a meaningful clue about its risks?

Banks are integral to how our system functions. Bank results are akin to taking the pulse of the economy. You get a diagnosis on how things are doing. Without getting deeply technical on how a bank functions, they are one of the organs that decide how much money circulates in the economy. When consumers pay down loans, that money gets recycled into new loans. A healthy bank system is core to a healthy economy. Look at Europe. The old continent desperately needs its banks to function better. Despite its flaws, I fundamentally believe the U.S. banking system is the best in the world. They are excellent at their primary function of allocating capital to the most promising opportunities which leads to an overall increase in the standard of living.

Continue reading “The Big Four”

Low Interest Rates and Risk Taking

There’s an issue with loose lending standards. There seems to be a pattern. Excessive borrowing and risk taking is encouraged. Then something somewhere blows up and everybody flees and the Federal Reserve has to step in and bail out that market. It happened in the 90s, the 2000s, and now with the pandemic. And yet the lesson doesn’t seem to be learned. We are on the same path as before. The current low interest environment pushes investor towards more risk taking. The main question is how do you restrict the amount of excessive risk-taking occurring at the same time? Is it possible? If yes how would you even do that.

Podcast: Discussing TikTok And Social Media

Here’s my latest podcast on The Intelligent Investing Podcast with Eric Schleien where we discuss Tik Tok among other things (Apple and Microsoft etc…). I tried Tik Tok in August just to get a better understanding of the app and it’s phenomena. I was really impressed with the quality of the app and AI recommendations. I have since deleted the app because the content is not appealing to me. But I understand how sticky it is and how losing an hour of your life feels like 5 minutes.

The podcast was recorded a couple weeks ago. A lot of developments has happened since. Tik Tok and Oracle now have a deal in place and it’s not clear if the government will approve it. The matter will be played out after the elections. A judge ruled Tik Tok won’t be blocked in the US, for now.

You can listen to it here:

Podbean

iOS

Android

If you prefer video:

A Supreme Court Mess

Just before going to bed Saturday night, I looked at my phone (which I normally avoid at night) and saw the headline that hit me like a truck: Justice Ruth Bader Ginsburg passed away at 87 years old. I immediately regretted looking at my phone. Really, what good can come out of looking at the news before bed. I instantly knew a political bomb was dropped in an already over-the-top gonzo super-charged election. The “October surprised” came early is a mild way of putting it.

Trump and Mitch McConnell didn’t waste time saying that they were going to fill the seat before the election, of course causing a massive controversy. The Democrats still haven’t digest what the Republicans did in 2012 with then-President Obama.

Some President never gets a pick. Just having one pick is a major decision. Trump is getting three picks in his first term assuming this one goes through. His first two picks were re-nominating conservatives judges to maintain the statue quo. But now he gets to flip a seat from liberal to conservative. Trump and McConnell gets to complete a judicial coup and install a 6-to-3 conservative majority. I don’t recall anything like that from happening and the Dems are freaking out.

The Democrats really have no power to stop them. So they make threats that if they take control of Congress that they will make sure that they get their day (severe retaliatory actions like expanding court, adding states (D.C. + Puerto Rico). For the Dems to take action they will need at least 52 seats plus the White House.

I don’t want to rehash everything that happened. If you read the news you know what happened in 2012 when McConnell and the Republicans stalled Obama to let the voters decide with ten months to go before the vote. It’s hard not to see the hypocrisy. But this is politics. Hypocrisy is an enduring norm with a long pedigree. Wouldn’t you have expected otherwise? You think the Democrats wouldn’t have not the done same in a similar situation? Try to imagine the reaction of Chuck Schumer, Nancy Pelosi if a conservative Supreme Court justice had died weeks before the re-election bid of a Democratic president while that party also controlled the Senate.

At first I was a “shocked” that the Republicans will go ahead with that. It’s hard to have faith in your politician, the government, the institutions when they pull that kind of tricks. But now that I digested the news, maybe the Republicans are shooting themselves in the foot with rushing the process.

At the moment of typing this post Trump is leaning towards Judge Amy Coney Barrett as a potential replacement. But it could change soon because they often send ” trial balloons” in the media to measure the reaction. Nominating Amy Barrett signals two things 1) Trump is going after the female vote 2) Trump is going after that “undecided/frustrated” middle-right centrist voter.

