Charlie Munger on Patience

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 2020 meeting, with markets still in panic from the COVID crash, to restate his views on what works in a crisis. He had been through many of them. The way he operated in any crisis, he said, was the way he operated out of one: underspend your income, invest the difference patiently, do not panic, and stay in the few things you genuinely understand. He was telling the room not to confuse activity with courage. The heroic move in a crash is rarely to swing; it is usually to refuse to swing badly. He was unsentimental about the price of panic. He told the audience that the people who sold into the crash were going to be the people who paid the tax of being wrong about timing forever. The investor who held great businesses through the decline, who refused to mark his mental portfolio to the panic price, was the investor who kept his options open. He pointedly did not recommend buying the dip aggressively, because that, too, was a form of panic - just panic in the other direction. The discipline was to keep the steady habits when the tape was screaming at you. He closed the COVID thought with a Costco callback. The right thing in a crash, in Munger's view, was to have already chosen your Costco's before the crash arrived, so that when the world fell apart you did not have to make new decisions under pressure. The work was done in the calm years; the harvest was reaped in the violent ones. That was the actual content of patience, not the popular image of patient suffering but the engineering reality of pre-positioning.

At the 2019 Daily Journal meeting, Munger offered his most compact summary of why Berkshire and the Daily Journal had outperformed. The answer, he said, was pretty simple. They tried to do less. They had never had the illusion they could just hire a bunch of bright young people and have them know more than anybody about canned soup and aerospace and utilities. They had never thought they could get really useful information on all subjects the way Jim Cramer pretends to have it. They had always realized that if they worked very hard, they could find a few things where they were right, and the few things were enough. He tied the point to expectations. If you had asked Warren Buffett for his single best idea in a given year, Munger said, and you had just followed it, you would have found that it worked beautifully. Buffett would not have tried to give you a whole heap of names - he would have given you one or two stocks, because he had more limited ambitions than the typical mutual fund manager. The discipline was not to know a lot, but to know a few things very well and to act on them only when the conviction was high. Munger closed the thought with the kicker: that is a very different way to approach the process than the way mutual funds approach it. The fund industry's job, structurally, is to be in everything so that no benchmark-relative argument can ever be made against it. Munger's job was to be in very few things so that the few things he was in were the ones where he had an edge. The two philosophies produce very different long-run returns.

Munger closed the 2019 meeting with a series of operating lessons drawn from Berkshire's history. He pointed to the founding businesses of Berkshire Hathaway - a doomed department store, a doomed New England textile company, and a doomed trading stamp company - and said that out of that mix came Berkshire. They had handled those losing hands pretty well and they had bought into them very cheaply. But, Munger said, of course the success came from changing their ways and getting into better businesses. The lesson was that scrambling out of mistakes without letting them cost too much is a real and underappreciated part of long-run compounding. He sharpened the point. It isn't that we were so good at doing things that were difficult, he said. We were good at avoiding things that were difficult, and finding things that were easy. The inversion of the popular image of Berkshire - which celebrates Buffett and Munger as patient geniuses who solve the hardest problems - was deliberate. Munger was telling the room that the actual edge was in saying no to the hard stuff and saying yes only when the proposition was simple, durable, and within reach. He connected the lesson to expectations and to China. His advice to a seeker of compound interest that works ideally was to reduce expectations, because he thought returns were going to be tougher for a while, and that having realistic expectations made you less crazy. On China, he repeated his 2017 line: the great companies in China were cheaper than the great companies in the United States. And he closed with the too-hard pile again - there was a pile on his desk, he said, that solved most of his problems. Every once in a while an easy decision came along and he made it. That was the system.

At the 2018 Daily Journal meeting, Munger returned to the theme of opportunity cost. The point he made to the audience was that Berkshire's discipline about saying no was not a virtue of caution but a virtue of focus. If they had one thing they could do more of, he said, they were not interested in anything that was not better than that. The rule simplified life a great deal. Anything that did not clearly exceed the next-best use of the marginal dollar was, in Munger's framing, a no - and the no was the active investment decision, not the absence of one. He tied the point to activity itself. It is amazing, Munger told the room, how intelligent it is to spend some time just sitting. A lot of people are just way too active. The observation was directed at the modern investor's bias toward doing something - anything - in response to market moves, news, or peer behavior. Munger's prescription was the opposite. The intelligent posture was to think, read, and wait, and to act only when the proposition in front of you was unambiguously better than the next-best alternative. He closed with the too-hard pile callback. Most of the propositions that came across his desk went onto the too-hard pile and stayed there. He did not feel guilty about that. The pile was the working part of his investment process. Every once in a while an easy decision came along, and he made it. That, Munger said, was his system. The audience was meant to take it as an actual system, not as false modesty - the discipline of refusing to invest in things you do not understand is, in Munger's view, the single most underrated competitive advantage an individual investor can have.

