Charlie Munger: Full Transcript of Daily Journal’s 2023 Annual Meeting

In 2016 I made a personal commitment to transcribe every Daily Journal Annual Meeting so long as Charlie was graciously hosting them. It’s been a privilege to attend each meeting and spend the time deep into the talks transcribing each sentence. Charlie will be dearly missed.


It was a wonderful pleasure to hear Charlie Munger speak at the Daily Journal Annual Meeting in February 2023 where his wit and wisdom was on full display!

In addition to the transcript, you may also listen to my “time-saver” edit of the meeting’s audio, or watch the entire meeting on YouTube.

I would like to thank Mr. Munger for energetically entertaining our questions and graciously sharing his wisdom, insights, and time with all of us.

My apologies for the long delay. I hope you all enjoy!

(Note: I frequently summarized the questions that were presented by the host Becky Quick, but as for anything that Charlie or Steven said, I translated them as accurately as possible while eliminating occasional superfluous words.)

Start of Transcript

Steven Myhill-Jones: All right, ladies and gentlemen, the meeting will come to order. Hello everyone. I’m Steven Myhill-Jones, the new Chairman and Interim CEO of Daily Journal Corporation as of the end of March 2022. I’m here today at our Los Angeles headquarters with an individual who really needs no introduction, the legendary Mr. Charles T. Munger, who until last year served as Daily Journal Corporation’s Chairman for many decades. I’m grateful that Charlie, who remains a director on our board, has agreed to join us today. I also want to acknowledge and express our gratitude that Mr. Munger continues to manage Daily Journal Corporation’s considerable portfolio of marketable securities and at no cost to the business, I might add. So thank you, Charlie.

Over the years, this annual shareholder meeting has become an increasingly popular event, given it’s been a unique and wonderful opportunity to hear from and ask questions of Mr. Munger. I recognize this is why many of you are joining us today. And so my goal is to go through our formal business as quickly as possible without sounding too much like an auctioneer. I also want to say that we really wanted to return to an in-person format this year with an audience of our shareholders actually here with us and with the other members of our board, Mary Conlin and John Frank joining us on stage. However, for health and safety reasons, we opted to err on the side of caution again this year and do another round of the online approach that we’ve followed over the pandemic. I recognize we’re all done with COVID, but COVID doesn’t quite appear done with all of us.

We’ll now transition to the Q&A once again with Becky Quick of CNBC serving as our moderator. Thank you in advance, Becky. I recognize most questions will be for Charlie, and I’ll likely answer the occasional question if it’s specifically about Daily Journal or Journal Technologies. Thanks, everyone. Over to you, Becky.

Becky Quick: Stephen, thank you very much and welcome everyone. We’ve got a great number of questions that came in and I’ve tried to sort through as many as I could.

The first question that we have is related to Journal Technologies. Can you give an update on the company’s new CEO, Stephen Myhill-Jones? He was appointed as Interim CEO nearly one year ago. How is he performing and when will a decision be made on selecting a permanent CEO?

Charlie Munger: Well, the answer is Steve chose his own titles coming in and we’ll change it whenever he wants to change it. How’s that?

Becky Quick: That sounds fair enough. Steven?

Steven Myhill-Jones: You know, yeah, I’ll say that when we were in discussions a year ago, I told Charlie that I was committed to ensure the success of the business, but that I wasn’t sure I would be the right long-term CEO. And I had incomplete information at the time, and I thought it was important that I have the optionality to hire someone better suited or promote from within, if we discover that would be a better path.

I founded and helped grow a geography software company with no background in publishing or the legal and court sector. And what I can say now is that the parallels between the software company I built and Journal Technologies are remarkable, and I believe I can add value. I like the business and the potential for it. So I expect we’ll have clarity on our long-term approach sometime later this year.

Becky Quick: Okay. Steven, thank you. The second question is in regards to capital allocation. Is the technology business a natural area to allocate excess capital for the best return on equity for the company. How does the current investment manager think about investing in the equity portfolio in relation to reinvesting in growing areas of the business or share buybacks?

