BOOK REVIEW: CHARLIE MUNGER: THE COMPLETE INVESTOR

 HELPS TO BE A GOOD INVESTOR, TO BE A GOOD BUSINESSMAN

AUTHOR: TREN GRIFFIN

 

Podcast here

Charlie Munger along with Warren Buffett are the co-chairmen of American conglomerate Berkshire Hathaway, the $715 billion – almost 25 times the size of the Uganda economy, enterprise that is into everything from insurance to power generation; railways to furniture and from paint to candy makers.

The diverse nature of the company’s holdings is what happens when rationale investors -- Buffett and Munger, are in charge of a company. In their search for good companies, run by good managers they can work they have built a literal mosaic of companies, which on the surface seem to follow no rhyme or reason.

"While Buffett is widely acknowledged as the greatest investor of all time, Munger is considered his equal at least in how he thinks about business and investment. The two of them have been at the helm since 1970 and bolted together a wealth creation machine the likes of which have never been seen. As of writing this review Berkshire Hathaway was trading at about $480,000 (sh1.7b) a share, and that is not a typo.

Author Tren Griffin distills the wisdom of Munger in this compact book and below are a few of Munger’s thoughts on investment and business.

1.       Understanding how to be a good investor makes you a better business manager and vice versa

He says it in the book that the number one job of the investor is asset allocation, committing money with the hope of future return. To do this optimally it helps to understand the business you are investing in. On the flip side as a businessman if you understand how investors think you can better structure your business for long term success, because investors are looking for businesses that can sustain high returns for the long term. A businessman who thinks like an investor will focus on building the companies value consistently.

2.       Betting on the quality of the business is a better than betting on the quality of the management.

A business quality is largely dependent on its ability to develop and sharpen its competitive advantage, that thing that it can do profitably better than the competition. By developing and maintaining its competitive advantage not only will it keep the competition at bay or people dissuade people from joining the industry, it allow them better flexibility in determining pricing of their products or services. Those are the best businesses to be in, than those whose pricing is determined by their competition.

3.       The most effective way to genuinely reduce risk is to know what you are doing.

When you leave home to drive to work, no one seeing you having done the trip to and from often, fear that you will not return at the end of the day. But give the car keys to your ten-year old child to drive and the risk rises exponentially. The way to mitigate risk is to know more about the business or investment. Just because your neighbour has made a killing in the mobile money business doesn’t mean you will enjoy equal success, mostly because you don’t know what he knows.

 

4.       Excess cash is an advantage not a disadvantage.

They say profit is an opinion but cash is fact. Anyone who has been in business knows that what is in the profit and loss statement may not reflect what is in the bank account. While the accountants fret about too much cash lying around, because the returns on it are not much, cash on hand allows you flexibility and may be the difference between surviving a crisis – like the covid-19 pandemic, or not. At last count Berkshire Hathaway has $149b in cash and has served as the savior of other less liquid companies during the financial crisis of 2008 and more recently with Covid-19. So actively building cash reserves in the business should not be frowned upon even if the bean counters think otherwise.

 

5.        The only way you win is by knowing what you are good at and what you are not good at and sticking to what you are good at.

Munger and Bufffet always talk about circle of competence and how important it is to know the boundaries of this circle. As suggested above to stray out of this circle increases the risk of failure. How many businesses have come unstuck because following success in one endeavor the promoter thinks he can replicate the success in another field of business? Munger counsels concentration of ones efforts for better returns, while diversification seems to be a hedge against future disaster, it risks pulling you out of your circle of competence, increasing the chance for loss of capital.

 

Munger and his partner have been in the business of investment for more than 100 years between themselves, so when they talk you listen.

Its fantastic book, more than worth its weight in gold.

 

The book is available on Amazon.

TO TORTURE OR NOT TO TORTURE?

Podcast here

In the last few days the critics have had the government on the back foot, following the release of author Kakwenza Rukirabasaija. Kakawenza had been in detention since the end of last year during which time he claimed he had been tortured by state agents and had the scars to prove it.

