Venture Capital, Gambling, or Investment
By Quan Nguyen Ha
Ben Gilbert and David Rosenthal, the co-founders of Acquired (a leading technology podcast), had the opportunity to attend an intimate dinner with Charlie Munger through the arrangement of Andrew Marks (son of Howard Marks, the seasoned investor of Oaktree Capital). Both Ben and David have deep involvement in the investment landscape through funds such as Kindergarten Ventures and PSL Ventures, so this was a rare honor for learning. Charlie Munger is a legend in the investment world, renowned as the Vice Chairman of Berkshire Hathaway. He, along with his close friend (and younger brother), Warren Buffett, has participated in numerous extraordinary investment deals.
Both adhere to the philosophy of value investing: specifically focusing on long-term deals, investing in businesses with business models they understand well and that are undervalued (rather than chasing high-risk and short-term profits). Charlie also contributed to popularizing the concept of “worldly wisdom,” a collection of mental models forming a latticework of perception to process information before making investment decisions (he delves deep into this topic in his famous “Poor Charlie’s Almanack”). Thanks to this serendipity, Ben and David were able to persuade Charlie to appear on their podcast for the first time to share insights from 99 years of investment experience in the world (he will turn 100 on January 1).
The main theme of the podcast revolves around the difference between gambling and investment, specifically the confusion between these two concepts in the realm of stock markets and venture capital (VC) investing. Charlie repeatedly emphasizes the difficulty of the investment profession (requiring the highest intellect rather than appearing as easy as on Shark Tank) in a world where opportunities are becoming increasingly scarce. He does not shy away from gently reminding fund managers getting rich by exploiting investors (through fees) and acknowledges that the U.S. venture capital (VC) industry is extremely poor at supporting early-stage startups (of course, there are exceptions; Munger has praised Sequoia Capital, the organization behind Apple, Google, and Airbnb).
Ben started with the question: “When watching the NFL (football league) last weekend, I noticed that most of the ads around the stadium are related to sports betting. Is this good for the United States?” Charlie responded bluntly: “Common forms of gambling like betting on dog races or all kinds of racetracks and casinos are extremely dangerous.” Although Warren Buffet also participates in races, he never gambles recklessly, squandering money. Warren always wants the odds separated from the frenzied crowd; he simply wants to be the house, not the punter. Those participating in retail stock trading are essentially engaging in gambling. For Charlie, the stock market is inherently organized this way. Most retail investors do not understand the companies they invest in; they gamble on price fluctuations, often falling into the traps set by market manipulators. Charlie jokingly said that if he were in charge of the world, he would tax short-term gains and not offset losses when they engage in gambling like this. We must find a way to free retail investors from this frenzy of speculative investment.
The psychology of “gambling” also flows into the venture capital (VC) landscape. For Charlie, investment is the most intellectually demanding and extremely challenging field. The VC industry is almost impossible to consistently make the right choices time after time; occasionally, a too-hot deal can tempt the minds of seasoned investors in the VC realm to make quick decisions. They also drown in the FOMO feeling like retail investors (fear of missing out, as seen with Temasek in the FTX case).” This essentially is also a form of gambling. Ben delves into Charlie Munger’s thoughts on the role of venture capital (VC) in society and how to design a perfect funding system for new ideas or innovations. Charlie emphasizes, “investment work needs to be done properly because it carries a sacred mission: allocating resources to the right people, nurturing, enhancing strength, and supporting innovations.”
However, the VC game involves too many deceptive tricks, and investors, instead of genuinely helping founders run their businesses, often intervene excessively, leading founders to resent their funders or scheme to lure other investors. Colliding with numerous figures in the venture capital industry, Charlie has fundamentally recognized (ordinary rule) that this group is merely doing their “money-making” job, mostly not considering themselves as partners aiding the company but rather acting selfishly, attempting deep intervention that leaves founders bewildered. This approach never happens at Berkshire; the personnel here do not lure founders into the most lucrative or highest-value deals. If a group of investment bankers proposes a profit margin 20 times higher or expresses interest in a noisy business, Berkshire will never participate (buy or sell). Charlie and Warren’s fund only sells a business when they discover an issue that truly cannot be resolved. If the business is on the verge of becoming an efficient organization, Warren and Charlie will never sell anything. Clearly, the reputation of Charlie and Warren is built on sticking with the best deals in the long term.
The practice of buying and holding for the long term, not only in terms of mentality but also in the demonstrated results over the long run, has deeply connected investors with fund managers. However, this approach is often rare in reality. Everyone has their own standard way of working, like how lawyers use their own standardized forms. Of course, if everyone in the investment world follows such standardized patterns, the outcomes produced during the ups and downs of the investment cycle are understandable. Berkshire never wants to make money by twisting investors, but this is how many venture capital (VC) or private equity (PE) funds operate. This world is full of partners originating from former Goldman Sachs personnel (ex-Goldman Sachs partners).