Charlie Munger: Well, it’s all very simple. We made a lot of extra money out of the publishing business in its heyday, and that was about $30 million and that was all made in the foreclosure boom. And of course, in the old days we had an information monopoly on publishing the appellate court’s decisions daily in newsprint and the Internet came along and destroyed our position and our circulation went way down and so forth. So we’ve had a drastic change in good fortune in our publishing business. And Steve actually ran a small software company in Canada for years and years and years, which is quite similar to what Journal Technologies does. So that’s how we got together. The future of this business is not in the publishing side, it’s on the Journal Technologies side. The good news is that we’re in a huge market because all the courts of the world are in the Stone Age still in terms of automating with modern technology. So it’s a big market. The bad news is it’s a long, slow slog where you deal with a lot of bureaucracies in response to RFPs, requests for proposals, and it’s just a very slow, difficult business. So we’ve got a slow, difficult business of chewing our way into a huge market that’s not going away with one big competitor in it. And that’s the future. And like many a publishing company which used newsprint, it’s a miracle that any survived.

If you look in the small and mid-cap edition of the Value Line books, you’ll find there are two entries left. One is Gannett, which used to own the Monopoly newspaper in, I don’t know, 50, 60 or 100 different cities. And the executives used to ride around in giant airplanes and be treated like Lords of England when they went to Publisher’s Convention. And every newspaper publisher…you know, was hugely powerful in his own community. So they were like the Lords of England, all these publishers. And now mighty Gannett is just a pale shadow of itself with newspapers shrunk down to a tiny little few and very limited assets and so forth.

So there’s been an unbelievable change in the technology and competitive outcomes in publishing ordinary newspapers on newsprint. And by and large, the safe rule is they’re all dying. They’re just in different states of near death. And so if this place has a future, it’s in the Journal Technologies side. And that’s a long, slow grind. And the only reason we have a lot of marketable securities is we had the extra money and we preferred the marketable securities to cash in an inflationary world. And of course, there’s been a minor miracle that we’ve got as much as we have in marketable securities because our investments have done better than average. The good news is we survived so far and we’ve got some surplus wealth. And the bad news it’s a long, slow slog ahead in the main future is in Journal Technologies.

Becky Quick: As a follow up to that. Given the extended amount of time that it will take to digitize the court systems because of complexity, risk and bureaucracy and the fast moving world of software innovation, how can shareholders be assured that Journal Technologies’ solution remain cutting edge long enough to reward shareholders? And how do you think about the risk of arriving in 2030 with a great software business, but which only lasts a few years until it gets disrupted by some new technology?

Charlie Munger: Steve, you take that one.

Steven Myhill-Jones: You know, of course, there are no assurances. And at the same time, you know, I do have some background dealing with this challenge because I did it for 19 years with my former company and we earned consistent and appealing profits. And I expect the model is still working well for the folks who acquired us. You know, I think a key responsibility is to get technology change working for us and our customers rather than against us. And it takes advance planning and investment to engineer software with change over time in mind. And so it’s inherently upgradable. And I think this model works, works great. If you can establish a sufficient licensee base to fund that proactive R&D to evolve products in a way that manages technology change. So that… And it also needs to be highly repeatable. And I think all of this requires a mindset that enterprise software development is an ongoing process and not a onetime event. And so are customer deployments.

Becky Quick: Let me move on to another question. Two years ago, during the 2021 annual meeting, you said Daily Journal’s $350 stock was selling way above the price that you would pay for the new shares. As I write, this daily Journal trades for $305 a share a $420 Million market cap with a total equity portfolio value of over $310 Million debt charges covered several times over by the bank’s Dividends and with Journal Technologies’ off financial statement value and huge market, do you still hold the same belief?

Charlie Munger: Well, he accurately stated our circumstances and we do have a lot of surplus wealth, but we need it to attack this big market. These courts, why would they gamble on a little company with no net worth? The courts that are (awarding) the RFP contracts. So we’re using our net worth to help the business.

Becky Quick: But does that get at the question of whether you’d buy this stock at $305?

Charlie Munger: Well, I don’t buy it and I don’t sell it. So that’s what the Mungers have been doing. You know, it’s not a crazy valuation considering what everything else is selling for these days. So I have no feeling that it’s almost foolishly high on some crazy mystique. Some people felt, ‘Well, it’s a small Berkshire, and it’ll double like rabbits’, you know. And of course, it’s not a small Berkshire. I’m 99 years old for Christ’s sake.

Becky Quick: Another person wrote in who asks, Berkshire has unloaded the bank stocks. If it’s not good enough for Berkshire shareholders, why is it good for us?