He was charged with offensive communication for saying unflattering things about President Yoweri Museveni and his son Lieutenant General Muhoozi Kainerugaba, after which he was released on bail. As I write this it has been reported he has jumped bail and fled the country.

This sequence of events is disturbing on very many levels.

There seems to be no doubt that Kakwenza’s detention and mistreatment was carried out by agents of the state, not least of all because they had the good manners to produce him before court after they had worked him over. Ironically this is a source of comfort but also further discomfort.

On the one hand if it was your regular kidnapper they may have just dumped him by the roadside somewhere – dead or alive. The discomfort would come from the idea that state agents can mete this kind of brutality on anyone let alone a citizen of Uganda...

We in the public were further confused. Is this now government policy in dealing with people they disagree with or the work of rogue elements in the security services working at the behest of individuals?

It could not be the former because the framers of the constitution did not even try to qualify torture. In one sentence, in article 24 they said “No person shall be subjected to any form of torture, cruel, inhuman or degrading treatment or punishment. “

No lesser an authority than the President himself is on the record for condemning torture as a means of interrogation.

But beyond that, this whole adventure –the NRM project, can be called into question. The bush war was a protest against a flawed election, but even more importantly, to defend the integrity of Ugandans who had suffered gross human rights violations for years.  For a younger generation those are all old wives’ tales, but when they are confronted with present day rights violations, who are you to tell them anything about the past?

When I joined journalism in the 1990 one of the senior journalists at the time, told me that in the early 1980s he used to come to work with his passport in his back pocket, just in case. The way journalists these days play fast and loose with the truth they clearly have no fear of extrajudicial reprisals.

In a strange way it would be more comforting if the use of torture was government policy, because then using the various levers of influence the public has at its disposal -- the courts, their MPs and the media, and maybe able to influence government to see the error of their ways and change the policy altogether. But we know this is not government policy as several officials have said.

The alternative is far scarier.

That there are rogue elements in government and security, pursuing personal agendas, in defiance of the president, meting out their particular brand of justice, a power onto themselves, means none of us is safe. We are at the mercy of their whims.

Following the argument to its logical conclusion it is not a stretch of imagination to think, left to their own devices their influence will grow to the point … well, they are already openly defying the president.

If this last scenario is so then Kakwenza is a sign of a bigger problem.

We see a silver lining in this very dark cloud. That we can discuss it in the open. That may not seem like much, but there was a time – another old wives’ tale, that we wouldn’t dare talk about missing friends and relatives, they were out of sight and out of mind for fear that we would go the same way.

"The UPDF, owe it to themselves and their proud history to get to investigate, get to the bottom of, remedy and nip in the bud this threat to national security, because that is what it is....

 

THE TIME TELLER VERSUS THE CLOCK BUILDER

He is a businessman of some reknown. He would have been better known if we all appreciated the business he built. He is “Retired’ now, but prefers to go to office to every morning and read the papers there. He thought he would be some sort of consultant helping his daughters run the business, but clearly he did such a good job setting up his company and his successors, he is little needed at the office.

The businessman, let us call him Jack, now has time weighing heavily on his arms and is not averse to a chat.

This time he had the book “Built to Last” by Jim Collins on his desk when I visited. He was visibly excited and after the usual niceties started telling about the chapter that had really resonated with him, chapter Two “Clock building. Not time telling.”

“You know how when you see or hear or read something for the first time and it is as if you had known it for a long time? This is it,” he said slamming a palm on the hapter’s lead page.

For purposes of back ground Jim Collins, the author identified one of the biggest distinctions of leaders who built enterprises that thrived, even after their demise is whether they were time tellers or clock builders.

The time tellers are often charismatic leaders who may have had a good team or lurched onto the latest fad and showed some success for a while, the clock builder on the other hand work on shaping culture and building an enterprise that can generate ideas that allow it to thrive for a long time. To have  enduring success you need a clock builder not a time teller. The clock builder is strategic and the time teller is tactical...

“If more people or managers knew this and applied it this country would be far ahead,” he said.

