By: Jesse Koltes
Whitney Tilson, one of the world’s most followed value investors, announced the closure of his hedge fund in September 2017.
“If I were managing only my own money, the fund’s recent results wouldn’t bother me quite so much,” Tilson wrote in a letter to investors.
“But investing and running a money management business are two very different things, and reporting sustained underperformance to you was making me miserable.”
But Mr. Tilson is hardly going away. After many years in the spotlight, Mr. Tilson is turning his attention to a new business venture named Kase Learning that will offer seminars on value investing, hedge fund entrepreneurship and short selling.
During a recent discussion at his Manhattan office, Mr. Tilson shared a never-before-told story about Charlie Munger’s personal advice to him on short selling.
What follows is a slightly edited transcript of Mr. Tilson’s story as told to Jesse Koltes.
The Charlieton: You’re a well-known follower of Charlie Munger and Warren Buffett. What do you make of the fact that Munger and Buffett recommend against short selling, and why did you decide to short stocks in your fund?
Whitney Tilson: I’ll tell you something, a story I’ve never told publicly. My very first experience with shorting was with Farmer Mac and then MBIA. That was with Guy Spier, who was pitching Farmer Mac to Bill Ackman and me as the long. Bill correctly identified it as a short and helped get Guy out. We all shorted it.
These were two of the first activist short campaigns in history. No short seller ever talked about shorts back then. Today, it’s a daily event that somebody’s going after some company publicly.
The companies did not like it. They sicced the SEC and Eliot Spitzer’s office on us. That was a very unpleasant early experience. They pitched a story to The Wall Street Journal that ran that talked about this cabal of market-manipulating short sellers.
This is back in 2002. I was three years into my fund. I managed less than $10 million. Here I am getting smeared in The Wall Street Journal. Then, a day later, I was getting subpoenas from the SEC and the New York Attorney General. i.e. Eliot Spitzer. I thought my life was over.
Here I am getting smeared in The Wall Street Journal…I thought my life was over
I called Buffett up to ask for a little bit of advice. He said, “Whitney, this too shall pass. It doesn’t appear you’ve done anything wrong and I know it feels very vivid right now but this will pass,.”
Then he said, “You know what, Whitney, I’ll bet Charlie would have something to say about this. Why don’t you call him up?”
I said, “Mr. Munger? I’ve never talked to him. I don’t know him. Does he even know who I am? Will he take my call?”
Buffett chuckled and said, “Oh, yeah. Charlie knows who you are. He’ll take your call. Give him a call.” I called him up and sure enough, he picked up the phone. He’s my hero. Imagine, you know?
Charlie had some very interesting things to say. The first thing he said was, and I still remember the exact tone of voice and his exact words. He said, “First of all, Whitney, you and Bill are exactly right about MBIA.” Then, he said, “The idea that anyone would ever think that this company is triple A is so ludicrous,” in those exact words.
I was feeling pretty good—my hero thinks my analysis was correct!
Then he said, “From a societal perspective, Whitney, I think it’s a good and healthy thing that you and Bill are out there raising correct, legitimate questions about this company and companies like this. I think it’s a healthy thing.”
But he said, “My advice to Whitney Tilson is don’t do it because,” he said, “If you go around in life stepping on people’s air hoses, they’re going to hate you and they’re going to attack you
If you go around in life stepping on people’s air hoses, they’re going to hate you and they’re going to attack you
“You know, Whitney, shorting is a tough business.” He said, “I remember back when I was just a young guy and I shorted a few stocks. I remember I’d shorted the Yen once and they all ended up working out but the Yen doubled against me or something before it finally worked out.” He said, “It cost me a lot of sleepless nights.” He said, “I eventually concluded that just wasn’t worth it and I stopped doing it. That would be my advice to you, Whitney.”
Then he paused, sort of like he was almost speaking to himself. He sort of chuckled and said,
You know what? Every young guy seems to have to learn this for himself.
I look back on that moment as one of the great mistakes of my career – why the hell didn’t I listen to Charlie Munger? Charlie Munger himself, my idol, told me, “Whitney, just don’t do it?” Instead, I did it for another 15 years and it was still early. I’d only shorted two stocks in my life up to that point.
Here I am hundreds of stocks later, millions of dollars of losses later. If I was really clever, I would have stopped right then. I would have listened to Charlie Munger.
Editor’s Note: Mr. Tilson has offered readers 20% off on all Kase Learning seminars. Visit KaseLearning.com and use code TC20 to register.
jesse koltes
April 3, 2018
By Jesse Koltes
The Daily Journal hosted its annual shareholders meeting on Wednesday, February 14, 2018 in
Los Angeles, California. The meeting was hosted by Charlie Munger, and attracted a crowd of
approximately 600 shareholders and fans.
Mr. Munger briefly addressed the business of the Daily Journal before opening the floor to two hours of question and answer.
While I did not take stenographer-grade notes this year, I did live tweet the entire meeting with the aim of capturing the event’s most memorable quotes.
I think a thematic summary will more useful to those that did not attend, and will be more useful to me as a method of internalizing what I learned.
Theme #1: Total Integrity as a Creed
Integrity is such an overused word that it can seem a little cheap. For Munger and company, it comes up so often that to breeze past it would miss something essential about what makes Munger and the Daily Journal so special.
Peter Kaufman, a DJCO board member and editor of Poor Charlie’s Almanac singled out “total integrity” as the first of the “five aces” that people should seek in their investment managers. Without integrity, everything else, from hard work, to raw intelligence, can lead you on a road to nowhere.
Munger’s emphasis on integrity is part of a strict code of conduct that feels downright religious, and perhaps even a little cult-like. In fact, I think denying that Munger’s code can seem like a “business religion” is counter-productive.
Value investing of the Buffett-Munger type is a quasi-religion in that it is universal, strict, and prescriptive of a certain type of behavior. That is clearly part of the draw for Munger fans like myself, and part of what makes him annoying to those who dislike him.
As an avowed fan, I thought of Munger when I read the following David Foster Wallace quote:
“In the day-to day trenches of adult life, there is actually no such thing as atheism. There is no such thing as not worshipping. Everybody worships. The only choice we get is what to worship. And the compelling reason for maybe choosing some sort of god or spiritual-type thing to worship — be it JC or Allah, be it YHWH or the Wiccan Mother Goddess, or the Four Noble Truths, or some inviolable set of ethical principles — is that pretty much anything else you worship will eat you alive.”
While “worshipping” Munger may be a stretch, what he does provide, for me at least, is a set of “inviolable ethical principles” that help me to navigate the trenches of daily life with more clarity.
And if you follow the quotes logic, if you don’t end up choosing something like a set of ethics to guide you, you’ll probably ending up venerating something like yourself, the money you earn, or your fleeting power, all of which can easily lead you to ruin—especially in finance.
Theme #2: Deep Fluency Built by Keeping at It
Deep Fluency, or mastery of the subject material you’re dealing with, was the second of Peter’s Kaufman’s “investment aces” and a recurring theme in the talk generally.
When asked how to build deep fluency, Mr. Munger’s advice was simple:
“My whole system of life is keeping at it. The task of life is not to see clearly in the distance but to do the task at hand.”
My whole system of life is keeping at it. The task of life is not to see clearly in the distance but to do the task at hand
Mr. Munger pointed out that the Daily Journal’s government division has carved out a niche for itself by consistently applying itself to winning the trust of slow-moving government bureaucracies.
The business isn’t sexy and the going is slow, but by gradually earning the trust of the courts the Daily Journal is digging a moat around its business that should generate satisfactory earnings for the long haul.
In contrast, Munger was critical of General Electric’s lauded management rotational program, wherein young men and women are shuttled amongst various departments in order to build a diverse understanding of the business as quickly as they can.
That sort of mile wide and an inch-deep approach to management doesn’t seem to work as well as Berkshire’s method of leaving executives within one operation, Munger said. By leaving managers within one company, the executives gain the deep fluency that can only come with from hard work over a long stretch of time.
The same procedure can be applied to building a fluency in whatever you’re doing. It’s the slow layering on of knowledge and skill that builds deep fluency. There’s no way to build it except by keeping at it.
Theme #3: Self-Mastery and Leading by Example
Many of the questions directed to Mr. Munger were about how he would go about changing something. With very little variation, Mr. Munger would often say that he had no idea how he could change something, whether that thing was a government agency, a business culture, or the United States health care system.
Changing things, Munger said, is hard.
“If they made me CEO of a company with a million employees and said ‘change the culture Charlie’ I would regard that as a sentence to hell. I think it would be hard to change the culture of a restaurant.”
If they made me CEO of a company with a million employees and said ‘change the culture Charlie’ I would regard that as a sentence to hell. I think it would be hard to change the culture of a restaurant
In that quote I see a theme. Munger does not see himself as a master of the universe that can bend reality to his will. Instead, he tasks himself with deeply understanding reality as it is, with all of its complications and complexities. In many cases, he concludes that he cannot change anything, even if he were to try his hardest.
Given the difficulty of change, I sense that Charlie’s advice is not to seek to master others, but to master one’s self, and to seek out those willing to try to do the same.
You can find a full transcript of the meeting at Value Walk.
jesse koltes
February 19, 2018
By Jesse Koltes, TheCharlieton.com
When I was eight years old, my dad caught me trying to cheat at blackjack.
“People get shot for doing that,” he said. If I wanted to win, he told me I needed to count cards. My dad became calm as he methodically explained a simplified counting method involving the five card.
Even as a boy, I sensed his fascination, and caught an early glimpse of my dad’s gambling streak. I wanted to connect with him about whatever this was.
Seeing that I wasn’t quite following, and still reeling from the casual death threat, my dad handed me a dog-eared copy of Ed Thorp’s book Beat the Dealer, and said that that was how he had learned.
Twenty years later, Ed Thorp’s autobiography, A Man for All Markets, was the only book Charlie Munger recommended at the 2017 meeting of the Daily Journal Corporation. That recommendation was my most important takeaway from the 4-hour affair. *
While Mr. Munger’s own comments from the meeting are worth reading, I’d suggest reading Thorp’s book first. In many ways, Thorp is a second Charlie in terms of both intellectual power and scope, which is perhaps the highest praise I could offer another person. Thorp’s book is chock- full of knotty lessons for investors, thinkers, and business people, but because Thorp is far less well covered than Munger, many of these ideas felt new and let me see them with fresh perspective.
My biggest takeaways are below.
Extreme Knowledge and Circles of Competence
“We often find that winning systems go almost ridiculously far in maximizing or minimizing one or a few variables” – Charlie Munger
“I’m no genius. I’m smart in spots—but I stay around those spots.”
— Tom Watson Sr., Founder of IBM
One of my favorite ideas from Charlie is that the secret to winning systems is the maximization or minimization of one or two key variables. Think of the minimalism at Costco, fee reductions at Vanguard, or portfolio concentration in the Kelley formula: In order to have better than average results, you need to have different than average behavior.
But one of my other favorite ideas from Munger is that investors should stay within their circle of competence, and only bet big when they have a high conviction understanding. As Buffett has said, he greatly prefers stepping over one foot hurdles to heaving himself over ten foot hurdles.
Both of these ideas are fantastic advice, but Thorp’s book made me realize that when you combine them there is a tension. In knowledge work fields (like investing), the variable you want to maximize is actionable understanding. You have to constantly improve your probabilistic understanding of how events will unfold in the future, while at the same time constraining your faith in your own abilities to understand the things you’ve learned about. You are forced to push and pull in opposite directions—to an extreme degree—at the same time.
Ed Thorp is an excellent and understudied example of how to thread this needle between growth and humility. When Thorp began to study the stock market, he was surprised and encouraged to discover “how little was known by so many.” He quickly recognized that the stock market was full of the same ignorance and lazy analysis that had pervaded the gambling world. Where others saw an unbeatable game of chance, Thorp saw a system of probabilities and payoffs masked by a veil of psychology and whim. If he could maximize his understanding of the system, perhaps he could beat the market, just as he had beaten Vegas.
His ambitious endeavor paid off. By applying the tools of physics, computer science and math to finance, Thorp created the world’s first “quant shop,” and a trading system that functioned profitably for decades with few drawdowns.
What I find incredible about Thorp’s example is not only that maximized his understanding and beat the market, but that he avoided the quackery and hubris that can so often bedevil people who have ventured so far from the average.
To make this point clear, consider how Thorp’s example compares with inventors of the Black-Scholes model. Thorp, and later Fischer Black, Myron Scholes and Robert Merton, stretched their understanding of the world to the extreme, and were able to deduce a theoretical model for pricing derivatives. Thorp took his discovering and traded it profitably for years. Merton and Scholes won the 1997 Noble price for the same discovery, but were unable to control themselves and use it safely within their circles of competence. Their hedge fund, Long Term Capital Management, blew up in 1998 and had to be bailed out by a government led consortium.
Thorp’s example is like an anti-Icarus, skilled enough to balance hubris and humility, flying neither too low nor too high.
Nontransitive Odds
Although Munger’s observation that winning systems often maximize one or two variables, Thorp’s book points out an an important exception: non-transitive games.
In Thorp’s telling, Warren Buffett introduced him to the subject at a fateful meeting of the two greats. Buffett would offer a guest their pick from a set of three dice. The guest was asked to pick the “best” die, and Warren would pick the “second” best. Both players would roll the dice at the same time, and the highest number would win. The trick was that no matter which die the guest selected, Warren could always beat them by picking second.
“This puzzles people because they expect things to follow what mathematicians call the transitive rule: if A is better than B, and B is better than C, then A is better than C. For example, if you replace the phrase “better than” by any of the phrases longer than, heavier than, older than, more than, or larger than, then the rule is true. However, some relationships don’t follow this rule. For instance, is an acquaintance of, and is visible to, do not. The childhood game of Rock, Paper, Scissors, is a simple example of a nontransitive rule.”
A Man for All Markets, page 158.
What’s remarkable about the non-transitive rule is that it bends the mind away from thinking that issues are always about straight-forward maximization or minimization. Sometimes, the edge doesn’t always go to the actor who boldly picks the apparently best option, but to the person who adapts to the first mover, and counters with something better.
Institutions and Resilience
For all the similarities between Munger, Buffett, and Thorp, it is notable that Berkshire stands as a colossal monument to the first pair’s intellectual achievements, while no such entity exists in Thorp’s wake. All three men possessed an enthusiasm for the power of compound interest, and enjoyed great returns and long careers. What explains the difference in institutional outcomes?