Charlie Munger: Well, I might have a different idea, see. If you own securities, marketable securities within a corporation located in California, you pay huge state and federal taxes if you sell things at a big gain. And that affects our willingness to sell some of those bank stocks I bought on the bottom tick in the foreclosure crisis. It literally was the bottom tick. And they’re practically all gain. So I immediately give the government 40 some percent of everything we sell out of those bank stocks. And of course, they’re producing…the dividends are almost tax free. So based on what we would get if we sold them and the return we’re getting out of the dividends, it’s not so bad for us.

The answer is, we’re not in a normal position. All factors considered, we’re willing to hold them for a while. And there is a big disadvantage in having this huge layer of federal corporate taxes and state taxes between us and any money we make in a state like California, which is a very business unfriendly state. It isn’t like people are rushing to come out and incorporate in California. And there are all kinds of states that have no income taxes and deliberately use that lure to bring in corporations. California is trying to force its wealthy people and its wealthy corporations out of the state, and I must say it’s working fine. They’re leaving just one after another. That’s just the way it is. But, you know, if we succeed in this software business, it will all come good in the end. And if we fail, we have a crutch under us in our real estate and our securities, which means we won’t lose so much from the present market price. So it’s not a crazy thing to own now at the market valuation, but it’s not cheap either.

Becky Quick: Charlie, while I know the Daily Journal is not a mini-Berkshire, I’d have suspected that there would be some shared principles in the area of governance, specifically regarding the board of directors. I’m surprised to see such a small ownership. Three of the five owned zero shares, a fourth owns 100 shares. Pretty unimpressive, doesn’t suggest much alignment between the board members and shareholders. Not trying to be rude, but thinks it’s a fair question.

Charlie Munger: Well, what happened was we used to have Guerin and Munger and we were the two biggest shareholders and of course we’d been partners for years and years and we took no fees, no directors fees, no expenses, no nothing. And so it was a very user friendly Berkshire type place. Well, Guerin died finally at age 90. So now we’re down to one last survivor of the old guard. And of course, we need a certain number of new directors. And our new directors are pretty damn smart. And they’re all rich, by the way. So it’s still a very Berkshire like board, smart and rich and thinking like a capitalist. We have that.

Steven Myhill-Jones: I would add that while I don’t have equity yet, I’m certainly keen to participate in future growth of the business. What should the timing of that be with someone as new as me? I think that’s an interesting question…

Charlie Munger: We’ll work it out.

Steven Myhill-Jones: Yeah. Right now I don’t think that’s impacting my drive or decisions. I already feel enormous skin in the game. Mr. Munger and the board entrusted me to take the reins of the business, is something I take very seriously.

Charlie Munger: It’s really quite interesting to have a pile of securities and one interesting activity in a very high-tech field and with a lot of politics and travel and difficulty in it. But it’s a huge, huge market. And it isn’t like there are a lot of other people in it. Most of the big corporations that would be our natural competitors are places where they hate RFPs. In other words, one of the reasons the business is good for us is a lot of the big companies just hate what we’re doing. They want easier money (to sell a) standard piece of software and just repeat it over and over again. They’re spoiled. We’re willing to slug it out in the mud of all these little consulting contracts, and that makes us have literally a few competitors in the field.

Becky Quick: Charlie, since you brought up Rick Guerin who passed away about a year ago. He was your longtime friend and business partner for several decades. How was he as a person, as an investor, and how do you remember his legacy?

Charlie Munger: Well, he was just terrific as a person and an investor, and I miss him terribly. Of course, we were together for years and years and years and we were poor together. And that creates a bonding. When we met in 1961, we were both poor and struggling and young. So we had a long ride together. But all things end, you know, that’s the nature of the human condition.

Becky Quick: Question about GPT and artificial intelligence and the impact on Daily Journal’s business model and civilization at large. What are your thoughts on AI’s impact on Daily Journal’s business and more broadly, our civilization at large?

Charlie Munger: Well, I think that artificial intelligence is very important, but is also a lot of crazy hype on the subject. Artificial intelligence is not going to cure cancer. It’s not going to do everything we want done. And there’s a lot of nonsense in it, too. So I regard it as a mixed blessing, all this artificial intelligence. Some people have used it in some things like insurance underwriting pretty well, but a lot of people try and use it in ordinary things like buying office buildings or something. And I think that’s way more… I don’t think it’s going to help anybody buy an office building, not very much anyway.

