Podcast with Charlie Munger; My friend's take on the latest employment report; I did the World's Toughest Mudder this past weekend

1) Longtime readers know that, second only to my parents and the legendary Warren Buffett, Charlie Munger is my greatest mentor and hero.

One of the great honors of my life was contributing to Peter Kaufman's brilliant biography of Munger, Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger.

Astonishingly enough, Munger is still mentally sharp at age 99 (he turns 100 on January 1) and is doing new things – like a podcast for the first time in his life!

Somehow, the young guys who do the excellent Acquired podcast interviewed Munger for more than an hour and, as always, he was smart, funny, and engaging. You can listen to it here and here's the transcript. Here's a summary:

Over dinner at his Los Angeles home, Charlie reflected with us on his own career and his nearly 50-year partnership at Berkshire Hathaway with Warren Buffett. He offered lessons and advice for investors today, and of course he shared his speech on the virtues of Costco once again (among other favorite investments).

(He also recently did an interview with the Wall Street Journal, which I'll cover in a future e-mail: Charlie Munger Will Take Your Questions Now.)

Below are some of my favorite excerpts from the podcast episode...

On Berkshire Hathaway's (BRK-B) investment in a handful of Japanese trading companies:

Andrew Marks: There's been a lot of discussion about Berkshire's investments in the Japanese trading houses.

Charlie Munger: That is a no-brainer. Something like that, if you're as smart as Warren Buffett, maybe two to three times the century, you had an idea like that. The interest rates in Japan were half a percent per year for 10 years. These trading companies were really entrenched old companies. They had all these cheap copper mines and rubber plantations.

You could borrow for ten years ahead. Probably about a year you could buy the stocks and it's likely at 5% dividends. A huge flow of cash with no investment, no thought, no anything. How often do you do that? You'll be lucky if you get one or two a century. We could do that, nobody else could.

It looked attractive for half a percent, but you couldn't get it. But Berkshire with its credit could, and the only way you could get it was to be very patient, just pick away little pieces at a time. It took him forever to get $10 billion invested. It was like God just opening a chest and just pouring money. It's awfully easy money.

Ben Gilbert: It's interesting that it's paradoxical. You need Berkshire's credit. But at Berkshire scale, it's actually hard to put enough money to work.

On how Munger came to be on the board of Costco Wholesale (COST) and why Berkshire never bought the stock (or the company outright):

Ben: How did you eventually meet Jim Sinegal?

Charlie: Sinegal asked Warren to become a director of Costco. He was looking for somebody with a financial reputation.

Ben: As an independent?

Charlie: Yes, and Warren wouldn't do it. He said, why don't you get Charlie to do it? I want shorter plane rides to director's meetings and so forth. That's how that happened.

Ben: Did Berkshire ever try to become a shareholder or acquire Costco?

Charlie: They tried to get Warren to buy out the French when they left (Carrefour) and Warren wouldn't do it. Warren doesn't like retailing.

David Rosenthal: Was it just that he doesn't like retail? Or what was the big          objection?

Charlie: Practically everything that was once mighty in retail is gone. Sears Roebuck is gone, the big department stores are gone. It's just too damn difficult as far as he's concerned.

Andrew: You had a bad experience with Diversified Retailing, right?

Charlie: No, we made nothing but money from Diversified. We didn't exactly make it in retailing, but we made a lot of money.

Ben: Wow, and with Diversified, most of the money was not on the retailing operation. You made a lot of that money through...?

Charlie: What happened was very simple. We bought this little pissant department store chain in Baltimore. Big mistake. Too competitive. As the ink dried on the closing papers, we realized we made a terrible mistake. So we decided just to reverse it and take the hits to look foolish rather than go broke. We just told get us out of this.

By that time we already financed half of it in covenant-free debt, and so forth. They had all this extra cash and our own stocks got down to selling enormous... we just, in the middle of one of those recessions, we just bought, bought, bought, and bought. All that money went right into those stocks. Of course, we tripled it just sitting on our ass.

