Charlie Munger on Long-Term Ownership

Asked at the 2023 DJCO meeting about Costco's economic moat in the long term, Munger gave the line that would become one of his most-quoted final verdicts on a business: as long as Costco kept the faith with its strong culture and extreme low mark-up policy, he didn't see any stopping it. The trouble with Costco, he said, was that it traded at forty times earnings. But except for that, he said, it was a perfect damn company. It had a marvelous future, a wonderful culture, and it had been run by wonderful people. He told the room he loved everything about Costco, that he was a total addict, and that he was never going to sell a share. The Munger formulation matters because it separated the business from the price. The business was perfect; the price was not cheap. He refused to pretend otherwise on either side. He did not say the multiple was justified by growth, and he did not say the business was a sell because of the multiple. He told the truth in two clauses: the moat is intact, the price is full. Investors who try to compress that truth into a single buy or sell call, Munger implied, are losing the actual information. The point about pricing discipline - buy wonderful businesses but don't pay any price for them - was Munger's version of Buffett's margin-of-safety principle, applied at the level of the multiple rather than the level of the asset value. He had lived by it. His own Costco position had compounded enormously and he still refused to sell; his own DJCO bank stocks he held for tax reasons even after they had multiplied many times. The discipline was never sell a great business at any price; the discipline was also never buy a great business at any price. The two had to be held together.

At the 2020 Daily Journal meeting, held as the COVID crash was still unfolding, Munger reiterated his hold-not-sell philosophy by reference to Costco. He was, by his own description, no good at exits. He didn't even like looking for exits. He was looking for holds. He told the audience to think of the pleasure he had got from watching Costco march ahead - such an utter meritocracy, doing so well - and asked why on earth he would trade that experience for a series of transactions. He would be less rich, not more, after taxes. The second place was a much less satisfactory life than rooting for people he liked and admired. He condensed the philosophy into a single line that became one of his most quoted precepts: find Costco's, not good exits. The grammar was deliberate. The hard work was upstream, in identifying the kind of business that compounded intrinsic value over decades - a Costco, a See's, a Coca-Cola - and then holding it. Once you owned something like that, the sell decision was a different and far less important question. The trap was the investor who kept trying to find clever exits from positions he had never properly chosen in the first place. Munger paired the holding discipline with a spending discipline. The secret of his and Buffett's early compounding, he said, was controlling costs and living simply. They had tiny little bits of money and they always underspent their incomes and invested the difference. You live long enough, Munger told the room, you end up rich. It is not very complicated. The line was characteristically Munger: take an obvious truth, refuse to dress it up, and dare the audience to argue with it.

Munger used the 2019 platform to reflect on BYD, more than a decade after Berkshire's original 2008 investment. The position had been the source of considerable public attention, and Munger had been the principal advocate inside Berkshire for the bet on the Chinese EV maker. He told the audience that the bet had worked out, that BYD had become a serious business, and that the early conviction about the founder and the technology had been validated by the company's subsequent execution. The reflection was characteristically Munger in two respects. First, he refused to take credit for foresight. The investment had worked because the founder had executed; the bet had been a bet on a person and a culture, and the person and the culture had delivered. Munger's framing was that he had identified a small number of things that mattered - the founder's character, the technology trajectory, the Chinese government's commitment to electrified transport - and had refused to be talked out of the bet by the surface-level concerns about Chinese governance and disclosure that had scared other foreign investors away. Second, Munger connected the BYD reflection to the broader thesis on international investing. He told the room that Berkshire had made a serious amount of money in China over the years - PetroChina before BYD - because the great companies in China had traded at lower multiples than comparable great companies in the United States. The pattern was not luck; it was the consequence of doing the work and being willing to underwrite a foreign franchise when other investors were standing on the sideline. The lesson for the audience was that the international opportunity set was real and recurring, and that the patient, disciplined investor who did the work would be paid for doing it.

-18- Questioner: Would you address the future of the beverage business [and Berkshire’s investment in Coca-Cola]? Charlie Munger: Well that’s an easy one. For many decades, the basic product, full-sugared Coke, grew every year. It was like an inevitable march of time. In recent years, full-sugared Coke is declining. Fortunately, the Coca-Cola Company has a vast distribution business infrastructure and a lot of other products, so while Coca-Cola as an individual product is declining some, instead of going up the way it always did before, the rest of the businesses are on average rising. So I think Coke is a pretty strong company and will be a respectable investment, but it’s not like it used to be when it was like shooting fish in a barrel. [End of recorded material]

But he has no magic wand with which to compensate for competitive losses among his best customers or from the weak economic conditions. He is redoubling his efforts to pare costs, which must be his response to conditions faced. Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco’s former involvement with Mutual Savings, Wesco’s long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of appreciated real estate assets consisting mainly of the nine-story commercial office building in downtown Pasadena, where Wesco is headquartered. Adjacent to that building is a multi-story luxury condominium building which MS Property Company has recently built and is in process of marketing. For more information, if you want a very-high-end condominium, simply phone Chris Greco (626-585-6700). MS Property Company’s results of operations, immaterial versus Wesco’s present size, are included in the breakdown of earnings on page 1 within “other operating earnings.” Other Operating Earnings (Loss) Other operating earnings (loss), net of interest paid and general corporate expenses, amounted to ($6.9 million) in 2009 and ($0.4 million) in 2008. The 2009 figure includes a $6.2 million after-tax writedown of the book carrying value of a condominium building that was completed in the worst condominium market in decades.