They establish private funds, manage billions of dollars, and charge fees under the “2 and 20” model, for example. Specifically, they take a management fee of 2% (on assets under management/AUM) and a performance fee of 20% of revenue (or the “3 and 30” model). They lead affluent lives thanks to these fees, while institutional funds (endowments, often universities) always have to struggle to earn good returns. Charlie truly cannot accept that funds charge fees on the upside on investors’ side when the market is down or challenging. This fee structure has led many quirky “investors” to pretend to achieve good results instead of making genuine efforts (to maintain the fees collected) with numerous unethical tricks taking place outside. Finally, pouring capital into innovations mostly attracts the wrong people, those with investments in the wrong places (not in funds pursuing deep value), and those making the most money from the VC realm often resemble investment bankers more than great or knowledgeable investors (the group deciding which hot area to invest in). This group is not made up of great or knowledgeable investors in anything; let’s not be mistaken.
Charlie recognizes that exploiting investors (investing in funds) has almost become the nature of the wedges and the way the industry operates. If there are no truly exceptional results, the fee structure is unacceptable. Those providing advice must first have the intellectual capacity to explore the difficult path to wealth, making it clear why one should pay someone for advice when they themselves are not wealthy. Furthermore, if they are truly wealthy, why wouldn’t they put their money down to ride the market waves up and down with other investors? In reality, institutional investment funds (endowments, often universities) and large pools of capital have started challenging the “fee chargers”: “We are willing to pay an initial fee for the ‘3 and 30’ model (or any other number like ‘2 and 20,’ for example) and double the amount. However, in the next half, you will not receive a dime.
Let’s ride the investment wave together fairly with each other (pari passu).” This has led to fees being halved (reduced by 50%, happening across the United States), resulting in many humorous stories. Funds are now confused, angry, and foolish in front of investors. Charlie believes that the fee structure most in line with reason lies in Warren’s system (Buffett Partnership), specifically the 0/6/25 model that was formed in the 1960s (he learned this from his mentor Ben Graham). Warren does not charge a management fee (0%), sets a minimum return rate to start charging fees at 6% (hurdle rate), and only charges a 25% fee on the profit exceeding that threshold (this fee is entirely based on investment capabilities). This formula is fair for both limited partners and managers, and Charlie hopes to popularize this formula widely in the investment world.
Charlie Munger is nearing the age of 100. A few decades ago (around 70 years old), he realized the difficulty of the investment job through many painful experiences. He realized that those who participate in the “2 and 20” or “3 and 30” model and confidently claim the ease of this job are just stepping on their own dung. Charlie believes that if he were to go back to the age of 30 or 40, he would still be involved in investment work (as it is ingrained in his nature), but certainly not in something called “2 and 20” or “3 and 30.”
He only wants to operate with his own money (and his intellect), not under the pressure of having to sell, negotiate with investment banking experts, advisors, or deal with the uncertain flow of venture capital somewhere. Charlie emphasizes “to hell with them,” believing that the key to getting rich is not to surround oneself with too many people or external influences. Of course, even though he swam upstream in the past to rebuild Berkshire, Charlie admits that “achieving success as it is today is impossible.” Almost everything is composed of three factors: intelligence or cleverness, hard work, and luck. All three are required for outstanding success. Of course, we cannot intervene in what is called “luck,” something beyond our control (let’s pray for divine favor).
He believes that investors should perhaps start investing early, aiming for long-term goals, and if lucky, they may reap one or two extraordinary things along the way. As a devoted follower of Ben Graham (the father of value investing), Charlie is only interested in understanding two types of companies. First, if a company is terrible but the price is incredibly cheap, he may consider buying it (the “cigar butt” type of company). He occasionally participates in such deals, but only one or two of them yield substantial profits (unlike Howard Marks), and not every deal is a resounding success, as reality is not that easy. Easy money doesn’t present itself before us hundreds of times. Second, Charlie is interested in companies that operate well and become role models for virtues. These are companies that have built a good brand and have reasonable prices. The trick here is to be able to identify rare opportunities when such companies are offered at a discounted price (if buying Costco at its current price, this investment may still be okay, but it is no longer an overwhelmingly great opportunity).
Investors need to understand that the world has become wealthier (more competitive), but capital flows only to a few rare opportunities because this is the nature of everything. Observe biological processes that contribute to creating an advanced creature like us (able to participate in intellectual discussions on various topics). This happens through a fierce survival competition that has lasted hundreds of thousands of years. In other words, the system for nature to promote intelligence is clearly uncomfortable for losers. The era of “cigar-butt” investing, a period when Charlie and Warren could find low-priced investment opportunities more easily, has passed. In today’s deeply interconnected environment, extraordinary opportunities become even rarer.
