Berkshire’s Munger

Vice-chairman of Berkshire Hathaway Corporation Charlie Munger talks to CNBC about the need for creative destruction in business, value that can be found in failure, and the reckless trends in today’s capital markets and government. I appreciate most of what Munger says and I have always liked his candor. Here is the direct link.

I think it is important to note however, that when he and Buffett speak about how well Berkshire has done in terms of book value gains on their business portfolio, it must be acknowledged that Berkshire is a publicly traded company. The way that Berkshire investors have fared is reflected in the price action of its shares, including since this secular bear began in 2000. And on that count, Buffett and company have been struggling through a secular bear with the other long-always equity managers. The chart below is of Berkshire A shares, but it could easily be mistaken for a chart of the S&P (or the TSX).

After peaking with the credit bubble and the risk trade in 2007, Berkshire shares fell more than 50% to March 2009, before recovering and losing with the overall stock markets over the past 3 years. The bottom line is that investors in Berkshire are flat now for 5 years, and if they happened to join near the peaks in 2007, 2008 or 2011, they have lost money.

During the next bear market  (historically due any day now)  those who hold Berkshire shares, like those who hold other stocks, are likely to lose heavily once more.  Perhaps this is no trouble for Berkshire’s billionaire founders, but for the rest of the regular population, years of market loses and especially in one’s 50’s and older can be a life-altering event–not in a good way.

Which leads one to the elephant in the room that long-always advocates dare not address: what is the point of huge capital risk and volatility in order to earn flat to negative returns over years of holding? Who’s interests are passive asset allocations serving?

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5 Responses to Berkshire’s Munger

  1. MG says:

    I was there last year during the Annual Meeting as it was one of the things to do on my bucket list (I know, it’s not for everyone). It was interesting to hear about the Sokol affair during the meeting. Buffett was doing most of the talking while Munger was snacking on peanut brittle or Sees Candies 😎

    I bought a few shares a few months before the AGM, and it’s down slightly. Yet the S&P shows a positive return since I bought the shares. I know last year, the insurance unit was hit, so profitability for BRK wasn’t as great. This year it seems to have turned around with no major natural disasters. However, the home construction, and other home-related businesses haven’t fared as well.

    One of the questions asked by a shareholder: if there would ever be a dividend or some type of income payment paid out to shareholders. Buffett seemed reluctant to that idea. Given the need for yield nowadays retirees can’t live on capital gains alone.
    I’m hoping this will change. BRK is just sitting on big pile of cash. Obviously, there aren’t any bargains to be had. If BRK isn’t buying, then why should I? Maybe stockpiling cash for myself isn’t a bad thing?

    It was a good experience to attend an event such as that. I wouldn’t do it every year. But Buffett & Munger aren’t getting any younger, and who knows when senility kicks in.

  2. michael says:

    Re: Munger

    If ever I was in need of a father figure and Charlie Munger was the only choice, I would prefer to be without a father…. arrogance extraordinair…. Synonyms: airs, aloofness, audacity, bluster, braggadocio, brass, cheek, chutzpah*, conceit, conceitedness, contemptuousness, crust, disdain, disdainfulness, ego, egotism, gall, haughtiness, hauteur, high-handedness, hubris, imperiousness, insolence, loftiness, nerve, ostentation, overbearance, pomposity, pompousness, presumption, pretension, pretentiousness, pride, priggishness, scornfulness, self-importance, self-love, smugness, superciliousness, swagger, vanity

    http://www.zerohedge.com/news/whole-lot-uncivilized-people-out-there

  3. Attila Balazs says:

    Re: MG Is Berkshire Hathaway’s stock as good as its hype?

    http://www.streetsmartpost.com/
    Saturday, May 5.

  4. Geotrader says:

    Here is how Charlie’s ” uncivilized ” gold investor did vs. Berkshire Hathaway equity.
    Senile at 88 or just talking his book ?

    http://screencast.com/t/rqudGBNU

  5. Roberta says:

    On the Long-always method: Most folks where I work who put their money into 401K mutual funds each month seem to be doing OK. Yeah, for a few years they lost money on paper, but if they didn’t sell at the low prices, by now they’re pretty close to breaking even on shares they bought near the peak, but on all the other shares bought before the peak and during the 2008/2009 crash they may be making a profit by now. And if they’ve been buying a lot of shares, then their accounts are fairly large. I got out of the market when it started to crater, and was too dumb to get back in at the bottom (because I didn’t know it was a bottom) so I’ve not made much at all. There may be something to this long-always strategy. HOWEVER, if I were in right now, if I saw steep stock market declines, I’d get out and sit on cash, waiting for the bottom. My guess is that there are so many people with this plan that the decline is going to be much steeper and scarier than last time when everyone starts selling simultaneously.

    I’d think that investing in individual stocks as a long-always investor, if the stock pays dividends AND if it splits occasionally, would pay fairly well over the long haul. However if I saw steep stock market declines, I’d get out. I don’t like seeing minus signs in front of my quarterly return.

    Of course, if the steep decline starts on your 67th birthday, and you don’t sell, you’re going to be hurting in retirement. Guess that’s why they made Social Security.

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