OT: DJCO Meeting Transcript

For those who prefer to read:

Charlie Munger: 2022 Daily Journal Annual Meeting Transcript

https://junto.investments/daily-journal-2022-transcript/

Charlie Comments on:

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Thanks for posting, BreckHH.

A few snippets regarding China and BABA:

"
[Questions on viability of investing in Chinese companies]

Charlie Munger: Well, of course, only the future knows who’s going to be right. But China is a big modern nation. It’s got this huge population and this huge modernity that has come in the last 30 years. We invested some money in China because we could get more value in terms of the strength of the enterprise on the price of the security than we could get in the United States. Other people, including Sequoia, the leading venture capital firm in the United States, have made the same decision we have…

Charlie Munger: Well, we did it for a very, very simple reason. We got more strength per dollar invested in China. The companies we invest in are stronger relative to their competition and priced lower. That’s why we’re in China.

[Questions on investing in BABA]

Charlie Munger: When you buy Alibaba, you do get sort of a derivative. But assuming there’s a reasonable honor among civilized nations, that risk doesn’t seem all that big to me.

Charlie Munger: Warren, like many other intelligent people, likes to invest where he’s personally comfortable. For some reason, I’m more comfortable with the Chinese than he is. That’s a minor difference…I don’t think Alibaba is as entrenched as something like Apple and Alphabet. I think the internet is going to be a very competitive place even if you’re a big internet retailer.
"

There are some more comments on China but I’ve quoted enough. The whole session is a brilliant read and an incredible testament to Charlie’s mental acuity and stamina at age 98. Wow.

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you do get sort of a derivative. But assuming there’s a reasonable honor among civilized nations… Warren, like many other intelligent people, likes to invest where he’s personally comfortable. For some reason, I’m more comfortable with the Chinese than he is. That’s a minor difference

I guess the investment case for BABA is summarized above. IF you are comfortable that China will act with honor, and respect interests of “others”, you can invest in BABA, if not, you shouldn’t.

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It was an excellent read. And the questions were so much better than those typically asked in the Berkshire AGM.

With in person AGM this year, I am not looking forward to the questions from the precocious 14 year old. Nor to the ones from attention seekers who seem to have not read a single of Buffett’s letters.

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@rnam

Preach it! The “let me introduce myself for 5 minutes and try to make something of myself” question is nauseating at this point.

Love Munger, love his acuity. I wish I could get there on his views on China. If I could, I know BABA is one heck of a table pounder at these price levels. I’ve been grinding gears nonstop on that one and don’t seem to get anywhere these days.

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I guess the investment case for BABA is summarized above. IF you are comfortable that China will
act with honor, and respect interests of “others”, you can invest in BABA, if not, you shouldn’t.

Well put.

In this context, the question is whether it’s worth risking a material amount of one’s hard earned capital given the uncertainties.
But I think it could be worth pointing out that there’s more than one way to skin a cat.

The real world outcome seems to be strongly asymmetric: lots of possible outcomes with a high or very high return, but a few outcomes with a VERY low return.
But the options market tends to assume symmetry of outcome probabilities.
The mismatch can perhaps be used to one’s advantage.

If the concern is not risking too much capital, I think there could be a good case for putting 1% of one’s portfolio into call options.
It strikes me that there are probably several choices that might return a ten bagger if the clouds clear,
and a possible 10% boost to one’s portfolio with almost nothing risked doesn’t sound so bad.
Plus, if the horizon clears a lot, the calls can be exercised to create a very good long term
holding at a reasonable net entry price–while not taking any material risk during the uncertain period.
The Dhandho view: heads I win, tails I don’t lose much.

In this case, unusually, I’d suggest considering somewhat out-of-the-money options (strike above current price).
If the price is going to rise, it’s probably going to rise a lot in the next couple/few years ($300-400?), so you might as well get a bunch of leverage.
And again unusually, I’d suggest not going with the longest dated options.
Maybe go out a year, wait to see what happens.
If things look better in a year, put more capital at risk. If not, don’t.
You can perhaps make a better informed decision at that time whether to bail, buy more calls, or buy stock.
Or, who knows, close the position at a huge profit.

