Trite Munger quotes that hit me, H1'24 edition: great company mismanagement and big tech
I’ve got a few annual and semi-annual loose traditions1 on the blog. One of those traditions are my “trite buffett” and “trite munger” quotes series. The basics of this series are simple: both Buffett and Munger say a lot of stuff that is, quite frankly, trite. But part of their genius is that, every now and then, I’ll be working on something and a huge light bulb will go off that unlocks some deeper meaning for me in something I heard them say and laughed off 5-10 years ago.
So the purpose of the series is to present some quote they said that I heard years ago that I’ve just been noodling or learning on. Recently, I’ve been thinking about this Munger quote:
“I had a friend who said, ‘If it won’t stand a little mismanagement, it’s not much of a business.’ We like businesses that can stand a lot of mismanagement — but don’t get it. That’s our formula.”
Why have I been thinking about that quote?
Big tech today represents, broadly, the best set of businesses the world has ever known. I’ll just use the Magnificent 7 as a stand in for big tech; I’m sure you could quibble with one or two of them as the best businesses ever (I’m looking at you, Tesla), but broadly speaking these are businesses with moats, scale, cash flow, and growth that we’ve never seen before.
The reason I’ve been thinking about that quote is because all of them seem to be, by and large, run by really good managers (and that may be an understatement). Meta, Tesla, and NVDA are still lead by their founders and at this point the founders are at least in consideration for the Mt. Rushmore of best founders / CEOs of all time. Apple, MSFT, AMZN, and Google are no longer founder led, but I don’t think anyone would bat an eye if you said their CEOs were in the top ~5% of S&P 500 CEOs. It’s also notable that all of the companies and CEOs still have some type of strong ties to the founders in some way (obviously Jobs passed away, but Cook was his hand picked successor).
So, in the Magnificent 7, you’ve got the greatest businesses of all time run by some of the greatest management teams of all time. It’s tough to paint a broad valuation brush given different levels of investment and everything, but generally these businesses are trading for ~30x P/E currently, and if you were really honest with yourself you’d probably say that valuation is too cheap given the businesses seem poised to grow mid-teens for basically ever, have unbelievable moats, and almost certainly have a bunch of growth opex and capex that could quickly be cut to buy down that multiple if they really wanted to.
But, even with 15% annualized growth, 30x is a pretty lofty multiple. You’re paying for a lot of future cash flow / terminal value when you pay that multiple…. and what I’ve been thinking about is what happens to the future cash flows when the management eventually changes? In Charlie’s words, could these businesses withstand “a little mismanagement”2?
I suspect the answer is no. These businesses are huge and complex, and they need to catch and respond to technology shifts or else they’re dead. Where is META if they don’t shift to mobile and buy instagram? Amazon if they don’t lean into AWS? GOOGL if they don’t buy YouTube? MSFT if they stay dogmatically committed to Windows? Tesla if they don’t hop from one pump to the next to raise huge amounts of equity (sorry, couldn’t help myself)?
The answer is that these are much smaller businesses / less relevant businesses. In some cases they might be dead; in others they might just be getting run as cash cows or something.
Obviously it was a different time, but we’ve probably seen a preview of what these businesses look like when they have poor management with Ballmer running MSFT in the 2000s / early 2010s. Dismissing revolutionary new products. Missing tech shifts. Failed M&A (both attempted and actual). Growth stalling out and the company trading for a single digit multiple / getting priced for terminal decline.
Anyway, I don’t have a real point here. Right now, the investing world is dominated by the Magnificent 7 and the like. Investing in them just feels like it’s so easy; they grow and spew off cash flow like nothing we’ve ever seen before. If you’re an active manager, they’re the bar to beat and they set an incredibly high bar that few can live up to, and that’s probably not changing any time soon…. but, eventually, these businesses will have management changes, and a few of them will have successors that can’t come close to living up to their predecessors. When they do, I suspect they will quickly fail the Munger “we like a business that can handle a lot of mismanagement” rule.
(PS- this analysis probably means that, for all of these stocks, if you’re long them you want to seriously consider exiting / stepping aside from them when management changes are announced. The fact is these are great businesses that have been magnificently run (for the most part); any management change really presents only downside optionality since it’s hard to think the successor could materially improve what the predecessor is doing. AAPL, GOOGL, and AMZN all had incredibly successful transitions, but one day the transition is going to be botched and when it happens look out below).
