Charlie Munger: Boeing Will Survive, and Elon Musk Isn't Wrong All the Time
Charlie Munger (Trades, Portfolio), Warren Buffett (Trades, Portfolio)'s long time business partner at Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and chairman of The Daily Journal (DJCO), recently talked to a large audience as part of the Journal's annual meeting.
Munger can be hugely entertaining because he isn't always practicing social tact at Warren's level - no doubt on purpose. He is a genius investor with more experience than most.
The first question Munger answered was a very interesting one about value investing:
"Well, both are important. But basically, all investment is value investment in the sense that you're always trying to get better prospects than you're paying for.But you can't look everywhere at once any more than you can run a marathon in twelve different states at once.
So you have to have some system of picking some place to look which is your hunting ground - but you're looking for value in every case.
What is interesting to me is I don't agree with you. I think the strongest companies are not in America. I think the Chinese companies are stronger than ours and they're growing faster.
I have investments in them and you don't. And I'm right and you're wrong.
Well, you can laugh but I just spoke a simple truth.
Li Lu is here. I just saw his face in the audience. He's the most successful investor in the whole damn room. Where does he invest? China. And boy was he smart to do that."
Li Lu runs Himalaya Capital and keeps a very low profile. Munger first invested in his fund a long time ago. The current 13-f shows that Himalaya Capital Management LLC's top holdings are Micron Technology, Inc. (NASDAQ:MU) , Baidu, Inc. (NASDAQ:BIDU) and Alibaba Group Holding Limited (NYSE:BABA). Li Lu concentrates his portfolio, but it is likely that he also invests in foreign companies that don't show up on the 13-f.
I don't agree with Munger's statement that China has stronger companies than the U.S. Speaking on a very general level can be dangerous. However, I think it's fair to say that China has protected many of its industries and sheltered national companies to be able to get to scale. Alphabet (GOOG) (GOOGL) is an example of a company that was unable to break into the Chinese market due to national protection of homegrown companies. It's the only major territory in the world where they don't dominate the internet search market.
In the talk, Munger continued:
"Is he good at it? It really helps if you know which hunting ground to look in. In fact, we all do better when we go hunting where the hunting is easy.
I have a friend who's a fisherman. He says: "I have a simple rule for success in fishing. Fish where the fish are."
You want to fish where the bargains are. It's that simple.
If the fishing is really lousy where you are, you should probably look for another place to fish."
This goes into the current debate whether value investing is dead. For about the last ten years, value strategies haven't worked as well as in the past. Berkshire didn't do so great either over the past ten years. Meanwhile, U.S. large-cap growth has been flying.
Historically, that's been one of the worst performers you can find. Munger sort of suggests going with an approach that works. I think that's very dangerous because value investing works precisely because it doesn't work all of the time. There will be annoying stretches where everyone is buying random story stocks and running circles around you and no one cares about balance sheets.
I remember 2009, and it was all everyone could talk about: balance sheet this and balance sheet that. Everyone was a value investor by 2009. Nowadays, nobody talks about balance sheets. Value investing is questioned and even many value investors don't like to identify as such, even holding positions in companies like Netflix (NFLX) and AMZN (AMZN) in their portfolios. Changing strategies now does not sound like a great idea to me, but maybe I've got ten tough years coming.
This is where Munger is asked about Tesla (NASDAQ:TSLA):
"My thoughts are two: I would never buy it, and I would never sell it short.
I have a third comment. Howard Amundsen once said something that I've taken to heart: "Never underestimate the man who overestimates himself."
I think Elon Musk is peculiar and he may overestimate himself but he may not be wrong all the time."
Regarding the current market environment, Munger said:
"Nifty Fifty is an interesting question. At the heights of the Nifty Fifty crazness, which was created by the Morgan bank of all places, it had a home-sewing company that was trading at 50 times earnings. Home-sewing, great god.
We are not that crazy yet. So a lot of what's happened is not that crazy. I think a lot of these companies are very valuable, though they may be selling at too high prices.
But home-sewing was sure to fail. I don't think our leading tech companies are at all sure to fail. The current situation is not nearly as crazy. Nifty Fifty was absolute dementia."
Munger seems to think things can get nuttier still, although I'm not sure if he's aware of all the weird pockets of irrationality that are going on in markets well outside of the size Berkshire play at.
One question at the talk was about electric vehicles and BYD. "Why are electric vehicle sales at BYD down 50% to 70% while Tesla is growing 50% and what does the future hold for BYD?" Munger answered:
"Well, I'm not very sure I'm the world's expert on the future of electric vehicles, except I think they're coming generally and somebody's going to make them.
BYD's sales went down because the Chinese reduced the incentives they were giving to buyers of electric cars.
Tesla's sales went up because Elon has convinced people that he can cure cancer."
Berkshire owns BYD Company (BYDDF) and has an investment in General Motors (GM). I don't know why the questioner thinks Tesla is growing 50% because year-over-year revenue is up 2%, but on a sequential quarterly basis it's down.
"Well, I don't like to jump on Boeing.
Boeing is a great company that had one of the great success rates in safety records of the world. They lost their way, they made some dumb mistakes. I think that's generally the way of things too if you're trying to do something very complicated with hundreds of thousands of people. Occasionally, there will be slip-up.
In most places, if you actually look at them, they have some near-misses. Boeing had a near-miss a few years ago when the rudder stuff failed and they had a few crashes. I was on the Safety Committee at US Air when that happened and nobody could figure it out for months. Something in the rudder was not working, and it caused three crashes. It took them something like six months to figure it out and they must've put an army on it.
Well they survived that one and they'll no doubt survive this one but it's really expensive to make a big safety mistake. Of course, they should be avoided."
I'm getting the impression here that Munger really likes the company and thinks its problems are solvable. I think he navigated the question very carefully. Boeing is down about 25% from highs prior to the 737 MAX crisis. I'm guessing they still think it's too expensive, but they may have a chance to buy if there's more bad news.
Disclosure: the author is short TSLA
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