Monday, December 05, 2005

The World According to Poor Charlie

The holidays come early for Charlie Munger fans: Kiplinger sits down with Charlie for a short interview, and as with pretty much everything he writes/says, it is absolute must read material. Some of the highlights:

What are your work styles like?
We have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.

What would a good investor's portfolio look like? Would it look like the average mutual fund with 2% positions?
Not if they were doing it Munger style. The Berkshire-style investors tend to be less diversified than other people. The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?

Should people be investing more abroad, particularly in emerging markets?
Different foreign cultures have very different friendliness to the passive shareholder from abroad. Some would be as reliable as the United States to invest in, and others would be way less reliable. Because it's hard to quantify which ones are reliable and why, most people don't think about it at all. That's crazy. It's a very important subject. Assuming China grows like crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock? That is a very intelligent question that practically nobody asks.

Ibbotson finds 10% average returns back to 1926, and Jeremy Siegel has found roughly the same back to 1802.
Jeremy Siegel's numbers are total balderdash. When you go back that long ago, you've got a different bunch of companies. You've got a bunch of railroads. It's a different world. I think it's like extrapolating human development by looking at the evolution of life from the worm on up. He's a nut case. There wasn't enough common stock investment for the ordinary person in 1880 to put in your eye.

Great Stuff. I think Charlie and Mr. Burns are the only people who still use the word Balderdash.

For the real Charlie die-hards, a Ben Franklin museum exhibit is beginning to make the rounds.

More is out on the fee-filled Mini-Berkshire shares that Wachovia is creating.

University of Kansas students get ready to pitch businsess to Warren.

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Jim Rogers throws that phrase around too. Great minds/investors think alike. :)

So maybe one of you can help me out. What is it that makes Jeremy Siegel's data balderdash? Just because the firms were different (and fewer) 100-200 years ago, does that make the data factually incorrect? Would Charlie have a different answer if someone said, "What was the average equity return from 1800-1900?"

It seems that Charlie is disagreeing with an (unstated) inference from the data, not the data itself. Can anyone provide more clarity?
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