Charlie Munger's Inversion Applied To Costco

Charlie Munger’s Inversion Applied To Costco & Chipotle | Invested September

Charlie Munger is famous for saying “Invert, Always Invert!” and using the lessons I learned from Danielle Town’s Invested book, I share investing inversion arguments and rebuttals for Costco and Chipotle respectively.

Warren Buffett likes to call Charlie the Abominable No-Man because he’s always shooting down Buffett’s worst ideas.

“Invert, always invert” helps with solving difficult problems. Many hard problems are best solved when they are addressed backwards, Charlie said.

While we usually start off making our investment cases or theories based on what we think will go right for a company, we should be just as prepared for what could go wrong too. We should find the holes in our confirmation bias.

The book says to come up with 3 reasons to own a company, and then 3 reasons NOT to own it. Danielle Town, a lawyer, wrote about cross-examining our investing case for and then proving the opposite.

Li Lu said Charlie likes to approach inverting the investment case for a company so he fully understands the investing risks of any given business.

I came up with an investing story for Costco (ticker symbol COST), and then I inverted the story by finding arguments against this big box retailer that I then rebutted.

I love Costco’s Mission: To continually provide our members with quality goods and services at the lowest possible prices.

On Costco’s Moat: They are the low cost provider of goods and services (11-15% markup). Costco is recession-proof because people will still need toilet paper and food during the toughest of times like what we experienced in 2020. People grabbed carts and were in lines outside that snaked around the entire parking lot waiting to get into the store.

Costco’s management is CEO Craig Jelinek. We should also what check expensive errors we could make because no gurus are currently buying this company.

We should bust out the 10-K to evaluate the financials and determine the margin of safety valuation. Check out this video to learn how to do example margin of safety calculations. I didn’t look into debt compared to free cash flow but this should also be considered.

Costco’s competition includes: Walmart, Target, Kroger, Amazon and other warehouse clubs such as Sam’s Club and BJ’s Wholesale Club.

My reasons as to why I’d like to own Costco:
-Buying in bulk is efficient whether you’re a single person or have a family and you don’t have to return to the store as frequently.
-I trust Costco is doing a good job providing the lowest cost because they only place an 11%-15% markup above costs on their wholesale goods compared with typical retailers placing 25%-50% markups.
-Costco cares that their customers have a great experience with food samples and the treasure hunt experience.
-They have a 90% member renewal rate.
-People load up the “truck” in their shopping carts, I just try to buy exactly what I need by only buying what I can physically carry myself and zip through the check out lines.
-Costco pays their employees much higher than average retail and offers health insurance.

There are several reasons not to own Costco, which include reasons such as the “retail apocalypse,” people want to do more online shopping than in a physical store, big box stores are a thing of the past, and people want an easier shopping experience.

Bill Ackman of Pershing Square Capital Management made impressive rebuttals against critical points about Chipotle (CMG) made by people on a CNBC segment back in November 2017. In this video, I delve into each of the main arguments against Chipotle and how Bill defended the company, saying its food safety issues were totally addressable.

I think Bill Ackman proved to be right as CMG climbed from $275 in November 2017 to recently hitting $1900 in September 2021.

At the end of the chapter, Danielle described the concept of “practice shares.” If you don’t want to put money on the line yet, you can open a paper trade account with some brokers where you don’t have to put in real money, and you can practice what it would be like to buy a company.

If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.

I look forward to making more investor friends! Add me on Instagram: michellemarki! 🙂