Charlie Munger, US Dollar, Investment Ideas
1. Munger's talk from Wesco: http://www.tilsonfunds.com/wscmtg03notes.html. Other talks are available at http://www.tilsonfunds.com/brkwscnotes.html, and at http://www.tilsonfunds.com/buffettmungerspeeches.html.
2. The basic idea that Munger has is this. Find patterns. Evaluate investments. Put your money in low risk investments that are almost foolproof. The Munger strategy could be boiled down into these points: (a) Choose a few investments carefully and don't diversify. (b) Ignore the efficient market hypothesis. (c) Find companies with sustainable competitive advantage at cheap rates and buy them.
3. The current pattern I see is that the US dollar is collapsing. Consider (a) the speech by Bush denying a collapse, and (b) the fact that Hershey's is raising its price 6%.
4. In general, comapanies which import their raw materials will find their profits shrinking and so will have to increase their prices. Consumers are less likely to buy most of these goods at a higher price and so their profits will decrease. Hershey's sells 90% of its chocolate within the US. So it will experience a downward pressure on its profits.
5. What kinds of companies would benefit from a weaker dollar? (a) Companies which import raw materials but then export most of their products. (b) Companies that consume US raw materials.
6. In general companies which make most of their money outside the US, or which spend most of their money inside the US, stand to make the most money from this downward spiral of the US dollar.
7. What are some of the reasons the downward spiral will continue? (a) The administration has just received a mandate on its policies. It is likely to continue with them for the next four years. (b) The cheaper dollar benefits exporters who will lobby for it. (c) The lower US interest rates reduce the attractiveness of the dollar. (d) The continuing war and the deficit also have a downward impact on the dollar.
8. What will be the impact of rising interest rates on the dollar? As the interest rates rise (which they are beginning to do now) this will have a strenghtening influence on the dollar. However, the other reasons listed above remain in effect and so we will see the dollar continue to slide.
9. For the moment let us ignore the macroeconomic forces and focus instead on good businesses to invest in. The macro world is unstable and difficult to predict. Next, we evaluate some investment opportunities.
10. What are some investment ideas that are worth exploring? The ideas are: (a) RIMM, (b) ENR, (c) SBUX, (d) MSFT, (e) EBAY, (f) GOOG, (g) AAPL, (h) COST, (i) G, (j) COKE, (k) IBM.
11. Why are these good opportunities? That is not clear yet. These opportunities need to be explored on the following basis: (a) How sustainable is the business. (b) What are the competitive threats to the business from other companies in the industry. (c) What are the competitive threats to the business from other industries and products. (d) What has the financial performance of the companies in this industry been like? Based on these and similar questions this companies can be evaluated.
12. What is ENR? ENR is the Energizer Group, which is the parent company of Schick razors. This is an interesting company to compare to Gillette (G).
13. What is a sustainable business? A sustainable business is one where the demand for its products is not likely to disappear in the next 10 years. Consider Starbucks. It is possible that coffee will go out of fashion (for example, it might be demonstrated that it has a negative impact on health). It is also possible that the Starbucks brand will lose its appeal, as its current customers get older and are replaced by a demographic with a different sensibility. However, the odds of these changes in the next 10 years are slim. Generally, people who drink coffee continue to drink it out of habit, and are unlikely to stop. So this is an analysis of the sustainability of the business.
2. The basic idea that Munger has is this. Find patterns. Evaluate investments. Put your money in low risk investments that are almost foolproof. The Munger strategy could be boiled down into these points: (a) Choose a few investments carefully and don't diversify. (b) Ignore the efficient market hypothesis. (c) Find companies with sustainable competitive advantage at cheap rates and buy them.
3. The current pattern I see is that the US dollar is collapsing. Consider (a) the speech by Bush denying a collapse, and (b) the fact that Hershey's is raising its price 6%.
4. In general, comapanies which import their raw materials will find their profits shrinking and so will have to increase their prices. Consumers are less likely to buy most of these goods at a higher price and so their profits will decrease. Hershey's sells 90% of its chocolate within the US. So it will experience a downward pressure on its profits.
5. What kinds of companies would benefit from a weaker dollar? (a) Companies which import raw materials but then export most of their products. (b) Companies that consume US raw materials.
6. In general companies which make most of their money outside the US, or which spend most of their money inside the US, stand to make the most money from this downward spiral of the US dollar.
7. What are some of the reasons the downward spiral will continue? (a) The administration has just received a mandate on its policies. It is likely to continue with them for the next four years. (b) The cheaper dollar benefits exporters who will lobby for it. (c) The lower US interest rates reduce the attractiveness of the dollar. (d) The continuing war and the deficit also have a downward impact on the dollar.
8. What will be the impact of rising interest rates on the dollar? As the interest rates rise (which they are beginning to do now) this will have a strenghtening influence on the dollar. However, the other reasons listed above remain in effect and so we will see the dollar continue to slide.
9. For the moment let us ignore the macroeconomic forces and focus instead on good businesses to invest in. The macro world is unstable and difficult to predict. Next, we evaluate some investment opportunities.
10. What are some investment ideas that are worth exploring? The ideas are: (a) RIMM, (b) ENR, (c) SBUX, (d) MSFT, (e) EBAY, (f) GOOG, (g) AAPL, (h) COST, (i) G, (j) COKE, (k) IBM.
11. Why are these good opportunities? That is not clear yet. These opportunities need to be explored on the following basis: (a) How sustainable is the business. (b) What are the competitive threats to the business from other companies in the industry. (c) What are the competitive threats to the business from other industries and products. (d) What has the financial performance of the companies in this industry been like? Based on these and similar questions this companies can be evaluated.
12. What is ENR? ENR is the Energizer Group, which is the parent company of Schick razors. This is an interesting company to compare to Gillette (G).
13. What is a sustainable business? A sustainable business is one where the demand for its products is not likely to disappear in the next 10 years. Consider Starbucks. It is possible that coffee will go out of fashion (for example, it might be demonstrated that it has a negative impact on health). It is also possible that the Starbucks brand will lose its appeal, as its current customers get older and are replaced by a demographic with a different sensibility. However, the odds of these changes in the next 10 years are slim. Generally, people who drink coffee continue to drink it out of habit, and are unlikely to stop. So this is an analysis of the sustainability of the business.
posted by Asim at 10:50 PM
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