Steven Myhill-Jones: Through the lens of Daily Journal Corporation. AI is something that we started experimenting with in the summer for certain types of writing, of certain types of articles, and that’s something we’re certainly tracking very closely. I think in terms of complex work, I think it’s a long way off. But for many types of activities, especially routine things, I think it’ll be fascinating to see how disruptive it is over a relatively short time horizon for many types of work and activities.

Charlie Munger: It’ll disrupt… We had our big disruption when technology kind of severely and adversely affected our publishing business. And we have our opportunity in this new business. But it’s just a long, tough slog. There’s no there’s no royal road to success in what we’re doing.

Becky Quick: A question posed by ChatGPT. Mr. Munger, you’ve spoken about the importance of avoiding mental biases and decision making. In your experience, what’s the most challenging bias to overcome and how do you personally guard against it? So I’d ask your answer to that question and then what you think of the question that GPT wrote for you.

Charlie Munger: Well, if I had to name one factor that dominates human bad decisions, it would be what I call denial. If the truth is unpleasant enough, people kind of…their mind plays tricks on them and they think that it isn’t really happening. And of course that causes enormous destruction of business where people go on throwing money into the way they used to do things, even though it isn’t going to work at all well in the way the world is now having changed. And if you want an example of how denial is affecting things, take the world of investment management. How many managers are going to beat the indexes all costs considered, I would say maybe 5% can consistently beat the averages. Everybody else is living in a state of extreme denial. They’re used to charging big fees and so forth for stuff that isn’t doing their clients any good. It’s a deep moral depravity if some widow comes to you with $500,000 and you charge her one point a year and you could put her in the indexes, but you need the one point. And so people just charge some widow, you know, a considerable fee for worthless advice. And the whole profession is full of that kind of denial. It’s everywhere. So if I had to say…

I always quote Demosthenes, it’s a long time ago Demosthenes, that’s more than 2000 years ago. And he said, “What people wish is what they believe.” Think of how much of that goes on. And so, of course it’s hugely important. And you can just see it. I would say the agency costs in money management, there’s just so many billions it’s uncountable and nobody can face it. Who wants to… If you want to keep your kids in school you need the fees, you need the brokerage commissions, you need this and that. So you do what’s good for you and bad for them. Now, I don’t think Berkshire does that, and I don’t think Guerin and I did it at the Daily Journal. Guerin and I never took a dime in salary or director’s fees or anything. And if I have business, I talk on my phone or use my car, I don’t charge it to the Daily Journal. That’s unheard of. It shouldn’t be unheard of. And it goes on in Berkshire and it goes on in the Daily Journal.

But we have an incentive plan now in this Journal Technologies, and it has $1,000,000 worth of Daily Journal stock. That did not come from the company issuing those shares. I gave those shares to the company to use in compensating the employees. And I learned that trick, so to speak, from the guy at BYD, which is one of the securities we hold in our securities portfolio. And BYD, at one time in its history, the founder chairman, he didn’t use the company’s stock to reward the executives. He used his own stock. And it was a big reward, too. Well, last year, what happened? BYD last year made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion who’s a brand-new entrant in the auto business for all practical purposes? It’s incredible what’s happened. And so there is some of this old-fashioned capitalist virtue left in the Daily Journal, and there’s something left in Berkshire Hathaway, and there’s some left in BYD. But most places, everybody’s trying to take what they need and just rationalizing whether it’s deserved or not.

Becky Quick: Charlie, you bring up BYD, so I’ll jump to a question. Why do you prefer an investment in BYD to Tesla?

Charlie Munger: Well, that’s easy. Tesla last year reduced its prices in China twice. BYD increased its prices. We’re direct competitors. BYD is so much ahead of Tesla in China, it’s like a… it’s almost ridiculous. If you look at BYD, which most people never heard of, if you count all the manufacturing space they have in China to make cars, it would amount to a big percentage of all the land in Manhattan Island. And nobody ever heard of them. A few years ago.

Becky Quick: Did the sale of some BYD and Taiwan semi shares have anything to do with the relations between the United States and China? Or was it for purely economic reasons?

