Happy New Year!
Today marks the day that Charlie Munger would have hit the century mark. I was thinking about his life this morning and it prompted me to reread a few of the journal entries that had Charlie’s name tagged, and thought I might send out a few links of articles here on Base Hit Investing that were inspired by Charlie’s wisdom.
Q3 2023 hedge fund letters, conferences and more
A select few of you (elite few? poor souls? depends on who’s asking but I prefer the former) have been BHI readers for many years. You may have read these previously, but for the majority of you who subscribed to these musings in recent years, here’s a collection of just a few BHI articles that were in some way inspired by the wisdom of Munger.
It was fun taking a glance at these posts (some close to a decade old or more) to notice how some of my own thinking has subtly evolved over the years. This game is one of continuous improvement, which ties into one of my favorite Charlie Munger quotes: “try to go to bed a little bit smarter than when you woke up”. Doing that day after day compounds over time.
Happy 100th birthday Charlie!
- Be the Best Plumber in Bemidji (9/8/2014)
- 2015 Daily Journal Summary and Art of Stock Picking (4/27/15)
- Charlie Munger: Thoughts on Investment Edge (2017 DJCO; 2/27/17)
- Thoughts on Competitive Markets (BRK Takeaway 5/15/18)
- Cost of Capital and Buffett’s $1 Test (10/30/17)
- Importance of ROIC: “Reinvestment” vs “Legacy” Moats (excellent guest post by my friend Connor Leonard; 5/23/16)
- Munger Podcast, Retail Stocks, Munger the Bargain Hunter? (Most recent post, which Andrew Walker and I also elaborated on in a podcast on retail and Floor and Decor)
One of the things I reference in that last post is something Charlie mentioned about his liking for buying bargains in addition to the high quality dominant moats he’s more known for. I’ve been thinking a lot about recently. When it comes to investment style, Munger is known best for pushing Buffett to buy quality companies at a fair price, but Munger was also a bargain hunter. He wanted quality, but I think he was less willing to pay up for it than many people might realize (see See’s Candies valuation below).
One of his most famous quotes is referenced in the slide below:
In my view, the most important aspect of this quote (and the one that often gets marginalized) is the time horizon: Charlie defines long-term as 20-40 years.
The other thing that is conspicuously absent from the quote is what Charlie meant by “an expensive looking price”. I think investors have taken far too much liberty with the definition of “expensive”. I’m not sure what Charlie meant by expensive, but my guess is it might have been 20-25 P/E at the max. From a recent post:
Side note: Munger’s definition of paying up might be much different than many think: they paid 6 times pretax earnings for See’s Candies and they both felt they could raise prices to a level that would give them 50%+ earnings growth the first year — even with the sizable corporate tax rates of the 1970’s, this still offered a 14% after-tax dividend yield in year 1 that could grow over time (pg 346 of Snowball references the valuation).
Costco is one of Charlie’s favorite stocks, but if you pay 40 P/E for a stock that ends the decade at 20 P/E, that is a -7% per year headwind. With a quarter trillion of annual sales volume, 10% growth is no easy task, but if we assume Costco can continue growing at this rate, we still only achieve a low single digit return if the stock becomes valued in line with its historical P/E multiple of 20-25. Charlie wasn’t selling, but you can understand why he said he probably wouldn’t be buying. I’m not convinced that holding is actually the best decision there either, but that’s a portfolio management topic for another post (one I’ve spent a lot of time thinking about in 2023).
Lesson: there will be many stocks that prove to be undervalued at 40 P/E, but you need a very high rate of growth to overcome that inevitable headwind of the P/E engine. Possible, but I would always want to explicitly label the contribution (or detraction) of each of the 3 engines.
I have some “ugly first drafts” in my journal on one of Munger’s cigar butt investments (Belridge Oil), which he made 30x his money on. I think the younger Charlie (just like a younger Buffett) would be looking these types of investment opportunities. I believe they’d be looking for two types of investments:
- The dominant high quality companies that can grow over time (but being careful not to pay much more than 15 P/E, which seems to be the max price they pay for core common stock investments)
- Bargains and special situations
I don’t consider the 2nd category to mean “low quality”. I think there are lots of examples of stocks in low growth businesses (but highly durable businesses with predictable cash flows) that sell at a discount. There are high quality investment opportunities from both categories, and after all: “that is what we’re trying to do”.
I plan to be writing more often in 2024, including more articles for subscribers on businesses I’m studying, stocks I’m investing in, and stocks I’m watching. I’ll have a post coming this week on a business that I have really enjoyed getting to know over the last year that happens to be what I believe it is a Category 1 type of long-term core holding that has Category 2 type special situation attached.
Thanks for reading, and Happy New Year!
Article by Joh Huber, Base Hit Investing
About John Huber
John Huber is the founder of Saber Capital Management, LLC. Saber manages separate accounts for clients and also is the general partner and manager of an investment fund modeled after the original Buffett partnerships.
John can be reached at john@sabercapitalmgt.com.