In his own simpler language, he said it was like the hunter going out in search of the elephant, but every so often squirrels, rabbits and antelopes cross his path. The clock builder will focus on the long game ignoring the smaller distractions for the bigger prize while the time teller will chase everything that crosses his path and may even forget the elephant altogether.

“These small wins make you happy and can even make you a star, but you have to keep your eye on the bigger goal, the big picture,” he said. “The bigness of the eventual prize will determine whether you can weather all the ups and downs that are thrown at you as you chase the dream.”

Some people are wired to focus on the distant future he thinks, but believes it can be taught and the earlier we do it the better.

I asked how he thinks this had worked in his business.

He had scribbled some notes in his note book.

“Looking back I think it helped that I always asked the question of myself and staff, whether we are fully meeting our customers’ needs. As long as we were thinking like that innovation became easy, because as the customers’ demands widened or increased we got better and better. Making money is good but it comes as a byproduct of delivering a good product or service.”

It sounds so cliché but it is a basic, a first principle, he said.

“Look around you people or businesses who fail are not in touch with their clients. They either lose them along the way or were n ever in touch to begin with.”

But later when the business started making money he learnt, he doesn’t remember from where, that real money would be made when you sell the business.

“At the time I looked at the business and realized even I wouldn’t pay much for it, because I was the alpha and omega, without me the business was not worth much,” he said.

To make it more marketable he had to put in place systems. It was painful to let go and it took him about 10 years to the point where he was comfortable letting go of his “baby”.

“It was not easy and I even gave up several times, took back control of the business. I was too emotionally attached to it. But because I had seen the promised land I somehow always got back on track, maybe I would have achieved it sooner.”

It took him another six years to get to his current stage of “retirement”.

The point of the chapter “Clock building. 

Not time telling” he thought, was that as business owners and managers we need to be ambitious beyond making money for ourselves and be ambitious for the company’s success in order to build businesses that will outlive us...

“If you are stuck in emeere ya leero thinking, you cannot build anything of enduring value.  Impossible.”

He hasn’t sold the business yet, he hasn’t felt a need to – the multimillion dollar offers aren’t tempting enough. And the way his daughters are running the business, he thinks it may still be a while before they sell.

FUEL SHORTAGES REMIND US OF OUR INADEQUACY

The recent fuel shortages that saw a liter of petrol going for as a high of sh12,000 is a reminder that when we fail to make hard decisions we make life hard for ourselves somewhere down the road.

The trigger for the shortages was the insistence by the health ministry that truck drivers must b not only be tested before they enter the country but must also pay for the tests. The truck drivers struck in protest of this measure, arguing that they are tested for free in Kenya and this was an additional cost they refused to carry.

First of all it must be the height of negligence that truck drivers acting on a whim can hold a whole country ransom. A country whose landlocked nature is not new and should dictate that we have numerous alternatives to ship in or ship out goods.

The truckers of course now represent a huge cross national interest group that will fight tooth and nail to sustain the status quo.

The status quo is that Uganda continues to rely on costly road transport for all bit a small part of our transport needs.

This is a result of the failure to resuscitate the old railway or get the Standard Gauge Railway (SGR) off the ground. In light of the powerful interest groups that have coalesced over the years around road transport I am inclined to think the woes surrounding the railways are not a coincidence.

The truckers have forced our hand and we have suspended testing but our troubles with fuel will not be immediately lifted. Experts say it could take a month or longer before things are back to normal. Losses in lost business and tax revenues while we readjust will be in the billions.

But imagine an alternative scenario where all or most of our fuel comes by rail, even if you instituted a testing regime it would only be a handful of people to be tested. They say the SGR can haul as more than 100 containers. On the road this would be at least 200 drivers and turnboys to be tested.

So what has happened to our railway projects?

Uganda Railways Corporation (URC) is still reeling from a scandal surrounding the purchase of engines that are not fit for purpose. This after a concession with Egyptian based RVR came unstuck a few years ago affecting the flow of goods by rail, seeing businessmen shifting their cargo back on the road. Funding is being sort for the rehabilitation of the more than 100-year-old line but this can only be a stop gap measure as we seek to build the SGR.

