Wednesday, July 6, 2011
Charlie Munger's Thoughts on the World
Most of you know exactly what I think about every subject, but you still come anyway. It's a damn cult."
So began this year's annual meeting with Berkshire Hathaway's (NYSE: BRK-B ) 87-year-old vice-chairman Charlie Munger in Los Angeles. It was, sadly, the last we'll see of these gatherings -- formally the Wesco Financial annual meeting, and this year, simply labeled "A Morning With Charlie."
"You need a new cult hero," Munger said. "I'm doing you all a favor by not having another one of these meetings."
"We'll be talking about a lot today," he told the crowd of 500. "Some of it is academic. Some philosophical. And some will be about investments because I know you're all a bunch of greedy bastards."
Here's Part 1 of my notes in Munger's own words, lightly edited and condensed for clarity.
On the Wall Street meltdown: It all started with an asinine bubble. The cause was a combination of megalomania, stupidity, insanity, and I would say evil on the part of bankers and mortgage brokers.
And it was widespread. Alan Greenspan was a smart guy, but he totally overdosed on Ayn Rand when he was young. You can't give bankers the freedom to create gambling games. That's what it was. Wall Street was a gambling house, and the house's odds were better than a Vegas casino. And real casino operators have to build parking lots, fly in entertainers, pay for bars and restaurants. It's expensive. Wall Street was like a casino with no overhead. It was hog heaven for them. But it created vast damage with terrible consequences to civilization.
None of us should fall for the idea that this was constructive capitalism. In the 1920s they called it bucket shops -- just the name tells you it's bad -- and they eventually made it illegal, and rightly so. They should do the same this time.
On opportunity: Patience combined with opportunity is a great thing to have. My grandfather taught me that opportunity is infrequent and one has to be ready when it strikes. That's what Berkshire is. It's amazing how fast Berkshire acts when we find opportunity. You can't be timid -- and that applies to all of life. You can't be timid in marriage when you find the right spouse. It might be your only opportunity to be happy in life. Too many people don't act when they should. That's why half of all marriages don't work out.
On Berkshire's valuation: Berkshire's stock is at a point Buffett and I never anticipated it would go to. Part of this is due to weather [insurance losses], part of it is Europe being welcomed into what I call adult life.
On the future of Berkshire: Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends.
On banks: Bernie Madoff expressed sorrow in court to get a lighter sentence, but it was all false. In prison he told a guy that he carried his clients for 25 years, and now he's serving 150 years. He doesn't think it's fair.
Many people don't. I bet Richard Fuld [former CEO of Lehman Brothers] doesn't have an ounce of contrition. It's just megalomania. When it's like that, you need rules to prevent catastrophe. When banks are borrowing the government's credit rating [FDIC insurance, etc.], you need rules to prevent stupid things.
Clever derivatives broke dozens of companies. It killed them. Bankrupt. We don't need these kinds of innovation in finance. It's OK to be boring in finance. What we want is innovation in widgets.
On the power of Berkshire: People make contracts with Berkshire all the time just because they trust us to do well. They trust us to behave because they know others won't. It's a wonderful position to be in. And as the saying goes, "How nice it is to have a tyrant's strength, but how wrong it is to use it like a tyrant."
On lifetime learning: When we bought See's Candies, we didn't know the power of a good brand. Over time we just discovered that we could raise prices 10% a year and no one cared. Learning that changed Berkshire. It was really important.
You have to be a lifelong learner to appreciate this stuff. We think of it as a moral duty. Increasing rationality and improving as much as you can no matter your age or experience is a moral duty. Too many people graduate from Wharton today and think they know how to do everything. It's a considerable mistake.
Most of Berkshire's success grew from stupidity and failure that we learned from. I hope that makes you feel better about your own life.
On accountants: Banks showed income and assets for things that were neither/nor, and the accountants were totally fine with it. What kind of profession acts this way? The medical profession wants to eradicate epidemics. Accountants feel no similar responsibility toward their field. They feel no embarrassment about it. They just want to get the job done. It's contemptible behavior. At the top of an idiot boom, a bank's allowance for bad debt goes to zero. That's the accounting rule. What kind of maniac thinks this is good? A certified public accountant, that's who.
On financial collapse: The world learned what happened after World War I when we demanded that Germany repay. It was chaos and hyperinflation. The result, of course, was the rise of Hitler. And Hitler could have been more successful than he was; his kids or family members could still be in power today had things gone just a little differently. You don't ever want to do anything to push an economy to collapse. Terrible things result.