Charlie Munger: Well, BYD’s selling at about 50 times earnings. That is a very high price. On the other hand, they’re likely to increase their auto sales by another 50% this year. So we sold part of ours, by the way…about a year ago, at a much higher price than it’s selling for now. And, no, we’re not a mini-Berkshire. We’re not going to have a big correlation between us and what Berkshire does. You could understand why somebody will sell BYD stock at 50 times earnings. At the current price of BYD stock, little BYD is worth more than the entire Mercedes Corporation market capitalization, so it’s not a cheap stock. On the other hand, it’s a very remarkable company.

And by the way, I want to tell people the great contribution I made to the success of BYD. We got into it through Li Lu and then it was a little company that knocked off the Japanese cell phones. And the chairman, who’s kind of a genius, said, I (want to) buy a bankrupt little crappy auto plant and go into the auto business from dead scratch when he’s making cell phones, a little tiny nothing company. And both Li Lu and I tried to talk him out of it. We said, “Please don’t do this dumb thing. You’ll get your head handed to you, go into the auto business, little BYD, and so forth.” Well, last year they made more than $2 Billion in the auto business. From that standing start to zero, it’s unheard of. But Li Lu and I deserve all the credit because we tried to get him…we tried to talk him out of doing what worked so well. Which shows that there’s some accident in life.

Becky Quick: Charlie, according to company filings, it appeared that Alibaba shares were purchased with leverage. And when the stock price fell last year, you were seemingly forced to sell. Can you confirm that it was bought with leverage? And if so, why did you do that? It seems to go against your philosophy. I got several questions that were similar to that.

Charlie Munger: Well, yes, it’s true. I operated with no leverage for long stretches of my old age, and Warren’s the same way. And recently I did use a little bit of leverage here and in another place because the opportunities were so ridiculously good. I thought it was desirable to do that. So you’re right, it’s unusual for us. But we did find a few things. And by the way, if you go back early in my career, I used some leverage. I sometimes ask myself a mental question. I say, “What is the appropriate percentage of your net worth You should put it in the stock if you think it’s an absolute cinch?” Well, if you’re the kind of fellow who’s right when you think something is a cinch, the answer is 100% or maybe 150%. But nobody teaches people to think that way in finance. But if the opportunity is great enough, the logical answer is 100%. Or maybe 200%.

Becky Quick: Somebody else wrote in quoting you where you said the three things that ruin people are ladies, liquor and leverage. So why would you use leverage know that’s one of the three things that can destroy somebody?

Charlie Munger: Well, I used a little on my way up, and so did Warren by the way. The Buffett Partnership used leverage regularly every year of its life. What Warren would do is he would buy a bunch of stocks and then he’d borrow against those stocks and then he’d buy into these…They used to call it event arbitrage; liquidations, mergers and so forth. And that was not… didn’t go up and down with the market. That was like an independent banking business and Ben Graham’s name for that type of investment, he called them Jewish Treasury Bills. It always amused me that that’s what he would call them. But Warren used leverage to buy Jewish Treasury Bills on the way up, and it worked fine for him. I don’t think either of us ever buys… Well, no. Berkshire has stock in Activision Blizzard, and you can argue that’s…whether that’ll go through or not, I don’t know…but that’s a Jewish treasury bill.

Becky Quick: The arbitrage play on Activision?

Charlie Munger: Well yes, (it’s) event arbitrage. But we sort of stopped doing it because it’s such a crowded place. But here’s little Berkshire doing it again in Activision Blizzard. And Munger using a little leverage at the Daily Journal Corporation. You could argue that I used that leverage to buy BYD. You can argue it’s the best thing I’ve ever done for the Daily Journal.

Becky Quick: So is leverage the least evil of the three L’s?

Charlie Munger: I think most people should avoid it, but maybe not everybody need play by those rules. I have a friend who says, “The young man knows the rules of the old man, knows the exceptions.” At least if he’s lived right, he knows them.

Becky Quick: Charlie, how should investors view geopolitical events in regards to their investment in foreign countries? How do you look at the situation of the recent Chinese spy balloon in regards to the Alibaba investment?

