I previously discussed a 2009 BBC interview with Charlie Munger (Trades, Portfolio) that shed some light on his opinion of Wall Street and why impatient investors deserve the mediocre returns they get. In the same interview, Munger goes on to talk about why he believes few people have attempted to replicate his and Warren Buffett (Trades, Portfolio)’s success.
Very simple ideas
The central core of the Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) strategy can be summarized as follows. First, invest only in businesses that you are capable of understanding and analyzing. Do not get swept up by something alien to you. Second, make sure the company in question has some intrinsic characteristics that give it a sustainable competitive advantage - a moat. Third, Munger and Buffett like to invest in companies with management teams that are both talented and honest. Finally, the company must be available for purchase at a price that is at the very least fair (and better yet, cheap).
All of this seems quite straightforward. Why, then, have so few investors attempted to replicate the Berkshire experience? Munger has his theory:
“It’s a very simple set of ideas. And the reasons that our ideas have not spread faster is they’re too simple! The professional classes can’t justify their existence if that’s all they had to say. It’s all so obvious and so simple - what would they have to do with the rest of the semester?”
In other words, there are people with a vested interest in discounting the Berkshire philosophy. Academics who teach other (often much more complex) strategies and investment professionals who need to convince their clients that only they can deliver good results are examples of the kinds of people Munger is referring to.
Of course, Munger is also being a little disingenuous. The ideas may be simple, but they are not exactly easy to put into practice. After all, if it were easy, everyone would do it.
Even big companies can be undervalued
Another interesting nugget from Munger concerned Berkshire's purchase of Coca-Cola (KO), which ended up being one of the duo’s best bets. In particular, it is interesting to think a massive company like Coke could be undervalued:
“Well at the time we bought it, it was succeeding mightily on multiple fronts and it was cheap in relation to what was plainly going to happen. That was a valuable insight: there are times when even a company as big as Coca-Cola is too cheaply priced by the market considering what it’s going to do for the shareholder. And there are times when we can figure that out, and there are times when we can’t. And the times where we can figure it out we tend to go in very heavily. For many-many months, we were buying as much Coca-Cola as we could buy - roughly a third of the volume trading. Every day, for months. So we were very aggressive buying in.”
Presumably, there were hundreds of analysts covering Coca-Cola on Wall Street when Munger and Buffett began their aggressive buying. But somehow, the market was undervaluing the future growth of the company, despite all the attention. Perhaps investors should have heeded the gurus’ "simple ideas."
Disclosure: The author owns no stocks mentioned.
Read more here:
- Charlie Munger: The Problem With Wall Street
- Warren Buffett: Activist Investors Can Sometimes Be Useful
- Jim Chanos: This Berkshire Hathaway-Backed Health Care Company Is an Insurance Fraud
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