Charlie Munger has warned of a brewing storm in the US commercial property market, with American banks “full of” what he said were “bad loans” as property prices fall.
The comments from the 99-year-old investor and sidekick to billionaire Warren Buffett come as turmoil ripples through the country’s financial system, which is reckoning with a potential commercial property crash following a handful of bank failures.
“It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair told the Financial Times in an interview. “But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits?.?.?.?When bad times come they lose too much.”
Munger was speaking on the veranda of his home in Greater Wilshire, a leafy neighbourhood of Los Angeles where he has lived for 60 years since he designed the property himself.
Dressed in a plaid shirt, Munger held court from his wheelchair as the travails of ailing California-based bank First Republic were playing out in real time on a television screen airing CNBC in the background.
Berkshire has a long history of supporting US banks through periods of financial instability. The sprawling industrials-to-insurance behemoth invested $5bn in Goldman Sachs during the 2007-08 financial crisis and a similar sum in Bank of America in 2011.
But the company has so far stayed on the sidelines of the current bout of turmoil, during which Silicon Valley Bank and Signature Bank collapsed. “Berkshire has made some bank investments that worked out very well for us,” said Munger. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”
Their reticence stems in part from lurking risks in banks’ vast portfolios of commercial property loans. “A lot of real estate isn’t so good any more,” Munger said. “We have a lot of troubled office buildings, a lot of troubled shopping centres, a lot of troubled other properties. There’s a lot of agony out there.”
He noted that banks were already pulling back from lending to commercial developers. “Every bank in the country is way tighter on real estate loans today than they were six months ago,” he said. “They all seem [to be] too much trouble.”
Munger grew up in Omaha, Nebraska, a few hundred feet from where Buffett now lives. The two met in 1959, when Buffett was 28 and Munger 35. Munger, who at one point worked in a grocery store owned by Buffett’s grandfather, trained as a lawyer before being coaxed into investment by his soon-to-be partner.
Buffett has credited Munger with encouraging him to move on from the “cigar-butt strategy” espoused by his mentor Benjamin Graham, which involved buying cheap stocks akin to a discarded cigar where just a single puff of value remained.
In 2015, Buffett wrote in the conglomerate’s 50th annual letter: “The blueprint he [Munger] gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”
This approach has served them well. Berkshire has generated compounded annual returns of nearly 20 per cent, twice the rate of the benchmark S&P 500 stock index, since 1965.
“We were a creature of a particular time and a perfect set of opportunities,” said Munger, adding he had lived during “a perfect period to be a common stock investor”.
He and Buffett had benefited “by and large [from] low interest rates, low equity values, ample opportunities”, he said.
Munger said he had made most of his money from just four investments: Berkshire, retailer Costco, his investment in a fund managed by Li Lu’s Himalaya Capital and Afton Properties, a real estate venture that owns apartment buildings in California and New Jersey. Forbes estimates his wealth at $2.4bn.
“It’s the nature of things that a very intelligent man working hard maybe gets three, four, five really good long-term opportunities of buying great companies at a cheap price,” he said. “It happens rarely.”
Ahead of the company’s annual meeting on Saturday, tens of thousands of Berkshire shareholders will descend on Omaha to hear from the two nonagenarian investors as they attend something akin to a festival of capitalism.
But Munger warned that the golden age for investing was over and investors would need to contend with a period of lower returns.
“It’s gotten very tough to have anything like the returns that were obtained in the past,” he said, pointing to higher interest rates and a crowded field of investors chasing bargains and looking for companies with inefficiencies.
“[At] the exact time that the game is getting tougher we’ve got more and more people trying to play it,” he said.
Berkshire has struggled to find worthwhile investments at times over the past decade, a fact epitomised by a cash balance that often sits in excess of $100bn and the choice by the company to buy back tens of billions of dollars of its own shares.
Munger also took aim at his own industry, hitting out at a “glut of investment managers that’s bad for the country”. Many of them are little more than “fortune tellers or astrologers who are dragging money out of their clients’ accounts, which [is] not being earned by any useful service”.
He had harsh words for buyout groups as well. “There’s too much private equity, too many buyers of all kinds?.?. it’s making it a very tough game for everybody.”
“The people getting the fees are still doing well,” he said of private equity fund managers. But he warned: “People that aren’t being served very well by paying all those fees may eventually be unwilling to pay them.”
Where Buffett has emphatically told Berkshire shareholders to “never bet against America”, Munger is more cautious. “I do not think that we can take it as a given that American democracy will prosper and flourish forever,” he said. “But I think we’ll stumble through pretty well for quite a while yet.”
On his own imprint on the world, Munger said: “I would like my legacy to be a more relentless determination to develop and use what I call an uncommon sense.”