Investing legend Charlie Munger, Berkshire Hathaway’s (BRK-B, BRK-A) vice-chairman and Warren Buffett’s long-time business partner, was recently asked when investors should sell a stock, especially as prices seem inflated amid a “speculative frenzy.”
Munger offered his thoughts during the Annual Meeting of Shareholders of the Daily Journal Corporation (DJCO), where he serves as chairman of the board.
As of Sept. 30, the Daily Journal Corporation’s stock portfolio was valued at $179.37 million. By Dec. 31, the portfolio had reached a value of $260 million, up 45% in just three months. The portfolio includes investments in Bank of America (BAC), Wells Fargo (WFC), US Bancorp (USB), and Posco (PKX), according to the most recent 13-F securities filing. The portfolio also includes a position in BYD, the Chinese manufacturer of electric buses and other vehicles.
A tendency to stick
During the meeting, a shareholder asked specifically about the “very large paper gain” in the BYD position and how Munger decides to hold on to a stock or sell some.
Munger pointed out for the first five years that Daily Journal held BYD’s stock, it “did nothing.” Last year, the stock quintupled.
“What happened was that BYD is very well-positioned for the transfer of Chinese automobile production from gasoline-driven cars to electricity-driven cars,” Munger said. “You can imagine it’s in a wonderful position. And that excited the people in China, which has its share of crazy speculators. And so the stock went way up.”
He said that since the Daily Journal admires the company and likes its position, they have “a tendency to stick.” He also said they’d have to pay “huge taxes” to the federal government and the state of California if they sold.
“On balance, we hold on to certain of these positions when normally we wouldn’t buy a new position,” he said. “Practically everybody does that. One of my smartest friends in venture capital is constantly getting huge clumps of stocks at nosebleed prices. And what he does is he sells about half of them always. That way, whatever happens, he feels smart. I don’t follow that practice. I don’t criticize it either.”
Buffett and Munger aren’t the same on everything
Munger was also asked why Daily Journal has held its Wells Fargo stake, while Berkshire has drastically cut its position. During the fourth quarter, Berkshire slashed its stake in Wells Fargo by another 58%.
“I don’t think it’s required that we be actually the same on everything. We have different tax considerations,” Munger said.
He added, “there’s no question” that Wells Fargo has disappointed long-term investors like Berkshire because of the prior management’s “terrible judgment in having a culture of cross-selling.”
“So, you can understand why Warren got disenchanted with Wells Fargo. I think I’m a little more lenient. I expect less out of bankers than he does,” Munger said.
Later in the meeting, a shareholder asked what the Daily Journal might do with a sudden windfall of profits.
Munger said, “It’s not easy to handle accumulated money in the current environment when stocks are so high and many parcels of real estate of certain kinds is also very inflated.”
“It’s very difficult,” he said. “All I can say is we’ll do the best we can. But when it gets difficult, I don’t think there’s any automatic fix for difficulty. I think when difficulty comes, I expect to have my share.”
Another shareholder pressed Munger on the valuation of BYD and if Munger has a system for selling securities.
“Well, I so rarely hold a company like BYD that goes to a nosebleed price, but I don’t think I’ve got a system yet. And so I’m just learning as I go along. I think you can count on the fact that if we really like the company and like the management, and that is the way we feel about BYD, we’re likely to be a little too loyal. And I don’t think we’ll change on them,” Munger said.
My policy is to ride out frenzies
In the annual letter released in January, Munger wrote that shares of Daily Journal Corporation closed at $404 on Dec. 31, a price “reached amid (1) much speculative frenzy and (2) much forced buying by index funds.”
During the meeting, Munger explained that frenzies happen in the market from time to time.
“You get crazy booms. Remember the dot-com boom, when every little building in Silicon Valley ran at a huge price, and a few months later, about a third of them were vacant? There are these periods in capitalism. And I’ve been around for a long time, and my policy has always been to just ride them out,” Munger said.
He added that he thinks shareholders should also ride them out.
“In fact, what shareholders actually do is a lot of them crowd into buying stocks on frenzy, frequently on credit, because they see that they’re going up. And of course, that’s a very dangerous way to invest. I think that shareholders should be more sensible and not crowd into stocks and buy them just because they’re going up and they like to gamble,” Munger added.
Another shareholder asked Munger if management has a “moral responsibility” to have their shares trade as close to fair value as possible.
“I don’t think you can make that a moral responsibility because if you do that, I’m a moral leper,” he said. “Because the Daily Journal stock sells way above the price I would pay if I were buying a new stock. So no, I don’t think it’s the responsibility of management to ensure where the stock sells. I think the management should tell it like it is at all times and not be a big promoter of its own stock.”
Shares of the Daily Journal fell $6 on Thursday, or a decline of 1.71%, to close at $345.
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.
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