Buffett and Munger have been best buddies for as long as people can remember.
They enjoy each other’s company because they have each found an equal in terms of intellect. The relationship keeps them on their toes and they sharpen each other’s thinking.
Investing (as with anything in life) is burdened with cognitive biases and it is important to catch each other’s bullshit, in order to maintain their intellectual honesty.
They have deep respect and mutual worthiness for each other which makes it hard for them to argue even though they may disagree on certain matters.
Some may be surprised that they have disagreements since they have always appeared cordial and supportive in front of an audience. So, what are the issues that Buffett and Munger don’t see eye to eye on?
#1 – Investing in China (or outside of US)
“Never bet against America” is a key mantra of Warren Buffett. He reiterated in Berkshire Hathaway’s AGM during the lowest point of the pandemic in 2020. He encouraged investors not to give up on the U.S. and that is one single best bet you can make for a long time to come.
It wasn’t the first time he has said it. He has been consistent even when you looked back at Berkshire’s past AGMs and other occasions Buffett spoke to the media.
But Munger is less optimistic about the future of the U.S. The disagreement with Buffett wasn’t a recent event.
We can go back 16 years ago to the Berkshire Hathaway’s AGM in 2005, in the excerpt video below:
Buffett was touting the “never bet against America” mantra and Munger just plainly said he believed that the U.S. was at its apex, which suggests it is likelier that U.S. is going to decline in the future.
Munger doesn’t make a lot of investments in his life and he was proud that he had 3 – Costco, Berkshire Hathaway and Li Lu’s Himalaya Capital fund.
Munger has been bullish about China and has invested in China for more than 15 years via Himalaya Capital. He was also vocal about his bullishness in China during Daily Journal Corp AGM in 2020, “the strongest companies in the world are not in America, I think Chinese companies are stronger than ours and are growing faster.”
He didn’t merely say it. Daily Journal Corp invested 19% of its portfolio into Alibaba in 2021. It held only 5 stocks and for the first time, a big position in a Chinese company.
Contrast this with Berkshire Hathaway’s portfolio whereby the only famous China stock in it was BYD. And it was Munger who recommended Buffett to meet Wang Chuanfu, which led to Berkshire’s investment in BYD in 2008. But Buffett didn’t make any more investment into Chinese companies since then. And BYD is just 2% of Berkshire’s listed equity portfolio.
Two of the smartest and wisest people in the world who are the best of friends did not share the same investment convictions.
#2 – Investing in index funds
It is ironic that the best stock picker in the world is a fervent supporter of index investing.
Considering that Buffett said before, “I’d be a bum on the street with a tin cup if the markets were always efficient.” Yet, he invited Jack Bogle, the founder of Vanguard Group and probably the icon of index investing, to Berkshire Hathaway AGM in 2017 and sang praises about him.
Buffett even picked an index fund to pit against Protégé Partners LLC in a 10-year, $1m dollar bet and Buffett won as the index fund performed better.
Despite all the praises about index investing, Berkshire Hathaway’s portfolio is actively managed and no shreds of index funds in it.
I think Buffett wasn’t contradicting himself. He built his career on exploiting inefficiencies in the markets and he knew how hard it was. Although he believes he can pick stocks better than most people, he doesn’t expect the majority of the people to be able to – especially not his heirs.
He was explicit with his advice to his heirs in his 2013 annual letter to Berkshire shareholders:
My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
Munger doesn’t outright oppose index investing. In fact, he agrees with Buffett that most investors are better off investing in passive index funds. But he disagrees he needs to do it.
Between the choice of Berkshire shares and index funds, he is sticking with the former as he said in 2021 Berkshire Hathaway AGM, “I personally prefer holding Berkshire to holding the market… I’m quite comfortable holding Berkshire. I think our businesses are better than the average in the market.”
In contrast, Buffett said, “I’ve never recommended Berkshire to anybody,” in the same meeting.
#3 – Wells Fargo & Co.
The disagreements between Buffett and Munger are not just limited to the big ideas. They disagreed on individual stocks too, like Wells Fargo.
Berkshire Hathaway has invested in Wells Fargo for 31 years and finally sold everything in May 2021. That’s a freaking long time. What changed?
Wells Fargo was embroiled in scandals of mistreating customers and it had aggressive sales targets for its staff. Buffett said in an interview with CNBC in 2020 that Wells Fargo had a dumb incentive scheme and was slow to correct the problems.
Meanwhile, Munger-managed Daily Journal Corp maintains its huge position (32% of its portfolio) in Wells Fargo.
Munger said in Daily Journal Corp in 2021, “there’s no question about the fact Wells Fargo has disappointed long-term investors like Berkshire,” and added, “Warren got disenchanted with Wells Fargo.”
He also said that “I think I’m a little more lenient, I expect less out of bankers than he does.” Most importantly, Munger opined that the management wasn’t a fraud, just aggressive in pursuing sales which was short-sighted in nature.
Who should you listen to?
Both Buffett and Munger are the most revered investors in the world. Their words carry weight. It is easy if they sing the same tune but on important matters such as China and index investing they diverged. Who should you listen to?
That’s where you need to put on your thinking cap. Everyone has a different situation and you have to think with contexts instead of blindly following someone – not even Buffett or Munger.
Even the best minds in the world don’t think the same on all things so you have to think for yourself.
Your advantage is also going to be different from theirs. For all you know, none of their advice may even work for your situation. You need to find your own edge and play to it. Good luck!