Part of the answer has to do with how Thorp and Buffett constructed their backup systems. In Berkshire’s conglomerate model, excellent businesses are acquired, but remain totally unintegrated. This requires that Berkshire forego the “synergies” and cost reductions that typical come with merger integrations.
But decentralization gives Berkshire a valuable firewall against negative contagions. When bad practices pop up at Wells Fargo, they can’t quickly spread to Kraft-Heinz or even to Omaha. Because no single pillar is central to Berkshire’s success, perhaps no longer even Buffett himself, the company has grown into one of the largest and most stable businesses in the world.
Compare that structure to Thorp’s now defunct Princeton-Newport Partners. Thorp arranged PNP such that the business was split into two geographically separate but equal offices. The East Coast office handled all the business administration and trading execution work that Thorp found tedious. Thorp was delighted to outsource the administrative parts of the business that he despised, and set up his own office on the West Coast where he designed the firm’s mathematical trading strategies.
Critically, Thorp claims that both offices acted independently, with each exerting full control over their own hiring decisions and cultures. Thorp may have thought that this added a protective layer of redundancy to his business as he often thought deeply about worst case scenario planning in nearly all aspects of his business. Thorp even asked Goldman Sachs what would happen to PNP’s account if a nuclear bomb went off in New York harbor (Goldman allayed his concerns by having a backup system in Colorado).
Unfortunately for Thorp, his backup system overlooked how co-dependent the reputation of two separate offices, with two separate bosses and oversight systems could be. That was a fateful mistake.
When the top five officers at PNP’s East Coast office were charged with stock manipulation and other white collar crimes in the late 1980s, the system Thorp created did have the resilience to guarantee the firm’s survival. The decentralization of the two offices had let one veer dangerously off track, but the interrelatedness of the two parts meant that neither could survive independently.
Though Thorp’s West Coast office was innocent in practice, it was fatally wounded by its relationship with the East Coast counterpart. Seeing no way forward, Thorp was forced to wind down his partnership before it could achieve the scale we might have expected of it.
By Thorp’s telling, the opportunity cost of this closure was massive. His ideas went on to inspire the success of the next generation of great quantitative firms such as D.E. Shaw and Citadel, each now valued at many billions of dollars.
*My second best takeaway was taking the opportunity to ask Mr. Munger a brief question in person. Unfortunately, things did not go exactly as planned. I racked my brain for months searching for a line of attack that might shake loose a new, previously undisclosed nugget of wisdom. Unfortunately, Mr. Munger deflected my question before launching into a stump speech that while interesting, was well known.
jesse koltes
April 7, 2017
By Jesse Koltes
Any year that passes in which you don’t destroy one of your best loved ideas is a wasted year.
— Charlie Munger
I ordered 55 books for myself in 2016, and downloaded 18 audiobooks. I didn’t read every word in every book—not by a long shot. I read some books three times.
I approach a new book like a new dish at a restaurant. I’m curious and cautious at first, but if its delicious, I consume the whole thing with gusto. If the dish is bad after a few bites, it’s probably not going to get better, and I allow myself to skip around and look for good parts. I don’t understand the masochists who insist on finishing full plates of bad food.
In the spirit of Charlie’s quote, I thought I’d review the most important ideas I picked up from my reading and thinking this year. To generate the list, I asked myself which ideas spent the most time at the front of my mind, hoping that time roughly correlates with importance.
Some ideas are new, some are old, but hopefully there’s more here than the normal value investing fare. Enjoy!
Inversion
2016 marked the first full calendar year that I worked for myself. I am my own boss, and my own employee (I am happy to report labor relations are very good).
Left to my own devices, I made inversion my project manager. For any given project, I ask myself what the stupidest way to go about something would be, and then proceed to chart the opposite path. I am embarrassed to admit how often I find myself slandering something I certainly would have done but for having taken the time to slander it first. It’s a wonderful mental trick.
The most common outcome of project management by inversion is that I assign myself a lot of reading. What could be dumber than failing to read the five best books on something of great importance to you? This usually only takes a week or two tops if I’m efficient, and I always end up enormously ahead of where I started. All it takes is a library card, some sitzfleisch, and enough chutzpah to believe you can learn.
Invert, always invert – Carl Jacobi
I’m amazed how many people devote a career to something without having devoted a week to studying their craft. I also wonder how many expensive consulting projects could be avoided if a company assigned a smart person to read five books and then summarize them first. Probably a lot.
Sales versus Marketing
I hated sales for most of my professional life. Even as a kid, I had the impression that sales were undignified, and somehow beneath me. I don’t like saying that, but I definitely believed it.
I didn’t become fully conscious of my own bias until I read Jim Koch’s book Quench Your Own Thirst. Koch is a recovering management consultant turned entrepreneur (like me), and reading his story was like looking in a mirror, albeit a far more successful one (Koch founded Samuel Adams).
Before I read Koch’s book, I thought that marketing was the thinking mans way of generating revenue, and that sales were merely a low level function. After all the top business schools don’t teach any courses on sales, but they teach dozens on marketing. Fortunately, Koch set me straight:
“The difference between marketing and sales is the difference between masturbation and sex. One you can do all by yourself in a dark room and fool yourself into thinking you’re accomplishing something. The other requires real human skills and all the fury and muck and mire of real human-to-human contact.” – Jim Koch
Koch destroyed the anti-sales mental roadblock that had been preventing me from studying sales seriously. That was no easy task. The anti-sales ignorance was very strong within me just a few years ago, and that ignorance, along with a lollapalooza of other compounding errors, is why my first entrepreneurial venture hardly lasted two years before failing.
Racking the Shotgun
When I began my study of sales, I searched for the five best books on the subject. Of the many I’ve read, 80/20 Sales and Marketing is far and away the best.
Perry’s “racking the shotgun” parable is the most powerful idea I have ever read about the act of actually being involved in sales
“In a noisy club in Las Vegas, a professional gambler pulled a sawed-off shotgun out of his jacket, racked it, and looked around to see who recognized the ratcheting sound and turned their heads. He said to his protégé, “John, the people who turned their heads are not marks. Do not play poker with them. Gamble with everybody else.”
The basic wisdom is that sales is an elimination game. If you send one signal to an audience that most people ignore, but qualified leads respond to, you have massively simplified the sales process. I think there is a broader point for all kinds of selection scenarios, including investing: its all about finding the right fishing holes.
Fractal 80/20
“Most people think they understand 80/20. Not one person in 1,000 people actually does.” – Perry Marshall
A year ago I would have told you I understood 80/20. I even thought I understood it better than most business people and mused that it would be funny to name a pet (or a kid) Vilfredo, after the Italian economist who first identified the unequal relationship between inputs and outputs.
80/20 Sales and Marketing showed me about a dozen ways 80/20 worked that I had not understood. The most important new idea is that 80/20 relationships are fractal. This means that if 80% of the results come from 20% of the work, its also true that 80% of the 80% of results comes from 20% of the 20% of the work, and so on, ad infinitum.
In other words, the most important things are exponentially more important than non-fractal 80/20 would suggest. If 80/20 is fractal, 64% of the results (80%2) comes from 4% (20%2) of the inputs, and 51% of the results (80%3) come from less than 1% (20%3) of the inputs.
The takeaway is that your best customer, opportunity, investment, etc is probably not two or three times more important than the median, but potentially 50-100 times more important.
Ask versus Guess
The basic idea here is that some people are from “ask” cultures, and other people are from “guess” cultures (here is a link to the article).
An “ask” person is taught that it is perfectly polite to make nearly any request one may feel like asking, because it is assumed that if someone does not want to comply with the request, they will politely respond “no”. Because asking and answering are both permissible and even encouraged, neither party is offended by any outcome.
A “guess” person or culture is not comfortable asking direct questions. Bold requests are considered rude and forward. Instead of directly asking for things, the appropriate course is to put out gentle feelers, insinuate your desires, and only ask questions you are relatively certain you will receive positive responses to. If a “guess” person plays it perfectly, they may even entice the person they want something from to offer something peremptorily, thereby avoiding the embarrassment of asking any questions at all.
The magic here comes from understanding which culture you were raised in, which culture you are currently in, and which approach might be more appropriate at a given time. I was raised in the Midwest (definitely a guess culture)but the world I work in now, and perhaps most markets in general, are ask cultures.
Two Ways to Tether Stock Prices to Reality
Are stocks pieces of paper to be endlessly traded back and forth, or are they proportional interests in underlying businesses? A liquidation settles this debate, distributing to owners of pieces of paper the actual cash proceeds resulting from the sale of corporate assets to the highest bidder. A liquidation thereby acts as a tether to reality for the stock market – Seth Klarman
Warren Buffett has said that a good investing class would teach two things: how to value a business, and how to think about market prices. I humbly propose that a field trip to the federal bankruptcy courts in Delaware would make an excellent addition to this basic syllabus.
I’ll never forget what it was like to watch a set of creditors (or were they hyenas?) devour the corporate assets of a company I had been the legal owner of just weeks before. After you watch a bankruptcy, there can be no doubt about the nature of the stock market. Stocks are most definitely partial ownerships interests in real business that can really be liquidated.
On the flip side, my partial ownership of a non-traded company has illuminated the possibility for total control as a second tether between stock price and reality. If a stock price is somehow chronically low in relation to the fundamentals of the underlying business, buying 100% of the outstanding shares removes the veil, and closes the gap between price and value.
Jeremy Miller’s book Warren Buffett’s Ground Rules details Buffett’s long history of taking personal control of companies. By controlling the firm’s flow of earnings, he reduces the markets ability to either radically undervalue or overvalue the real value of the business.
In other words, after you have control, there really is no price, provided that you never intend to sell. The only way you can extract value from the firm is by consuming the free cash flow the business throws off. Ironically, over the long term, that was precisely the case that existed when the company was traded, but this truth was obscured by the expansion and contraction of trading multiples. Bankruptcy and private control both reveal the reality of the situation.
Superforecasting
Philip Tetlock’s book Superforecasting was on my mind just about every day this year. I read this book multiple times, and will probably read it again in 2017.
The central idea of the book is that real world forecasting can be quantitatively expressed, measured, scored, and calibrated to a degree I had never thought possible. Tetlock not only hypothesized that it could be done, but also rigorously showed the way how, citing tremendously clear examples from his work with the intelligence community.
Tetlock was at his best when explaining how forecasters can improve their performance by carefully layering new information upon well selected base rate probabilities. Guy Spier has made a similar point by suggesting that investors should use an “inflight” checklist in addition to a “preflight” checklist to make sure you focus on both the initial conditions, as well as how the situation may be changing.
Superforecasting is an extremely successful blend of theory and practice. I couldn’t stop thinking about this book, and am still trying to integrate its lessons into my life and work.
The Power of Working Alone
As I previously mentioned, 2016 was the first year that I worked alone. My nearest colleague lives nearly 1,000 miles away, and I see him roughly six times a year, although we talk on the phone quite frequently.
My isolation is an accident of my career trajectory, geography, and (lack) of money. I think it may be one of the most important accidents of my life. Through sheer happenstance, I have ended up in a working environment not terribly different from the one employed by Buffett, Munger,and other likeminded value investors. After a year of working this way, I’m noticing tremendous upside to the situation.
Working alone has been a boon to my productively, happiness, calm, and freedom. I read when I want, set my own work hours, and feel very little compulsion to produce anything but tangible results, which are usually the outcome of having harvested good ideas from books.
Working alone means I have no human resource issues. I am immune to the contagions of other’s moods, biases, and desires. When I hear about the pressures of hiring, firing, promotions and other cancers of office politics, I get positively giddy about my situation.
As an aside, I definitely didn’t understand this a few years ago (and it may not be right for all people at all times). I once wrote a letter to Mohnish Pabrai and told him I’d pay him to let me work for him (he once made a similar offer to Buffett, allegedly). He politely turned me down, and said he didn’t work with analysts. I have a new appreciation for why.
Other Ideas in the Mix (New and Old)
In addition to the big ideas enumerated above, there are a few golden oldies I can’t help but touch upon briefly:
- The power of coaching: I hired a (remote) strength coach for the second time. I made more progress in the last twelve months than I’ve made in 9 years of working by myself. My coach Andy Baker cowrote the books Practical Programming and The Barbell Prescription, both of which are worth careful study. I’m looking forward to starting several business coaching relationships in 2017. A good coach or mentor is invaluable.
- Mutually exclusive, collectively exhaustive: I still use this consulting trick every day, and can’t imagine working without it.
- The systems in Getting Things Done: I’ve been using this management system for six or seven years, but never more fully than this year. It’s simply incredible.
- Talking to management: as I mentioned in my Horsehead postmortem, I previously under appreciated what can be learned by talking to a company’s management. Now that I am a company’s management in a startup, my old idea of ignoring management seems borderline insane.
- Multiple languages of politics. Arnold Kling’s The Three Languages of Politics, got taken a step further by Jonathan Haidt’s theory of moral tastebuds in The Righteous Mind. Both ideas are tremendously useful for understanding why people don’t believe what you believe.
- I thought about the dynamics expressed in Charles Murray’s Coming Apart at nearly every turn in the 2016 election. I also thought money would be more important to political outcomes. I read this book nearly three years ago, and still think about it almost daily.
- The ideas and processes in Quantitative Value, by Wes Gray and Tobias Carlisle. This book set my brain on fire when I read it, and remains my gold standard for adding rigor and processes to a subject.
- The business model canvas has become one of my indispensable tools for evaluating or creating businesses. Once you’ve used it and seen it, I find it impossible not to use it.
jesse koltes
December 24, 2016
By Jesse Koltes, Founder of TheCharlieton.com
My investment in Horsehead Holding went to zero recently. This marks the second time I’ve lost 100% of my money on an investment, but the first time I’ve done so since stumbling across Ben Graham and becoming an aspiring value investor.
As Charlie Munger has said, it’s wise to embrace your errors, and even to rub your nose in them.
It’s wise to embrace your errors, and even to rub your nose in them
I don’t want to let that happen with Horsehead. Forgetting would only compound what has already been a painful, permanent loss of capital. I want to collect up the broken pieces and build a cairn at this point in the path. I also want to think diligently about the very real possibility that I have been fooling myself.
While I do think the story of Horsehead is quite interesting, the purpose of this article is not to litigate the merits of the investment itself. My focus will be on my reconciling my prior beliefs with my new experiences. As an excellent example of this exercise, I encourage readers to check out Tyler Cowen’s post on how he updated his belief’s after the rise of Trump.
