The Enduring Legacy of Charlie Munger with Lawrence Cunningham

[00:00:00] Welcome to excess returns where we focus on what works over the long term in the markets.

[00:00:05] Join us as we talk about the strategies and tactics that can help you become a better

[00:00:09] long-term investor. Justin Carboneau and Jack Forehand are principals at Validia Capital

[00:00:13] Management. The opinions expressed in this podcast do not necessarily reflect the opinions of

[00:00:17] Validia Capital. No information on this podcast should be construed as investment advice.

[00:00:21] Securities discussed in the podcast may be holdings of clients of Validia Capital.

[00:00:24] Hey guys, this is Justin. In this episode, Jack and I sit down with Larry Cunningham, when Charlie Munger passed away and we were thinking about who we could have on the podcast to talk about Munger, his life, his legacy, his contributions to just investing overall on Berkshire Hathaway. We really thought of you as a first person, just given how much time you spent thinking

[00:01:42] about writing about Berkshire Hathaway, Warren Buffett, and Charlie Munger's only an arm's This dad was a lawyer, his father was a federal judge. He graduated from Central High School, I think with a strong sense of ethics and sort of Midwestern roots and appetite for reading and learning, which he developed there.

[00:03:02] And he went off to the University of Michigan,

[00:03:04] majoring in math and he was doing well. But then he was kind of, I think, a little antsy. I think he liked that fine. But he was really interested in investing in business.

[00:04:20] And so when he met Warren, that was the catalyst

[00:04:25] for Big Pivot.

[00:04:27] He sounded like one of those guys that and computer science and political theory, you know, all of the basics in as many fields as you can, they start to overlap, interact and amplify and reduce your propensity to make mistakes, to overlook important details and to see analogies and stuff like that.

[00:05:40] So, you know, success in any field, probably,

[00:05:45] and certainly, you know, he was the catalyst that kind of brought them together? A dinner party in Omaha, hosted by some mutual family, a family that was mutual friends, and someone in the family, it was the Davis family, someone, I don't know if I forget the exact details, but someone said, who knew them both said,

[00:07:02] those two have to meet.

[00:07:04] They're both unusual, and they're unusual in similar ways,

[00:08:05] more engaged and first to tell a joke in a group and amiable. And so they just, but the core disciplines were very much alike

[00:08:12] and they laughed in different ways, but they, I think, you

[00:08:17] know, instantly hit it off and then became, you know, the best

[00:08:22] of friends.

[00:08:24] Last time we were on the podcast, we asked you about the

[00:08:26] key attributes that made Buff control biases. And so he made a conscious commitment to that sort of thinking clearly and rationally and keeping your biases in check. So I'd say those two things really define each of them,

[00:09:40] and maybe the two most important characteristics

[00:09:43] of each of those guys.

[00:09:46] Yeah, one of the most important things I remember

[00:11:00] him doing for Berkshire was he wrote a retrospective element of modesty stuff but what he's talking about Warren and the company and and the shareholders um it was really about I mean they they they got got it for a super cheap price. And what Charlie said, you're going to miss a lot of really wonderful opportunities with that kind of formula. You should look as much at the quality of the business, maybe even more. You might be able to pay a fair price for a good business

[00:13:44] and not always look for getting that good price for a fair

[00:13:48] business. to be a very successful result as a business and as an investment. And Warren came away from that appreciating that the Ben Graham cigar bot approach, quality investing approach, can pay off bigger. And Charlie had learned those principles

[00:15:00] from Phil Fisher, famous investor author of that era,

[00:15:06] a little bit. I mean, Buffett remains a value oriented guy at heart. He's looking for that bargain crazy in expanding his circle of competence. But over time, he did expand his circle of competence. He did invest in tech eventually. Do you think Mugger was a big contributor to that? Yeah, I think so. I think there were many factors. I think that pivot or that shift was less pronounced

[00:17:41] than at C's candies, where a singular one off,

[00:17:45] where they really had a heart just sort of see it. And then he had other influences, including the portfolio managers in his team. But you're right, absolutely, Jack, that Munger certainly encouraged that inclination and supported it. So that was an important factor.

[00:19:06] You mentioned C's Candies before. And I was mean, that's, if we wanted to sit down, hey, let's try to zero in on some things that he had the greatest hand in, I think looking at Westco in particular would be productive.

[00:20:24] Yeah, he also seemed to, as you mentioned, like Costco seemed to be something he really loved. Like whenever I would hear I was obviously none of us were ever with them when they were alone. But if you we were when there were a few other little group or gathering and then were there all there with 7,000 and 40,000 people, and my sense is that their their conversation their relationship was the same at all those scales. So yeah,

[00:21:44] Warren would call and say, Listen, I, I wanted to run this

[00:22:43] tough questions that would get Warren to rethink it. But in his very laconic,

[00:22:47] evuncular sort of manner.

[00:22:51] Yeah, the annual meeting is something

[00:22:52] I think will never be the same.