Chairman Wang Chuanfu opened the 2008 annual results briefing against the backdrop of the September 2008 announcement that Berkshire Hathaway's MidAmerican Energy subsidiary had subscribed for 225 million new BYD H-shares at HK$8 each, raising approximately HK$1.8 billion and giving MidAmerican a 9.9 percent stake in the Company. Wang told analysts that the transaction was structured as a long-term strategic partnership rather than as a financial investment, that MidAmerican's interest in BYD's battery and electric vehicle technology had been the strategic motivation and that the Berkshire relationship would provide BYD with access to global capital markets, technology validation and the standing to recruit international senior management. Wang walked analysts through the 2008 results, indicating that net profit had grown to approximately RMB 1.02 billion on revenue of approximately RMB 26.7 billion, with the rechargeable battery business contributing the majority of operating profit and the automotive business contributing the majority of revenue growth. He flagged that the F3 sedan had become one of the best-selling single models in the Chinese market, that the battery technology had been validated through the supplier relationship with Nokia and other global handset manufacturers and that the Company was preparing to launch the F3DM, the world's first mass-produced plug-in hybrid electric vehicle, during 2009. On the Q&A, analysts pressed on whether the electric vehicle ambition was a credible near-term business or a long-term option. Wang responded that the underlying battery technology had been developed over a decade of consumer electronics scale, that the iron-phosphate battery chemistry being deployed in the F3DM was inherently safer than the cobalt-based chemistry used in many competitor products and that the Company intended to deploy the technology across the full model range within the next several years. He also defended the choice of the iron-phosphate chemistry as reflecting the long-term safety and cost trajectory rather than the short-term energy density. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of rechargeable batteries, the largest manufacturer of electric vehicles in China and the leading manufacturer of new energy solutions for the global market, anchored on the vertically integrated battery, automotive and energy storage franchises.

In the 2008 Berkshire shareholder letter, written in the depths of the global financial crisis, Buffett and Munger disclosed Berkshire's $230 million investment for roughly 9.6% of BYD, the Chinese battery and electric-vehicle maker. The investment had been Munger's champion play inside Berkshire. He had argued that BYD's founder, Wang Chuanfu, was one of the most capable operating executives he had ever met, and that the combination of low-cost Chinese manufacturing, advanced battery chemistry, and an early-mover position in electrified transport would compound for decades. The investment thesis was deliberately simple. BYD was, in Munger's view, a real company making real products at low cost, with a genuine engineering edge in batteries and a market - China - that was being underwritten by a state committed to electrification. The price was modest relative to the long-run earnings power. The risks were real - Chinese corporate governance, foreign-currency exposure, execution risk on the technology roadmap - but Munger's view was that the market had over-discounted those risks and that the underlying franchise was available at a price that did not require any heroic assumption to justify. The retrospective implication, captured in the 2008 letter's plain disclosure of the position, was that Munger had identified a small number of things that mattered - founder quality, technology trajectory, market underwriting, valuation - and had refused to be talked out of the bet by the surface-level concerns that scared other foreign investors away. The position would, over the next fifteen years, multiply many times in value. By the time Munger discussed BYD at the 2023 DJCO meeting, the company was making more than $2 billion after taxes in its Chinese auto business alone. The bet on the founder and the technology had been one of the most profitable investments Berkshire ever made on Munger's recommendation.

Paul Arnold, long CORT’s star CEO, and his management team, have devoted much effort over the past two years, expanding and redirecting CORT’s rental relocation services toward the needs of businesses and government agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees worldwide. CORT’s operating results are subject to economic cycles. When we purchased CORT, its furniture rental business was rapidly growing, reflecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Shortly thereafter, with the burst of the dot-com bubble, followed by the events of September 11 and a protracted slowdown in new business formation, CORT’s operations were hammered, reflecting generally bad results in the “rent-to-rent” segment of the furniture rental business. There followed a far-too-short period of improving business conditions which have more recently given way to increasingly difficult recessionary conditions, perhaps the beginning of the worst economic recession in decades. Under Wesco’s ownership, CORT has continuously undertaken to improve its com- petitive position. With several websites, principally, www.cort.com and www.apartment- search.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $5.8 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.6 million in both 2002 and 2001. Sources were (1) rents ($3.3 mil- lion gross in 2002) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insur- ance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Corporate Governance Two of our long-standing directors, Jim Gamble and Dave Robinson, are not standing for reelection. At practically no pay, they have been wise and honorable protectors of Wesco shareholders for many decades going back to a time before Berkshire Hathaway had any interest in Wesco.