Now think about this. During World War II, Japan tortured our soldiers to death. They marched them around. The Germans put people in ovens. Just awful. And what did we do after the war? We gave them money to rebuild. We said, "Let bygones be bygones." The result was a magnificent global economic system and a win for human rights.
Who deserves the most credit for this? That would be John Maynard Keynes and his book The Economic Consequences of the Peace. People figured out he was right, and they just did it.
On our financial crisis vs. Japan's lost decade: There was an orthodoxy of the world that Keynesian tricks would goose an economy and solve and ameliorate recessions. Economists were so sure it would work that GDP would grind ahead. They thought it was a law, like the laws of physics.
But then came Japan. Japan's crash was caused by factors similar to ours -- an idiot boom that burst. They tried every Keynesian trick they could think of, and the result was stasis. And I mean they tried everything. I once noted that you cannot find a piece of garbage on a Japanese mountain. They hired as many people as possible to clean it up. Yet the result was still stasis. Twenty years of stasis! And think, this couldn't have happened to a better group of people than the Japanese. They're uniquely capable of handling tragedy. They're polite, respectful. The outcome of 20 years of stasis in the United States would not be nearly as good.
But it's more complicated than just looking at [Keynesian policies]. There are other explanations. Japan has an export-driven economy, and out of nowhere they suddenly faced huge and credible competition from China and Korea. Of course that will cause slower growth. It was a bad outcome all around.
On not jumping to conclusions: Matt Ridley wrote the terrific Book The Rational Optimist -- and that really is a good book. I've read it several times. But even someone as smart as him is too quick to jump to conclusions and a single explanation. His explanation for the success of modern capitalism is Adam Smith's division of labor. He repeats it over and over again.
But this is a totally inadequate answer. Joseph Stalin can achieve division of labor and there would be benefits. That doesn't mean it's capitalism.
The major success of capitalism is its ability to drench business owners in feedback and allocate talent efficiently. If you have an area with 20 restaurants, and suddenly 18 are out of business, the remaining two are in good, capable hands. Business owners are constantly being reminded of benefits and punishments. That's psychology explaining economics.
On taxes: During the Punic Wars, two-thirds of war debt was repaid before the war was even over. People who paid taxes thought it was the right thing to do. They had a sense of duty and patriotism. I don't like the idea that we can't add new taxes today when faced with such problems. At the same time, people are responding to real frustration. It's hard to be optimistic with current politicians. They just hate each other so much. It's all sound bites designed to please their constituents. Some of you might enjoy this. I don't.
On envy: There is nothing more counterproductive than envy. Someone in the world will always be better than you. Of all the sins, envy is easily the worst because you can't even have any fun with it. It's a total net loss.They do it because overdrafts generate big fees. Banks had computer programs to rank the largest withdrawal so as to generate the greatest number of overdraft charges. There's now a class action suit against this, as there should be.
On consumer credit: Banks don't offer free checking accounts because they don't want to make money. They do it because I don't want to sell credit to people who are going to hurt themselves with it. You should only sell products that are good for the people who use them. Some disagree with this, but I know I'm right. That is to say, you're talking to a Republican who admires Elizabeth Warren.
On the investing climate: It's a very different world today. Bill Gross of PIMCO has a very good concept called "the new normal." Bond yields are so low, and prices will, of course, fall when interest rates rise. And there's so much other trouble in the world. It could mean very modest returns for some time to come.
On high-speed traders: Fancy computers are engaging in legalized front-running. The profits are clearly coming from the rest of us -- our college endowments and our pensions. Why is this legal? What the hell is the government thinking? It's like letting rats into a restaurant.
On tech stocks with low P/E ratios: I don't know much about them. But it's hard to imagine Google (Nasdaq: GOOG ) not having a strong position in the future. I don't know how you can replace Google. For other tech companies, of course there are very real threats.
On what his favorite company is outside Berkshire: That's easy. It's Costco (NYSE: COST ) . Costco is a different kind of place. It's one of the most admirable capitalistic institutions in the world. And its CEO, Jim Sinegal, is one of the most admirable retailers to ever live on this planet.
Costco will continue making huge contributions to society. It has a frantic desire to serve customers a little better every year. When other companies find ways to save money, they turn it into profit. Sinegal passes it on to customers. It's almost a religious duty. He's sacrificing short-term profits for long-term success. More of you should look at Costco.