Ben: That led to Blue Chip?

Charlie: Yeah, it was part of the early success of Blue Chip.

Ben: Wow. You mentioned Warren doesn't like retailers.

Charlie: Blue Chip did something else you both don't know about. We bought a little pissant savings and loan company for maybe $20 million. When we left that thing, we had taken out of our little $20 million investment over $2 billion in marketable securities, which went into Nebraska insurance companies as part of their bedrock capital. We had some wonderful early years, and that's what everybody needs, those wonderful early years.

On the importance of making a few big investments in a lifetime:

Ben: As you reflect back on one of these few great companies in a lifetime that you should bet big on, what advice would you have for David and I as young partners looking for a few of these in our lifetime? Things to look out for?

Charlie: You may find it five years after you bought it. These things may work into it or your own understanding may get better. But when you know you have an edge, you should bet heavily. When you know you're right. Most people don't teach that in business school. It's insane. Of course you got to bet heavily on your best bets.

Ben: How do you develop that level of conviction to know?

Charlie: You work at it. You do a lot of reading, thinking, and visiting.

Munger's comments on the auto industry:

Ben: The topic then turned into the automakers and the future of the car industry.

Charlie: How hard would it be to go into the auto business, to have some big killing? Who's going to win? Who knows? The whole thing has been thrown way up in the air by all these electric cars, all these big, new capital requirements, different ways of selling cars. Plus they got these tough unions. See I just don't even look at the auto industry!

Ben: Do you think it's more investible today than it was 50 years ago because of the disruptive innovation of electric?

Charlie: Well maybe for one or two electric cars that are really good, maybe, but certainly nobody else. It's too tough. BYD was a miracle. That guy worked 70 hours a week and has a very high IQ. He can do the things you can't do. You can look at somebody else's auto part and you can't figure out how to make the goddamned thing. You can't do that, you see.

: Charlie, you invest in Hyundai.

Charlie: Yes, but they're clever too.

: How was that investment for you?

Charlie: I lost money, not much because I was stubborn, I held out until I got back to almost what I paid for it when I sold.

After discussing various brands like Nike, LVMH, Hermès, and Costco's Kirkland, Munger commented on how he first learned about the amazing, enduring value of a strong brand like See's Candies:

David: We've spent a lot of time studying these brands. How do you look at the value of a brand?

Charlie: It's hard for us not to love brands, since we were lucky enough to buy See's Candies for $20 million as our first acquisition. We found out fairly quickly that we could raise the price every year 10%, and nobody cared. We didn't make the volumes go up or anything like that. Just made the profits go up. We've been raising the price by 10% a year for all these 40 years or so. It's been a very satisfactory company.

It didn't require any new capital. That's what was good about it: very little new capital. It had two big kitchens and a bunch of rental stores when we bought it, and now it's got two big kitchens and a bunch of rental stores.

Charlie See was a playboy, and his brother ran the company, his older brother, and dominated it completely. And when he died, Charlie made his brother as executor, and now he needs a lot of money to pay death taxes. He doesn't have it. It's due eight months or something later. They really wanted to sell it so they can pay the death taxes. See, it was only making $4 million pretax when we bought it.

Later in the interview, Munger talked about the brands of Berkshire Hathaway holding Kraft Heinz (KHC):

David: After that, our conversation turned to Kraft Heinz and why Heinz is able to have pricing power while Kraft is not.

Charlie: It is very interesting. There's something about the flavor of ketchup on a goddamned fried potato... that you are really unwilling to change brands over. They want Heinz! And so, you can raise the price of Heinz pretty much. If you try and raise the price of Kraft cheese, everybody goes into rebellion, including the final customer, the housewife. They don't care that much about whether cheese is Kraft or not.

Ben: Why do you think that is?

Charlie: Something about the sauce flavor. It's happened elsewhere. In Korea, one guy, a Chinese guy, controls all the sauces. Every single major sauce, he controls at least 95% of them.

