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Welcome to Firstlinks Edition 537 with weekend update

  •   30 November 2023
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The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.

Legendary investor Charlie Munger died aged 99. He overshot with his longevity as he did with his investing prowess.

Two weeks ago, I did an article on a podcast interview that Munger did where he relayed his thoughts on an array of topics from Buffett to Apple to gambling and his optimism on China. It was vintage Munger, though little did I know that it would be the last in-depth interview that he ever did.

In that article, I wrote about how Munger and Buffett met:

“Munger first met Buffett in 1959 through a mutual friend. A doctor in their hometown of Omaha, Dr. Edwin Davis, told Buffett in 1957 that he trusted him to manage money because Buffett reminded him of someone called Charlie Munger. “Well, I don’t know who Charlie Munger is, but I like him,” Buffett responded to Davis. Two years later, Davis arranged for the pair to meet, and they hit it off right away.”

Almost 20 years after that meeting, Munger became Vice Chairman of Berkshire Hathaway, a position he retained through to his death.

So, what is Munger’s legacy? Will he be remembered in 50 years’ time as anything other than the sidekick to one of the world’s greatest-ever investors in Warren Buffett?

I think he will, for four reasons:

1. He pioneered applying different subjects to investing

Think about the greatest investors of the past century – T. Rowe Price, John Templeton, Philip Fisher, Benjamin Graham, George Soros, Peter Lynch, and Buffett – and all of them had something distinctive which gave them an edge in markets.

One of Munger’s edges was his ability read widely outside of finance and apply different subjects to investing. He outlined his use of so-called mental models in a 1995 speech called The Psychology of Human Misjudgment:

“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.

You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head…

…You may say, “My God, this is already getting way too tough.” But, fortunately, it isn’t that tough—because 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And, of those, only a mere handful really carry very heavy freight.”

Munger was big on taking elements of mathematics (such as algebra and probability), physics (like first principles), psychology (avoiding common biases), engineering (margin of safety), and biology, and applying them to every day decision making and investing.

An example of this is Munger’s famous exhortation for people to “invert, always invert”. The quote is often mistakenly attributed to him, though it originally comes from the mathematician, Carl Gustav Jacob Jacobi.

Jacobi’s saying means that problems are often best solved by thinking backwards instead of forwards. For instance, if you’re a manager of a department and you want to improve workplace culture, thinking forwards would mean considering different ways to foster a better culture. Thinking backwards would mean investigating the best methods to destroy a workplace culture, which may then yield ideas about how to best improve it.

Munger’s genius was in using these different mental models or heuristics to become a better investor. With this, he inspired many great investors, and his methods may remain relevant for decades to come.

2. He reignited growth investing

Seemingly every investor is a growth investor nowadays. Charlie Munger is a big reason for that.

He wasn’t the first growth investor; far from it. Philip Fisher can probably lay claim to this. Then, T. Rowe Price popularized growth investing in the 1950s and 1960s. During the 1970s, growth investing fell deeply out of favour as then overhyped stocks got obliterated.

Yet it was during this time that Munger persuaded Buffett to abandon his value approach to investing. In Buffett’s words:

“It took Charlie Munger to break my cigar-butt habits and set the course for building a business that could combine huge size with satisfactory profits.

The blueprint he gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”

Munger inspired Buffett to become a growth investor and that in turn inspired millions of others to follow suit.

3. He helped create one of the world’s great companies

Munger will also be remembered for helping Buffett build Berkshire Hathaway into the US$780 billion company it is today. It’s still underappreciated how well the pair has set Berkshire up to last for potentially decades longer. They’ve methodically built the pieces of the puzzle to ensure the company has the best shot at achieving it.

Berkshire will have to defy the odds as the average lifespan of an S&P 500 company is less than 20 years. But it’s already surpassed that average, and it will be up to Buffett and Munger’s heirs to ensure Berkshire’s longevity.

4. His no BS policy

I’ll admit that for a long time I found Munger arrogant and his comments over-the top. Gradually, I came to see what many others did: that he was refreshing in his independent thoughts and his blunt delivery of them.

In a world where CEOs and fund managers are surrounded by marketing, legal, and compliance departments, and prevented from saying anything even remotely controversial, or in many cases interesting, Munger was different. He had strong opinions and didn’t care who was offended by them. And he was often funny.

Here are some of his more pointed barbs:

“Bitcoin is probably rat poison squared.”

"I am not proud of my country for allowing this crap — well, I call it crypto sh--. It's worthless, it's crazy, it's not good, it'll do nothing but harm, it's antisocial to allow it."

