The Learnings And Blunders Of Charlie Munger

“Of course, there’s going to be some failure in making the correct decisions. Nobody bats a thousand. I think it’s important to review your past stupidities so you are less likely to repeat them, but I’m not gnashing my teeth over it or suffering or enduring it. I regard it as perfectly normal to fail and make bad decisions. I think the tragedy in life is to be so timid that you don’t play hard enough so you have some reverses…” Charlie Munger, Berkshire Hathaway’s right-hand man and investment partner to Warren Buffett.

Kokkie Kooyman, head of SIM Global, draws on the learnings (and blunders) of Charlie Munger, to show that making mistakes in the world of investing is both inevitable and a necessary evil. 

Kokkie says: “In the past, I’ve often felt intimidated sitting on stage with other fund managers who never seemed to make mistakes and appeared to have all the answers. So it was reassuring at this year’s Berkshire Hathaway Annual General Meeting in May to hear Charlie Munger speaking about the importance of making mistakes”.

Every year, the two business legends, Warren Buffett and Charlie Munger, sit in front of thousands of investors who flock to Omaha to hear their wisdom.  This year, Charlie Munger admitted that he still makes mistakes even after many decades as a business person and investor.  He also said that it is important to “rub your nose” in your mistakes, that admitting a mistake was simply just another layer of ignorance removed.

It is through the process of making mistakes and getting feedback from the market, that you can learn and establish sound business judgment, paving the way to future successes.

And yet, says Kokkie, in investments the golden rule ironically always seems to be: Don’t admit to getting a new insight and making a change.

So we make mistakes. But how do we avoid them?

Keep it simple

Charlie’s view is that a great way to avoid mistakes is to invest in a business that is simple to understand. If you can’t understand it, don’t do it, is a simple rule of thumb.

And if, after you’ve made a mistake and you can’t explain why you failed, the business was too complex for you to have invested in in the first place, says Buffett.  For Munger and Buffett, it is essential to understand why they made a mistake, so they can learn from the experience and make sure it won’t be repeated.

Mistakes of omission

Our biggest mistakes were things we didn’t do, companies we didn’t buy.

Munger especially recommends paying attention to so-called “mistakes of omission” (mistakes you make by not doing something):

Says Charlie, “The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it, but didn’t act on it. They’re huge mistakes — we’ve lost billions. And we keep doing it. But we are getting better at it.”

There are two types of mistakes:  1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.

Don’t forget the margin of safety!

Many fund managers with excellent track records lost a lot of money by investing in US investment banks and/or AIG during 2008, believing there to be sufficient margin of safety.  Likewise, African Bank seemed like an excellent investment at R2 a share with a huge margin of safety. But you needed considerable specialist knowledge and a lot of research to know that the safety wasn’t really there.

Says Kokkie, I’ve learnt the hard way that the margin of safety only really gives you safety when you have enough knowledge.

A classic example was our investment in a small business called Accident Exchange (in 2007). It ticked all the boxes, such as: Honest management had started the business and were still the majority shareholders; there was sufficient scope for growth; they had just overcome major setbacks; they were very undervalued after a 75% price decline. But we didn’t understand the competitive environment they were in and that the large insurance companies were squeezing them to death.

Challenge your investment ideas!

Another way to avoid mistakes is to have someone who you can run your decision by so you can improve your odds of success, which is what Buffett and Munger do for each other. Having a diverse team of experienced people that you trust and respect to look at a potential investment is critical if you want to avoid making too many mistakes. And of course this is what the team of equity analysts do at SIM Global.

“We challenge each other constantly on our investment ideas and interrogate the detail,” says Kokkie. “We don’t have the powers of crystal ball-gazing, but what we do have is a thorough investment process. We make sure we understand the fundamentals of the businesses we’re investing in, we consider the market concerns and determine its fair value through rigorous research and analysis. Over the years our process has increased its robustness, with sufficient checks and balances in place to help minimise human error”.

Sanlam Global Financial Fund: an excellent 10-year track record

Despite the worst market correction since 1929, a US-led banking crisis and a European sovereign debt crisis, an emerging market currency collapse and many other problems, the Sanlam Global Financial Fund has generated an average annualised return of 10.2% since launch date (8 April 2004) to 31 August 2014. This is for a lump sum invested at the start of the measurement period.

Source: Morningstar (September 2014)

Looking ahead, says Kokkie, it’s very unlikely that we’ll have a repeat of the financial environment of 2008 – 2011 soon, yet financials globally are trading at 50% of the values they traded in 2007. The average P/NAV in 2007 was 2.67x, now it is 1.34x. P/NAV ratio shows how expensive a share is compared to its net asset value, so the lower the ratio, the better.  All this bodes well for the Sanlam Global Financial Fund.

Kokkie Kooyman, Head of SIM Global, received the Investment Week Fund of the Year award (category: financials) four years in a row (2010, 2011, 2012, 2013) for the Sanlam Global Financial Fund. The fund also received the award for the Best Specialist Fund for 2012. The full details of these awards are available from the manager.

Disclosure: Important information relating to the fund, such as its fees and total expense ratio (TER), is available on the fund’s fact sheet. Past performance is not an indication of future performance. For the calculation of the performance figures stated, the net asset value (NAV) to NAV values were used and the calculation assumes that income distributions, before the deduction of applicable taxes, were reinvested. An individual’s actual investment performance may differ as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax.

International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information.