The genesis of this post is a transcript of Charlie Munger’s comments at USC twenty years ago. It’s rather long and chatty, but I managed to slog through the whole 90 yards. Munger provided some insight into investment objectives and constraints at Berkshire Hathaway that I had not known and found useful.
For example, Berkshire must make large investments, given the sheer size of the fund. Its size limits the commitments its managers can time-effectively consider. It does not invest in technology companies. Munger openly states that he and Buffett don’t know much about technology and further, do not invest in tech wave companies — companies that grow by riding a big tech spurt or trend. Both small and tech are out for Berkshire Hathaway. That is part of Buffett and Munger’s “Model.”
I’m a small time investor, choosing only one or so stock to put my IRA cash into, once every few years. I have never thought of my investments as having a strategy. Nor do I profess to having a model. But lately I have begun to think that I do have a model — albeit an unarticulated one. My investments have been in only a handful of companies: Panera Bread (where I worked), 7-Eleven (which I wrote a case on), Nordstrom (which I wrote a case on), Clearwire (about whose interim Chairman I worked on a case), Apple (which was founded in my hometown of Cupertino, CA) and Wet Seal (which I researched while writing a note on women’s apparel).
Obviously I like to invest in companies I have learned something about. And I have learned from each investment: Panera went through some trouble with food cost while I was there, and the stock price reflected that. When I went to business school, the stock was not performing well, and I eventually sold at a loss in order to pay tuition. In hindsight, now that the stock has recovered, I wonder if I ought to have taken out a low interest loan in order to maintain my position. Therein lies lesson number one: I don’t like being in debt. I suppose if I had thought about it, I would have known that Panera is a stable company with good management that would figure it out. Plus, markets go up, markets go down. But I didn’t like being in debt, and I had already taken out loans to be in school. There’s some risk intolerance there. I sold Apple at the end of business school for essentially the same reason. If I had held it, I could have purchased a Tesla Roadster with the proceeds.
7-Eleven, Clearwire, and Wet Seal are three of a kind. I purchased them all because I liked the management changes happening at each. The difference in return ended up being how long I held them. I purchased a large lot of Wet Seal at $0.90 a share, and it rapidly rose to $9. At that point, I probably should have sold. I bought at rock bottom, which itself is hard to do, largely by accident and faith. But I lacked any sense of when to sell, so I held. 7-Eleven and Clearwire I held until I was forced to sell in an acquisition of the entity. 7-Eleven was before business school, and I did well — but not as well as I would have if I had sold on the speculative open market just before the tender offer was completed. Clearwire was after business school, and I hung on through to the tender offer, hoping for a 7-Eleven-like outcome. (It was.)
Nordstrom, I made a modest profit on after writing the Harvard Business School case on its turnaround effort, which I believed in.
I used to think that I should make a great many more investments, rather than holding money market or index fund balances at times when I don’t know where to put cash. But I found that sometimes having cash enabled me to make bigger bets on things I believed in. If I hadn’t had cash, I likely would have missed the Clearwire opportunity. Munger offered a second reason that not being invested is ok: big bets come along infrequently. He asks if we had a punchcard with only 20 holes, one per potential investment in our lifetimes, which would we make? There’s something gratifying about external validation and I certainly felt some relief at his remarks.
More so than that, I felt challenged to define and aggressively pursue an investment thesis of my own. I am mindful that the country is underfunded in Social Security and that individual Americans are underfunding their retirement accounts. I’ve decided that I’d like not to be a poor older person, so I primarily invest my IRA funds in search of long term growth. I still prefer investing a large amount in one company at a time, and actively monitoring the commitment until it is time to sell. I don’t plan to become a professional stock picker, so one at a time seems about as much as I can comfortably handle. Beyond that, I would like to keep to my practice of investing in companies I know with some depth. Maybe I am a customer, maybe I am a researcher or business writer, maybe I know something about its management team. Whatever ‘it’ is, I would like to have the confidence that it is both doing a best-in-class job, and heading somewhere better.
This isn’t much of a model for an investment fund. But for my private future, run out of my kitchen table trading desk, I’m ok for now.