Charlie Munger - Art of Stock Picking

Who is Charlie Munger? From Wiki:

Biography

Although Munger is more famous for his association with Warren Buffett, Munger ran a very successful investment partnership of his own from 1962 to 1975. According to Buffett's famous essay, "The Superinvestors of Graham and Doddsville", Munger's investment partnership generated compound annual returns of 19.8% during the 1962-75 period compared to a 5.0% annual appreciation rate for the Dow.

There are many insightful words in his letter, I am picking out a few that is against conventional wisdom:

When Warren lectures at business schools, he says, "I could improve your ultimate financial welfare by giving you a ticket with o­nly 20 slots in it so that you had 20 punches ‑ representing all the investments that you got to make in a lifetime. And o­nce you'd punched through the card, you couldn't make any more investments at all."

He says, "Under those rules, you'd really think carefully about what you did and you'd be forced to load up o­n what you'd really thought about. So you'd do so much better."

Again, this is a concept that seems perfectly obvious to me. And to Warren, it seems perfectly obvious. But this is one of the very few business classes in the U.S. where anybody will be saying so. It just isn't the conventional wisdom.

To me, it's obvious that the winner has to bet very selectively. It's been obvious to me since very early in life. I don't know why it's not obvious to very many other people.

I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, "My God, they're purple and green. Do fish really take these lures?" And he said, "Mister, I don't sell to fish."

Investment managers are in the position of that fishing tackle salesman. They're like the guy who was selling salt to the guy who already had too much salt. And as long as the guy will buy salt, why they'll sell salt. But that isn't what ordinarily works for the buyer of investment advice.

If you invested Berkshire Hathaway-style, it would be hard to get paid as an investment manager as well as they're currently paid ‑ because you'd be holding a block of Wal-Mart and a block of Coca-Cola and a block of something else. You'd just sit there. And the client would be getting rich. And, after a while, the client would think, "Why am I paying this guy half a percent a year o­n my wonderful passive holdings?"

So what makes sense for the investor is different from what makes sense for the manager. And, as usual in human affairs, what determines the behavior are incentives for the decision maker.

Banking crises, retailing downturn and stretched consumers

The Globe and Mail recently published two interesting articles outlining the Canadian retailing market condition and its consumers' profile. With so much negativity in the media, it is hard to find any silver lining with the global stock markets.

History is not a perfect indicator, but it's worth noting that value of any stock market is usually based on future expectations and fundamentals in the long term. More importantly, high media pessimism predicts downward pressure on market prices followed by a reversion to fundamentals.

I thought Canadian banks and consumers are more disciplined than its south boarder partner, the United States.

However, it's interesting to note that:

[In Canada,] ratio of household debt to disposable income has soared to 130 per cent, moving past that of the United States.

In the meantime:

Outstanding credit card balances, have risen to $80-billion, up 40 per cent since 2004, and delinquent payments - those late by 90 days or more - are rising.

And:

Bankruptcy filings by consumers soared 51 per cent in December from the year before, Industry Canada said earlier this week. In all, 8,299 consumer and business bankruptcies were filed in December, compared with 5,659 a year earlier.

Canadian consumers in general:

“We are seeing changes in our customers' shopping habits,” said Caryn Lerner, chief executive of Holt Renfrew. “We're seeing a shift in brand preferences and in price point preferences. People across all levels of spending have pulled back.”

She said consumers don't want to be too overt in wearing pricey labels, and instead prefer understated outfits. To respond to the shifting tastes, Holt's is stocking its shelves with fashions that are less flashy. And it's trying to get shoppers in the spending mood with a complementary cappucino or bouquet of flowers.

The efforts are in response to sales that fell “in the single digits” over the past six months at the privately held retailer, Ms. Lerner said. She expects similar results this year. “Canadian retail has held up reasonably well,” Mr. Rosen [CEO of Harry Rosen] said.

Over-leveraged public companies are taking a beating right now because their financial imprudence, and its no difference to these individuals that are feeling the same pressure when economy took a severe downtown.

Consumerism has been the primary GDP growth factor since post-war. It seems that we are getting to a point with too much wants and over supply of goods, compounded by easy credits. I believe there is a good chance that the slowdown in consumer spending will bring an economy havoc that is bigger than any of the current issues such as the banking crises, sub-prime mortgages, stock market meltdown, and devalued asset classes.

Confidence is a big issue, and governments around the world are looking for ways to restore it at all costs. I hope consumerism can held our last leg up, but we could be living in the most difficult economy environment in the last 25 years. I do believe profits can still be achieve with business owners, but critical structural reform is needed for a better future. However, governments around the world are still sticking to the same methodology with the same group of decision makers that we have in the past. It's hard to get excited about any of the stimulus plans because they are similar to what was done in the past, only with more debt.

As an individual, there is no better time than now to recheck your financial score card. Those who stayed prudent and living within their mean will have ample opportunities down the road to find attractive bargains in all asset classes because others are forced to liquidate. Now it is not too late to start the preparation and be ready for the next 2-5 years.

This time around, the rush to bankruptcy gets a lot faster

Purveyors of luxury goods, services start to tiptoe down-market

Intelligent Investing Transcript with Jeremy Grantham interviewed by Steve Forbes

An awesome friend send me this interview transcript with Jeremy Grantham at forbes.com.

