Whitney Tilson: “Why the Hell Didn’t I Listen to Charlie Munger?”

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.

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

“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,

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.

2018 Daily Journal Meeting Notes

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.”

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.”

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.

Book Review – Charlie Munger: The Complete Investor, By Tren Griffin

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.

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

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

The 2016 Daily Journal Meetings Notes: February 10, 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.

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 19^th 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.

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. 

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.

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.

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”. 

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.

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.

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?

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.

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.

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.

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’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.

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. 

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!