Charlie Munger: Well, of course, it was a very interesting thing. Jack Ma was a dominant capitalist in Alibaba, and one day he got up and made a public speech where he basically said the Communist Party is full of malarkey. They don’t know their ass from their elbow, they’re no damn good and I’m smart. And of course, the Communist Party didn’t particularly like his speech. And pretty soon he just sort of disappeared from view for months on end. And now he’s out of (Alibaba). It was pretty stupid. It’s like poking a bear in the nose with a sharp stick. It’s not smart. And Jack Ma got way out of line by popping off the way he did to the Chinese government. And of course it hurt Alibaba. But I regard Alibaba as one of the worst mistakes I ever made. In thinking about Alibaba I got charmed with the idea of their position in the Chinese Internet. And I didn’t stop to realize they’re still a goddamn retailer. It’s going to be a competitive business, the internet (retailing). It’s not going to be a cakewalk for everybody.

Becky Quick: Just about China in general. I had a lot of questions that came in regarding that. I’ll ask this one. Previously, you stated that despite certain shortcomings, China was generally moving in the right direction. However, with the recent actions taken by the Chinese government, such as capriciously punishing technology and educational companies, declining to import effective COVID vaccines, escalating threats towards Taiwan. Do you still maintain that China is a viable investment option for foreign capital, or is China experiencing a similar regression as Russia has seen under Putin’s leadership that culminates in the invasion of Taiwan?

Charlie Munger: Well, that’s a very good question, of course. But I would argue that the chances in a big confrontation from China have gone down, not up because of what happened in the Ukraine. I think that the Chinese leader is a very smart, practical person. And Russia went into the Ukraine because it looked like a cakewalk. I don’t think Taiwan looks like such a cakewalk anymore. I think it’s off the table in China for a long, long time. And I think that helps the prospects of investors who invest in China. And the other thing that helps in terms of the China prospects are that you can buy the best… You can buy better, stronger companies at a cheaper valuation in China than you can in the United States. So you’re getting…the extra risk can be worth running given the extra value you can get. That’s why we’re in China. It isn’t like we prefer being in some foreign country. Of course I’d rather be in Los Angeles right next to my house. You know, it would be more convenient, but I can’t find that many investments, you know, right next to my house.

Becky Quick: Just to follow up on that. How have political events in China over the last few months affected your thinking on the country? Several people, including me, were taken aback by the forceful withdrawal of former President Hu Jintao at the October 22 Annual Congress. President Xi seems to have consolidated power and his actions have indicated that he thinks very differently about the role of business in Chinese society.

Charlie Munger: Well, I have more optimism about the leader of the Chinese Party than most people do. He’s done a lot right, too. And, you know, he led a big anti-corruption drive. He’s done a lot of things right. So I don’t know where this man lives. Where is there a place where the government is perfect in the world of sin and sorrow? The democracies aren’t that brilliantly run either. So it’s natural to have some decisions made by government that don’t work well. It’s natural to have decisions in each individual life that don’t work very well. We live in a world of sin, sorrow and mis-decision. That’s what human beings get to cope with in their days of life. So I don’t expect the world to be free of folly and mistakes and so forth. And I just hope I’m (invested) with the people who have more good judgment than bad judgment. I don’t know anybody who’s right all the time.

Becky Quick: How should we think about the political climate around Taiwan and the long term impact on the semiconductor industry specifically? Do you see the chips and science act favorably?

Charlie Munger: Well, the semiconductor industry is a very peculiar industry. In the semiconductor industry you have to take all the money you’ve made and with each new generation of chips, you throw in all the money you’ve previously made. So it’s a compulsory investment of everything if you want to stay in the game. Naturally, I hate a business like that. At Berkshire we like a whole lot of surplus money to come in and we can do something else with. And of course, now if you’re enough ahead of it, like Taiwan Semiconductor is, that may be a good buy at these prices. It’s not at all clear to me that they’re not going to succeed mightily. It’s a business with enormous promise for the big winner, but it’s a difficult business in requiring everybody to keep increasing the bets on and on with all the money. And so it’s not perfect that semiconductor business. But remember when Intel owned the world? Intel was once the Taiwan Semiconductor business of the world. They invented the damn business, and they dominated it for decades. And it’s not clear to me that Intel’s going to have a very decent semiconductor business getting as far behind as they are now. My answer is it’s not so damn foolproof as it looked.

Becky Quick: Even with the incentives to build plants here in the United States, like Intel is doing in Ohio?

Charlie Munger: Well, of course, that will really help. But they’re borrowing the money. There’s no indication the government is going to forgive the loans or something. It’s not like the recent loans to business where they said, “We’ll loan you the money” and then (they’re like, “Oh heck,) keep the money.” The government is not planning to do that with these new semiconductor loans. And so it’s not a field where I feel I have a lot of expertise. What the hell do I know about semiconductors?

