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🦉 Munger's Costco Masterclass 📚
Charlie Munger's Costco investment was a HUGE success. Learn how patience and smart choices paid off BIG! 💰
Jeff
November 06, 2024
In partnership with
Hi there… Today, we're diving into a feast of financial wisdom. We'll explore Charlie Munger's Costco chronicles, unpack how our age affects investment choices, and peek into American Express's impressive economic moat. Buckle up for insights that might just revolutionize your investment thinking!
— Jeff
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Wisdom of the Day
If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make fewer mistakes.
In the pantheon of investment legends, Charlie Munger's relationship with Costco stands as a testament to the power of patient, intelligent investing. From his appointment to Costco's board in 1997 to his unwavering commitment until his passing, Munger's journey with the retail giant offers invaluable lessons for investors.
Munger recognized Costco's unique ability to offer rock-bottom prices while maintaining profitability - a paradox that became the cornerstone of his investment thesis. The company's membership model, efficient operations, and focus on high-volume sales created a stable, predictable revenue stream that proved invaluable over decades.
The numbers validated Munger's vision: consistent 20%+ returns on equity, positive free cash flow, and 13.94% compound annual net income growth from 2014 to 2022. His famous declaration, "I'm never going to sell a share," exemplified his conviction.
Even after Berkshire Hathaway divested its Costco position in 2020, Munger maintained his personal stake, which grew to approximately $100 million. This steadfast belief, even in the face of institutional selling, demonstrated the independence of thought that characterized his career.
Munger's Costco investment encapsulates timeless principles: the power of sustainable competitive advantages, the value of patient capital, and the primacy of customer value. It stands as a shining example of his philosophy in action - combining deep business analysis with unwavering patience to create extraordinary long-term value. — Jeff
MULTIDISCIPLINARY WISDOM
In the intricate dance between time and investment, our perception of value shifts as we age, profoundly impacting portfolio decisions. This phenomenon, known as temporal discounting, reflects our innate preference for immediate rewards over future gains.
Youth often brings an aggressive investment approach, driven by the allure of quick returns and a seemingly distant future. However, this same youthful perspective offers the advantage of time, allowing for higher risk tolerance and the power of compounding.
As we enter middle age, the balance between present and future begins to equalize. The challenge lies in maintaining growth potential while acknowledging closer horizons. Later years typically see a shift towards wealth preservation, yet the fear of outliving assets introduces a new dimension to risk assessment.
Throughout this journey, awareness of our temporal bias is crucial. Setting clear long-term goals, regular portfolio reviews, and education on financial principles can help mitigate its effects. Seeking professional advice provides an external perspective to counter personal biases.
Ultimately, successful investing requires aligning our portfolio choices with our evolving relationship with time and value. By recognizing the influence of age and temporal discounting, we can craft more balanced, fulfilling financial strategies that serve both our present and future selves.
THE MOAT
In the dynamic landscape of financial services, American Express stands out as a beacon of innovation and resilience. The company's Q3 2024 results, with revenues soaring 13% to $15.4 billion and network volumes reaching $420.2 billion, underscore its robust market position and operational efficiency. With a net income of $3.1 billion, American Express demonstrates its ability to generate substantial profits even in challenging economic conditions.
The company's economic moat is both wide and deep, anchored by its unique closed-loop network, premium brand positioning, and focus on affluent consumers and SMEs. This closed-loop system allows American Express to capture a larger portion of transaction value and gain comprehensive data insights, creating significant barriers to entry for competitors.
Key competitive advantages include enhanced revenue capture, customer and merchant loyalty, and a robust rewards program that creates high switching costs. The company's focus on SMEs and corporate clients, coupled with continuous technological innovation, further cements its market position.
However, American Express faces challenges including economic sensitivity, intense competition from fintech entrants, and regulatory risks. Despite these headwinds, the company's strategic initiatives and strong management provide confidence in its ability to navigate future challenges.
Currently trading at a slight premium to its estimated intrinsic value ($158.50 vs. $148.51), American Express's stock reflects market confidence in its strong fundamentals and growth strategies. For investors seeking exposure to a financial services company with enduring competitive advantages, American Express presents a compelling narrative, albeit at a price that requires careful consideration of the potential risks and rewards.
Always Invert
How can American Express increase its cardholder base and grow its transaction volume?
Ask this:
What could cause people to stop using their American Express cards?
High annual fees: Charging excessive fees that outweigh perceived benefits.
Limited acceptance: Failing to expand merchant acceptance, especially internationally.
Poor rewards programs: Offering weak rewards or making them difficult to redeem.
Ask Yourself:
Are American Express's annual fees competitive with the value provided by its cards and rewards programs? Are they actively working to expand merchant acceptance globally and across various categories? Do they offer compelling rewards with a user-friendly redemption process?
REC
📚 Book: Poor Charlie's Almanack
Dive into the wisdom of Berkshire Hathaway's vice-chairman. It's like getting a lifetime of investment advice over a cup of coffee. Learn about mental models and rational decision-making that can transform your investing approach.
📰 Read: Storage Units
Explore the complexities of transitioning to renewable energy. It's a reminder that even green investments need careful scrutiny. Consider how energy storage challenges might impact your portfolio, especially in utilities and tech sectors.
🎥 Video: Why Charlie Munger Loves Costco
Watch Munger explain his admiration for Costco. It's like getting investment tips from your wise uncle. Gain insights into what makes a company truly valuable in the eyes of one of the world's greatest investors.
🎓 Course: The Intelligent Investor
Boost your value investing skills with this comprehensive course. It's like getting an MBA in Buffett-style investing. In today's complex market, understanding how to assess business quality and value can give you a real edge in making investment decisions.
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