For background on the investment and the events that transpired, I suggest this article by Tom Massedge, as well as this article in the New York Times. I am personally waiting for a tell-all book by Guy Spier and Phil Town to fill in any of the remaining gaps.
Previous Belief #1: Don’t Bowl Without Bumpers
I got this tip from Greg Speicher’s website some years ago. The basic gist is that if you are going to be an active investor, you can probably avoid a lot of stupid mistakes by limiting your investable universe to those investments that have already been prequalified by ending up in some other smart person’s portfolio.
Few ideas have impacted me more than this one. I am a diligent reader of 13Fs, and stumbled across Horsehead while reading Mohnish Pabrai’s SEC filings.
And what an intriguing little finding it was. Not many people held it, it appeared to be an unappreciated, low cost producer with great long term prospects. But most importantly, Mohnish held it, and as far I could tell, he hadn’t “cloned” the idea from anyone else. If the cloner had gone off script, this had to be really good!
Like an idiot, I was attracted to the novelty of my own discovery and quickly fell in love. In retrospect, I loved that I was clever enough to “know” what Mohnish was thinking, and justified the investment decision ex post to comport with that feeling.
While I certainly wouldn’t endorse the opposite of this rule (only bowl without bumpers?), I think it’s problematic for a few reasons. How can we fight the confirmation bias inherent in starting an analysis where a respected person has finished theirs? How can we avoid the crowd following, mean reverting tendencies that arise from looking to others as a source of investment ideas?
The answer, true believers would say, is obvious: exercise good judgement and work hard to understand the investment. I definitely should have done my own work, started with more skepticism, and only made the investment if it fit with my carefully selected rules. But as I’ll address further down, I’m no longer as confident in my abilities to avoid this trap, even after I’ve spelled out how I think the trap works. More on that later.
Previous Belief #2: It’s OK to Ignore Management
I’ve always had trouble with the idea that value investors can adequately assess management talent. How do they do it? No one ever has been able to explain it well to me, and I therefore think most of these judgements are fraught with biases of all sorts, high error rates, and general silliness.
I’ve always been more comfortable in analyzing the business itself. If the returns on capital are consistently high, the business is evidently good, and management has thus far not been able to kill to the golden goose (not that I don’t believe they might be trying).
So prior to investing in Horsehead, I didn’t know a damn thing about the CEO, the CFO, or anyone else for that matter. I knew Mohnish Pabrai and Guy Spier owned nearly 10% of the business between the two of them, and figured that if they liked this business, management was probably not so bad. Even if they were bad, the business was good, and the superinvestor’s minding the store would keep things on track.
I was wrong. After visiting Delaware and listening to the executive leadership of Horsehead take the stand in their bankruptcy hearings, I was nothing short of appalled. Quite simply, these were people I would never go into business with privately. They were slippery, cunning, and didn’t care at all about the shareholders (it wasn’t even clear they knew any shareholders other than themselves). I underestimated how easily bad managers might be identified by showing up and listening to what they have to say.
Belief update: Bad management is like pornography; you know it when you see it.
Bad management is like pornography; you know it when you see it
Previous Belief #3: Diversification is for Suckers
I started off as an efficient markets guy in college. It seemed like a plausible explanation for the silliness I had seen during one summer running papers tickets around an options trading pit in Chicago. The EMH school taught me that diversification was a free lunch, and therefore a very good idea.
Charlie Munger changed that for me. I think the Kelly formula, the notion of diminishing returns, and basic statistics show that excessive diversification doesn’t help after a certain point. But what, precisely, is that point?
Munger and Buffett often concentrate their holdings in just five ideas. Obviously, they don’t think there is a lot of ignorance to diversify against, and they’re probably right about themselves. The problem is, I don’t have the same level of ignorance as them. If anything, I think I’ve been too ignorant to know how ignorant I really am at any given moment.
I’ve been too ignorant to know how ignorant I really am
I think this is one of those phenomenon where taking a maximalist view is not wise. You need to scale your level of concentration to your sophistication, while also considering the performance dragging effect of spreading your money too thinly. For me, I think that number is 10 – 20 roughly equally sized holdings for a person at my level of sophistication and experience.
Belief update: it’s possible to “diworsify” but it’s also possible you’re not as clever as you think. Weird stuff happens, and some diversification can help when it does. Having 10-20 equally sized holdings now (in my late twenties) and scaling down as I gain confidence is a better path than starting with an extremely concentrated portfolio now and blowing up while I gain valuable experience.
Previous Belief #4: (My) Discretion Can Beat Rules
Charlie and Warren have said that they don’t believe investing can be boiled down to a formula. They argue that discretion and horse sense will lead to better investing outcomes than rules and algorithms.
I no longer believe this to be absolutely true. First, the academic evidence says simple rules beat judgement in almost every imaginable scenario. We should all get a lot more familiar with the work of Paul Meehl.
Furthermore, even Warren and Charlie endorse rules for the truly ignorant, and that rule is called indexing. In one of my favorite turns of phrase, Warren makes the point: “Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.
But how do we reconcile the fact that rules nearly always outperform discretion, but Buffett and Charlie defend their approach as discretionary? I think its partially a problem of language.
Perhaps what Buffett and Charlie call discretion is actually more rule like than 99% of other human behavior. Perhaps a great deal of their outperformance stems not from their creative deviations, but from their iron adherence to many (but not all) of Ben Graham’s better than average rules.
I think much of what Charlie and Warren actually do is a sort of self imposed rule following, but they don’t call it that because they don’t like quants. This confuses the rules versus discretion debate and perversely lowers the prestige of the rule following.
Bottom line: I believe that well selected rules are often better than discretion, even in investing. It’s possible that some geniuses can improve on rules after decades of mastering the nuances of an algorithm, but the truly ignorant should stick to the rule.
Previous Belief #5: Reading Big = Big Circle of Competence
I have worked in aerospace, consulting, software, transportation, and the food industry. I have read lots of books about these industries. I have also read lots of books about industries in which I’ve never worked.
Unfortunately, it’s too easy to confuse knowing something about an industry with knowing enough about an industry.
It’s too easy to confuse knowing something about an industry with knowing enough about an industry
Belief update: My circle of competence for making discretionary investments is smaller than I thought. It’s probably restricted to food companies and absolutely obvious monopolies.
Previous Belief #6: The Most Important Thing is Showing Up
Trying to be consistently not stupid is its own form of genius. My experience with Horsehead confirms and strengthens this previously strong belief.
Had I “showed up” mentally and analyzed the company like I know I am able to, I would have been better served (although I’m not saying I would have been able to avoid – see my point about diversification).
When I did “show up” physically, it was to the Delaware Bankruptcy court and I met some amazing people such as Guy Spier and Phil Town. I also learned an incredible amount about the company that prior to bankruptcy, I had not known. It was silly that I had not taken the time upfront to understand the things that ultimately killed me in the end.
Belief update: show up mentally and physically to the things that matter to you.
jesse koltes
September 28, 2016
By Jesse Koltes
Donald Trump has made his business record the centerpiece of his campaign. When he’s not talking about banning Muslims, building walls, or trashing war heroes, he’s usually talking about all the huge (Yooge!) success he’s had in business.
But what do we really know about this man’s business philosophy? To catch a glimpse, here are twelve times that Donald Trump disagreed with the Oracle of Omaha.
1. On Reputation
- “In the second grade, I actually gave a teacher a black eye—I punched my music teacher because I didn’t think he knew about music and I almost got expelled.” – Donald Trump, The Art of the Deal, p. 71
- “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett
2. On Billionaires
- “You have to be wealthy in order to be great, I’m sorry to say” – Donald Trump, 26 May 2016
- “Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.”— Warren Buffett
3. On Options
- “I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first.” – Donald Trump, The Art of the Deal, p. 50
- “The difference between successful people and really successful people is that really successful people say no to almost everything.”— Warren Buffett
4. On Debt
- “Leverage: don’t make deals without it.” – Donald Trump, The Art of the Deal, p. 54
- “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”— Warren Buffett
5. On Work
- “I try not to schedule too many meetings, I leave my door open…I prefer to come to work each day and just see what develops…There’s rarely a day with fewer than fifty calls, and often it runs to over a hundred. In between, I have at least a dozen meetings. The majority occur on the spur of the moment, and few of them last longer than fifteen minutes.” – Donald Trump, The Art of the Deal, p. 2
- “I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business.” – Warren Buffett
6. On Employees
- “[My project manager] was one of the greatest bullshit artists I’ve ever met, but in addition to being a very slick salesman, he was also an amazing manager…the problem was that [he] wasn’t the most trustworthy guy in the world….”– Donald Trump, The Art of the Deal, p. 85 – 86
- “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.”– Warren Buffett
7. On Friends
- “I don’t kid myself about Roy [Cohn]. He was no Boy Scout. He once told me he’d spent more than two thirds under indictment on one charge or another….I said to him, “Roy, just tell me one thing. Did you really do all that stuff.” He looked at me and smiled. “What the hell do you think?” he said. I never really knew. – Donald Trump on Roy Cohn, Nixon’s legendary fixer, The Art of the Deal, p. 100
- “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”– Warren Buffett
8. On Losing
- “I’m not saying I would have a won, but if I went down, it would have been kicking and screaming. That’s just my makeup. I fight when I feel I’m getting screwed, even if its costly and difficult and highly risky.” – Donald Trump, The Art of the Deal, p. 236
- “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” – Warren Buffett
9. On Honesty
- “[The Holiday Inn was] attracted to my site because they believed my construction was farther along than that of any other potential partner. In reality, I wasn’t that far along, but I did everything I could short of going to work at the site myself, to assure them that the casino was practically finished. My leverage came from confirming an impression they were already predisposed to believe.” – Donald Trump, The Art of the Deal, p. 54
- “Honesty is a very expensive gift, don’t expect it from cheap people.” – Warren Buffett
10. On Deal Making
- “My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing to get what I’m after. Sometime I settle for less than I sought, but in most cases I still end up with what I want.” – Donald Trump, The Art of the Deal, p. 45
- “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.” – Warren Buffett
11. On Casinos
- “I’ve never had any great moral problems with gambling because most of the objections seem hypocritical to me. The New York Stock exchange happens to be the biggest casino in the world. The only thing that that makes it different from the average casino is the players dress in pinstripe suits and carry leather briefcases.” – Donald Trump, The Art of the Deal, p. 196
- “Gambling is a tax on ignorance… I find it socially revolting when a government preys on its citizens rather than serving them.” – Warren Buffett
12. On Each Other
- “I ask Donald Trump: ‘Have you no sense of decency, sir?’”– Warren Buffett
- “I don’t care much about Warren Buffett,” – Donald Trump
- Bonus Charlie Quote: “My attitude is that anybody who makes money running a casino is not morally qualified [to be president]” – Charlie Munger
jesse koltes
August 3, 2016
Book Review by Jesse Koltes, Editor of TheCharlieton.com
Welcome to The Charlieton’s first book review. The aim of this review is to deeply understand the ideas of the book, and to compare them with related and competing ideas as they exist elsewhere in the world. The recitation of historical facts, narratives, and other trivialities will be minimized, except insofar as they support an interesting idea.
I will number each major idea in the book as I come across them in order to create an easily referenceable catalog of ideas. My hope is that this numerical system will be of growing use of as the number of book reviews piles up in the future.
I encourage the readers of this review to support the author of the original work by purchasing the book. Please note, I have only included my thoughts on Griffin’s first chapter. For a complete review of all 71 ideas in the book, please subscribe to our mailing list.
Overall Thoughts:
This book is a well-organized and thorough survey of both the Ben Graham value investing system, and Charlie Munger’s contributions to the investing world. Griffin expertly displays how Munger’s own ideas both emerged from, and later departed with the intellectual foundations laid by Graham.
Griffin also makes a valiant attempt at summarizing Charlie Munger’s notoriously artful and qualitative approach with rigor and detail. I believe this effort was successful, with my only quibble being that several points of explanation seemed duplicative or redundant. As a management consultant would say, the ideas within the constructed framework were not always “mutually exclusive and collectively exhaustive.” Still, this may be the price of trying to detail a system so thoroughly dependent on personal rationality, grit, and temperament. I doubt I could do better.
I hope to see more work from Tren Griffin that detail his own thoughts on contemporary value investing. His chapter on factor versus value was his best, despite it being one of the shortest. Now that the author has so successfully catalogued many of the great ideas of Charlie Munger, I hope to read future works by Griffin that are focused on more controversial subjects at the margins of modern value investing.
Note: All page numbers refer to quotes in Charlie Munger: The Complete Investor 2
Intro Summary:
The purpose of the book is to teach the reader how to think more like Charlie Munger, the legendary thinker, investor, and vice chairman of Berkshire Hathaway.
The purpose of the book is to teach the reader how to think more like Charlie Munger, the legendary thinker, investor, and vice chairman of Berkshire Hathaway.
Griffin first explores the Ben Graham value investing system (the foundation and intellectual progenitor of the Berkshire system). Second, Griffin explores Munger’s complementary system using three elements: “principles, the right stuff, and variables.”
Chapter 1: The Basics of the Graham Value Investing System
Griffin explore the basic ideas of Ben Graham’s value investing system, citing it as the intellectual underpinning of Charlie Munger’s own system of thinking.
Idea #1: Simplicity
• Investing is simple but not easy. Complexity militates against an effective understanding of what is going on. Keep things as simple as possible.
Idea #2: Circle of competence
• Knowing what you don’t know is as important as what you do know
• “Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing.” – Munger, p. 11
Idea #3: Inversion
• Rather than trying to be smart, it’s better to try to avoid being stupid.
• “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, “It’s the strong swimmers who drown.”” – Munger, p. 13
“It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, “It’s the strong swimmers who drown.”” – Munger
Idea #4: Investing is a zero sum game
• It is an undeniable arithmetic fact that the average return of all active investors will equal the average return of all passive investors, less costs.
• “The idea that everyone can have wonderful results from stocks is inherently crazy, nobody expects everyone to succeed at poker.” – Munger, p. 15
jesse koltes
June 12, 2016
Transcribed, abridged and edited for clarity by Jesse Koltes
On April 30, 2016, Warren Buffett and Charlie Munger hosted the 2016 annual meeting of Berkshire Hathaway in Omaha, Nebraska. Mr. Buffett and Mr. Munger responded to a wide array of questions for over six hours without the use of notes. Though Mr. Buffett generally answered the questions himself before soliciting Mr. Munger’s opinions, Mr. Munger’s answers were often both complete and incredibly concise.