On parallels between Rome and America: Of course there are parallels. Every great empire passes the baton. The failure rate of empires is 100%.
But in one sense, the greatness of the past stays with us. What was great about the Athens of the past is still with us. You can be 100% certain America will pass the baton, but our best values will go with that baton. The most important people in Asia studied at American universities and learn from America like sponges. Most of what is achieved now will never die.
Responding to a comment about the dollar depreciating 95% in past half-century: If you think the past half-century was bad, you will have serious problems in life.
Despite inflation, we've been a huge success. Real GDP has grown 2% per year per capita. That's fantastic. The period you describe as miserable was a tremendous time for the American economy. You've described success.
On hypocrisy of ripping on other financiers: To the extent that all I've done is pick stocks that have gone up, and sat on my ass as my family got richer, I haven't left much contribution to society. I guess it's a lot like Wall Street. The difference is, I feel ashamed of it. I try to make up for it with philanthropy and meetings like this one today. This meeting is not out of kindness. This is atonement.
On patience: Blue Chip Stamps was doomed a long time ago. But it had all this float, just like an insurance company. We had to do something intelligent with that float. Over decades, we only found three things to do with it: Buy See's Candy, the Buffalo Evening News, and Wesco. That's it -- just three ideas over the course of decades! That is very interesting, isn't it? Most think it's easy to go out and buy something. And it is. But most who do it will do so to the detriment of their shareholders. Study after study shows shareholders lose when management acquires businesses. Ours didn't. It was all because of patience.
On following his lead: Most people who try my way will end up unpopular and unsuccessful. There are certain peculiarities of my personality that I would not recommend. My irreverence. My insistence. These things will get most people into trouble. ... Basic morality works for everyone. Discipline works for everyone. Objectivity works for everyone. That's what you should focus on.
On pension funds: Public pensions are quite dishonorable. A police officer who earns $50,000 a year can work all this overtime in his last year and, because of it, collect a $100,000 pension for life. Of course, people think it's OK because he's an honorable police officer. But it's evil and overaggressive. It's wrong to have people behaving like that.
On Berkshire acquiring Wesco: I view myself as a captain of a ship. That ship's cargo -- Wesco -- is larger than anyone expected. But we're now at the port we always wanted to reach, at Berkshire. We've wanted this for so long, but the price was never right. It was never really feasible until now. I'm glad we waited. Berkshire has a history of waiting a long, long time before acting. It's a desirable outcome.
On Greek entitlement and bailouts: The Greeks describe failure as a job that consumes eight hours a day and five days a week. Of course, you're going to have problems with that mentality. Accepting Greece into the European Union was a huge mistake.
You can't let their big banks fail. But when I heard of Greece's bailout, my first thought was, "Those poor children." They'll be paying for it. At some point, you have to draw the line. We did. I think Lehman Brothers was a good place to draw the line.
Coke today vs. past: Coca-Cola (NYSE: KO ) is not as good today as it used to be. It's just so big. Like Berkshire, it's hard to make the elephant move very fast.
But it's still one of our favorites. The trouble with selling an expensive product is that it gives people the incentive to knock you off. Coke isn't like that. Branded companies that sell cheap products, and lots of them, is a fantastic business model to have.
On Berkshire paying a dividend: Some of you will live to see it. I hope I don't. It will only happen when we don't think we can get $1 of value for each $1 of retained earnings. I hope that never happens.
On an easy life: Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you've won.
Asked if his children have benefited from his wealth: Of course they have. When rich parents make their kids sell newspapers on the sidewalk, the result is always the same: It breeds hate. It's no different than if a man indulges himself while leaving his wife in a small corner in the kitchen.
That doesn't mean you can't have good, constructive children. They just won't be as motivated as ones who start out half-starving. It's a huge advantage to start from nothing [but be given an opportunity]. Of course, you simply won't find that in the Rockefeller descendants. It's too damn bad if you've grown so rich that your kids don't have that kind of motivation to succeed.
On challenge: Most dentists and doctors know what they're doing. They deal with problems they know they can fix. I don't want that. It's in my nature to move toward the really hard problems that haven't yet been solved.
On unemployment: I would be flabbergasted if jobs bounce back. Unemployment will be a considerable problem for a considerable amount of time. But it doesn't have to ruin your life. I was raised during the Depression, and people dealt with it. People with gumption today will deal with it.