Munger told the 2017 audience that the Daily Journal and Berkshire Hathaway had succeeded, more than anything else, by refusing to attempt to know too much. He kept a too-hard pile on his desk, he said, and most of the problems that crossed his path got shifted onto it. Every once in a while an easy decision came along, and he made it. That, he said, was his entire system. The room laughed, but Munger meant it as a serious investment philosophy. He tied the too-hard pile to the discipline of patience. A normal human life does not have very many great decisions in it. He told the audience that if they actually counted the meaningful decisions made in the history of the Daily Journal Corporation or the history of Berkshire Hathaway, the number per year was not very high. The game was being there all the time, recognizing the rare opportunity when it came, and recognizing that normal human life does not contain very many such moments. He contrasted this with what he called the racetrack tout - the people who sell securities and act as though they have an endless supply of wonderful opportunities. Those people, Munger said, are not even respectable. They pretend to know a lot of stuff they do not know, and pretend to furnish opportunities they are not furnishing. His advice to the audience was to avoid them - unless, he added with characteristic dryness, you happen to be running a stock brokerage firm, in which case you need them. The honest investor's job was to recognize the rarity and to refuse to manufacture the frequent.

-4- waiting. That doesn’t mean you sit around waiting for the next depression. You can’t do that. But a fair amount of patience is required . . . Patience followed by pretty aggressive conduct. Imagine sitting there having all this money rolling in from the foreclosure boom and in like one day [being fully invested]. Now that was luck [but] it wasn’t luck that we had the money on hand when other people didn’t and were willing to deploy it when other people [didn’t]. Questioner: Historically, Berkshire was built around its insurance operations to provide a low-cost source of capital. What other business models did you try/consider but ultimately did not pursue? Charlie Munger: Well, we were always opportunistic. We wanted to buy the best thing that was conveniently available that we could understand. In the early days we thought we had a special advantage as investors in marketable securities. So we tended to look carefully at float businesses. Nowadays, of course, we have enormous float but not [of] much usefulness. Such is the nature of life. We made so much money out of those float businesses it was obscene in the early days. It is not a tragedy that now our float businesses don’t get much advantage above the . . . . Berkshire’s cash, which is large, is not getting much of a return. In Europe the rates are negative. In Japan the rates are negative. Questioner: What do you think about the attractiveness of the average software business?

If we were gonna make our venture capital-type assault on this peculiar part of the software market, we needed momentum from other sales forces and service operations and so forth, so we just bought ‘em. But don’t judge those things by the standards of normal corporate acquisitions. Those are part of venture capital, and if you don’t like it you can lump it. “But a fair amount of patience is required . . . Patience followed by pretty aggressive conduct.”

Speaking to USC Law graduates in May 2007, Munger argued that wisdom acquisition is a moral duty, not merely a career strategy. He had come to that conviction early, he said, and had lived by it ever since. The corollary, in his telling, was uncompromising: you are hooked for lifetime learning, and without it you will not get very far. What you already know is barely the down payment; what you learn after you leave the hall determines the trajectory. He grounded the claim in the Berkshire record. The skill set that got Berkshire through one decade would not have sufficed for the next, he said. Without Warren Buffett functioning as a continuous learning machine, the documented long-run investment record would have been absolutely impossible. He then generalized the lesson: at lower walks of life he constantly sees people rise who are not the smartest and sometimes not even the most diligent, but who are learning machines. They go to bed every night a little wiser than when they got up. With a long run ahead of you, he said, that habit does the heavy lifting. He closed the thought with Alfred North Whitehead's observation that civilization advanced only when man invented the method of invention. Munger flipped the same logic onto the individual: if civilization can only progress when it invents the method of invention, you can only progress when you learn the method of learning. Coming to law school already equipped with the method of learning, he said, was the luckiest break of his long life and the one that paid off most reliably.

Munger used the 1997 platform to restate what he considered Berkshire's single most underappreciated advantage: the willingness to do less. He had tried, he said, never to operate under the illusion that he could hire a bunch of bright young people and have them know more than anybody about every industry under the sun. The honest framing was that with very hard work he and Buffett could find a few things where they were right, and the few things were enough. That was a reasonable expectation. Anything more ambitious than that, Munger suggested, was self-flattery. He contrasted Berkshire's approach with the institutional investor's approach. The fund manager was paid to be in the market, paid to have a view, paid to look active. Berkshire was paid by no one to be active. It could sit. It could go years without a serious move, then move aggressively when the rare opportunity arrived. The structural asymmetry - Berkshire had no benchmark to defend, no client to appease, no quarterly questionnaire to answer - was, in Munger's view, the single most underrated edge in long-term investing. He connected the do-less philosophy to position sizing. When the rare opportunity did arrive, the discipline was to size it correctly. A great idea deserves serious capital. Munger told the room that the temptation, when the world is calm, was to spread bets in the name of safety; the temptation, when the world is in crisis, was to small-size the great opportunity in the name of risk management. Both temptations were to be resisted. The whole trick was recognizing the rare fat pitch and then swinging hard.