The following transcript has been edited and abridged to focus exclusively on the comments of Mr. Munger. A video recording of the entire proceedings can be found here.
[00:42:24]
CAROL LOOMIS: Good morning. I’ll make my very short little speech about the fact that the journalists, and the analysts too, have given Charlie and Warren no hint about what they’re going to ask. So they will be learning for the first time what that’s going to be also.
This question comes from Eli Moises. In your 1987 letter to shareholders, you commented on the kind of companies Berkshire liked to buy: those that required only small amounts of capital. You said quote; “Because so little capital is required to run these businesses, they can grow while concurrently making almost all of their earnings available for deployment in new opportunities.”
Today the company has changed its strategy. It now invests in companies that need tons of capital expenditures, are over regulated, and earn lower returns on equity capital. Why did this happen?
[00:46:10]
CHARLIE MUNGER: Well, when circumstances changed, we changed our minds.
Well, when circumstances changed, we changed our minds.
[00:47:33]
JONATHAN BRANDT: Thanks for having me again. My first question is about Precision Castparts. Besides your confidence in its talented CEO Mark Donegan, what in particular do you like about their business that gave you the confidence to pay a historically high multiple? Are their ways Precision can be even more successful as an essentially private company? For instance are their long term investments to support client programs or acquisitions that Precision can make now that it couldn’t realistically have done as a publically traded entity?
[00:51:04]
CHARLIE MUNGER: Well, in the early days, we used to make wiseass remarks. Warren would say, “We buy a business that an idiot could manage because sooner or later, an idiot will.” We did buy some businesses like that in the early days and they were widely available. Of course, we preferred to do that but the world has gotten harder and we had to learn new and more powerful ways of operating.
A business like Precision Castparts requires a very superior management that’s going to stay superior for a long time. And we gradually have done more and more of that and it’s simply amazing how well it works. I think that to some extent, we’ve gotten almost as good at picking the superior managers as we were in the old days, at picking the no-brainer businesses.
[00:53:07]
STATION 1 QUESTION: Good morning, my name is Gaspar. I am Spanish and I come from London. I admire you both in many ways. But I would like to know When looking backwards, what would you have done differently in life in your search for happiness?
[00:55:19]
CHARLIE MUNGER: Well, looking back, I don’t regret that I didn’t make more money or become better known, or any of those things. I do regret that I didn’t wise up as fast as I could have — but there’s a blessing in that, too. Now that I’m 92, I still have a lot of ignorance left to work on.
I don’t regret that I didn’t make more money or become better known, or any of those things. I do regret that I didn’t wise up as fast as I could have — but there’s a blessing in that, too. Now that I’m 92, I still have a lot of ignorance left to work on.
[00:56:00]
BECKY QUICK: This question comes from Salomon Ackerman who’s in Frankfurt, Germany. He wants to know why Berkshire has significantly sold down their holdings in Munich Re, which is the world biggest reinsurance company based in Germany while sticking with their reinsurance operations within Berkshire, like Berkshire Hathaway Reinsurance, and General Re? Would you reduce exposure to Berkshire Hathaway Reinsurance and General Re if they were listed companies? And he’s hoping that this can bring out some of your insights as to what’s happening in the reinsurance business right now.
[01:00:45]
CHARLIE MUNGER: There’s a lot of new capacity in reinsurance and there’s a lot of very heavy competition. A lot of people from finance have come over into reinsurance and all the old competitors remain, too. That’s different from Precision Castparts where most of the customers would be totally crazy to hire some other supplier because Precision Castparts is so much more reliable and so much better.Of course, we like the place with more competitive advantage. We’re learning.
Of course, we like the place with more competitive advantage. We’re learning.
[01:02:46]
CLIFF GALLANT: Thank you. In terms of growth and profitability GEICO really got whooped by Progressive Direct over the last year. In 2015, Progressive Direct grew its policy count by 9.1%, GEICO only 5.4%, and in terms of profitability the combined ratio at Progressive was a 95.1%, and GEICO’s was a 98.0%. Is this a evidence that Progressive’s investments in technology like Snapshot, investments that GEICO has spurned, is making it difficult at a time of difficult loss trends? Why is GEICO suddenly losing to Progressive Direct?
[01:07:10]
CHARLIE MUNGER: Well, I don’t think it’s a tragedy that some companies had a little better ratio from one period. GEICO has quadrupled….alright quintupled its market share since we bought all of it. I don’t think we should worry about the fact somebody else had a good quarter.
I don’t think we should worry about the fact somebody else had a good quarter.
[01:07:55]
NORMAN RENTROP: Greetings to all of you from the Midwest of Europe. I am Norman Rentrop from Bonn, Germany, a shareholder since 1992. My question is about the future of salesmanship in our companies. Warren, you have always demonstrated a heart for direct selling. When we met you in the midst of a tornado warning in a barbershop, you immediately offered to write insurance for us.
We see with the rise of Amazon.com and others a shift from push marketing to pull marketing, from millions of catalogues being sent out in the past, to now consumers searching on what they are looking for. What is your take on how this shift from push to pull marketing will affect our companies?
[01:14:02]
CHARLIE MUNGER: Well, I would say that we failed so thoroughly in retailing when we were young, that we pretty well avoided the worst troubles when we were old. I think net Berkshire has been helped by the Internet. The help at GEICO has been enormous and it’s contributed greatly to the huge increase in market share. Our biggest retailers are so strong that they’ll be among the last people to have troubles from Amazon.
[01:14:52]
ANDREW ROSS SORKIN: Great to see you today. Got a lot of questions on this particular topic and this question is particularly pointed one. Warren, for the last several years at this meeting, you have been asked the negative health effects of Coca Cola products and you’ve done a masterful job of dodging the question by telling us how much Coke you drink personally.
Statistically, you may be the exception. According to a peer reviewed study by Tufts University, soda and sugar drinks may lead to 184,000 deaths among adults every year. The study found that sugar sweetened beverages contributed to 133,000 deaths from diabetes, 45,000 deaths from cardiovascular disease, 6,450 deaths from cancer. Another shareholder wrote in about Coke, noted that you declined to invest in the cigarette business on ethical grounds despite one saying, “It was a perfect business because it costs a penny to make, sell it for a dollar, it’s addictive, and there’s fantastic brand loyalty”. Again, removing your own beverage consumption from the equation, please explain directly why we Berkshire Hathaway shareholders should be proud to own Coke?
[01:21:50]
CHARLIE MUNGER: Well, I like the peanut butter brittle and I drink a lot of Diet Coke.
And I think that people that ask questions like that one always commit the one error that’s really inexcusable. They measure the detriment without considering the advantage. Well, that’s really stupid. It’s like saying we should give up air travel through airlines because 100 people die a year in air crashes or something.
[01:23:18]
GREG WARREN: With coal fired and natural gas plants continuing to generate around two thirds of the nation’s electricity and renewables accounting to less than 10 percent, there remains plenty of room for growth. At this point, Berkshire Energy which has invested heavily in the segment is one of the nation’s largest producers of both wind and solar power. And yet, it still only generates around one third of its overall capacity from renewables.
As you noted earlier, MidAmerican recently committed another $3.6 billion to wind production which should lift the amount of electricity it generates from wind to 85 percent by 2020. You also have…the company overall pledging to have around $30 billion of renewable longer term. The recent renewal of both wind and solar energy tax credit has made this kind of investment more economically viable and should clear the path for future investments.
Eliminating coal fired power plants looks to be the main priority but natural gas fired plants are also fossil fuel driven and are also exposed to risk of energy crisis. Is the end game here for Berkshire Energy to get 100 percent of its generation capacity converted over to renewables? And one of the risks and rewards associated with that effort…after all, the company operates in a highly regulated industry where rates are driven by an effort to keep customer costs low while still providing adequate returns for the utilities.
[01:29:50]
CHARLIE MUNGER: Yea, I think we’re doing more than our share of shifting to renewable energy and we’re charging way lower energy prices to our utility customers and other renewable…If the whole…rest of the world were behaving the way we are, it would be much a better world. I will say this about the subject though and that is that I think people who worry about climate changes [being] the major trouble of earth don’t have my view. I think that we…I like all this shifting to renewables but I have a different reason. I want to conserve the hydrocarbons because eventually we’re going to use every drop [of fossil fuel] feedstocks and so I’m in their camp but I got a different reason.
[01:32:53]
ADAM BERGMAN: Good morning Mr Munger. My name is Adam Bergman. I’m with Sterling Capital in Virginia Beach. In your 2008 shareholder letter, you said, derivatives are dangerous. They have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks. So, my question for you is, how do you analyze and value companies, like, Bank of America, Merrill Lynch and other commercial banks that Berkshire has investments in relative to their significant derivative exposures? Thanks.
[01:40:04]
CHARLIE MUNGER: Well, we’re in the awkward position where I think we’ll probably make about $20 billion out of derivatives in just those few contracts that you and I did years ago. All that said, we’re different from the banks. We would really prefer if those derivatives had been illegal for us to buy. It would even be better for our country.
We would really prefer if those derivatives had been illegal for us to buy. It would even be better for our country.
[01:47:54]
DAN CHEN: Hi Charlie. Great to see you. This is Cora and Dan Chen from Talguard Investments of Los Angeles. This annual meeting reminds me of the magical world of Hogwarts of Harry Potter. This arena is our Hogwarts. Warren, you are headmaster and professor, Dumbledore. Charlie is our headmaster direct and full of integrity. The magic of long term concentrated value investing is real. Yet, similar to Harry Potter, the rest of the world doesn’t believe we exist.
Your letter to me has changed my life. Your Secret Millionaires Club has changed my children’s lives. They go to class chatting about investing. My question is for my children watching at home today and the children in the audience. How should they look at stocks when every day in the media, they see companies that they have made a time of their life, go IPO, they’re dilutive and they see they see a lot of very short term span…the cycle is getting shorter and shorter. How should they view stocks and what’s your message for them? Finally, I would love to thank you in person and shake your hand personally today. I repeat what I said last year. Thank you for putting…setting the scenes for my generation, to want and for my children’s generation too with the Secret Millionaires Club. I truly walk amongst giants. Thank you.
[01:52:10]
CHARLIE MUNGER: No, I think that your children are right to look for people they can trust in dealing with stocks and bonds. Unfortunately, more than half the time, they will fail in a conventional answer. So, you…they really have to…they have a hard problem. If you just listen to your elders, they’ll lie to you and make…and spread a lot of following.
[02:04:37]
KEN MARTIN: Hi Charlie. I’m Ken Martin. I’m an MBA student from Tuck School of Dartmouth. My question is about college tuition and the problem of rising student debt balances. In the past, prominent philanthropists have founded institutions that are now prominent research universities in our country. Why is this not a bigger part of today’s philanthropic debate?…the founding of new colleges were not new supply in higher education part of the solution of this problem?
[02:05:10]
CHARLIE MUNGER: Yea, I think that if you expect a lot of financial efficiency in American higher education, you’re howling at the wind…Well, I do a lot more than Warren does in this field. And I’m frequently disappointed.
But monopoly and bureaucracy have pernicious affects everywhere and universities aren’t exempted from it. But, of course, they are the glory of civilization.
[02:08:45]
ANDREW ROSS SORKIN: Thank you, Warren. This is from a shareholder, asked to remain anonymous. If Donald Trump becomes the President of the United States and recognizing your public criticism of him and your public support for Hillary Clinton, what specific risks, regulatory policy or otherwise, do you foresee for Berkshire Hathaway’s portfolio of businesses?
[02:09:47]
CHARLIE MUNGER: I’m afraid to get into this area.
[02:17:46]
MICHAEL MOZIA: Hi, my name is Michael Mozia. I’m from Brooklyn, New York and I’ll be starting at Wharton Business School in the fall. In an interview with Bloomberg Markets recently, Jamie Dimon defended the role banks play in financial markets, saying, banks aren’t markets, the market is amoral. You’re trained to the market. A bank is a relationship but banks, namely investment banks have struggled as regulators have favored market based solutions. And many of those relationships investment banks have worked so hard for have proven to be less lucrative especially compared to the growing fixed costs of supporting them…In the marketable securities portfolio, do you feel good about the going forward prospects of the investment banking companies, especially as Wells Fargo moves into that business?
[02:21:42]
CHARLIE MUNGER: It’s not the investment banking that draws you to Wells Fargo. Well, that’s horrible. It’s the general banking that…I think generally we fear the genre more than we love it.
[02:23:23]
CAROL LOOMIS: In the conclusion of a book, Dear Chairman, which you recommend in this year’s annual letter, a new book you recommend, the author argues that “the life’s work of great investors is inevitably reabsorbed into the industrial complex with little acknowledgement of their accomplishments. He then, argues that Berkshire Hathaway will be eventually be targeted by activist investors if it trades too sharp a discount to intrinsic value. Do you agree with this assessment and have you considered installing corporate defences that might future generations of activists from trying to break up Berkshire Hathaway?
[02:26:57]
CHARLIE MUNGER: Well, I think we have almost no worries at all on this subject and that most other people have a lot of fairly justifiable worry. And I think that helps us. So, I look forward on this subject with optimism.
[02:27:51]
JONATHAN BRANDT: Leasing has quietly become an important contributor to Berkshire’s earnings with its several leasing units, logging about $1 billion in combined annual pre-tax income. Can you talk about Berkshire’s competitive advantage is in its various leasing businesses, including containers, cranes, furniture, tank cars and rail cars. Are there other leasing businesses you’d be interested in entering, for instance airplanes or commercial auto fleets? Plane leasing companies, in particular, seemed to sell for reasonable prices and are often available?
[02:30:36]
CHARLIE MUNGER: I think you’ve said it pretty well. We’re well located now but we…I don’t believe we’ve got huge opportunities.
[02:31:03]
ZONE 7 QUESTION: Good morning Charlie. I am …from the Philippines. Warren, my wife and I sent original paintings to your office two days ago. We hope you like them. Today…sorry…today, Berkshire’s size ensures that it faces competition from numerous businesses. If you had a silver bullet, which competitor would you take out and why? And sorry, you…and can’t say Donald Trump.
[02:33:05]
CHARLIE MUNGER: And we’re not targeting competitors for destruction. We’re just trying to do the best we can everywhere.