"It takes years to build a few kilometers of road in this country now you can imagine what will happen with a railway...

It has been since 2008 when the SGR project was mooted. Today 14 years later not a single railway sleeper has been lined – not counting the ceremonial ones laid in Munyonyo more than five years ago. With compensation for the right of way we have only managed 130 km of the 230 km between Kampala and Tororo since 2016. And even then we have spent sh100b of the sh400b planned in compensation with treasury managing to trickle through about sh20b a year for this.

The history of development shows that Uganda not have meaningful industrialization without inexpensive mass transport – rail or water. It is not a mistake that the colonialists braved man eating lions, hostile tribes and the engineering demands of the rift valley to build a railway; and it is the reason we learnt about the Rhine Valley in Germany as a driver of industrialization there.

It costs almost double --$5200 to shift a 30 ton by road from Mombasa compared to $2800 by rail. The tradeoff currently is that you use road because it takes two weeks by rail today versus just under a week by road to shift cargo. But with a more efficient rail system that argument would not hold.

"To be a competitive economy we need to be able to shift huge volumes quickly and at the least possible cost. It would not be a stretch to think that the way we are treating our railways suggests talk of industrialization is just hot air....

So we can blame all the stoppages over the last two years on the Covid-19 pandemic, but don’t worry if it is not Covid it will be something else.

The Kenyans have failed to move the SGR from Naivasha and onto Kisumu and Malaba. China is justifiably jittery to release money for our side when the Kenyan leg has stalled, probably, fatally.

That may be as it is but cargo to and from Uganda now at 18m tons annually is set to rise to 21.5m tons a year, figures that are well above our old railways capacity regardless of the patchwork we do on it.

When UPE was launched 25 years ago, no one seems to have thought about how we will employ the jobseekers that would hit the market 15 to 20 years down the road and how to prepare for them. Now that the jobless ranks are swelling it has suddenly hit us.

Industrialisation would sponge up all the thousands hitting the job market annually. But to sustain an industrialization push you need huge amounts of raw material and the markets to absorb your output. At both ends of the value chain mass transport systems are needed....

Which makes you wonder about lackadaisical attitude towards developing our rail transport system.

WHAT IS MUTEBILE’S LEGACY?

Earlier this week Bank of Uganda governor Emmanuel Tumusiime Mutebile passed on in Nairobi hospital bringing a life well lived in the service to this nation to a close but served only as a comma in the legacy he leaves us.

When the history of the last three decades is written Mutebile will have pride of place for his central role in the resuscitation of the economy.

"But in the last week I noticed that his legacy is not fully appreciated or is in danger of going unacknowledged, shocking as that may sound to some of us...

According to the first NRM budget speech read in August 1986, then finance minister Professor Ponsiano Mulema reported that the country’s revenue collections amounted to sh402.5billion shillings. At the time the official exchange rate for the dollar was sh1,400, so we collected about $287.5m.

In the coming budget 2022/23 government has set URA the target to collect sh23trillion in local revenue. In dollar terms using sh3600 as the dollar rate this comes to about $6.4b.

If you think about it URA today would have collected the 1986 total projected revenue in half a month!

Just numbers yes, but to put them in to further context, in 1986 the population of Uganda was 14 million, today its thrice that much at about 45 million.

So if revenue collections had kept up with population growth URA’s work would have been so much easier, as they would be required to collect $862.5m or about sh3.1trillion or about an eighth of what is now expected of them.

The numbers suggest that revenue collections have grown 57 fold since 1986 or at annual compounded growth rate of about 12 percent.

Revenue collection is a useful measure to judge the growth of the economy. There has to be economic activity to tax to collect revenue, more taxes suggests more economic activity.

Of course a caveat has to be placed on these numbers.

For one, in real terms that 1986 figure is higher in today’s dollars but even if it is four times as much the progress made cannot be denied. Secondly, the economy in 1986 was mostly subsistence, we lived more from hand to mouth then than we do now, and revenue collections even measure against the low GDP then of $4b were woefully low. Revenue to GDP ratio was about eight percent compared to todays 12 percent, which is also way below the sub-saharan average or where we are supposed to be.