[00:22:53] I mean, he was such a huge part of that.

[00:22:55] Like the two of them playing off each other,

[00:22:57] it was such a cool dynamic.

[00:22:59] You know, that was something that would be very different.

[00:23:01] And he'll definitely be missed in a huge way at the next one.

[00:23:04] Yeah, you're right.

[00:23:06] It's just not anything you could do. they thought they were a great investment, they could make a lot of money, they always avoided that type of company. Can you just talk about that a little bit? Yeah, I mean, it's true, and way before this has become fashionable, there was one episode, they mostly don't talk about investments they didn't make,

[00:24:23] and I won't give the details,

[00:24:25] but there was a concrete example,

[00:25:25] telling everybody is terrible for you, but it was before that message had really gotten crossed into country.

[00:25:26] So I think that's a really good example, Jack.

[00:25:30] It's not as if they're the nuns who are activists, shareholders now, making sure everyone behaves

[00:25:41] in exactly this way. And I just can't change no matter what and there was a great quote in the Jason Joie garble that he wrote after Munger died It was more than almost anyone I've ever known Munger also possessed what philosophers call epistemic humility a profound sense of how little anyone Can know and how important it is to be open and change your mind So can you talk a little bit about that like his ability to do that and that how that influenced what they did at Berkshire?

[00:27:03] Yeah, I think that's a neat phrase epistemic humility because that I earlier said

[00:28:02] mistakes, that they're biases. People will get things wrong.

[00:28:04] Heck, we live in an uncertain world.

[00:28:07] You can't know what's coming.

[00:28:09] And so you're found to miscalculate,

[00:28:13] over underestimate things.

[00:28:15] And so that's epistemic humility,

[00:28:17] just knowing that almost no one, no one really,

[00:28:20] can get it right, ever, I mean, all the time.

[00:28:24] So that's, I think another important part of that for people, you're trying to get better yourself. I do that I do is try to have appreciation for learning, try to read widely, try to learn all of the, you know, the big the important

[00:29:40] topics and in all the disciplines that you know, the

[00:29:44] discovery of knowledge, had errors, customer loyal, operate business, well, they missed and so they paid a premium, they paid a C-type premium, they missed that with changes in container shipping and international manufacturing that shoes were gonna be much more cheaply made in China. And so they just, that company got destroyed

[00:31:03] and the whole investment went poop.

[00:31:04] So they kicked themselves for not seeing around that corner.

[00:32:05] able to own up and talk about those mistakes is one of the probably many contributors to why they have such a high

[00:32:08] quality shareholder base.

[00:32:11] Yeah, I think you know what one of the reasons Berkshire was

[00:32:14] able to attract the high quality shareholder base was candor.

[00:32:19] And I mean, there are a few things Sarah, but and I think

[00:32:22] the most important was when they when they took control of Warren made quite a few other doozies along the way. And he just just explained them directly to the holders. And, and so, you know, and a lot of them were, you know, most of them had had some, I don't know, element of time horizon in them, that there were there were problems that could be resolved over some

[00:33:43] period of time. And that's a good one.

[00:35:04] And a lot of people can't do what you times a day. We can all benefit from that. The other, just a little more seriously, but as And look, the other he was intellectually humble in another way, too. He, he said, I actually didn't think of most of the things that I know. I just read tons of books. And he's like, that's what everybody should do, because none of us can do all the great thinking. So those are

[00:37:42] two of my favorite ones, Justin, but I've got a list.

[00:38:44] million in 10 years or so. But I think his insight there, you know, it's so tempting for us, we make make an investment, take

[00:38:48] take a stake. And that thing will will grow and you let it let

[00:38:55] it ride and grow and grow and grow. But if you get the magic

[00:39:02] of compounding, but if you reduce it, you know, you're

[00:39:04] pulling out of it pulling out of it, you really believed in that. Absolutely. I mean, to... Munger used to like to quote Einstein that everything should be as simple as possible, but not more so. And it's another useful aphorism or muggerism, like it says in Einsteinism, but it's still it's really useful to cut through a lot of the tangle, the brush, the bureaucracy when

[00:40:26] you talk about a business organization. it absolutely as simple as possible. This is probably like an unfair or impossible question, but do you think there will ever be a partnership and value creation like Buffett and Munger has? Certainly, they would want that to happen. One of the other neat things that they gave us all was the knowledge,

[00:41:44] the references, the philosophy, But to your specific question, you're never going to see an exact replica of what they did. The constructive peculiarities of Buffett and Berkshire and Munger are just unique. So we're not going to have that. But I think that at a different scale,

[00:43:02] we'll see plenty of people proving that these ideas are And it's hard to do that. It was hard while during his time. But it's just really hard. There's a propensity to specialize. You get a lot of incentives around being the leading expert in this particular area, whether it's cyber security or climatology.

[00:44:20] It's hard to have that breadth of knowledge.

[00:44:25]