Felix Narhi and Ian Collins recently attended the Daily Journal (NYSE:DJCO) Annual General Meeting in Los Angeles. During the meeting, Charlie Munger (Vice Chairman of Berkshire Hathaway and the Chairman of the Daily Journal) took questions for a few hours about a broad range of topics from shareholders and investors. At 92 years old, Munger remains very sharp witted and often hilarious as he takes a no-holds-barred, tells-it-like-he-sees-it approach to the world. While there’s no way to make investing easy, we believe the constant quest for wisdom will improve the odds of success. Below are the observations that struck us as the most relevant to investing, with our further thoughts on these topics highlighted in italics below.
Block Off Some Uninterrupted Time to Read and Think
When asked about good daily habits and how one can reduce errors when investing, Munger opined: “Warren [Buffett] and I and Guerin [DJCO director J.P.] do two things. One, we spend a lot of time thinking. Our schedules are not crowded, and we look like academics more than businessmen. It is a soft life waiting for a few opportunities, and we seize them and are ok with waiting for a while and nothing happens. Warren is sitting on an empire, and all he has on his schedule is a haircut this week. He has plenty of time to think. Second, multitasking is not the highest quality of thought man is capable of, unless you’re the head nurse of a hospital. If not, be satisfied with life in the shallows. I didn’t have a #2 plan; I wasn’t going to dance the lead in the Bolshoi Ballet or stand on the mound in Yankee Stadium. The constant search for wisdom or opportunity is important.”
This seems like old fashioned advice and out of step with the modern world, but the truth is that the human mind does not function well at tasks that need to be studied in depth like investing when it is constantly interrupted. Because the brain cannot fully focus when multitasking, people take longer to complete tasks and are far more likely to make mistakes than if they were done sequentially. This is largely because the brain is compelled to restart and refocus. Obsessively reviewing emails, compulsively checking social media updates and scheduling questionable meetings make it difficult to truly focus on the task at hand. The constant stream of easily accessible “news”, opinions and minute-by-minute stock quotes from the online information fire hose is a recipe for reactive rather than thoughtful decision making. Buffett has said that reading is the most important part of his job and he conscientiously guards his time so he can focus on that activity. The mental image of a “haircut day” on an otherwise empty weekly calendar of one of the most accomplished and sought after businessmen in the world is both amusing and counterintuitive, but it serves as a vivid reminder of the importance of blocking off uninterrupted time to read and think. Although Buffett’s time management discipline is admittedly extreme, a lot can be accomplished with smaller allotments of focused “think” time. When Munger was younger and part of a busy law practice, he decided to “sell” an hour of the day to his most important client – himself. And through those intense sessions, he got himself into real estate, built some apartments and expanded his wealth creating activities.
Specialization vs. a Multi-disciplinary Approach
On whether he is in favour of specialization or taking a synthesis/multi-disciplinary approach: “Saying one is in favor of synthesis is like saying one is in favor of reality. It is easy to say we want to be good at it, but the rewards system pays for extreme specialization. You are usually way better off being a deep expert [in one thing] than someone an inch deep in a lot of disciplines. It [synthesis] is helpful to some but not the best career advice for most people. The trouble is you make terrible mistakes everywhere else without it, so synthesis should be a second attack on the world after specialization. It is defensive, and it helps one to not be blindsided by the rest of world.”
In a world that is increasingly complex and competitive, the way to get ahead is to become extremely specialized in a niche where relatively few can compete. In other words, be “an inch-wide, but a mile-deep”. Unfortunately, specialization comes at a high price when operating outside a narrow specialized field because it is human nature to distort reality to fit your own world view, or at least to think it does. Munger calls this the “man with a hammer syndrome” – if all you have is a hammer, everything looks like a nail. Use a hammer when that is the best tool for the job, but learn how to use other tools if they are more appropriate for the job. Unlike many other fields, investing is a multi-disciplined endeavor which, amongst others, includes the synthesis of mathematics, accounting, statistics, psychology, neuroscience, economics and industry specific fluency. As Munger might say, when it comes to investing, without synthesis, an investor is like a one-legged man in an ass-kicking contest.
In the past, Munger has said that he considers being rational his most important quality. When asked how others can learn to become more rational, he said, “I worked at being rational young and kept doing it. Do it until you’re as old as me, it is a good idea and it is a lot of fun if you’re good at it. I can hardly think of anything more fun. And I have a lot of cousins [like-minded attendees] in the room. You don’t have to be emperor of Japan. You can be a very constructive citizen by being rational. Just avoid … resentment, anger, jealousy and envy. They’re a one-way ticket to hell, and many people wallow in them and it’s a disaster for them and everyone around them. Self-pity won’t improve anything if you’re dying of cancer. Keep your chin up and forget about it.”
No one is rational at all times and research has shown that the part of your brain responsible for emotions is needed for good decision making. When it comes to investing, being rational is easier said than done. Emotional trading can often derail otherwise sensible investment plans. Studies show that investors seem to be hard wired to do the wrong thing at the wrong time. They buy more when prices are inflated and sell when they fall – the opposite approach they take to everything else. Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.
The Future is Unknowable – Stay the Course with Good Businesses
When asked about oil prices, Munger said: “I wouldn’t have predicted oil would fall so low, and it is generally true that we can get periods of extreme prices in commodities as we see now with iron ore. Commodities can do strange things…up and down…and they have macroeconomic consequences. If you’re in Australia [iron ore] or in the tar sands of Canada [oil], it is terrible now. We are in a weird period, but that’s the nature of the human condition with free markets. I have never accurately predicted those swings. We just get into good businesses and let the cycles happen.”
Many aspects in life and business are important, but unknowable. Why spend a lot of time thinking about and trying to predict the truly unknowable? In some periods, like commodities today, markets swing to extremes which completely surprises everyone, including the very best pundits and insiders in the industry. Accept the reality that markets will do strange things at times and cycles will come and go. Instead, buy good businesses and be patient through the cycles. Stay focused on the more knowable and important factors when investing like balance sheet strength and competitive positioning which should get you through the inevitable down cycles from time to time and emerge stronger for the next cycle.
Felix Narhi, February 24, 2016