Random example (most definitely not a recommendation, just a math example):
March 2023 $150 calls might cost you about $14.70 now.
If the price were to return to its prior all time high of $317, those would be worth $167 = 11.4 times what they cost.
That’s unlikely within 13 months, but who knows? Max downside is only the $14.70.
And it’s reasonable to imagine the firm might be worth more in March 2023 than it was 2.5 years
earlier when that high price was set, so revisiting the old high is not entirely inconceivable.*

Jim

  • “You keep using that word. I do not think it means what you think it means.”–Inigo Montoya
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The real world outcome seems to be strongly asymmetric: lots of possible outcomes with a high or very high return, but a few outcomes with a VERY low return. But the options market tends to assume symmetry of outcome probabilities.

A quick doesn’t reveal options are not mispriced per se. But the idea of asymmetric return using options is something one can easily do.

You don’t have to necessarily do a straight call, you could achieve similar returns with spreads; For ex: you can buy $200 Jan 23 call and sell simultaneously $250 call for < $5 and it gives you 700 days and $50 profit potential. If you do just 10 contracts, it will cost you $5000 and a potential $250,000.

Again, I don’t want anyone to make plans on those $250 K gains, but just trying to show the asymmetric nature of the risk v reward.

Separately from Dec, it is trading in the range, almost 3 months, looks like the stock is done falling. At least that’s the hope.

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This one stood out for me:

Becky: What are your current thoughts on the inflationary environment? Please compare and contrast it to the 1970s.

Charlie Munger: When Volcker, after the 1970s took the prime rate to 20% and the government was paying 15% on US government bonds, that was a horrible recession. Lasted a long time, caused a lot of agony. I certainly hope we’re not going there again.

The conditions that allowed Volcker to do that without interference from politicians were very unusual. In twenty-twenty hindsight, it was a good thing that he did it. I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of recession.

So I think the new troubles are likely to be different from the old troubles. You may wish you had a Volcker-style recession instead of what you’re gonna get. The troubles that come to us could be worse than what Volcker was dealing with. And harder to fix.

Larry Summers has also been beating a similar drum.

"By the pricking of my thumbs,
Something wicked this way comes."

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2021 Annual Meeting(10 months ago):

BECKY QUICK: I will ask this question from Chris Fried from Philadelphia, and whoever wants to take this on stage —

“From raw material purchases by Berkshire subsidiaries, are you seeing signs of inflation beginning to increase?”

WARREN BUFFETT: Let me answer that. Then, I think Greg can give more —

We’re seeing very substantial inflation — it’s very interesting.

I mean, we’re raising prices. People are raising prices to us.

And it’s being accepted. I mean, it’s not — if we get — well, you know, take home building.

I mean, you know, the cost of — we’ve got nine home builders, in addition to our manufactured housing thing — and then — operation, which is the largest in the country. So, we really do a lot of housing. (Laughs)

The costs are just up, up, up. Steel costs, you know, just every day, they’re going up.

There hasn’t yet been — because the wage stuff follows. I mean, the UAW writes a three-year contract, we got a three-year contract.

But if you’re buying steel at General Motors or someplace, you’re paying more every day.

So, it’s — it’s an economy, really — it’s red-hot, I mean.

And we weren’t expecting it. I mean, all our companies, when they — they thought when they were allowed to go back to work, you know, at — for various operations — we closed the furniture stores, I mentioned. You know, they were closed for six weeks or so, on average.

And they didn’t know what was going to happen when they opened them. And, you know, they can’t stop people from buying things. And we can’t deliver them if they say, well, that’s OK, (laughs) because nobody else can deliver them, either. And we’ll wait for three months or something of the sort. But the backlog grows.

And then we thought it would end when the $600 payments ended in, I think, you know, around August of last year. It just kept going. And it keeps going, and it keeps going, and it keeps going.

And I get the figures. Every week I call — or (Nebraska Furniture Mart Chairman) Irv Blumkin calls me — and we go over day-by-day what happened at the three different stores in Chicago, and Kansas City, and Dallas.

And it just won’t stop. People have money in their pocket. And they pay the higher prices. And when carpet prices go up in a month or two, you know — they announced a price increase for April — our costs are going up. Supply chains, all screwed up, you know, (laughs) for all kinds of people.

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