[02:33:36]
BECKY QUICK: This question comes from Sugar Land, Texas. He writes, my wife and I have the vast majority of our net worth invested in Berkshire and in shares of the Sequoia Fund. Mr Buffett, you have endorsed the Sequoia Fund on more than a few occasions. Recently, the Sequoia has been in the news because of its large position in Valeant Pharmaceuticals. Mr Munger has termed Valeant business model highly immoral. Mr Buffett, do you agree with Mr Munger’s assessment. Have your views about Sequoia changed?
[02:41:37]
CHARLIE MUNGER: Well, I totally agree with you that Sequoia, as reconstituted, is a reputable investment fund and the manager, as reconstituted, is a reputable investment advisor. And I’ve got quite a few friends and clients that use Ruane Cunniff and I’ve advised them to stay with the place, as reconstituted.
So, we think the whole is fixed. Valeant, of course, was a sewer and those who created it deserved all the opprobrium they got.
Valeant, of course, was a sewer and those who created it deserved all the opprobrium they got.
[04:00:28]
MATT CLAIBORNE: Hi, my name is Matt Claiborne from Columbus, Ohio. And thank you for putting this on for all of us. My question is, you’ve said before that your job will be divided into parts for your succession. One of which will be, is the responsibility of maintaining culture by having Howard as non-executive chairman. What is the plan for how Berkshire will maintain its culture when Howard no longer fills the role and what should shareholders watch for to make sure that the culture is being properly maintained decades from now when I’m your age?
[04:03:42]
CHARLIE MUNGER: I’m even more optimistic than you are. I’ve never noticed it. I really think that the culture is going to surprise everybody by how long it lasts and how well they do. They all wonder why they ever made any fuss over us in the first place. It’s going to work very well.
[04:05:05]
ANDREW ROSS SORKIN: It’s a bit of a multi question. About two dozen men and women work with you, Warren, at our corporate office. I see from last year, the quality of the pictures have been improved in the annual report. So, congratulations on that. However, looking at it, there’s something that comes to any one’s attention and it’s the lack of diversity among the staff. A 2015 analysis by Calvert Investments found that Coca Cola is one of the best companies for work place diversity while Berkshire Hathaway was one of the worst. You’ve explicitly stated that you’ve not considered diversity when hiring for leadership roles in board members. Does that need to change? Are we missing any investment opportunities as a result? And do you consider diversity, however defined, of company leadership and staff when analysing the value of a company that you may want to purchase?
[04:11:11]
CHARLIE MUNGER: Years ago, I did some work for the Roman Catholic Archbishop of Los Angeles. And my senior partner pompously said, you know, you don’t need to hire us to do this. There’s plenty of good Catholic tax lawyers. And the Archbishop looked at him, like, he’s an idiot and said, Mr Peeler, he says, last year, I had some very serious surgery and I did not look around for the leading Catholic surgeon. That’s the way I feel about board members.
[04:12:01]
GREGG WARREN: When Berkshire authorized the share repurchase program, originally ended up buying back shares at prices no higher than 10 percent premium to the firm’s most recent book value per share. A figure that was subsequently increased repurchase share at prices no higher than 20 percent premium to book value. There’s been relatively little share repurchase activity during the last four and a half years. Even as the shares dipped down below the 1.2 times book value threshold during both January and February of this year, if you base it on a buyback price calculated on Berkshire’s book value per share at the end of 2015. A number that had not yet been published when the stock did dip that low.
Given your belief that Berkshire’s intrinsic value continues to exceed its book value with the difference continuing to widen over time, are we at a point where it makes sense to consider buying back stock at a higher break point that Berkshire currently has in place and would you ever consider stepping in buying back shares that did dip down below 1.2 times book value per share even if that prior years’ figure had not yet been released?
[04:18:05]
CHARLIE MUNGER: Well, you’ll notice that elsewhere in corporate America. These buyback plans got a life of their own. It’s gotten quite common to buy back stock at very high prices that really don’t do the shareholders any good at all. I don’t know why people exactly are doing it and I think it gets to be fashionable.
We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.
We’re always behaving a lot like what some might call the Episcopal Prayer. We prayerfully thank the Lord that we’re not like these other religions who are inferior and I’m afraid there’s probably too much of that in Berkshire but we can’t help it.
[04:23:47]
CAROL LOOMIS: This question comes from New York. Mr Buffett, you have expressed concern about cyber, biological, nuclear, and chemical attacks but preventing catastrophe is not getting enough attention. For example, a bill passed the House unanimously to harden the electric grid against the high altitude nuclear exposure. Not too many bills passed unanimously these days but then, the bill got bottled up in the Senate. Have you considered funding…wouldn’t it be a good idea for you to consider funding a lobbying and educational campaign and counteract industry lobbyists who are often more interested in short-term profits?
[04:31:43]
CHARLIE MUNGER: We haven’t been very good at getting the government to follow any of our advice?
[04:35:36]
STATION 10 QUESTION: Hello. Hello, Mr Buffett and Mr Munger. Thank you so much for your insights, teaching and being great role models. I am a violinist based in New York City. My question to both of you is really apt to psychological biases. Through Berkshire’s operations, you get a very good read on macroeconomic factors. Yet Berkshire does not make investment decision based upon macroeconomic factors.
How do you control the effect of information, such as knowing macroeconomic factors or the anchoring effect of knowing stock prices because after a while, it’s hard not to once you’ve analyzed them before. And how does that influence your rational decision-making, whether you should ignore it or whether you should try to use it in a positive way?
[04:38:01]
CHARLIE MUNGER: Well, there hardly could be anything more important that the microeconomics, that is business. Business and microeconomics are sort of the same term. Microeconomics is what we do and macroeconomics is what we put up with.
STATION 10 QUESTION: The anchoring effect…I mean, how do you deal with that as well?
CHARLIE MUNGER: Well, we’re not anchored to what we’re ignoring. We try to avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.
We try to avoid the worst anchoring effect, which is always your previous conclusion. We really try and destroy our previous ideas.
[04:40:40]
BECKY QUICK: Warren, just a quick request. Would you please stop using CNBC as an acronym for mass destruction? This question comes from Matt Bandy in Dallas, Texas. He is asking about Seritage Growth Properties. He says, in December 2015, you filed a personal 13G evidencely….evidencing a roughly eight percent ownership position in the real estate investment trust, Seritage Growth Properties which to my knowledge is not parallel as a Berkshire investment. Alternatively, in September 2015, Warren filed a personal 13G evidencing ownership in Phillips 66, which is parallel as a Berkshire investment.
My question is, how do you decide when making a personal investment for your own account versus an investment for Berkshire. I understand market cap in ownership sizing are the likely factors but does it still to invest for the shareholders’ benefit in a company, like, Seritage that might have a significant upside and where are you putting your personal to work?
[04:44:07]
CHARLIE MUNGER: Well, part of being in a position, like, that we argue by, you really don’t want conflict of interest or even appearance of it. And it’s been 50 or 60 years. When have we embarrassed Berkshire by some sort of side position?
Both of us have practically nothing of significance in the total picture outside of Berkshire. I’ve got some Costco stock. I’m director of Costco. Berkshire has got some of Costco stock. There are two or three little overlaps, like that but basically, Berkshire shareholders have nothing to worry about regarding some conflict that Warren and I are going to have. We’re not going to do it.
[04:45:35]
CLIFF GALLANT: One of the great financial characteristics of Berkshire today is its awesome cash flow. While a simple earnings, less capex, [04:45:39] yields and annual free cash flow calculation, I figure, of around $10 to $12 billion, in reality it seems to be much higher, closer to $20 billion. I think part due to the changes in deferred asset year to year. What is the outlook for free cash flow and can investors continue to expect similar dynamics going forward?
[04:48:56]
CHARLIE MUNGER: Well, there are very few companies that have ever been similarly advantaged. In the whole history of Berkshire Hathaway we’ve lived in a torrent of money and we were constantly deploying it and dispersed assets and we were wising up as we went along. That’s a pretty good system. We’re not going to change it. What you’ve got to do is be aversive to the standard stupidities. If you just keep those out, you don’t have to be smart.
What you’ve got to do is be aversive to the standard stupidities. If you just keep those out, you don’t have to be smart.
[04:49:59]
BRUCE WANG: Thank you so much for your generosity and sharing your life accumulation of knowledge in financial capital to …humanity. Thank you for that. And Berkshire managers, thank you for building important companies and securing our financial futures. Thank you guys. This is Bruce Wang from [inaudible], traveling west from Orlando, Florida. Last year, you kind shared with me the importance of getting the best reputation you can and behaving well. This year, I like to ask in preface with…Bill Gates wrote, Warren’s gift is being able to think ahead of the crowd. It requires more than taking his aphorisms to heart to accomplish that although Warren is full of aphorisms well worth taking to heart.
And he also added that, I’ve never met anyone who taught in business in such a clear way. Warren, what elusive yet obvious to you truth has allowed you to get ahead of the crowd and build a clear mental framework to produce a historically significant institution powerhouse brand. And Charlie, same to you, what obvious truth presents itself so clearly to you but many would fervently disagree with you upon?
[04:53:26]
CHARLIE MUNGER: Well, it’s just a few simple tricks that work well and probably you’ve got a temperament that has a combination of patience and opportunism in it. I think that’s largely inherited although I suppose it can be learned to some extent. Then I think there’s another factor that accounts for the fact that Berkshire has done as well as it has is that we’re really trying to behave well. I had a great-grandfather, when he died the preacher gave a talk and he said, “None envied this man’s success so fairly won and wisely used”. Now that’s a very simple idea but it’s exactly what Berkshire’s trying to do.
There are a lot of people who make a lot of money and everybody hates them and they don’t admire they earned the money. Its not particularly admirable making money running gambling casinos and we don’t own any. We’ve turned down businesses including a big tobacco business. So, I don’t think Berkshire would work as well if were just terribly shrewd but didn’t have a little bit of what the preacher said about my grandfather. We want to have people think of us as having won fairly and used wisely. It works.
[04:55:20]Think of how lucky you were [Warren] to have your Uncle Fred. Warren had an uncle who was one of the finest men I ever knew. I used to work for him too, you know? A lot of people have terrible relatives.
Warren’s a Democrat but he came from different antecedents. I worked for his grandfather, Ernest and he was earnest and when they passed social security which he disapproved of because he thought it reduced self-reliance and he paid me $2 for ten hours work. There was no minimum wage in those days on Saturday and it was a hard ten hours
At the end of the ten hours, I came in and he made me give him two pennies which was my contribution to the social security and he gave me two one Dollar bills and a long lecture about the evils of Democrats and the welfare state and the lack of self-reliance and it went on and on and on, so I had the right antecedents too. I had Ernest Buffett telling me what to do.
[04:58:09]
ANDREW ROSS SORKIN: Warren and Charlie, you’re famous for making a deal over a day or two with nothing more than a handshake. You pride yourself on a small overhead of doing the due diligence mostly yourself. Other successful acquisitive companies use teams of internal people, outside bankers, consultants and lawyers to do due diligence, often over many months to assess deals. Speed may be a competitive advantage. You’ve done some amazing deals but does your diligence process also put us at greater risk? And if you’re ever gone, how would you recommend Berkshire change how we approach deal making?
[05:02:20]
CHARLIE MUNGER: Well, when you start to think about it, business quality usually counts on something more than whether you crossed the T in some old lease or something and the human quality of the management who are going to stay are very important. And how are you going to check that by due diligence, you know?
And I think I don’t know anybody who’s had a generally better record than Berkshire in judging business quality and the human quality, the people who are going to lead the business after it’s acquired. And I don’t even would have been improved at all by using some different method. So, I think the answer is that, for us at least, we’ll go ahead the way we should.
[05:05:21]
GREGG WARREN: Warren, the announcement earlier this month that Ajit Jain would be taking over responsibility for all Berkshire’s reinsurance efforts once Tad Montross retires from General Re has raised some questions about, not only in leadership structure but succession planning. Given the state of the reinsurance market, it makes sense to have Ajit overseeing both businesses especially if the pricing environment is expected to be difficult for another 10 years.
And there are duplicative efforts that can be streamlined. Given this move and the change of responsibilities in several of Berkshire’s subsidiaries in the last few years, I was just wondering if you could give us some color on how succession planning is handled at the subsidiary level and any insight you could give us into what led you to finally decide to have Ajit oversee both of Berkshire’s reinsurance arms and whether or not it would change the amount of work you’d be doing and especially inside of the business would be greatly appreciated.
[05:09:28]
CHARLIE MUNGER: Well, there’s an upper side to that. Not only can the able people usually do a lot more, but the unable people by and large you can’t fix. So…I think you’re forced to use our system if you have your wits about you…Warren and I once reached the decision, we wouldn’t pay more than X dollars for something and the man who was a subordinate to both of us who was working on it just said, “You guys are out of your minds. This is really stupid. This is a quality operation. You ought to pay up for it.” We just looked at one another and did it his way. We don’t pay any attention to titles.
[05:11:26]
STATION ONE QUESTION: Hello Mr Buffett. Hello Mr Munger. Thank you for taking my question. With Berkshire Hathaway being so well managed, why doesn’t it have the highest credit bond rating?
[05:11:45]
CHARLIE MUNGER: I’m going to take that one, okay.
The rating agencies are wrong. And set in their ways.
[05:12:34]
CAROL LOOMIS: Questions continue to come in about the financing and working relationship that Berkshire formed with 3G a couple of years ago and this is one of those questions.
While 3G has been very successful in cutting costs and increasing margins at Kraft Heinz, the company has seen volumes and revenues decline. As a long-term investor, how do you judge when a management is cutting muscle as well as fat? Can a business increase revenues, while cutting costs? And I forgot to say this came from Rick Smith in New York City.
[05:16:49]
CHARLIE MUNGER: Yeah and sometimes when you reduce volume it is very intelligent because you’re losing money on the volume you’re discarding. It’s quite common for a business not only to have more employees than it needs, but it sometimes has two or three customers that could be better off without. And so, it’s hard to judge from outside, whether things are good or bad just because volume is going up or down a little. Generally, speaking I think the leanly staffed companies do better at everything, than the ones that are overstaffed. I think overstaffing is like getting to weigh 400lbs when you’re a normal person. It’s not a plus.
[05:22:17]
JOHN GORRY: Good afternoon Mr Buffett and Mr Munger. I’m John Gory from Iowa City, Iowa. When interest rates go from zero to negative in a country, how does that change the way that you value a company or a stock? Do you choose a high valuation because the discount rate is low or on the other hand, do you choose a low valuation because the cash flow is likely to be poor?
