Quote from Munger via Pabrai

[netnet]

Motley Fool did an interview with Monish Pabrai three and a half years ago.  He mentioned advice from Charlie Munger, some of which was news to me..

 

He quotes Charlie as saying

[*]Look at what other great investors are doing. (ok I knew that)

[*]Look at so-called cannibals--companies that are buying a tremendous amount of their own stock--I knew that too

[*]Look at spin-off, although a fertile area, I had no idea that Munger would suggest this. (thanks to spinoffmonitor for this)

 

Here is the direct quote from the article:

 

mentioned that if an investor did just three things -- and I don't think Charlie's talked about this publicly -- but he said if an investor just did three things, the end results would be vastly better than the rest. And he said one is carefully look at what the other great investors have done. So, in fact, Charlie was endorsing copying off the 13Fs, right? So he said look at what other great minds are doing.

 

And the second thing he said is, look at the cannibals. And what he meant by "look at the cannibals" is, look carefully at the businesses that are buying back huge amounts of their stock. Because they're eating themselves away, so he called them the cannibals.

 

And the third is, he said, carefully study spinoffs. Of course, you know Joel Greenblatt has a whole book on spinoffs: You Can Be a Stock Market Genius Too. And so I found it interesting that Charlie basically said that investment operation that focused on these three attributes would do exceedingly well.

[Jurgis]

You're saying Munger suggests we should buy Liberties?  8)

[Graham Osborn]

You're saying Munger suggests we should buy Liberties?  8)

 

This might be oversimplistic.  There have been times in history when investors have favored dissolution and others where they have favored consolidation.  Owing to the cheapness of borrowing I tend to think the present categorizes more as the latter (similar to the conglomerate boom but with nonidentical reasons).  The general principles of value should hold in any market environment, but more specialized strategies like "buy spinoffs" may not always be advisable.  I can say personally that many of the spinoffs I have looked at have a ton of debt, so this strategy would lead you to a rather leveraged portfolio.  I believe that is true of some of the Liberties.

[netnet]

You're saying Munger suggests we should buy Liberties?  8)

 

This might be oversimplistic.  There have been times in history when investors have favored dissolution and others where they have favored consolidation.  Owing to the cheapness of borrowing I tend to think the present categorizes more as the latter (similar to the conglomerate boom but with nonidentical reasons).  The general principles of value should hold in any market environment, but more specialized strategies like "buy spinoffs" may not always be advisable.  I can say personally that many of the spinoffs I have looked at have a ton of debt, so this strategy would lead you to a rather leveraged portfolio.  I believe that is true of some of the Liberties.

 

Well, first of all I think you are missing Jurgis's well documented irony.

 

Secondly, Munger would never say blindly buy anything. He is saying other great investors' ideas, cannibals, or spinoffs are places to look. I am pretty sure we are agreed on that!

 

I think that the good spinoffs (for investors) can constitute companies where there are forced sellers and no natural buyers, to paraphrase Klarman's points about spinoffs.

 

(Now it may be that 'index' of spinoffs is a better than average, viz. the Guggenheim index, but that is not Munger's idea, although I think that the S&P has done better lately, at least versus Guggenheim.)