I say loose traditions because they require me to remember them to continue them, and I’m ~50/50 on it!
When I say a little mismanagement, I mean installing a CEO maybe in the bottom 10-20% of CEOs, not a complete zero who epically mismanages the company. No company could survive truly epic mismanagement!
Thought provoking! If I may...
Yes and no, each case is unique, but in general I tend to disagree. In general, I think these businesses are now so large, dominant, and entrenched that the CEO is less important. NVDA and TSLA are exceptions because they have yet to achieve the network effects/ecosystem lock-in of the other 5. Not surprisingly they are the most volatile of the bunch as their futures are less certain IMO.
You make the point that "these businesses are huge and complex." I agree, but I think this also means that more management of the various business lines is delegated, and the talent bench and institutional knowldge at these companies is very deep. Another way you could look at this is to say in total the Mag7 has undergone 6 CEO changes by my count (Cook, Balmer, Nadella, Schimdt, Pichai, Jassy), and only one of those was a failure (Balmer). So a 5/6 record so far.
"They need to catch and respond to technology shifts or else they’re dead." Again, yes and no. I'd say the two big tech shifts we've gone through in the 2000s are mobile and cloud. Microsoft missed mobile (Balmer), but got cloud and revived themselves (Nadella). Facebook arguably missed mobile at the OS level, but they nailed the transition at the app level. I'd argue we're going through the 3rd shift right now with AI, and Google is at the largest risk of tech disruption if there is a web search to conversational AI shift underway, which I think there is. If they miss it, are they dead? It would definitely hurt, a lot, but I'd argue between YouTube and GCP they probably have enough to stand on even if the search business gets cannibalized by AI. Alternatively, I can see a future where AI expands the market as consumers begin asking new questions that they wouldn't have even asked search before. Time will tell.
"Where is META if they don’t shift to mobile and buy instagram? Amazon if they don’t lean into AWS? GOOGL if they don’t buy YouTube? MSFT if they stay dogmatically committed to Windows?" When META bought Instagram in 2012 it wasn't even public yet. When Google bought YouTube in 2006 it had a market cap of $150 billion. These businesses are in vastly more priveleged competitive positions today than at those times. Point being, yeah, they needed those moves at those times to achieve the heights they've gone on to achieve, but now, in part because of those moves, their positions at the mountain tops are unassailable. AMZN invented cloud, so it is kind of hard to say where they'd be without it, but I think their retail/marketplace/logistics/advertising businesses would be no worse for wear without cloud? MSFT reinventing themselves after Windows is a good point, and the Balmer failure and Nadella turnaround might be the exception that proves your rule!!
NVDA and TSLA I think are much, much more dependent on Jensen and Elon than the other 5 businesses.
NVDA I think is a one-off case study because they are uniquely purely B2B among the Mag7 and are trying to achieve the ecosystem lock-in and network effects (with CUDA/software) that AMZN, AAPL, META, GOOG, MSFT have already achieved. They are not there yet IMO. They are still a cyclical hardware business without network effects until proven otherwise. Jensen of course has seen (and invented) the future of compute clearer than anyone, so I don't about his ability to achieve this with NVDA. But for now their game is still selling as many GPUs as possible.
TSLA similarly does not yet have network effects. I think they are building toward a network effect business in robotaxi and I think they will get there with or without Elon. But I don't think their energy, robotics or AI efforts have nearly the same right tail without Elon at the helm.
In sum, I guess what you made me realize here is that I think there is a really a Mag5, not 7. This is already apparent in companies like TSLA and NFLX being included/excluded from the group over time, but the core 5 never change.
The 5 I think could be "run by an idiot" to use a Buffett tritism (not a slander at current CEOs, who I think are all either undeniably exceptional or deserve the benefit of the doubt at this time, with Pichai being the most tenuous).
NVDA and TSLA are more dependent on the vision and execution of their founders, and have a much wider range of outcomes than the others IMO. Thus, studying these two and only these two businesses and getting them "right" might be a big source of alpha for active managers.
I think Blackberry is a cautionary tell for Apple wrt mismanagement, probably Tesla as well.
The problem with Meta, Google, Msft, and Amazon is the amount of overlap/competition between them. If that weren't the case, these businesses can probably stand quite a bit of mismanagement. But the current set up means that the room for error is much smaller.