[05:25:11]
CHARLIE MUNGER: Yea but I don’t think anybody really knows much about negative interest rates. We’ve never had them before and we never had periods of stasis, like, 20…except for the Great Depression. We didn’t have things like happened in Japan…a great, modern nation playing all monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25 years. And none of the great economists who studied this stuff and taught it to our children understand it either, so we just do the best we can
No, and our advantage is that we know we don’t understand it. If you’re not confused then you haven’t thought about it correctly.
No, and our advantage is that we know we don’t understand it. If you’re not confused then you haven’t thought about it correctly.
[05:27:25]
CLIFF GALLANT: You’ve long stressed the importance of taking a long term view when investing and over the decades, your substantial returns in American Express seems to support your point. You’ve talked in the past about the ability of American Express to reinvent itself overtime. But today, it seems to be a company that doesn’t have alternative businesses and its brand doesn’t seem to have the same cache as it once did. Shouldn’t a prudent investor like Berkshire periodically reassess its reasons for owning an investment?
[05:29:09]
CHARLIE MUNGER: A lot of great businesses aren’t quite so great as they used to be. The package goods business for the Procter & Gambles and so forth- General Mills. They are all weaker than they used to be at their peak.
Auto companies…oh my God. When I think of the power of General Motors, when I was young, and what happened. They wiped out all the shareholders. I would no more have predicted that when I was young, General Motors loomed over the economy like a colossus. It looked totally invincible. Torrents of cash, torrents of everything…
I think anybody in payments probably who’s an established long time player, with an old method, has more danger than used to exist. It’s just there’s more fluidity in it.
[05:31:29]
MIKE KELLY: Hi Mr Buffett. Hi Mr Munger. I’m from Arizona. My name is Mike Kelly. My family run some cattle ranches down in Arizona and that’s kinda what my question pertains to. I’m curious on your thoughts as it relates to the expanding global population and investing in cattle, and if you think it’s wise? Thank you.
[05:31:47]
CHARLIE MUNGER: I think it’s one of the worst businesses I can imagine, for somebody like us.
Yea. Not only is it a bad business but we have no aptitude for it.
Oh, yea, yea…they have one good year every 20 years or something.
MIKE KELLY: I know you guys like steak.
CHARLIE MUNGER: But not all in cattle.
CHARLIE MUNGER: Somebody has to occupy the tough niches in the economy. We need you.
[05:33:08]
ANDREW ROSS ROSKIN: Warren and Charlie. The first part is for Charlie, second part is for Warren. Charlie, you clearly understand the power of incentives. How do you apply this at Berkshire when designing compensation formula? Without naming names or dollar amounts, please illustrate for us with examples…of a couple of examples of Berkshire’s operating managers get paid for performance in different industries? The second part is for Warren, which is, you once said, you’d write about how we should compensate the next Berkshire CEO. Can you describe exactly how we should do it now?
[05:33:35]
CHARLIE MUNGER: I wouldn’t worry about the next CEO but the…When it comes to assessing incentives, the systems are different and what they’re trying to adapt to is the reality of each situation. And the basic rule on incentives is you get what you were awarded for, so if you have a dumb incentive system, you get dumb outcomes. And…and one of our really interesting incentive systems is at GEICO, and I’ll let Warren explain it to you because we don’t have a normal profits type incentive for the people at GEICO.
It’s simple but other people might reward something like just profits. And so, the people don’t take on new business that they should take it on because it hurts profit. You’ve got to think these things through and, of course, Warren is good at that, and so is Tony Nicely.
[05:37:39]
CHARLIE MUNGER: And maybe an undertaking power. God knows where they get the plan.
[05:40:10]
CHARLIE MUNGER: And he…he wanted more bad examples. A lot of the bad examples of incentives come from banking and investment banking. And if you reward somebody with some share of the profits and the profits are being reported using accounting practices that cause profits to exist on paper that aren’t really happening, in terms of underlying economics, then people are doing the wrong thing and it’s endangering the bank and hurting the country and everything else.
That was a major part of the cause of the Great Financial Crisis, is that the banks were reporting a lot of income they weren’t making, and the investment banks were too. The accounting allowed for a long time a lender to use as his bad debt provision his previous historical loss rate. So, an idiot could make a lot of money by just making loans at high interest and accruing a lot of interest, and saying ‘I’m not going to lose any more money on these because I didn’t lose money on different loans in the past’. That was insane for the accountants to allow that and…literally insane. It’s not too strong a word. Yet, nobody is ashamed of it. I’ve never heard of an accountant that’s ashamed of it.
We want it simple and right and we don’t want to reward what we don’t want. If you got to have…those of you with children, just imagine how your household would work if you constantly rewarded every child for bad behaviour. The house would be ungovernable in short order.
[05:49:03]
MARCUS DOUGLAS: Good afternoon Mr Buffett and Munger. My name is Marcus Douglas. I’m an investment adviser from Houston, Texas. Where I’m from, there a lot of people losing their jobs mostly due to the sharp decline of crude oil prices. My question pertains to the overall state of the union, more so [05:49:24]. Keeping in mind that crude oil is primarily bought and sold in American dollars, do either of you believe the major fluctuations in the supply of crude oil influence the US’s future monetary policy decisions?
[05:49:46]
CHARLIE MUNGER: Well, my answer would be ‘not much’.
[05:52:34]
CAROL LOOMIS: The question is from Larry Lapowitz of Boston. The year in the balance sheet for manufacturing service and retailing operation shows total current assets of $28.6 billion, of which cash and equivalents are $6.8 billion. Meanwhile, total current liabilities are $12.7 billion, implying net working capital of $15.9 billion. It has become increasingly common for companies, like, Apple and Dell to finance their businesses via their suppliers…in some cases with negative working capital. Why is it necessary for these Berkshire businesses to have so much working capital, particularly so much cash? More generally, how do you think about efficiently managing the working capital of a business segment so large sprawling and decentralized as this one?
[05:57:08]
CHARLIE MUNGER: Yea, I think it’s hard to do that brutally, when you’re rich and your supplier isn’t, and think that your supplier don’t love you. And so, I think there is something to be said for leaning over backward to have a win-win relationship with both suppliers and customers…always. Yea and we don’t need it. Let somebody else set the record on that one.
[05:57:52]
JONATHAN BRANDT: Most American corporations separate out supposedly, one time restructuring costs, whereas Berkshire doesn’t. Berkshire’s reported operating earnings are therefore, in my opinion, of higher quality. Have you ever calculated how much higher operating earnings on average would be if Berkshire separated out plant closing costs, product line exits, severance pay, and similar items? Is it a material number or does Berkshire not incur much in the way of these types of costs, typically, because most of your acquisitions are standalone?
[05:58:16]
CHARLIE MUNGER: Let me take that one. That’s a question like asking, “Why don’t you kill your mother to get the insurance money?”
That’s a question like asking, “Why don’t you kill your mother to get the insurance money?”
[05:59:11]
CHARLIE MUNGER: And you’re talking about… We like to advertise our defects.
[06:00:07]
STATION FIVE QUESTION: This is Martin from Germany. I’m a fixed income manager. We launched the…with Henry Lieber Fund and…Yea…yea…the volume is about $600-$650 million. We are 4.1 percent hedged this year. [06:00:28] my question is about fixed income If I look in your annual report, it’s about the volume of $25 billion. If I add, let’s say, the CDS, you are selling the CDS and it’s about the volume of about seven to eight billion. So, my complete question is, the premium on your CDS is about 31 basis points at the end of the year, so marked-to-market, it’s probably at the high teens or twenties. So, would you consider unwinding this position? Are you allowed to do it? In the annual report you say no, but probably you can make exactly the contrary trade on it. That means you are buying protection. Is that a philosophy, which you stand behind, could you do that from the ethic point of view, when the premium are extremely low, which is at the case…that the spreads are, as I said, between 15 and 20 basis points?
[06:03:52]
CHARLIE MUNGER: Well, the truth of the matter is we don’t pay much attention to trying to get an extra two basis points by being gamey on our short-term things and that credit default position is a weird, historical accident. We don’t pay much attention to it either. It will go away in due course.
[06:05:12]
BECKY QUICK: This question comes from Tom Hinsley, a long time shareholder from Houston, Texas who says, over the years, you have been effusive in your praise of Ajit Jain and his contributions to Berkshire. In the 2009 Chairman’s letter you write, if Charlie, Ajit and I are sinking in a boat and you can only save one of us, swim to Ajit. My question is, what if we don’t get to Ajit in time? Please comment on the impact on National Indemnity in Berkshire and whether or not there is another Ait in the house?
[06:08:10]
CHARLIE MUNGER: Yes, Ajit has a longer shelf life than we do. He’d be particularly missed.
[06:08:33]
CLIFF GALLANT: Thank you. Low to negative interest rates are something that’s been discussed a few times today, and you’ve mentioned its implications for a return on float. I was wondering how should shareholders value the 25 percent of the float that’s been created by retrocession reinsurance where the business is booked at an underwriting loss and, at times, has adversely developed.
[06:10:28]
CHARLIE MUNGER: Yeah, we’re willing to pay a little money now to have just the certainty of having a lot of money available, in case something really attractive comes up, in a bit difficult time…It’s an option cost, right.
[06:13:27]
ANDREW ROSS SORKIN: Warren, Todd and Ted now had been at Berkshire for several years. What have been their biggest hits and failures, specifically? And what have they learned from Charlie and Warren? And what are the biggest differences between you and them?
CHARLIE MUNGER: Again, I’ve got nothing to add.
[06:15:02]
ANDREW ROSS SORKIN: The biggest hits and failures, I think they specifically wanted to know in terms of investments and try to understand the way you think perhaps. I think the question was more…I think my…the implication was, the way they think and the way you think. Are there differences?
[06:16:16]
CHARLIE MUNGER: And we don’t want to talk about specific hits and failures.
[06:18:47]
STATION SEVEN QUESTION: Good afternoon Mr Buffett and Mr Munger. My name is Jeffrey [06:18:52] from Cranford, New Jersey. I just have a simple question. How would you explain IBM’s move?
[06:19:05]
CHARLIE MUNGER: No, I don’t either.
[06:19:35]
CHARLIE MUNGER: Yea, it’s obviously coping with the considerable change in the computing world and…and it’s big and interesting, and God knows whether its gonna work flawlessly or very well. I don’t think Warren knows either.
[06:19:55]
CHARLIE MUNGER: Yea, yea, yeap. But it’s a field where a lot of intelligent people are trying to get big in.
[06:20:19]
CHRISTIAN CAMPOS: Hello everybody. Good afternoon. My name is Christian Campos. I’m from New York City. I’m a senior accounting major at Baruch College, part of the City University of New York. And Mr Buffett, in your annual shareholder letters and during interviews, and even today, your sense of humour always shines through. Where does your sense of humour come from? Please tell us Thank you.
[06:21:16]
CHARLIE MUNGER: I think if you see the world accurately, it’s bound to be humorous because it’s ridiculous.
I think if you see the world accurately, it’s bound to be humorous because it’s ridiculous.
[07:05:22]
RICHARD MILLER: Good afternoon Mr Buffett. I’m Richard Miller in the Creighton Theology Department here in Omaha and I study climate change and its social effects. I just wanted to make you aware that Berkshire is operating within a larger economy and that the most important climate analysis, economics analysis, from Nicholas Stern indicates that on our current path, by the end of this century, 30 percent loss in global GDP is possible.
The other issue is when we talk about doing something about climate change, doing something means to avoid major sea level rise, we need to reduce emissions globally starting today…seven percent per year.
The only time we’ve ever reduced emissions over…over a 10 year period in a growing economy was in the 1990s in England and we reduced at one percent per year. So, we’re talking about a completely different thing than President Obama’s gradual move and we need to do something. We need to do massive transformation immediately. And with your large global holdings, you are a world significant figure on this, not just about this particular shareholder resolution. Thank you for your time.
[07:07:23]
CHARLIE MUNGER: Well, yes. We’re in Omaha, which is considerably above sea level. And we have no big economic interest in this subject and our insurance companies, we don’t write much of that catastrophic insurance that we used to write many years ago. So, we’re asked as a corporation to take public stance on very complicated issues.
We got crime in the cities. We got a hundred…we got a thousand complicated issues that are very material to our civilization. And if we spend our time on the meeting public stance on all of them, I think it would be quite counterproductive. And I don’t like the fact that the people that constantly present this issue never discuss any solution except reducing consumption of fossil fuels.
So, there are geoengineering possibilities that nobody is willing to talk about. And I think that’s asinine. So put me down as not welcoming.
jesse koltes
May 15, 2016
Los Angeles—Charlie Munger hosted the Daily Journal Corporation’s (NASDAQ:DJCO) 2016 annual meeting at the company’s headquarters in Los Angeles, California on February 11, 2016. Detailed notes of the proceedings appear below. These notes fall short of a verbatim transcription. Rather, they represent my best attempt at capturing Mr. Munger’s wisdom as faithfully as allowed by the circumstances. Errors of transcription are mine.
Charlie Munger: (Inaudibly addressing the formal business of The Daily Journal for approximately five minutes)
Unidentified Audience Member: Can you please turn the mic up?
Charlie Munger: Is this better? (Audience cheers) Some of you may remember that this same thing happened at a Wesco meeting once. Back to the Daily Journal. Like many newspapers it was once a fine business. Of course the world changed a lot, as it has for other newspapers.
But some things have gone well, like our stock holdings. We made a lot of money in the foreclosure boom. We had more than 80% of the foreclosure notice business. It was huge prosperity for us and that gave us a lot of money, and we then used that money to buy securities at low prices during the panic. We were aided by that peculiar circumstances, and it offset the deterioration of our newspaper business. Of course, we’ve also entered the software business.
And what’s happened now is that we have more software properties than print properties and those businesses are doing much better. And the business is doing better because our product is way better than that of our main competitor. And there is an endless market for this stuff. District attorneys, courts; it’s hard to imagine anything more certain to flourish.
It’s agony to do business with public bodies and their bureaucracies and agencies, but it’s the agony that keeps many other software companies from coming into the market. If you’re Microsoft you’re into easy money. They did buy one of these businesses once, and it was not a success. The really big boys find it hard, and they tend to stay out. I think our prospects are thus better than our main opposition.
What you have here is a sort of venture capital approach to the software business. We’ve tacked on a software business to a newspaper. Our stock may be reasonable if you like VC investments, but it’s not right for Ben Graham groupies. I’m not saying it won’t work, but if it does, you don’t deserve it.