“Investment bankers and mortgage issuers were afflicted with insanity, megalomania and evil when they helped inflate the pre-2008 housing bubble.”

“I think Elon Musk overestimates himself, but he is very talented.”

“Every time you hear EBITDA, just substitute it with bullsh--!”

On the last quote, I remember when Munger first said it, probably in the early 2000s. At the time, there was a highly successful global fund manager in Australia who’d often referred to his key metric for determining a company’s value was EV/EBITDA(Enterprise value divided by earnings before interest, tax, depreciation, and amortization).

After Munger slandered the use of EBITDA, this particular manager wrote a lengthy report to his investors about why the metric still had merit, though of course it wasn’t the only valuation tool he used.

I still get a chuckle thinking about the fund managers who were ducking for cover at that time.

Munger’s no BS policy may not be his most enduring legacy, though it’d be nice if it was.

Munger quotes

Finally, it wouldn’t be right without ending with more Charlie Munger quotes. Here are nine of his best:

“Show me the incentive and I will show you the outcome.”

"The big money is not in the buying and selling, but in the waiting."

"In my whole life, I have known no wise people who didn't read all the time — none, zero."

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

"I did not intend to get rich. I wanted to get independent. I just overshot!”

"I've heard Warren say a half a dozen times, 'It's not greed that drives the world, but envy. ' Envy is a really stupid sin because it's the only one you could never possibly have any fun at."

"The fundamental algorithm of life - repeat what works."

“What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often. Opportunity comes, but it doesn’t come often, so seize it when it does come.”

“I don’t pay much attention to macroeconomic trends … Like the weather, I just ignore the weather. I just try to invest whatever capital I have as best I can and take the results as they fall. I just seize whatever opportunities I can and I hope I get my share.”

In my article this week, I look at how a lot of ASX success stories, such as JB Hi-Fi, Lovisa, and AUB, have followed one of two strategies: rolling out single store formats nationwide or consolidating fragmented industries. The article deep dives into these strategies, why they’ve been successful, and points to where the next 'multi-bagger' might lay.

James Gruber

Also in this week's edition...

Investors have been piling into bank savings accounts, excited by the yields on offer after years of getting next to nothing. Miles Staude suggests investors should temper their enthusiasm as high inflation means these accounts are losing money in real terms. He thinks investors should look for assets with higher prospective returns to add to their portfolios.

APRA is due to release the results of its review into hybrids by early to mid-next year. Elstree Investment Management's Campbell Dawson goes through APRA's public objections to hybrids and he finds them misplaced. He thinks if the regulator wants more safety in our banking system, it will come at the expense of effectiveness, and that's why wholesale changes to the hybrid market are unlikely.

Higher interest rates = lower share prices, right? Well, it hasn't quite worked out that way this year. Ophir Asset Management's Andrew Mitchell and Steven Ng say that shouldn't surprise investors as history shows a weak relationship between rates and share prices. They reckon company fundamentals are going to matter more in the coming years.

Nobel Prize-winning economist Harry Markowitz once said that “diversification is the only free lunch in investing”. What he meant was that holding a broader range of assets could result in better returns without assuming more risk. Markowitz's view has become accepted wisdom, though Joe Wiggins believes that it's incorrect.

Asia was considered the world's best growth story until China's economy hit the skids. Fidelity International's Martin Dropkin writes that the region's growth momentum can reignite as headwinds from a strong US dollar and China slowdown recede.

The Wealth of Experience podcast is back and this week delves into the world of private assets, specifically commercial real estate and private equity. Charter Hall's CEO of Direct Property, Steven Bennett, and Schroders' Global Head Private Equity, Rainer Ender, join us to discuss the sectors' challenges and bright spots. Meanwhile regular guest, Peter Warnes, looks at Michelle Bullock's hawkish turn and what it means for rates and the economy. 

Two extra articles from Morningstar for the weekend. Mark LaMonica outlines three shares for income investors while Shani Jayamanne reports on Morningstar's initiation on three new ASX stocks

Lastly, in this week's whitepaper, Franklin Templeton, explores opportunities for investors from the energy transition

***

Weekend market update

On Friday in the US, stocks and bonds rallied after Federal Reserve chairman Jerome Powell’s signalled policymakers could hold rates steady when they meet in two weeks. The S&P 500 added 0.5% and the Nasdaq +0.3%. The 10-year Treasury yield fell 12 basis points to 4.225%. Brent crude was down 2% to US$79.23 a barrel, while gold finished at a record high for the first time since 2020, up 1.7% to US$2071/oz.

