Charlie Munger is an amazing investor and Warren Buffett’s partner at Berkshire Hathaway. He recently gave an interview to CalTech alumni that has a lot to teach us about investing. There were many insights for investors in that interview, but I want to focus on one segment, where a viewer asks Charlie:
“How would you encourage mentees to take big bets on big edges, and how should this be taught at CalTech?”
To which Charlie Munger replied:
“I don’t think CalTech can make great investors out of most people. That’s because to some extent they are like great chess players – they are almost born to be investors.
Obviously you have to know a lot. But partly it is temperament. Partly it’s deferred gratification. You have to 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 how much you don’t know. You have to know the edge of your own competence.”
Let’s deconstruct Charlie’s response:
1. Some people are born to be investors – Charlie is pointing out that not everything can be learned in investing. Yes, you can read all the great investing books out there. And you should. You can study all the prior great investors. And you should. However, that is necessary but not sufficient. You also need certain qualities that some people have and others… just don’t.
2. Temperament – What are these qualities? Well, it’s best described as temperament. What does that mean? Imagine a scenario where everything is going wrong for you as an investor. The stock market is marking your investments way down. Your peers disagree with you. Your clients are starting to doubt you. You haven’t had a good year in the market in some time. Can you still stick to your well-reasoned investment process? Or will you fall apart and give in to the pain and start to deviate in order to try to catch up sooner rather than later?
3. Patience – It seems so simple. Just do nothing when there is nothing worth doing. And yet, this seems so elusive to most investors. They convince themselves, or are convinced by others, that if only they were smart enough, work hard enough, that there is always something intelligent to do. So they slide down the slippery slope of “good enough.” Each compromise seems minor, or not a compromise at all, but eventually they are well down-hill from the commanding heights of investing discipline that they had aspired to.
4. Aggression – Despite all their activity when patience is required, when it is actually time to act, most investors are… not active enough! I remember Peter Lynch coming in to give a talk to Fidelity portfolio managers and analysts early in my career, circa 20 years ago. He told the audience that when they find a great idea they should, triple-, quadruple-weight it. Not just have a small “overweight” position vs. their benchmark. There was silence. Nobody disagreed with the legendary investor. And yet when the portfolio managers went back to their offices the next day, I didn’t observe anyone change their approach or their portfolios, which typically contained hundreds of small, individually-insignificant investments.
5. Self-awareness about the edge of your own competence – Knowing the edge of your circle of competence is crucial as an investor. If you are not sure if something is within it, the answer is simple: it’s not. The penalty for waiting in investing is low, as long as you are aggressively pursuing the few great investment opportunities that you encounter. And yet so many try to answer hard questions that as an investor they should be leaving in the “too tough” pile and moving on. If that’s not overconfidence bias in action, I don’t know what is.
Charlie Munger has given us plenty of insights on investing before. To stay rational. To appreciate a company’s quality, not just the statistical cheapness of the stock. To pay attention to the acumen and integrity of the management team.
In the end, none of these are enough to make us good investors if we cannot do two simple, but not easy, things well when it’s most difficult to actually do them. To be patient when there is nothing to do, and to be very aggressive on the rare occasions that the stars align and there is a great investment to be made.
If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request an Owner’s Manual here.
If you want to watch educational videos that can help you make better investing decisions using the principles of value investing and behavioral finance, check out my YouTube channel where I regularly post new content.
More China coal investments overseas cancelled than commissioned since 2017
More China-invested overseas coal-fired power capacity was cancelled than commissioned since 2017, research showed on Wednesday, highlighting the obstacles facing the industry as countries work to reduce carbon emissions.
The Centre for Research on Energy and Clean Air (CREA) said that the amount of capacity shelved or cancelled since 2017 was 4.5 times higher than the amount that went into construction over the period.
Coal-fired power is one of the biggest sources of climate-warming carbon dioxide emissions, and the wave of cancellations also reflects rising concerns about the sector’s long-term economic competitiveness.
Since 2016, the top 10 banks involved in global coal financing were all Chinese, and around 12% of all coal plants operating outside of China can be linked to Chinese banks, utilities, equipment manufacturers and construction firms, CREA said.
But although 80 gigawatts of China-backed capacity is still in the pipeline, many of the projects could face further setbacks as public opposition rises and financing becomes more difficult, it added.
China is currently drawing up policies that it says will allow it to bring greenhouse gas emissions to a peak by 2030 and to become carbon-neutral by 2060.
But it was responsible for more than half the world’s coal-fired power generation last year, and it will not start to cut coal consumption until 2026, President Xi Jinping said in April.
Environmental groups have called on China to stop financing coal-fired power entirely and to use the funds to invest in cleaner forms of energy, and there are already signs that it is cutting back on coal investments both at home and abroad.
Following rule changes implemented by the central bank earlier this year, “clean coal” is no longer eligible for green financing.
Industrial and Commercial Bank of China, the world’s biggest bank by assets and a major source of global coal financing, is also drawing up a “road map” to pull out of the sector, its chief economist Zhou Yueqiu said at the end of May.
(Reporting by David Stanway; Editing by Kenneth Maxwell)
Bank of Montreal CEO sees growth in U.S. share of earnings
Bank of Montreal expects its earnings contribution from the U.S. to keep growing, even without any mergers and acquisitions, driven by a much smaller market share than at home and nearly C$1 trillion ($823.38 billion) of assets, Chief Executive Officer Darryl White said on Monday.
“We do think we have plenty of scale,” and the ability to compete with both banks of similar as well as smaller size, White said at a Morgan Stanley conference, adding that the bank’s U.S. market share is between 1% and 5% based on the business line, versus 10% to 35% in Canada. “And we do it off the scale of our global balance sheet of C$950 billion.”
($1 = 1.2145 Canadian dollars)
(Reporting by Nichola Saminather; Editing by Leslie Adler)
GameStop falls 27% on potential share sale
Shares of GameStop Corp lost more than a quarter of their value on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of names favored by retail investors.
The video game retailer’s shares closed down 27.16% at $220.39, their biggest one-day percentage loss in 11 weeks. The drop came a day after GameStop said in a quarterly report that it may sell up to 5 million new shares, sparking concerns of potential dilution for existing shareholders.
“The threat of dilution from the five million-share sale is the dagger in the hearts of GameStop shareholders,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “The meme trade is not working today, so logic for at least one day has returned.”
Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.
Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 15.2%, burger chain Wendy’s falling 3.1% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down nearly 20% after surging more than 38% on Wednesday. AMC shares were off more than 13%.
Worries that other companies could leverage recent stock price gains by announcing share sales may be rippling out to the broader meme stock universe, said Jack Ablin, chief investment officer at Cresset Capital.
AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.
“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run-up,” Ablin said. “Investors are taking a dim view of that strategy.”
Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.
GameStop on Wednesday reported stronger-than-expected earnings, and named the former head of Amazon.com Inc’s Australian business as its chief executive officer.
GameStop’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.
The company on Wednesday said the U.S. Securities and Exchange Commission had requested documents and information related to an investigation into that trading.
In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday, matching their January peak.
(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)
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