Last week, our colleague Brooks Hamner crafted an insightful post for Mercer Capital’s RIA Valuation Insights blog commemorating the legacy of the renowned investor Charlie Munger. In his post, Brooks revealed several lesser-known Munger quotes, highlighting wisdom that holds value not only for professional investors but for every business and industry. We hope you enjoy!

This week, we step aside from our usual musings on valuation trends in the RIA industry to honor the late Berkshire Hathaway Vice Chairman with our thoughts on some of his famous quotes (that might be relevant to you and your clients):

1. “I think the reason why we got into such idiocy in [personal] investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, ‘My God, they’re purple and green. Do fish really take these lures?’ And he said, ‘Mister, I don’t sell to fish.’”
   – 1994 speech at the University of Southern California Business School

We’ve all taken the bait on a flashy investment opportunity that didn’t pan out.  We knew better but couldn’t resist the prospect of doubling our money in a short amount of time.  Rational investing leads to rational returns, and irrational investing leads to irrational returns (typically below 0%).  Maximizing the ratio of rational investing to irrational investing for clients is easier said than done, but one of the primary responsibilities of a prudent financial advisor.  Feel free to share Charlie Munger’s thoughts on crypto the next time a client asks about Bitcoin:

2. “A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity.”
   – 2023 Wall Street Journal op-ed piece

Charlie Munger often distinguished between investing and gambling, which, in his mind, was the same thing as “investing” in a cryptocurrency.  That probably seems obvious to you (and your clients), but unfortunately, that’s not the case for much of the investing public.  Interestingly, he had a similar disdain for diversification, which probably isn’t so practical for most individual investors:

3. “A lot of people think that if they have a hundred stocks they’re investing more professionally than they are if they have four or five. I regard this as insanity.”
   – 2021 shareholder meeting for the Daily Journal Corporation

Mr. Munger called this ‘diworsification,’ and this philosophy allowed him to achieve above-market returns for several decades and become one of the most successful investors of all time.  This mentality probably only applies to active managers (like he was himself) who devote much of their professional careers to investment research and analysis.  His colleagues Warren Buffet and Jack Bogle would certainly not recommend this approach to most individual investors.

4. “Usually, I don’t use formal projections. I don’t let people do them for me because I don’t like throwing up on the desk, but I see them made in a very foolish way all the time, and many people believe in them, no matter how foolish they are. It’s an effective sales technique in America to put a foolish projection on a desk.”
   – 2003 Herb Kay Undergraduate Lecture at the University of California, Santa Barbara Economics Department

Since we often rely heavily on projections in our DCF valuation models, it’s probably best that Mr. Munger was never a client of ours (actually, I’m sure he would’ve been great to work with).  We understand the fallacies of projections and contend that all models are wrong, but some are useful (to quote the British statistician George Box) when grounded in reason and reality.

5. “I think you would understand any presentation using the word EBITDA, if every time you saw that you just substituted the phrase, bull**** earnings.”
   – 2003 Annual Berkshire Hathaway Shareholder Meeting

We often utilize EBITDA metrics in our valuation models, so Mr. Munger probably wouldn’t have appreciated that aspect of our analysis either.  Mr. Munger clarified this later in the meeting by stating, “There are two kinds of businesses: The first earns 12%, and you can take it out at the end of the year.  The second earns 12%, but all the excess cash must be reinvested — there’s never any cash.  It reminds me of the guy who looks at all of his equipment and says, ‘There’s all of my profit.’ We hate that kind of business.” Fortunately, your business is the former, and you get to keep most of its EBITDA every year.

6. “I am personally skeptical of some of the hype that has gone into artificial intelligence. I think old-fashioned intelligence works pretty well.”
   – 2023 Berkshire Hathaway Annual Meeting

Mr. Buffet took this one step further – “I will confidently wager that no computer will ever replicate Charlie.” Unfortunately, he was probably right.