Our stock may be reasonable if you like VC investments, but it’s not right for Ben Graham groupies. I’m not saying it won’t work, but if it does, you don’t deserve it.
Questioner One: Tell us about one or two opportunities in technology and also give us one or two risks.
Charlie Munger: The one I was most excited about was getting into (inaudible, but could have been Journal Technologies). Crucial milestone. We bought this little nothing software company and now it has 80 or 99 employees. The new business is interesting because it’s in a big market. I think whoever gets entrenched in it will be in a very sticky business.
At least we will have entered a business where we’ll be hard to dislodge. The hurdle is that we want to be most important player in this new niche, which is a big niche. I don’t regard that as going poorly. It’s going well. (Authors note: Journal Technologies is a subsidiary of DJCO and supplies case management software to courts and justice agencies).
Questioner Two: I’m from Stanford. Thanks for donating the Munger building. You’ve said you want to know where you’re going to die, so you never go there. A few years ago Warren Buffet bought IBM, and some people say he walked out of the circle of competence. Can you comment in relation to the first comment?
Charlie Munger: IBM is a lot like us. They have a traditional business that is very sticky, but then the world changed. And of course, in the new world they are not the leader. Up came Oracle and Microsoft. IBM didn’t do too well with the rise of the PC.
But IBM is in a position where they have an old business and a new business. (Inaudible). The automated checklist is a great idea. It was particularly useful for Edison.
But now IBM is a kind of super market and I don’t really have an opinion about it. I’m neither a believer nor disbeliever in the new business. It could happen or it could not happen. I do think the old business is very sticky and will die slowly. On the Berkshire side, we have to play a long game. It may work in a mediocre way, it may work big.
Questioner Three: I want to thank you for sharing your wisdom with all of us. Two questions: What advice do you give to your grandchildren? Second question: do you have a favorite investment story you can share with us?
Charlie Munger: Well, regarding grandchildren I was not able to change my children very much. My situation reminds me of what Clarence Darrow said about the great poem: “I am the master of my fate master of soul. Master of my fate? I can’t even pull an oar!” That’s the way I feel about grandchildren.
(Authors note: Clarence Darrow, a prominent 19th century lawyer was quoting and challenging the spirit of the poem “Invictus” by William Ernest Henley. Darrow said “Instead of being the captain of his soul, as I have sometimes expressed it, man isn’t even a deck-hand on a rudderless ship! He is just floating around and trying to hang on, and hanging on as long as he can.” Source: http://darrow.law.umn.edu)
Charlie Munger: What was the second question?
Questioner Three: Do you have a favorite investing story?
Charlie Munger: Well, I have many investment stories from my younger days, but not many that I haven’t told before. Al Marshall and I did something in 1962, where we were bidding for some oil rights. I soon realized that under the rules of the rights the only people who would bid for these oil royalties were oil brokers and they were a bunch of bastards. I realized the oil royalties business was populated by shady characters, who could be outmaneuvered easily. The Mungers were getting a $100k a pop for a while. (Authors note: Munger gave much more details regarding this trade / arbitrage but they were not audible)
The trouble with that business, is it didn’t work for very long, and that’s true of most investment stories. The trick is to get one or two or three.
Questioner Four: How does the current investment energy environment compare to the 1980s?
Charlie Munger: We owned Wesco for a long time. They did a lot of transactions. But it was only five or six outcomes that carried most of the freight. Now that is really interesting. To try and do a zillion little things is hard. Try to do a few things well, and it will work out. A few good decisions over a long period of time can lead to great success. You make your money by the waiting. A fair amount of patience is required. Like when we had all this money flowing in from the foreclosure boom, and we deployed it in a day. It wasn’t luck we had the money on hand.
You make your money by the waiting. A fair amount of patience is required. Like when we had all this money flowing in from the foreclosure boom, and we deployed it in a day. It wasn’t luck we had the money on hand.
Questioner Five: Historically Berkshire was built around its insurance model. What other models did you try and pursue?
Charlie Munger: In the early days we thought we had a special advantage in any float business. Now we have enormous float but it’s not that useful. It’s not a tragedy but the float business in Berkshire is large and it’s not getting a great return.
Questioner Six: The Daily Journal is in software. What do you think of the attractiveness of the average software business?
Charlie Munger: Software based businesses are like any other business. Some of them are the dumps, some of them are the best on earth. Good spots and bad spots.
Questioner Six: It seems like Journal Technologies is growing slower than its competitors, but people are paying high multiples for it. Would you ever consider selling Journal Technologies?
Charlie Munger: Well, never say never. We’ve had problems and opportunities. It’s a peculiar part of the software business. We can’t judge it like a normal business or even like a normal growth company. It’s venture capital. You have a venture capital like business that’s not venture capital.
Those little businesses are not acquisitions of the very best businesses that are going to be foolproof like we do at Berkshire. We are going to make a venture capital like assault on the software business. Don’t judge those things by normal standards.
Questioner Seven: If you were to design CEO compensation for an insurance company or a bank, what would you do?
Charlie Munger: Well both Berkshire and the Daily Journal have our own ways of doing things, and we just try and do whatever makes sense. That’s our system here.
Questioner Eight: What are your expectations for BYD?
Charlie Munger: That too is a venture capital like company. The founder started by borrowing $300K from the Bank of China, and was going into the small batteries business. He succeeded in grabbing a small part of that market. He’s a very remarkable man, doing an insanely ambitious thing. Last month he sold 10,000 electric cars in China, which is more than Tesla sold. Most people have never heard of BYD.
Berkshire doesn’t do this venture capital stuff, and I hope that the Daily Journal works out half as well. BYD is in a position to benefit from this electrification trend. It’s very helpful when people are dying in the streets of Beijing because they can’t breathe the air.
BYD is in a position to benefit from this electrification trend. It’s very helpful when people are dying in the streets of Beijing because they can’t breathe the air.
Questioner Nine: How do you use the discount rate to calculate intrinsic value?
Charlie Munger: We don’t use numeric formulas that way. We take into account quality factors. It’s like a bridge hand, you have to think about a lot of things. There is never going to be a formula. If that worked, every mathematical person would be rich, but that’s not the way it works.
There is never going to be a formula. If that worked, every mathematical person would be rich, but that’s not the way it works.
Questioner Nine: But you value a company…
Charlie Munger: Opportunity cost is crucial, and the risk free rate is one factor.
Questioner Nine: Do you use the same rate for different businesses?
Charlie Munger: The answer is no, of course not, different businesses need different rates. They all are viewed in terms of value, and they’re weighed one against another. But a person will pay more for a good business than for a lousy one. We really don’t want any lousy businesses anymore. We used to make money betting on reinventing lousy businesses and kind of wringing money out of them, but that is a really painful, difficult way to make money, especially if you’re already rich. We don’t do much of it anymore.
We used to make money betting on reinventing lousy businesses and kind of wringing money out of them, but that is a really painful, difficult way to make money, especially if you’re already rich. We don’t do much of it anymore.
Questioner Ten: Mental models question….what are your favorites?
Charlie Munger: Well, we’re always talking about multiple models, and that means I have many. That’s the nature of reality. There’s no way that it can be easy. You are all in the investment business – do you find it easy? Anybody who finds it easy is wrong. You are looking at an illusion. Occasionally you’ll get an easy one, but not very many. Mostly it’s hard. How many people find it hard? (Most of audience raises hands) Intelligent group of people here. We collect them. (Audience laughs)
Questioner 11: You said you try to reduce errors by avoiding auctions. What do you do in your daily life to reduce errors?
Charlie Munger: There are two things Warren and I have done. One is that we spend a lot of time thinking. Our schedules are not that crowded, and we sit around and think constantly. In a way, we look more like academics than businessman. My system has always been to sit quietly for a few hours. I don’t mind if there are long period where nothing happens. Warren’s the same way. He’s sitting on top of an empire now. Sometimes he clears his schedule for a haircut. His calendar will say “Tuesday: Haircut day”.
I don’t mind if there are long period where nothing happens. Warren’s the same way. He’s sitting on top of an empire now. Sometimes he clears his schedule for a haircut. His calendar will say “Tuesday: Haircut day”.
All you people are very good at multitasking, and that’s fine if you are the chief nurse at a hospital. Otherwise, multitasking is bad. Juggling three balls at once is not ideal. Luckily, a lot of you are so obscure you’re not that busy (audience laughs).That advice worked for me, and it should work for you. If it didn’t work for me, I didn’t have a backup plan. I was not going to dance lead in the Bolshoi Ballet.
But I do think that the constant search for wisdom and the right reactions can help. Being angry will never serve you. You can apply that to your life. But it’s hard to do. The nature of ordinary results is that they’re ordinary.
Questioner 12: You bought Wells Fargo. Why was that a good investment?
Charlie Munger: Well I’ll take you back to when Berkshire bought Wells. The world was coming apart. Real estate was the source of the chaos. Wells Fargo had a huge exposure. But we knew that the lending officers at Wells Fargo were not normal bank lending officers. They were grownups, and they had a somewhat cynical view, and they were appropriately careful and it was the right way to run a bank.
And we knew they were better, and we knew they wouldn’t lose at much because they chose better and managed better. So we had an informational advantage. We were aware they had that special capacity, so we bought heavily.
Secondly when the Daily Journal bought Wells we again knew that bankers at Wells were more rational than normal. It’s a different kind of superiority and rationality. I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away.
Questioner 13: Two powerful mental models are the concept of specialization and taking an interdisciplinary approach. How do you reconcile the two?
Charlie Munger: You can’t say live without synthesis. Synthesis is reality. Of course we need synthesis to understand anything. The question doesn’t make sense. However, the reward system of the world does not favor focusing on synthesis. Extreme specialization is the way to succeed. Most people are way better off specializing than trying to understand the world.
Being good at synthesis is good only for some people, but it’s not great career advice for most people. Most people should get very good at one thing. Even then, synthesis should be your second attack on the world, and it’s also a really good defense. Without synthesis we’d be blind.
Questioner 14: You’ve said that rationality was the most important thing to you. How would you advise us to become more rational?
Charlie Munger: If you start working at it young, it’s a good idea. And it’s a lot of fun. I can hardly think of anything that’s more fun. I’d say you’re on the right track. Not everyone gets to be the Emperor of Japan.
Being rational means you avoid certain things. Try the alternatives. Try jealously, try anger. They don’t work. Yet some people wallow in those feelings, and of course it’s a total disaster. Self-pity is not going to improve anything. Get self-pity out of your repertoire.
Self-pity is not going to improve anything. Get self-pity out of your repertoire.
Questioner 15: Increasingly, men and some women don’t find ROI in a long-term relationship worth it. What is your evaluation of this?
A: Well I think different folks can live in different ways, but I think all the evidence is that marriage is the best practical alternative for most people, and the statistics show it. They live longer. They measure happiness physiologically, smiling and all that…. It isn’t that a lot of marriages don’t fail and a lot aren’t made in Hell and all that, but considering how difficult the world is, it’s your best chance for most people. And of course it should be valued. That’s one of the things I like about the Asian cultures. The Confucian idea that the family is really important . . . too, for that matter, is a very sound idea. If we ever lost family values we would have a hell of a lot of [trouble]
Questioner 16: The Daily Journal bought property recently. Can you explain the choice to purchase real estate versus deploying that capital elsewhere?
Charlie Munger: We think we’re going to be in Provo, Utah for a long time. We have a lot of employees there, they like their work, and their location. It’s part of the business operations. We have customers that come there. I never see us leaving. We bought it cheaply, we built it cheaply, and it’s a nice piece of property. Our way of getting ahead has nothing to do with real estate investments.
Questioner 17: Do you think a person who can’t make money running a New Jersey casino is qualified to be President of the United States?
Charlie Munger: Well he did make money for quite a while. My attitude is that anybody who makes his money running a casino is not morally qualified to be President. I regard it as a very dirty way to make money.
Questioner 18: What has given you the greatest sense of accomplishment? If you could give advice to your younger self, what would it be?
Charlie Munger: Well, my family life has been great. Cicero used to say that one way to be happy in old age was to remember your achievements. Some people say that’s too damn self-centered. I agree with Cicero. It’s OK to look back. What was the other question?
Questioner 18: What advice would you give to a younger version of yourself?
Charlie Munger: My advice is always so trite: good behavior makes your life easier, makes it work better, and is less complicated than lying. And so I’m very old fashioned. Discipline works, old fashioned good behavior works, generosity works. We all know people who go to a funeral just to make sure someone’s dead. We don’t want to be in that crowd.
I’m very old fashioned. Discipline works, old fashioned good behavior works, generosity works. We all know people who go to a funeral just to make sure someone’s dead. We don’t want to be in that crowd.
This political situation we’re in is such a despicable mess. This political situation we all face now. Of course, it’s a disgrace, a lot of these people. I mean, it’s bad the leading civilization has these candidates for high office . . . we’re talking about. And they’re not all in one party. But you don’t want to get angry. After all, politicians have been politicians for a long, long time. You want to operate constructively, vote constructively. But anger. There’s just so much anger in politics now, so much automatic hatred.
How can any of us really know will the United States be better fifty years from now because we vote Republican or we vote Democratic in the next election? Who can tell what the exact mix is between compassion and something else?
How can any of us really know will the United States be better fifty years from now because we vote Republican or we vote Democratic in the next election? Who can tell what the exact mix is between compassion and something else?
Questioner 19: How do you understand a new industry or new business you’re trying to get into where the dynamics are different? How do you get insights into the specific domains? What is the relationship between oil prices and economic growth?
Charlie Munger: I don’t really know the correlation between oil prices and economic growth. I think it’s obvious that if oil had been a little cheaper and easier, the growth would have been greater than it had, and in that sense if oil gets to be expensive, and we still need it desperately, . . . and there is that correlation between oil prices and economic growth.
What’s happened to Exxon and so on, the damn price of oil went up faster than their production went down. Name me another business who’s earnings goes up when production units go down down down?
People who really have a lot of free energy, like the people in the Middle East, have very dysfunctional economies. They’re like a bunch of rich people spending their capital and not knowing how to do anything anybody else wants to buy. So, maybe in that sense I think a tougher hand has been good for us. My answer to that question reminds me of my old Harvard law professor who used to say, “Charlie, let me know what your problem is and I’ll try to make it harder for you.” I’m afraid that’s what I’ve done to you.