However that strategy might not pay off. Install Barrett and centrist GOP voters have one less reason to hold their nose to vote Trump. This could make the difference in the Presidential election. The Republican establishment probably already know that but staging the legal coup is very important to them. It’s worth the price to pay.

The simple answer here has always been that the GOP would confirm someone, because it’s worth an awful lot to them, and also that they’ll pay a price for doing so, because it’s worth paying a price for something that’s worth a lot to you. Maybe to the Republicans is worth sacrificing a few seats if you can reverse abortion and have a long-term hold on the judicial branch. If you’re McConnell you just want to get somebody confirmed as soon as you can, and then deal with the consequences (electorally and otherwise) later.

By paying a price, the polling suggests this is an unpopular move, perhaps verging on very unpopular depending on which poll you look at. So, it’s likely to make it harder (though far from impossible) for the GOP to hold the Senate. Is that the decision that will push the Senate to flip blue? And get slaughtered in the 2022 mid-term. But the playbook plays out, the Dems will be able to draw some decent House maps in redistricting, they can add D.C.+ Puerto Rico to help mitigate their Senate disadvantage, and the GOP seems to have trouble winning the presidency; it’s not a bad medium-run position.

SA Interview: Value Investing With Brian Langis

I got the privileged to be interviewed on Seeking Alpha. I believe the article is behind a pay wall at the moment unless you pay $200/month. Should be free after a week I think. It’s a long one, 19 pages. Enjoy!

Here’s a preview:


(Exclusive) SA Interview: Value Investing With Brian Langis

Summary

  • Brian Langis is a Chartered Business Valuator (CBV), investor, and manages Cape May Capital, a private investment company.
  • The first question he wants to answer in the research process, the value in seeing what the credit markets have to say before investing in the equity and the importance of thinking like a business owner are topics discussed.
  • Brian Langis shares long ideas on Intertape Polymer Group, Brookfield Asset Management, Brookfield Property Partners, Alimentation Couche-Tard and Jungfraubahn Holding.

Feature interview

Brian Langis is a Chartered Business Valuator (CBV), investor, and manages Cape May Capital, a private investment company. You can follow him on his blog at BrianLangis.com and on Twitter. We discussed how to evaluate a company’s culture, how to gain an edge from “on the ground” research and what “quality shareholders” are (and why companies need them).

Seeking Alpha: Walk us through your investment decision making process. What area of the market do you focus on and what strategies do you employ?

Brian Langis: First I want to answer the question “will it be around in the next twelve months?” In other words, does the company have a solid balance sheet? Does it have enough cash to pay its bills? To fulfill their obligations? To keep the lights on? To grow? To return money to investors? It’s a snapshot, akin to a quick blood test to prevent pitfalls. It also saves you time. It doesn’t matter how convincing the story is, cash is blood. Happiness is positive cash flow. A bad investing experience when I was a teenager left some scars in my brain. Basically the company was sexy, the product was better than anything on the market, and the CEO was smooth. But the company ran out of cash and creditors took over. If I repeat that mistake again I didn’t learn anything. People are attracted to investing for potential lucrative short-term returns. For me I can’t play that game. I don’t know what is going up today or next month. If you want to do this a long time, you need to survive, and you survive by avoiding losses. We see it today with the pandemic. It reinforces lessons we already knew. Liquidity and survival remains paramount.

Once I get a handle on a company, I look for four main things:

1. Is the company profitable? Do they generate strong free cash flow (FCF)? Good return on capital (ROC)?

2. Is it run by an honest talented management? Is management and shareholder interest aligned?

3. What are the re-investment opportunities? This is the capital allocation portion. What do they do with their cash? Are they a disciplined allocator?

4. Valuation. Can I buy it at a fair price?

You will notice that the first 3 points of the process are intermingling. It’s hard to have one without the others. A solid management team with a disciplined capital allocation process usually leads to excess FCF generation and great returns. Now the main question is can I buy it at a fair price? How much am I willing to pay for it? It’s a highly subjective exercise. It’s the “art” part in valuation. I know price and value and they are two different concepts. In order to know what action to take, you have to look at the asset’s price relative to its value. Assets are only attractive if they are priced right.

You can read the rest here.