From deep (sometimes excruciatingly deep) value investors, Smead Capital Management, February 22:
Dear fellow investors,
On February 5, 2023, Charlie Munger sat down as the Chairman Emeritus of the Daily Journal Corporation (DJCO) to answer questions from shareholders and the public. We think of it as the question-and-answer session of the Berkshire Hathaway meeting with an extra serving of pithiness and wit. We at Smead Capital Management believe Mr. Charles T. Munger is one of the wisest people to walk the earth today, particularly in the category of worldly wisdom. We stand at attention anytime he decides to opine on subjects. I wanted to write on a few of the subjects he touched on as we believe they are helpful for our investors.
Rules-based investing vs. experiential investing
Early in the Daily Journal meeting, a question came in about the three evils that ruin people. Becky Quick said:
Somebody else wrote in, and I don’t have the e-mail in front of me at the moment, but he wrote in quoting you, where you said the 3 things that ruin people are ladies, liquor and leverage. So why would you use leverage when you know that’s 1 of the 3 things that can destroy somebody?
Munger responded by pointing out that Buffett and he had both used leverage on arbitrage situations earlier in their investing career. He referred to the fact that Ben Graham (himself Jewish) referred to these as Jewish Treasury Bills. They would employ leverage on these arbitrage situations, but those opportunities are fewer today in a much more crowded space. Despite that, Berkshire is currently employing a Jewish Treasury Bill approach on Activision. Becky Quick went on to ask, “So is leverage the least evil of the 3 Ls?” Munger responded:
I think most people should avoid it, but maybe not everybody need to play by those rules. I have a friend who says, the young man knows the rules, and the old man knows the exceptions.
This kernel of wisdom got me so excited because it was a truth that we have already witnessed as investors. Generally speaking, the oil business is not the easiest business to get wealthy in. Also generally true is that companies with larger amounts of leverage don’t succeed. These are the rules of investing, in our opinion. Many investors will exclude the energy industry or other companies based on these rules....
....MUCH MORE