"The NRM when they came into power thought they could do it alone, taking a leaf from their struggle they thought they could rely on internal resources to turn around the economy. As they found out – not quickly enough, they had little to play with and almost no economy to work with...

After fidgeting about for about five years up to 1991, the reality could not be ignored and the adoption of a more market oriented economy happened.

Up to that point in lieu of revenues from the production they thought they could print money at a will to support the economy. When official inflation hit 240 percent reason prevailed.

The majority of Ugandans have no clue what 240 percent inflation looks like. It means that prices were doubling every three months. Imagine you take you child to school in January and school fees is one million, when you return for second term its sh2m and in third term you would have to shell out sh4m. Unbelievable today, but this is living memory we are talking about.

For me, this is where the legacy of Mutebile kicks in.

Mutebile and his allies, who were given all kind of names -- imperialist lackeys and World Bank running boys, argued strongly that to turn the economy around the government needed to proactively bringing inflation under control and secondly we needed to liberalise the economy to unleash the individual potential of Ugandans and the private sector. Government did not have the means (see above) to go this road alone. They also promised that if they could do these two things the aid taps would be opened and the recovery of the economy would have a better than even chance of succeeding. The rest as they say is history.

This is basic economics, not noble laureate winning stuff, so it is even more amazing that it took the uncompromising character of Mutebile (maybe something to do with him being a Mukiga) to carry this cause on his broad shoulders, debate all naysayers or barrel through any obstacles to ensure government stayed the path. And the people who he was debating were not ignoramuses like from a previous era, but studied men and women with exposure, having lived in foreign economies that work.

Ironically opposition to a liberalized economy has grown louder as we take for granted the economic growth of the last three decades.

"I hear people calling him a free market fundamentalist, but that was not my experience with him. He knew that there cannot be development, the improvement in people’s standard of living, without growth. That the government seems able to generate growth year on year even in their sleep, is a legacy the Mutebile helped happen. If we have not seen a more equitable sharing of this growth just shows that the journey still has some way to go....

I think of him as a pragmatist. And we need more of him today as we did in 1986. People who recognize that being a free-market or central planning advocate can deliver development, but a combination of both is the key.

We know that the market is the most effective tool of creating wealth or economic growth, but the worst at distributing that wealth. If left to its own devices the market gives more to those who have and to those with little even the little they have is taken away from them.

Mutebile’s contribution is that he held his conviction that a market economy is what we needed and managed to generate consensus around this from the most reluctant of contemporaries in the face of ugly, often uninformed opinion that will not let him rest even in death.

Rest in Peace Emmanuel Tumusiime Mutebile!

FAREWELLL EMMANUEL TUMUSIIME MUTEBILE

 On Sunday morning Bank of Uganda governor Emmanuel Tumsiime Mutebile breathed his last at a Nairobi hospital, bringing to a close a life well lived in the service of his nation, but only punctuating a journey he helped begin in Uganda’s economic recovery.

Fortunately or unfortunately the majority of us have no clue the depths from which our economy has come in terms of our economy. About eight in ten Ugandans were not born in 1986.

We came from a place where bar soap, sugar and paraffin were luxuries; where it took six hours to get to Jinja from Kampala by road, because there were more portholes than tarmac and where loadshedding was more frequent than not.

"The enormity of the task of turning the economy around would have drove lesser men to tears....

Hard decisions had to be made to turn around the economy, which included tightening on government spending, privatizing public enterprises, layingoff thousands in the public service and a breakup of the “kibanda market” by liberalizing the trade in foreign exchange. All this was being done when the NRM was trying to win the population over to its side.

It took a man of firm convictions to ensure government stayed the course even if the popular thing to do was to do the easy thing.

First as PS finance and secretary to the treasury and for the last two decades as Bank of Uganda governor Mutebile has been the constant in Uganda’s economic recovery other than President Yoweri Museveni.

In recent years critics have complained that the over reliance on the private sector has among other thing exacerbated the wealth inequalities in the country. Their prescription, a return to the day of state control of the economy as a way to even out inequalities, proof that the thing we learn from history is that we do not learn from history.

