When you locate a bargain, you must ask “Why me God? Why am I the only one who could find this bargain?”
That’s a quote from Charlie Munger, Warren Buffett’s long time partner at Berkshire Hathaway. And it’s one of the greatest quotes about investing ever, because it points to what is probably the biggest challenge that any investor can face…
How do you know? You find a stock that looks really cheap, seems like a good investment – but how do you know for sure that it’s a good place to put your money?
Because if you’re a thinking human that’s ever tried to put together furniture from Ikea, or paint a room in your house, or do some simple carpentry, well, you’re probably pretty aware of the incredible range of mistakes that a person can make…
“Well it looked like the right screw on the diagram…”
“I didn’t mix the paint enough and now one side of the room is darker than the other…”
Sometimes I look back and marvel at how easily mistakes I’ve made could’ve been avoided.
My brother jokes about it by saying “I didn’t think that would happen.” As in, if he had the knowledge to consider all possible outcomes, it would be easy to avoid the mistake. But also, maybe you actually do consider a particular outcome, dismiss it as unlikely, and it happens anyway.
It comes down to knowing what you don’t know – which is some kind of crazy cruel zen shit. Cuz if you knew what you didn’t know then you wouldn’t not know it, now would you!
In my opinion, there’s no place that will make you more aware of what you don’t know than the stock market. And there’s also no place that can make you suffer more for what you don’t know than the stock market.
“Why is the stock I just bought going down…?”
The simple fact is, there are more smart people intently focused on what stocks to buy and what stocks not to buy than any other human endeavor. On any given day Rocket scientists, genetic researchers, MIT grads, Harvard educated fund managers, brain surgeons, electrical engineers, billionaire venture capitalists and investment professionals with 40 years of experience are all scouring the stock market, looking for investments that will make them money…
So, yeah, “Why me God? Why am I the only one who could find this bargain?”
The short answer is of course, you’re not. Any stock you might find has been vetted by maybe millions of investors. Some dismissed it, some invested their money in it, some put it on a watchlist, some may have even shorted the stock because they think it’s crap and the price will head lower.
Wouldn’t it be great if there was a way to know exactly why all these other investors dismissed the stock, or bought, or think it’s going lower?
Well, there isn’t. So you can forget about that idea. Sorry.
So let’s explore Munger’s “Why me, God?” question through the lens of a couple Berkshire Hathaway investments…
One of Berkshire Hathaway’s greatest investments was buying Coca-cola (NYSE: KO) back in 1988. You’ve probably heard the story that Berkshire Hathaway receives an annual dividend from Coke that is equivalent to its initial investment. Talk about compounding! 100% a year is pretty good…
But, was Coca-cola some unknown stock in 1988? Did God speak directly to Charlie Munger “You Charlie, are the only one who sees the value of Coca-cola stock. Buy it. Buy it now!”
No, and please no.
Or take Apple (NASDAQ: AAPL). Apple is Berkshire Hathaway’s biggest investment. But you know, Buffett and Munger didn’t start plowing billions into Apple stock until 2016. The iPhone came out in 2008. Visionary Steve Jobs died in 2011…
Apple’s market cap was $686 billion in 2016. Would you call that a bargain?
Maybe not a bargain in the traditional sense. But absolutely a bargain in terms of its ability to grow unit sales, leverage its installed user base to push App Store, use its economy of scale to get the best pricing from its suppliers in order to grow revenue and profit and return $400 billion to shareholders over the last 5 years with dividends and buybacks…
Buffett and Munger’s Apple investment is up around 500%.
I Call That a Bargain, The Best I Ever Had
So ultimately, I think what Munger is saying is that there aren’t any bargains in the stock market…that if you find yourself saying “Why me God? Why am I the only one who could find this bargain?” then you should probably move on.
OK, let me rephrase that. Of course there are cheap stocks out there that could be considered bargains. Little oil or gold companies with leases that could produce windfall gains if the company can raise enough cash and execute properly…
These stocks tend to remain bargains.
But when it comes to investing, it’s not the share price that makes a stock a bargain. A stock is a bargain when it has the ability to manage costs and grow revenue and profit consistently over time.
FInd a reasonable valuation at which to buy that stock, and you certainly won’t be the only one doing so. In fact, you’ll be in very good company.
I’ll follow up with a few examples of “bargain” investments on Friday. Take care and I’ll talk to you then…