Who is Jeremy Grantham?

Here is a brief description from Wikipedia.

Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, an American investor well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock bond and commodity markets. Grantham started one of the world's first index funds in the early 1970s and currently manages approximately $120 billion US.

Mr. Grantham is well known as a great skeptic and holds a bearish view on the market since 1999. He is beginning to add equity position because he sees the market being cheapest in 20 years, speaking on a relatively basis. He believes the market is cheap, but not "very cheap" as it did in 1982 or 1974.

Jeremy Grantham Yes, I would say two-to-one, by the way, my instinct plus looking at the history books, that it will go to a new low [in 2009]. So this is the problem; we're underweighted still. In an ordinary asset allocation account that has 65% in equities, we have moved up to 55%. So, we're still underweight, even though they're cheaper than they've been, and they're reasonably cheap.

Now what happens? If we throw in the client's money and it goes down, indeed, as I think it will [in 2009], they will complain quite bitterly that we weren't very smart. We thought it was going down, and yet we threw their money in. So that's one kind of regret. And the other kind of regret is that we hang back and the market runs away, the one-in-three comes up and they say, "You told us the market was cheap. You told us that you had these 9% or 10% real return opportunities, and you're still underweight and the market's back up 200 points. You're an idiot."

So, there's no way you can avoid some regret. You have to look at your own personal balance sheet. How much pain can you stand? If you absolutely can't stand a 20% hit, you'd better carry quite a lot of cash, because you're quite likely to get it. If, on the other hand, you're made of steel, you can concentrate on the seven-year horizon and filter money in, and having a lot of cash here is probably a bit dangerous from the other point of view.

But in any case, it's a very personal judgment of risk avoidance and how tough you are under stress. The worst situation that will befall probably quite a lot of people is that they exaggerate their toughness. The market goes down 30% from here to 600 and they panic, dump their stocks and never get back. And that's the worst outcome.

He also made some interesting comments on China and Japan:

Jeremy Grantham It's taken them [Japan] 17 years to lose 78% of their money. This is what I say: That exhibit is called "stock for the very, very long run." Aimed at Jeremy Siegel, if you think that people are machines, then of course you can tuck stocks away and hold them forever. But ordinary human beings don't like to wait 17 years to lose 78% of their money or 28 years to round trip in Japan.

They haven't made a penny in 28 years, including dividends, in real terms. And people have dismissed that, "That's Japan, we're the U.S." And that is, in a way, the most simple minded of logic. Of course, every country is different. But do not think that we can't have terrible times. I sincerely hope we will not, and I don't expect that we will. But you have to consider it a possibility.

And on China:

Jeremy Grantham They have a very small consumer sector, so it's hard to stimulate that. A very large capital spending sector. How low does an interest rate have to get to build another steel mill when there are seven up the road empty, not operating. It's not an easy situation, I think. Direct spending on roads and so on is something that might work.

But can they do it big enough, since they're already doing it at a dramatic level? Can they increase it enough to rev their economy? I don't think so. I think their economy will be very flattish for a while. And that will be a bitter shock to everybody who's learned to depend on them.

2009 US stimulus spending package

[Update 1] The spending package has decreased to $317 Billion as agreed to in the Senate on February 6th. The most substantial change was a decrease from $79 billion to $39 billion in the State Fiscal Stabilization Fund, and a $20 billion elimination of the education modernization, renovation, and repair for public schools.

CNN.com has a very nice interactive chart for the proposed US economic stimulus spending (excluding tax cut provisions). US senators are debating with a revised plan that has an additional $40 billion spending to $391 billion, while the overall package decreased from $825 to $819 billion. [Anyone else lost track of the numbers with all the financial catastrophes, it seems $40 billion is a chump change now?]

This is the biggest government stimulus spending in the US history, and I thought the one in 2008 was big (it was purely rebates & tax incentives with a price tag of $152 billion).

Innovative Technology Loan Guarantee Program in energy alone is 1/8 of the proposed spending ($50 billion). Other big ticket items include $79 billion for State Fiscal Stabilizing fund (the name doesn't sound good), and $27 billion for Federal Highway Administration.

Where will it end? No one knows, but the mentality right now is we have to do something than nothing. "Save for a rainy day" seems like an obvious time tested advice, yet it seems we have forgotten that collectively as individuals, corporations, and even governments in the western world.

One-on-One with Warren Buffett - CNBC

http://www.pbs.org/nbr/site/research/learnmore/090122_buffett/

The Extended Interview

Portions of Susie Gharib's interview with Warren Buffett will air in the January 22nd & 23rd broadcasts of NBR. The complete interview is available below. Yoru can also read the complete transcript.

S&P's Monthly Report World By Numbers - Jan 2009

http://www2.standardandpoors.com/spf/pdf/index/WBN_Jan09.pdf

The world markets was slaughtered in 2008. It's no news to anyone but the number is still quite something to observe.

Overall, the world markets tracked by S&P saw the overall market cap declined by $15.5 trillions from $34.9 trillions in Jan 2008 to $19.4 trillions in Jan 2009. The decline is enough to pay for all the US public debt and sent every US citizen a $16,000 check.