"Mutebile was not infallible and criticism of the economic path we have taken merit some attention. But we have the luxury of having that debate because of the economic foundation set under his watch...

His work is not complete by any measure – we are still among the poorest countries in the world, but he always knew the transformation of the economy was a marathon and not a sprint. Many economists have been mentored by him and we can only hope that his legacy is secure.

Rest in Peace Emanuel Tumusiime Muteble.

THE MORE THINGS CHANGE THE MORE THINGS REMAIN THE SAME?

In 1979 I remember along the Kampala-Jinja highway the few fuel stations – they cannot have been more than five, had no fuel. But every so often you would come upon a jerrycan by the roadside, often plugged by a finger of matooke, and filled with a liquid either red but more often green.

If you needed fuel you stopped at the jerrycan and someone would emerge from the surrounding plantation or a nearby hut and you would negotiate. You were often so relieved to see fuel, because by this time your fuel gauge would be flashing red, its quality was the last thing on your mind.

I couldn’t help remembering this state of affairs from more than 40 years ago, in the light of the fuel “crisis” we suffered in the last week.

Truckers in protest over Uganda’s insistence they do a covid test before entering the country, had piled up at the border causing a fuel shortage.

Prices hit record highs with reports of petrol in western Uganda going for sh12,000 a liter!

"What we have known for a long time now, is that Uganda’s pain threshold is considerably lower than 1979. A few stations out of fuel and it’s a full blown crisis. Which is how it should be. When progress or development happens, what are counted as bare essentials rises...

In 1979 no petrol in the stations, no sugar, no soda was acceptable, try that now and see.

However, some of the solutions offered by politicians and the public also show that what we learn from history is that we don’t learn from history.

The suggestion by some sections that government should control the price of fuel, was one of those. Thankfully government was not entertaining the suggestion because it would cause more harm than good.

For starters it would aggravate an already bad situation, increase the shortages and push the prices higher as a parallel or black market in petrol emerges, a return to the days of the lonely jerrycan on the roadside.

It’s a simple supply and demand logic, when supplies fall, demand rises and prices will follow suit. This is not a manmade law, it’s a natural law and you can only subvert it temporarily and at great cost to yourself or in this case to the economy.

The law of gravity will work whether you like it or not. But for brief periods aeroplanes, for example, beat the law but at what cost?

A Boeing 737 weights about 70,000 kgs or 70 tons while fully laden. To keep it in flight costs 3400 liters of fuel per hour. A truck hauling the same amount of cargo would not consume 50 liters per hour.

The same goes with the laws of supply and demand.

"Politicians can huff and puff all they want but as long as there is an imbalance between supply and demand price will go where it will...

.

So while it looks like common sense for government to dictate price, traders will look at the cost of bringing the fuel to market compare it with government price. If it makes sense, meaning government price is higher than cost the traders may supply but as soon as it shifts the traders will turn off the taps or find a way to get their product onto the black market and the price goes up anyway.

Reminds me of when government liberalisd the foreign exchange market by allowing forex bureaux. The naysayers warned that even the little forex we had would be sucked out of the economy. But the opposite happened, more forex flowed in, the exchange rate found its level and the black market disappeared.

So what to do about the fuel crisis, using the laws of supply and demand?

Thankfully with agreement reached with the truckers,  supplies will be restored and prices will revert to the normal.

That being said a discussion around beefing up our national reserves would be something parliament may interest itself in. As it stands I hear we have fuel reserves, both public and private, to last us 10 days and this figure is falling every day as our fuel demands increases.

An investment in increasing our reserve capacity beyond ten days supply – The US petroleum reserves can last them a month at least, would come in handy. The cost of storage is the price we will pay for trying to rebalance the supply-demand equation when it goes awry.

Calls to dictate fuel prices or any prices for that matter, are a knee jerk reaction that may be good for the headlines but are bad economics that will invariably lead to a worsened political situation – ask Zimbabwe and should not be entertained by reasonable thinking members of society.