From AAP Netdesk:

The local share market on Friday bounced back from most of its losses to close slightly lower. After being down as much as 0.9% in the morning, the S&P/ASX200 rose fairly steadily in the afternoon to finish down 14.1 points, or 0.2%, at 7,073.2. The benchmark index gained 0.46% for the week, putting it up similarly for the year. The broader All Ordinaries fell 12.6 points, or 0.17%, to 7,285.1.

Nine of the ASX's 11 sectors finished lower on Friday, with energy up slightly and real estate basically flat.

Tech was the biggest loser, dropping 1.1% as Xero fell 1.9% and Technology One retreated 2.7%.

The heavyweight mining sector finished down 0.1%, with BHP gaining 0.1% to $46.34, Fortescue rising 0.8% to $25.20 and Rio Tinto dipping 0.1% to $124.91. Coking coalminer Stanmore Resources climbed 5.4% to an all-time high of $4.08, while Champion Iron added 2.9% and BlueScope Steel gained 1.9%.

The big four banks were mixed, with CBA and Westpac both finishing 0.5% lower at $104.19 and $21.27, respectively, while ANZ added 0.3% to $24.43 and NAB edged 0.1% higher at $28.43.

Premier Investments rose 2.8% to a two-month high of $25.11 as chairman Solomon Lew told shareholders that Black Friday week delivered a record sales result for the Just Jeans, Smiggle and Peter Alexander brand owner.

Coles dropped 1% to $15.17 as the Australian Competition and Consumer Commission announced it would not move to block the supermarket giant's $105 million acquisition of two state-of-the-art automated milk processing facilities from Saputo Dairy Australia. Coles CEO Leah Weckert said the purchase would allow Coles to improve security of its milk supply and add to supply chain resilience.

After the market closed on Friday, S&P Dow Jones Indices announced the results of its quarterly rebalancing of its indexes. Notably, Boss Energy, Helia Group and Smartgroup Corp will join the ASX200 on December 18, replacing Cromwell Property Group, Growthpoint Properties and Link Administration Holdings.

From Shane Oliver, AMP:

The good news on inflation continued over the last week. US core personal consumption (PCE) inflation fell to 3.5%yoy in October following the earlier reported fall in CPI inflation. This is below the Fed’s 3.7%yoy forecast for year end! And Eurozone CPI inflation for November dropped far more than expected to 2.4%yoy with core CPI inflation falling to 3.6%yoy, which is down from peaks of over 10% and 5% respectively. This is providing increasing confidence that major central banks have reached the peak in interest rates and that rates will be cut next year, which we expect from around mid-year or possibly earlier. Fed speakers over the last week remained cautious but most were consistent with the Fed leaving rates on hold this month. This included Chair Powell who said the Fed will hike again if needed, but that “considerable progress” has been made in reducing inflation and the Fed is now moving “carefully”.  

There has also been good news on Australian inflation. The Monthly CPI indicator for October came in far less than expected at 4.9%yoy, down from 5.6%, with an implied monthly fall of 0.3%mom. This was driven in particular by weakness in rents (due to increased rent assistance), petrol prices, travel, meat, furniture and household appliances. Of course, the monthly CPI can be very volatile, various subsidies impacted in October, key services (like hairdressing, dental and pet services weren’t measured) and underlying measures of inflation fell by less so there is a case to be cautious, but the good news is that the downtrend looks to be resuming after two relatively higher months.

Monthly inflation could have a three in front of it by December. While some fret that Australian inflation is now well above the circa 3%yoy rates that apply in the US, Canada and Europe it should be recalled that Australian inflation lagged on the way up and peaked three to six months later (partly reflecting the slower reopening from covid in Australia) and it’s doing the same on the way down so there is no reason to be alarmed that its currently higher. In fact, with monthly rises in November and December 2022 of 0.9%mom and 1.5%mom to drop out respectively in the next two months CPI releases we are likely to see monthly inflation with a three in front of it by year end. 

Our base case is no change in rates on Tuesday and that the cash rate has peaked ahead of rate cuts in the second half of next year. That said the risk of another rate hike – which would most likely be at the next meeting in February if it occurs - remains high at around 40%.  

Curated by James Gruber and Leisa Bell

 

Latest updates

PDF version of Firstlinks Newsletter

LIC Monthly Report from Morningstar

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Listed Investment Company (LIC) Indicative NTA Report from Bell Potter

 

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