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02-12-2023 : The passing away of Charlie Munger

Charlie Munger, vice-chairman of Berkshire Hathaway, died on Tuesday evening a month and 4 days shy of his hundredth birthday, having still not retired, or even semi-retired.

We can't help thinking that hard intellectual work is good health, and that finance keeps those who practice it regularly!

Charlie Munger, a lawyer by training, is the man whose letter to the shareholders of Berkshire Hathaway inspired our October news article, which questioned the impact of Berkshire Hathaway's management style as the source of its exceptional performance. In retrospect, we are glad to have been able to write that article while he was still with us.

Charlie Munger is the man who convinced Warren Buffett to change his investment strategy, as the latter admitted in 2005 in his letter to shareholders: "The blueprint he gave me was simple: forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices".

In fact, in his early days, Warren Buffett invested in companies in great difficulty, and therefore cheap, such as Berkshire Hathaway, which was active in the textile sector at the time. Then came the time for minority stakes in growing companies such as Amex, Coca-Cola, The Washington Post, and more recently Apple, taking advantage of moments of undervaluation, either in times of economic or financial crisis, or because market efficiency sometimes slumbers, like reason, or the takeovers of Geico in insurance, or Burlington Northern and Santa Fe Railway.

Charles Munger and his 93-year-old younger partner, Warren Buffett, were probably the best allocators of capital in the history of mankind, since in 57 years an investment of €1,000 in the S&P 500 index became €24,428, giving an actuarial return of 10% a year; while the same sum invested in Berkshire Hathaway shares became €3,777,937, giving an actuarial return of 20%. Correctly allocating capital, which is a resource that exists in limited quantities, to avoid wasting it and to make the best possible use of it, is at the heart of corporate finance.

Hats off to Mr Munger. 

16-11-2023 : Orpea and South Korea

No, Orpéa has not discovered that it owns retirement homes in South Korea! (although it does operate some in Brazil, Uruguay and China). The link between the two is through short-selling.

In response to our previous post, some people wondered why short sales weren't taking place to bring Orpéa's share price down to a level more in line with economic and financial rationality.

Well, to be able to sell short, you need to be able to borrow shares, which you don't have because you want to sell short, from investors who do. In a normal situation, this is possible because there are institutional shareholders in the capital who agree to lend their shares for a while and receive interest in return. But in the case of Orpéa, with a share price that has long exceeded all rationality, the institutional investors, who know how to count, have sold their shares and the bulk of the shareholders are individuals. These individuals do not have access to securities lending services and often hold a number of shares that are too small for this. Furthermore, banks are prohibited from lending the securities of their individual clients, which considerably reduces the number of securities that can be lent.

So, de facto, it is very difficult to sell Orpéa shares short, as there is no possibility of securities lending. This also explains why its share price has been so irrational for so long. Even if they are often unloved, short sellers have an economic role to play in contributing to market efficiency in the case of overvalued securities, as Orpéa's situation demonstrates a contrario. But like everyone else, they can also make mistakes, and usually at great cost to them. 

In South Korea, the stock market regulator has banned short selling from 6 November to the end of June 2024, officially to strike a balance between retail investors, who cannot sell short, and institutional investors, who can. On the day this measure came into force, the Korean index gained 4.5% during the day, with Korean investors thinking that without these short-sellers getting in the way, stock prices were more likely to rise, and this was immediately anticipated in stock prices. It is also said that with the general elections taking place in April, and with 14m of the 52m Koreans investing in the stock market, the measure was primarily electorally motivated. For those politicians wishing to follow the Korean example, it should be noted that a week later, the Korean index had risen by just 1.5%. And in the United States, where the measure was taken during the 2008 financial crisis on bank stocks for 15 days, the measure did nothing to stabilise prices, leading to the abandonment of the ban on short selling.