In one sentence: Phil and Danielle go through the main points of Munger's late-February 2019 Daily Journal meeting: most active managers fail because they diversify into an index while charging for it, and a few well-understood, well-priced businesses are enough.
Key ideas
- Munger calls it focus investing. It is the value idea (great businesses below their value), but with a handful of reliable positions in place of hundreds of cheap ones. Phil says this matches Rule #1 more closely than the name "value investing" does. [00:00–01:30]
- The "best ideas" story. Munger told of a firm that asked each smart employee for a best idea and bought all of them. It failed two years running. The point is that pooling many ideas just recreates an index while still charging active fees. [01:30–03:30]
- Berkshire "tried to do less". They never thought they could be informed on every subject. They worked hard on a few things and took it as enough that they were right on those. [03:30–04:30]
- Managers play a different game. Phil argues that professionals compete against peers over short periods, which is not investing, because a business needs years to show its value. Munger's game is long-term ownership of durable businesses run by able, honest people. [04:30–07:00]
- Entertainment is not advice. The hosts discuss TV stock commentary, noting that its lawyers argued it was entertainment. They read Munger's anger as protective of real investing, like complaining about a "cure for cancer" that is only alcohol in a bottle. [06:30–10:00]
- Munger's holdings. He described owning very few positions (Phil lists Daily Journal, Berkshire, Costco and Li Lu's fund) and hardly ever transacting. [11:30–12:00]
- Pabrai's shift. Danielle recalls an old (2011) interview in which Mohnish Pabrai had moved from roughly ten 10% positions toward smaller, more numerous ones after the financial crisis, since he was fully invested and couldn't buy. Phil says Pabrai is again concentrated, citing his Fiat Chrysler gain. This is a conversation about a 2011 interview and current memory, so check it before relying on it. [12:00–15:00]
- A Singapore class exercise. Phil says a class of ten picks held ten years turned $100,000 into about $1.25 million (32% a year) against roughly $300,000 for the S&P 500. One pick fell almost to zero and the others did okay to great. This is his anecdote, not a controlled result. [14:30–16:00]
- Diversification quote. Munger says anyone, or a computer, can diversify. The skill is spotting the few times you know something is better than average and betting there. Phil links this to the Kelly or "Fortune's Formula" idea: bet more as the odds improve and nothing when they're against you. [16:00–19:00]
- The three-businesses-in-a-town image. If you own three of the best enterprises in a growing town, you are diversified enough, provided you understand them and they are durable. [17:00–19:30]
- Costs and the widow story. Munger's story of a woman who put $300,000 in five stocks in the 1930s and left $1.5 million is told for its lesson on avoiding transaction costs. Danielle notes that hindsight did a lot of work, since you still have to pick the right company at the right price. [19:30–21:30]
- Old versus new access. Commissions once ran about 1% each way, Value Line cost thousands, and libraries lost pages. The tools are now cheap, but the method still has to be learned. [21:00–25:00]
- Teaser. Munger said missing one 1970s investment left his net worth half what it could have been. Next episode covers mistakes of omission. [25:30–27:00]
How it maps to RuleOne
- Position sizing on /holdings/ is the practical form of "few and well understood". The page makes it easy to see how concentrated you are.
- Phil's ten-position, 10% idea is a way to think about how many names to carry. Whether to use it is your call, since these notes only teach.
- /stocks/ is the funnel for finding the few. It does not suggest owning them all.
Buffett, Munger and Graham links
- Concentration appears in Buffett's 1993 letter (diversification protects against ignorance) and in Munger's Poor Charlie's Almanack.
- The Kelly formula is covered in William Poundstone's Fortune's Formula, which Phil mentions.
- The Munger / Pabrai connection is Pabrai's The Dhandho Investor.
- Buffett's partnership letters took a more concentrated line than Graham's wide portfolios.
Words to know
- Focus investing: owning a small number of businesses you understand deeply.
- Kelly formula: a rule for sizing bets by your edge.
- Mistake of omission: a good chance you saw but didn't take.
Try this
Open /holdings/ and list your positions by size. Write one sentence for each, saying why you are sure it is better than average. Any position you can't justify in a sentence may be diversification without conviction.
Check yourself
- Why did the "best idea from everyone" strategy fail?
Answer
Combining everyone's top ideas gave broad diversification that matched an index while still carrying active costs. - What did Munger mean by "we tried to do less"?
Answer
They didn't try to know every subject. They worked hard on a few things they could understand and acted only on those. - How does the Kelly idea apply to investing?
Answer
Bet more when the odds are strongly in your favour, nothing when they aren't.
Short quotes
"We tried to do less." (Munger as relayed by Danielle, ~04:00, auto-transcribed)