In his recent interview on the Think with Pinker Podcast, Charles Munger explains how he and Warren Buffett use patterns of noise to find hunting grounds for value. Here’s an excerpt from the interview:
What happens in the investment world is quite interesting. If you look at the noise of the constant movement of stock prices, the value investors like Warren and me, in picking these stocks we ignore the noise. We just ignore the random movements and we look for intrinsic value, but we look at the patterns of the noise to pick our hunting places for value investments in both time and distance.
What happened was in the noise of the short-term trading they happened to catch the worse stock panic since the collapse of stock prices in the Great Depression and they also hit a collapse in the stock of the Washington Post because they got on the wrong side of the Nixon administration during Watergate and people were afraid that the Nixon administration were going to take away their licenses for the television stations.
So we used all that noise to find a place to look. There was a time of low stock prices and panic. A place where one stock got clobbered for an unusual reason was suddenly available. So we were using noise to guide our hunting place.
But once we got to the hunting place we just figured out what the ‘Post’ was worth if you just sold off all the assets and we decided that the stock was selling at about one sixth of its intrinsic value, and it was of a type of enterprise that had a durable competitive advantage, which is the ideal place to find a bargain.
Everything was favorable, so we just charged in and bought.
You can listen to the entire interview here:
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