Lost in the noise of the weekend and then heading out to a conference here in Orlando the first part of this week, I ran behind on some of my required reading. Last night, I sat down and got quite a lot of reading done. I feel like I am just about caught up for now. Among the documents in my stack last night was the transcript of the Daily Journal (DJCO) annual meeting. As always, Chairman Charlie Munger allowed what he fondly calls the cultists to ask questions about the markets and the world once the corporation's business was completed. Munger is one of the most successful investors of our time, and it is always a good idea to examine his answer in search of advice and ideas.
Munger was asked about American Express (AXP) , which is one of the largest holdings in the Berkshire Hathaway (BRK.A) portfolio. He replied "I'm going to give you an answer that will be very helpful to you because you're somewhat confused about what the exact future of American Express will be and I want to tell you, I'm confused too. I think that if you understand exactly what's going to happen to payment systems 10 years out, you're probably under some state of delusion; it's very hard to know."
I found that interesting, as I was at the American Bankers Association National Community Bank Conference this weekend and had a great discussion with folks from Discover Financial Services (DFS) . I was not looking for such a conversation, but Discover had a booth that was serving coffee that Is far superior to the hotel offering, and I got caught up in the discussion. Discover is making a push to capture debit card business from community banks, and I think they may very well win market share from MasterCard (MA) and Visa (V) in this segment. Payment is a changing landscape, and I would be extremely reluctant to make a firm bet on who wins over the next decade. The Big Three will still be a part of the market, but companies like Discover and PayPal (PYPL) are going to make some inroads. Also, you can never rule out some innovative new company changing the whole payments game, as a decade is a very long time in the technology world.
Munger also talked about the impact of index investing on the market landscape. He told the cultists at the meeting: "The indexes have caused just absolute agony among the intelligent investment professionals, because basically 95% of the people have almost no chance of beating it over time. And yet all the people expect if they have some money, they can hire somebody who will let them beat the indexes. And of course, the honest, sensible people know they're selling something they can't quite deliver. And that has to be agony."
For many in the investment industry, it is agony. A lot of people are at starting to ask themselves why they should be paying hedge funds 2 and 20 or institutional managers 1% of assets when it is statistically probable that they will outperform with an index fund that charges 10 basis point? Last week when reviewing 13F filings I noted that a lot of people were paying a lot of money for closet indexers that will underperform because of fees before they even have a chance to make bad decisions that depress returns further.
Of course, back in 2015 Munger gave you the solution to dealing with the pressure to beat the index. He said then that "Robofunds and Index Funds are beating 98% or something of managed money over long period. If I had to manage $200 billion and were expected to beat the index, I would not welcome the job. I think people who have a good chance of performing well are those who are willing to work in less efficient markets."
What do inefficient markets look like? They look like community bank stocks, small-cap REITs and closed-end funds. They look like companies that are growing nicely in a boring business, and have little to no Wall Street sponsorship. They look like family-controlled companies, where the people running the company have a lot of skin in the game and tend to ignore the day-to-day in favor of the decade-to-decade.
John Templeton added to the chorus, remarking once that it is hard to beat the averages by doing what everybody else is doing. In spite of this, I would venture a guess that when the vast majority look at their account today, they hold the same stocks that everyone else does and imagines they can somehow trade around them better than everyone else. You can't. Just ask Charlie.