In a sense, our jobs problem is the same problem Japan has faced over the past 20 years: Huge competition from China. Part of the problem is that Asians are so damn smart. For years they were in this Malthusian trap, stuck in agriculture. Now they're unleashed, and human talent is just awesome when unleashed. They're formidable competitors.
On picking a good investment manager: We have recent experience picking investment managers, and it's quite humbling. It's really, really difficult. Lots of people come to us and they're all high-quality folks. You'd think it'd be like shooting fish in a barrel, but it's not. Most of them are good in small niches, but they can't scale. Warren and I could scale. You had to with Berkshire.
On success: You have to love what you do. My whole life I've never been good at anything that I wasn't interested in. Architecture is a terrible way to make a living, but a friend of mine who is an architect says he loves it so much that he never has to work. That's a great way to live. Everyone should try it.
On ETFs: I never look at them. In general, I approve of low-cost index funds. Most investors will do better with them -- and that goes for both individual and professional investors. But I don't touch them. I prefer to do better than average.
On valuation: When we buy businesses, we often pay liberal prices. Sometimes this comes at a great cost. Dexter Shoe, for example, which we bought with stock. We utterly failed on that one. But we rarely get cheap businesses. If you average it out, though, I like it that way, because we end up with good businesses. [You get what you pay for].
On adversity: Quitting under adversity or while being frightened just brings contempt. Living with adversity is the best chance for opportunity.
There will always be panicky people. If someone else panics and you're calm, people will remember the calm one. Think about when Bobby Kennedy was brain dead and dying. Jackie was the only person in the family who could say, "It's over. Pull the plug." She was the only calm one. And who do people remember from that family? Jackie.
On investing in banks: A friend of mine won't touch banks. His attitude is that sooner or later the bastards will go crazy. I think that's irrational. You have to be able to recognize the ones that stick out. Wells Fargo (NYSE: WFC ) and US Bancorp(NYSE: USB ) avoid stupidity better than most. And Wells admits that it had its head up its ass when it made some of its mortgage loans. They know it wasn't their finest moment. I'm comfortable with people like that.
On humility: I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.
On diverse learning: Economists have long been divided by a simple problem. When you go to the movie theater, soda and popcorn costs a totally unfair price compared with other locations. This just tortures economists. At least 1 million man-hours have gone into trying to solve this problem. Economists understand that a first-class ticket on an airplane costs more than coach. They get that one. It's marginal utility. But they can't figure out the movie theater to save their lives.
Here's the Munger approach to the problem. In the auto world, a car manufacturer will sell a car for $40,000, and charge $200 for the extra gizmo. No one cares about the extra $200 when you're already spending $40,000. It's insignificant. The movie theater is basically the same thing. People are OK paying that much for a soda after they've paid so much for an admission ticket.
Now, psychologists can explain this clearly. Economists can't for the life of them. It's so simple what happens when you think beyond your trained field. It's amusing to see someone spend 1 million man-hours on something I can solve with my left hand.
On the success of Iscar: Failure isn't an option in Israel. You're surrounded by enemies and you have no hydrocarbons.
On energy: It's like they say: It's the best of times and the worst of times.
It's the worst with things like corn and ethanol. This was the most asinine idea in all of human history. People are just now starting to figure this out.
But it's the best in things like renewable energy from things like wind. It can't happen everywhere or match coal, but without it, imagining a world without hydrocarbon looks so glum. And we'll find more hydrocarbon. Shale, for example, is seriously interesting.
You can solve almost any problem with enough energy. Israel gets half its drinking water from the ocean.
A typical day in the life of Munger: Both Warren and I have amazingly open calendars. We're particularly brutal about saying no to new commitments. We just like to read and talk with people. It's an enormous advantage.
Why he likes BYD: Partly because they work hard at engineering problems, and partly because when they fail they put their heads down and admit it.
On improvement: When I was young I would sell the best hour of the day to myself. The most important investment was in myself. The rest of the hours I sold to clients.
On his favorite morning reads: I love the Wall Street Journal, but I've never liked its op-ed pages. The one I like the best is the Economist. I regard it as the adult publication of the modern world. But, in its field [news], The Wall Street Journal is still first.
Asked about parenting advice: Don't preach one set of values and live another. Whatever values you want to teach need to come with examples day after day.
On reading: Most books I read I don't finish the first chapter. I'm not burdened by awful books.
Hope you enjoyed reading the maestro's parting thoughts!!