One of the rare opportunities that Charlie found in his life is Costco (the third-largest retailer in the world, formerly known as Price Club). Warren joked about this deal at a Berkshire shareholder meeting ten years ago. Specifically, on a hijacked airplane, the robbers selected two representatives for the dirty capitalist class, Charlie and Warren. They pointed guns at their heads and asked if they had any final demands before dying. Charlie responded, “Can I once again expound on the virtues of Costco” (sounding reasonable to the hijackers). However, when turning to Warren, the answer was, “shoot me first” (meaning he didn’t want to hear Charlie rambling about Costco anymore). Warren joked about Charlie’s repetitive habit of discussing Costco. In a person’s life, there are not too many instances of making the right decision (like investing in Costco), perhaps five or six times. However, if success comes too early and too often, investors become arrogant and often lose everything afterward (thinking that everything is easy).
Charlie recognizes the truth: opportunities like Costco are extremely rare. This is evident through several factors. First, they sell at a lower price than anyone else in the United States, and they achieve this in large stores (very efficiently) with parking spaces larger than the standard (10 feet, improving the shopping experience). Costco encourages bulk purchasing through reward points mechanisms and a “capital-light” business model. Costco doesn’t invest in inventory; they make suppliers wait until they receive payments from buyers, then plan the next payment only when the sales plan for the future is clear. This empire currently has over 900 warehouses always filled with high-quality merchandise ready to be sold immediately and incurs no sitting-on-the-books costs. The combination of “customer-centric,” “efficient operations,” and “efficient capital utilization” has made Charlie recognize this unique investment opportunity. Furthermore, from Costco, many other direct investment opportunities have emerged by mimicking the successful model for application in other regions. A case in point is Home Depot (in the home improvement market). When the “cigar-butt” era is over, it may be appropriate to look for new opportunities based on references to successful models (like Costco).
In the podcast, Charlie also shares his perspective on the world’s most famous quantitative fund, Renaissance, founded by mathematician Jim Simons. Quant funds focus on short-term trades (something Charlie sees as gambling). Specifically, they identify a group of sophisticated algorithms with predictive value in anticipating market movements. These predictions tend to be inaccurate when forecasting long-term stock prices, facing the paradox in the short-term realm: if algorithms are abused too much, the initial advantage of the quant fund will gradually disappear (due to market adjustments, limiting profits earned within a certain time frame). In Renaissance’s case, according to Charlie, the algorithms are straightforward.
They exploit past data to make decisions, such as the price “going up and up” in the last two sessions or “going down and down,” or more broadly, “going down and up” or “going up and down.” Once they recognize a specific “intent” flow, deeper than human psychology (which always follows natural trends and enthusiastically bets in the short term), Renaissance will program computers to automatically buy stocks the day before and sell before the end of the second day (black-box trading). They repeat this process day in and day out. Every day, the central clearing agent will announce, for example, today’s check is $8.5 million, and tomorrow’s is $9.4 million. Renaissance makes money through intraday leverage by applying the “predictive” algorithm. If the money keeps flowing steadily, the leverage is pushed higher and higher (increasing trading volume because profits will decrease as the market adjusts). Charlie finds this “leverage” approach unacceptable; it can drive people crazy when holding a lot of money. In fact, the effectiveness of Renaissance’s algorithm has dwindled since the Covid pandemic emerged in 2023, with nearly $15 billion withdrawn from Simons’ fund in 2022 after poor investment results (referred to as Renaissance Exodus).
Ben and David also introduced the audience to the internet’s replica of Berkshire (the unit sponsoring the podcast), an example showcasing the significant influence of Charlie and Warren. Berkshire started as a textile mill in Massachusetts nearly 200 years ago. Almost 20 years ago, Tiny’s founder, Andrew Wilkinson, along with his partner Chris, created their version of a textile mill on the internet, a design company called MetaLab, responsible for the user interfaces (UIs) of various popular companies such as Slack, Uber, Tinder, Headspace, Coinbase. They also wondered what Charlie and Warren would do if they were in their shoes.
This led the Tiny team to the realization that, just like how Berkshire explored the physical world, the internet world also has niche businesses with fantastic cash flows. In fact, they might be even better than traditional companies (like See’s Candies and Blue Chip Stamps) because they often require minimal reinvestment, have software margins, and can build global brands rapidly (See took 50 years to become a global phenomenon). Andrew and Chris used the surplus money from MetaLab to launch Tiny, an investment fund specializing in long-term investments in the most promising internet companies. The online space is undoubtedly a massive investment opportunity; however, not everyone possesses the combination of experience, calmness, capital, and reputation to make decisions as accurately as Berkshire. Andrew and Chris also tread in the footsteps of Charlie Munger and Warren over two decades (Ben and David have actually invested in Tiny along with Bill Ackman and Howard Marks).
Tiny is a long-term buyer of niche opportunities in the Internet realm. Anyone seeking a sustainable home for their profitable internet business or needing capital partners along with founders (or adventurous funds) will be fortunate to have the opportunity to work with Tiny. Recently, Tiny acquired a social network for film buffs called Letterboxd, the 12-year passion project of its founder. Tiny’s fundamental principle is to work only with the best internet companies, committing to a simple 30-day due diligence process to make investment decisions, and then leaving the business to operate independently. The founder must either run the business themselves or add new management with a long-term vision (an option). This fund recently became a public company earlier this year and can now execute deals ranging from $1 million to $250 million.