Becky Quick: Do you worry about any conditions that the government would put on companies that end up using any of that money with semiconductors or anything else?

Charlie Munger: Well, of course, all of that. It’s deeply intertwined with government policies of both China and the United States. So I would rather have something that’s more fool proof myself. But I do think Taiwan Semiconductor is the strongest semiconductor company on Earth. So I am a big admirer of what they’ve achieved. It’s just incredible of what they’ve achieved. And by the way, it may be a wonderful investment. The fact that I don’t like it because I’m an old man and I don’t like learning new tricks, that doesn’t mean it isn’t right for some younger person that understands it better than I do.

Becky Quick: That leads me to this question about crypto. In 2007 at the USC Law School, Charlie said, I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people who are supporting it. The question is, does this also apply to your Wall Street Journal article on banning cryptocurrencies? And if yes, would you care to share the arguments against your position?

Charlie Munger: I don’t think there are good arguments against my position. I think the people that oppose my position are idiots and so I don’t think there is a rationale argument against my position. This is an incredible thing. Naturally, people like to run gambling casinos where other people lose. And the people who invented this crypto-crappo, which is my name for it, sometimes I call it crypto-crappo and sometimes I call it…well, crypto-shit. And it’s just ridiculous that anybody would buy this stuff. You can think of hardly nothing on earth that has done more good to the human race than currency, national currencies. They were absolutely required to turn man from a goddamn successful ape into a modern successful humans and human civilization. Because it enabled all these convenient exchanges. So if somebody says, I’m going to create something that sort of replaces the national currency, it’s like saying I’m going to replace the national air. It’s asinine. It isn’t even slightly stupid. It’s massively stupid. And, of course, it’s very dangerous. And of course, the governments were totally wrong to permit it. And of course, I’m not proud of my country for allowing this crap, what I call the crypto-shit. It’s worthless. It’s no good. It’s crazy. It’ll do nothing but harm. It’s anti-social to allow it. And the guy who made the correct decision on this is the Chinese leader. The Chinese leader took one look at crypto-shit, and he says, “Not in my China.” And boom, there isn’t any crypto shit in China. He’s right. And we’re wrong. And there is no good argument on the other side. I can’t supply it.

Becky Quick: So does that counter what you said back at USC that you shouldn’t have a position unless you can counter?

Charlie Munger: No it doesn’t counter it. I do think you ought to be able to state on a lot of issues…You ought to be… How big should the social safety net be? That’s a place where reasonable minds can disagree. And you should be able to state the case on the other side about as well as the case you believe in. But when you’re dealing with something as awful as crypto shit, you…it’s just unspeakable. It’s an absolute horror. And I’m ashamed of my country that so many people believe in this kind of crap and the government allows it to exist. It is totally, absolutely crazy, stupid gambling with enormous house odds for the people on the other side and they cheat in addition to the cheating and the betting. It’s just crazy. So that is something that there’s only one correct answer for intelligent people, that is just totally avoid it and avoid all the people that are promoting it.

Becky Quick: How do you feel about the gambling that took place at the Super Bowl and surrounding that and the legalized gambling taking place in this country at this point?

Charlie Munger: Well, it’s not as bad as crypto-shit. I don’t think there’s much harm in betting a modest amount you can afford on a Super Bowl ball game. That strikes me as pretty… Particularly if you do it with a friend and not with a bookie. So I don’t have the same feeling. I obviously don’t think you should have a gambling compulsion going around betting against odds. If you take all the money that I have bet against odds in my whole life, I don’t think it’s more than a few thousand dollars. So I’m all in favor of betting with the odds.

Becky Quick: With the odds?

Charlie Munger: Yeah, sure.

Becky Quick: If you think that Bitcoin and Ethereum are rat poison, have you ever profited by shorting them?

Charlie Munger: No, I don’t short. That isn’t right. I have made three short sales in my entire life, and they’re all more than 30 years ago. One was a currency and there were two stock trades. In the two stock trades I made a big profit on one and made a big loss on the other, and they canceled out. And in my currency bet I made $1,000,000. But it was a very irritating way to make $1,000,000. I’ve stopped.

Becky Quick: Not worth the headache, I guess.

Charlie Munger: Well, you can laugh, but that’s true. It was irritating.

Becky Quick: Because you were worried?