Ben: And it's because sauces have such a particular flavor that no one can imitate the trade secret?

Charlie: Yeah.

Ben: And that gives pricing power?

Charlie: They get used to it, and they like it.

: Is that Coca-Cola as well?

Charlie: Yeah, sure.

Munger also showered the founder and CEO of Chinese electric-vehicle maker BYD, Wang Chuanfu, with praise:

Ben: Have you ever had an investment like that before? I think you've invested something like $270 million that's now worth something like $8 billion in BYD.

Charlie: Well, very few people have an investment... That's a venture capital–type investment. It happened to be a thinly-traded public company, and we bought it as a venture capital–type company. But it was a venture capital–type play, and they just put the foot right in the floorboard and played it hard.

By the way, both BYD and we tried to talk them out of going into the car business. They were gonna buy a bankrupt car business, and go into the car business. I said that's a graveyard for you, so why would you want to do that? And he paid no attention to us and went right ahead.

Ben: Had you invested already when he told you this plan?

Charlie: Yes, yes. And it worked fabulously well. After huge mistakes! They almost went broke with their early dealership building system, almost went broke.

David: What captivated you about it though?

Charlie: The guy was a genius. He had a PhD in engineering, and he looked at some great part... I've never seen anybody like that. He could do anything.

He is a natural engineer and a get-it-done type production executive, and that's a big thing. It's a big lot of talent to happen in one place. It's very useful. He solved all his problems on these electric cars, the motors, the acceleration, the braking, and so on.

David: How would you compare him and BYD to Elon and Tesla?

Charlie: He's a fanatic that knows how to actually make things with his hands if he has to. He's closer to ground zero, in other words. The guy at BYD is better at actually making things than Elon is.

Lastly, Munger credited Peter Kaufman for these wise words, "a young man knows the rules, and an old man knows the exceptions," and when asked about it, said:

Ben: What are some of the exceptions that you found the most useful in life?

Charlie: Take those goddamned Costco hotdogs. That's an exception. Anybody else would have raised the price of hotdogs a long time ago. They just don't do it. You know how famous it is. You bring your kids, and know they've got something going there that's worth extra money to them, and they just don't destroy it.

2) My very smart friend who anonymously posts on X, formerly known as Twitter, makes an interesting case in this 10-post thread that the latest employment report, which shows the creation of 150,000 jobs last month, might be artificially high due to noise in the data-collection process that occurs at all inflection points. Excerpt:

If he's right – and I suspect he is – it's likely good news for stocks because it means the economy isn't as white-hot as other measures indicate, which likely means the U.S. Federal Reserve is done raising interest rates and may start cutting sooner than investors currently expect.

3) This past weekend I ran my seventh World's Toughest Mudder!

It's a 24-hour obstacle race and it took place from noon Saturday to midday Sunday in Granbury, Texas, about an hour outside of Dallas.

The goal is to complete as many five-mile laps as possible, each with 20 obstacles – including electric shocks, mud, freezing water, monkey bars, crawling under nets and barbed wire, climbing over walls, etc.

I had a great race... I completed 13 laps (65 miles and more than 200 obstacles), which was good enough for third place in my age group (55 to 59 – I just turned 57).

Below are pictures of me with my friends before the race and afterward... The second picture at the end of the race is of the only four guys who have ever run 75 miles over the age of 50.

I set the record in 2016, nine days after my 50th birthday. My buddies Mark James and Joe Perry on the left tied me in 2019 and 2021... and this year, John Castle (standing next to me), joined us at age 56.

Right now, I feel like a fleet of trucks ran over me – it seems like every muscle in my body is aching!

In future e-mails, I'll discuss why I do these races and other extreme sports, and how it benefits me as an investor... so stay tuned!

Last but not least, thank you to the more than two dozen friends and readers who donated nearly $20,000 on a per-mile basis to motivate me and support my Ukrainian friend Artem, who's fighting on the front lines to defend his country. You can join them by donating here: www.taps.org/Tilson.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.