As for how do I understand a new industry: the answer is barely. I just barely have enough cognitive ability to do what I do. And that’s because the world promoted me to the place where I’m stressed. And you’re lucky if it happens to you, because that’s what you want to end up: stressed. You want to have your full powers called for. Believe you me, I’ve had that happen all my life. I’ve just barely been able to think through to the right answer, time after time. And sometimes I’ve failed.
Questioner 20: How do you deal with stress?
Charlie Munger: The answer is that I barely stress. I guess I grew out of it over the years.
Questioner 21: Last year you had some very pointed comments about Valeant. Do you have any updated thoughts or any thoughts on other companies? (Audience laughs)
Charlie Munger: I have no dog in that hunt, I have no interest in pharma, or Valeant. It’s just when you people have come so far….(audience laughs). Valeant is such an extreme example of extreme behavior that I wanted to call attention to it. One of the Valeant shareholders said Warren is a sinner because he owned Coca-Cola. My comments drew heat on Warren. He can handle it though. He’s a very philosophical man. (audience laughs)
It is true that crazy false values and crazy excess is bad morals, and bad for the nation, bad bad bad. A lot of that is in American finance. And there is no question that American finance has its sins. Elizabeth Warren and I don’t agree on many subjects, but she is basically right about American finance when she says it’s out of control.
Elizabeth Warren and I don’t agree on many subjects, but she is basically right about American finance when she says it’s out of control.
Bernie Sanders and Elizabeth Warren are not two of my favorite people, but they are absolutely right on that subject. You all see what goes on. The craziness, the stock promotions, the accounting, the culture. It’s very bad for all us that we have this huge overdevelopment of finance. And yet it’s very hard to do anything about it.
It reminds of me of the English land barons. They had all the land, and what did they do? They sat around and played cards, and they gambled for high stakes and that’s what human nature does. That continued day in and day out. Multiply the capital of the world by 30, and now we have people like the lords of England who had all that time to play cards. We have a vast gambling culture, and people have made it respectable. Instead of betting on horse, they bet on securities and derivatives.
We have a huge amount of legalized gambling of and of course a public market is an ideal casino and there are whole bunch of people who want to be in a casino. Just to sit there and see it every night go higher and higher. Other very respectable people see others getting rich and there’s way too much of that. Too much of the new wealth either owns a casino or they play in one. And I don’t think the exultation has been good for life in general, and I am, to some extent, a member of that group.
I’m always afraid that I’ll be a terrible example to the youth that want to make money. Even if you do it honestly, I don’t consider it much of a life.
I’m always afraid that I’ll be a terrible example to the youth that want to make money. Even if you do it honestly, I don’t consider it much of a life.
As this cycle of gaming in securities continues what happens is the big busts hurt us more than the big booms help us, like in the Great Recession. A lot of people think that Hitler rose because of the inflation in the Weimar Republic, but Germany recovered well from the Weimar. They destroyed the old currency and issued a new one, and that worked pretty well. It worked pretty well in Argentina too.
What really enabled Hitler to rise was the Great Depression. Weimar plus the Depression was so demoralizing that the German people were snookered by a Hitler. I think this is deadly serious. These crazy booms should be watched. Alan Greenspan didn’t think so. He’s a capable man but he’s an idiot. You should not make him the father of all banking. His hero is Ayn Rand. It’s an unlikely place to look for wisdom .A lot of people think that if an ax murderer goes around killing people in a free market it’s alright because free markets are alright.
These crazy booms should be watched. Alan Greenspan didn’t think so. He’s a capable man but he’s an idiot. You should not make him the father of all banking. His hero is Ayn Rand. It’s an unlikely place to look for wisdom. A lot of people think that if an ax murderer goes around killing people in a free market it’s alright because free markets are alright.
Question 22: Berkshire owns some auto companies. What about automobiles are uniquely different today that makes you own them?
Charlie Munger. The second one is easy. Berkshire is in GM because one of our young men likes it. Warren, when he was a young man, got to do whatever he wanted to do, and that’s the way it is. It is true GM may be protected by the federal government in the end, and it may be a good investment in the end, but the industry is as competitive as I’ve ever seen. Everyone can make good cars, they have the same suppliers, and cars last forever. It just has all these commoditized features. So I don’t think the auto industry is the place to be.
The culture of everyone having three or four cars is also shrinking so I think the auto industry is not great. If I were investing I’d want some way to be better than the others, and that’s hard to find.
Question 23: Can you give us more thoughts on oil?
Charlie Munger: I would not have predicted that oil would reach its present price. It’s forced me to look at things. I think it’s generally true that with commodities, there will be periods of extreme prices. I think commodities can do strange things, and of course that has huge consequences. If you’re Australia, this is a disaster. I think it’s the nature of the human condition that you’re are going to have weird periods. Weird periods of high and low prices. I’ve never been able to predict accurately. I don’t make money predicating accurately. We just tend to get into good businesses and stay there.
Question 24: Would you please recommend some books that you’ve enjoyed lately.
Charlie Munger: You people send me books. Thirty a week! I have to skim them so rapidly that I no longer have the joy of reading. You are ruining my love of reading! I’m no longer a good book source.
Question 25: Would you mind sharing with us some highlights of your philanthropic work and what inspires you about it, and what sort of results you’d like your work to produce in the future.
Charlie Munger:Well, I’ve never wanted to tackle problems like world peace. You know, I’ve read enough biographies. Carnegie thought he was so smart, so he thought he’d use his money and bring on world peace. And he created the court of the Hague and all kinds of very expensive things.
And the ink was barely dry on his creations when the crazy monarchs of Europe stumbled into World War I with the carnage and the poison gas and the agony and stupidity. And so that was quite demoralizing at the time. So I’m not trying to bring on world peace. I watched Carnegie try it, and I decided if he couldn’t do it I’m gonna leave it alone.
I don’t take on those big subjects. I like to create dormitories and science teaching facilities and stuff like that. It’s a pretty modest activity, but it’s interesting to me, and it’s easy to do them better than most people do them. I have no feeling I have any advantage in bringing on world peace, but I am pretty good at dormitories. So I do what I’m good at, and I suggest that all of you do the same thing.
Question 26: Please give us your views on politics. Why are people starting to “feel the Bern”?
Charlie Munger: A very good question. Because politics are corrupt perhaps. People like Bernie Sander’s attitude. But people who are really passionate about government action gave us the Soviet Union, and all the death and poverty there. They also gave us Communist China and North Korea. I’m suspicious about all this passion for equality.
If you want to look at what inequality gives us, look at China. Of course when they adopted private property what they got was growth more quickly than anyone had gotten before, but many Chinese fell behind. I think it’s a good bargain. I don’t think Bernie wants to understand this. He’s said it for thirty years. He’s a Johnny one note. As an intellectual, he’s a disgrace.
I think it’s a good bargain. I don’t think Bernie wants to understand this. He’s said it for thirty years. He’s a Johnny one note. As an intellectual, he’s a disgrace.
I’d think I’d be awfully glad to have him marry into the family just based on his personal characteristics, but as a thinker he’s pretty bad. Now, I don’t think he’s any worse than some of our Republicans, but at least they’re crazy in a different way.
But egality (sic) has one effect in a democracy that Aristotle commented on. People will cheerfully tolerate considerable differences of outcome if they seem deserved. Nobody minds the fact that Tiger Woods has a big income . . . and somebody who invents some new wonder of the world etcetera etcetera. But differences in outcome that are seen as undeserved tend to disrupt democracy. That’s why Aristotle commented on it in one of his most well-known observations.
But differences in outcomes are seen as undeserving. Who is getting all the underserved money in American now? A lot of the underserved wealth from the financial class is counterproductive. I think it would be nice to fix the obviously underserved wealth. If you take the ordinary investment manager, they take capital gains, and they don’t pay any income tax at all. It’s not very complicated to understand.
I think by and large inequality is a natural outcome of a natural civilization that’s good for everyone. And all of this stuff about the wealth of the 1%, what the hell does he do with it? He has to eat the same food, watch the same television, leave the money to something . . . Is he the main problem we have? He’s not really using the wealth very much. And most of these guys are not that interested in politics. People who like to talk about the terrible influence . . . on politics.
If you are rich, you realize how little influence the rich really have. Lots of rich people get practically nowhere. I think these people that are raging about it are wrong, but I think the undeserved wealth does deserve some attention. On that, I think they’re right, and a huge amount of the undeserved wealth is in finance.
Question 27: I’m pretty excited about self-driving cars, but as a Berkshire shareholder I’m worried about the prospect for the auto insurance business.
Charlie Munger: It will be bad for GEICO if cars don’t have drivers. But I think it will be quite slow. I think the auto industry, even if we don’t get self-driving cars, that the driving culture may be waning. Not so much in the third world, but in places like America.
Questioner 28: Thanks for being a great teacher. Someone asked you about books, and I sent you two, and a letter. If maybe you could publish a book list, we could keep learning?
Charlie Munger: I don’t want to be a book recommender. It would be quite time consuming.
Questioner 29: What is your view on unicorn companies on Uber, Palantir, AirBnB, Can they ever go public?
Charlie Munger: I have a circle of competence, and it doesn’t include which companies in Silicon Valley are going to succeed, so I tend to avoid the subject entirely. And it’s the same way with others.
But I will comment on one thing. The venture capital industry is a more honorable than some other areas of finance. VC is a useful member of society. But they don’t escape sin. They sneak a clause in contracts where anyone that’s new to a company is preferred. It’s a disgusting, dishonest thing to do, and worse because it’s obscured. So even in our most reputable parts of finance, there are dirty sleazy activities sneaking in. Large amounts of money make people behave badly. That’s Munger’s rule.
Questioner 30: Do you think fundamental value is losing relevance?
Charlie Munger: I don’t think fundamental value will ever lose relevance. You have to be buy things for less than they’re worth. It’s like arithmetic, it will always be with us.
High frequency trading is a complicated subject. Many such traders are admirable personally, but they are rats in the granary. They suck the resources out of civilization and contribute nothing.
High frequency trading is a complicated subject. Many such traders are admirable personally, but they are rats in the granary. They suck the resources out of civilization and contribute nothing.
Questioner 31: You mentioned that you haven’t changed your children much. Do you have an approach for quality time with family?
Charlie Munger: I don’t think I want to make myself a wonderful example of a family. We all have to live with our imperfections.
Questioner 32: Do you think that Coach Bryant at Alabama is . . .
Charlie Munger: I don’t know anything about coaches. I’m better about ballet.
Questioner 32: Can you name a few people you admire?
Charlie Munger: There are lots of historical people I admire. That’s the advantage of being a reader. You can consort with the best people of all time and that’s what I do. I admire a lot of people. The best surgeons, actors who are the best actors… there are a lot of people who are instructive and generous and they build the world for the rest of us. There are lots of good examples on the Costco board.
Dan Evans, the former Senator, was an admirable politician. There are all these crazy people on the right and left, but when you find a Dan Evans, wow. There will always be admirable people. My god, that’s what we all want to be. We all want to be admirable. You want to be the kind of person that other people name in their wills to raise their children. If people are doing that, you’re doing something right.
We all want to be admirable. You want to be the kind of person that other people name in their wills to raise their children. If people are doing that, you’re doing something right.
Questioner 33: How should we go about seeking wisdom?
Charlie Munger: If you do enough reading and thinking you don’t have to do much else.
Questioner 34: I was once given the advice that it’s really important to conquer fear. I’m wondering if you would speak to your relationship to fear and whether you’ve conquered it.
Charlie Munger: Generally I’ve avoided circumstances that cause fear. I mean if you want to go hang gliding, by all means.
My son Phillip is in the audience. He used to say, “if at first you don’t succeed, well so much for hang gliding” (audience laughs). I don’t seek out fear for thrills. Generally I’m not a lover of danger. That’s not my thing. I don’t think I’ve felt much fear for a long time. I’ve just lived a long time. I had fears when I was younger, but they gradually melted away.
Alright, one more question. One last question.
Questioner 35: My question is about Coke. But first I want to tell you quick story. My 17 years old son had his friends over, and we bought all the right refreshments including two bottles of Coke. At the end of the party, there was hardly any Coke consumed by these young men, and it gave me pause. Sweet beverages are on the decline. Does Berkshire’s investment gives Coke’s management cover to not address the future of the beverage business?
Charlie Munger: Easy one: Coke for many decades has been a basic product full of sugar, and it grew every year. Full sugar coke is now declining. Fortunately, the Coca-Cola Company has a vast infrastructure. Coca-Cola is declining some, but the rest of the businesses are rising. So I think Coke is a pretty strong company and will be a respectable investment, but it’s not like it used to be when it was like shooting fish in a barrel.
(Audience Applauds)
Authors Note: Following Mr. Mungers formal remarks and Q&A session, he lingered on stage to take pictures with attendees. This author was able to ask him a final question while having my photo taken with him.
Jesse Koltes: If you were starting a hedge fund right now with a much smaller amount of money would you still care as much about quality?
Charlie Munger: I’d always care about quality. But if I was running a smaller fund, I wouldn’t have to choose been Exxon and IBM. There would be a lot more interesting places to look.
Authors Notes: Please mail corrections to jesse@thecharlieton.com.
Spotted at the event: Mohnish Pabrai, Whitney Tilson, and lots of Stanford MBAs.
Note: This article was updated on 18 Feb 2016 following a review of audio recordings from the event. Errors are still mine.
Thank you to several eagle eyed readers for pointing out typos!
jesse koltes
February 10, 2016
The Charlieton is a blog dedicated to exploring the philosophy of Charlie Munger. The foundation of Charlie’s philosophy is the pursuit of “elementary worldly wisdom” via a curriculum of wide study. The intended field of study is the entire corpus of human knowledge.
To give away the joke, the blog’s name is a tounge in cheek jab at the difficulty of the task. Here’s hoping I end up a wise Charlieton, and not an idiotic charlatan.
To improve my odds, I’ll be taking lots of shortcuts. I won’t try to master every subject I come across, but I will try to understand the core concepts that carry the most weight. These “mental models” are the essence of the Mungerian philosophy. My intent is to document my journey through the various mental models that Charlie and others have identified.
In addition to teaching others while I learn, I will also occasionally post primary source material from interesting events, such as investor meetings or talks with friends.
On a personal note, I am an aspiring investor and entrepreneur interested in Value Investing, entrepreneurship, and politics. I intend to explore those three topics as they relate to Munger’s mental models as much as possible.
jesse koltes
September 11, 2015