Charlie Munger: Well, because they kept asking me for more margin. I kept sending over Treasury notes. It was very unpleasant. I made a profit in the end, but I never wanted to do it again.

Becky Quick: Charlie, I said I’d come back to this question. This was about something that you do like as an investment. What do you think can hurt Costco’s economic moat in the long term?

Charlie Munger: Well, as long as Costco keeps the faith with its strong culture and their extreme low markup policy, I don’t see any stopping it. The trouble with Costco is it’s 40 times earnings, but except for that, it’s a perfect damn company and it has a marvelous future and it has a wonderful culture and it’s been run by wonderful people. And I love everything about Costco. I’m a total addict. And I’m never going to sell a share.

Becky Quick: President Biden has proposed increasing the tax on stock buybacks from its current level of 1% to a new higher level of 4%. What are your views on taxing stock buybacks?

Charlie Munger: Well, I’m strongly opposed because I think if you’re… A good culture has a lot of people that are good fiduciaries, and it is like stealing to do something dumb with the corporate money when you can get more advantage for your shareholders by buying back your own stock. And I like encouraging morality and decency and honor (in) your dealings with the people you’re the fiduciary for. And so I agree with our president on some things, but this is not one of them.

Becky Quick: Do you vehemently disagree?

Charlie Munger: Well, I’m not vehement because it’s not as bad as cryptocurrency, and it’s a forgivable error. But yes, I disagree strongly. I think it’s a big mistake to adopt that policy. But, you know, I’m a Republican, I sometimes vote for Democrats, but I am a Republican.

Becky Quick: Another question on stock buybacks. Berkshire’s share repurchase has slowed considerably from $3 billion in the first quarter of 2022 to $1 billion in the second quarter and $1 billion in the third quarter, even though the price decline somewhat, as did the general market. One would think that the buyback would increase with a lower stock price. Does Berkshire adjust its buyback price based on the intrinsic value of the approximately $300 Billion stock portfolio or the quoted price?

Charlie Munger: I never pay any attention to how they do it. They’re cautious and careful people. But if you take the amount that’s been bought back in the last three years, it’s a lot. And I thoroughly approve of what we’re doing, and I don’t consider it at all fair that we’re being taxed because we are doing something good for our own shareholders.

Becky Quick: The president laid out the case today, I think he said something like north of 90% of executives are paid with stock compensation, at least in part, he said that’s not fair. The best way to goose your own compensation is to buy back your shares. So it helps the executives, it helps the shareholders, but it doesn’t help the employees or other constituents.

Charlie Munger: Well, there’s no question about the fact that he sympathizes with the employees more, and that’s understandable. And a lot of people would have the president’s orientation on that issue. And I don’t have a big opinion about how wealth ought to be distributed in a country. I don’t know the answer. I do think we need a capitalistic system if we want to have a productive economy that makes civilization advance.

Becky Quick: A recent Barron’s article stated, Berkshire shareholders could benefit after Warren as the company could come under pressure to break up. I don’t see how we would benefit with our businesses being broken up. As you and Warren have long stated, the company as a whole is stronger and one division could always aid another division in need. Warren and you, Charlie, have said that the current structure and philosophies will be preserved after your departures. However, please offer us shareowners reassurance that the company would never succumb to these pressures to break it up.

Charlie Munger: Well, I don’t think it’s at all likely that it’ll be broken up for a long, long time. A lot of companies are worth more dead than alive, meaning at the current price for whole businesses, you could sell things at higher prices, but you can only do it once. Shareholders would pay a big tax, and then you’d have the problem of what to do with the money and so forth. I think all factors considered, and with Berkshire buying in its own shares when they’re reasonably priced, I think Berkshire is a pretty damn good bet for shareholders who hold it long term in the future. And I don’t think it’s any hardship that it isn’t being broken up. It works pretty damn well. Everybody that bought Berkshire held it for 20 years, it’s done well. I think that will be true for those who buy it at the current price. I don’t think it will be as good in the future as it was in the past, but it will be okay considering how poorly everything else is going to do.

Becky Quick: Why do you think everything else is going to do so poorly?

Charlie Munger: Because the valuations start higher now and because government is so hostile to business.

Becky Quick: And that’s a view over the next five, ten, twenty years? How and how far out are you thinking?

Charlie Munger: I would say it will fluctuate naturally between administrations and so on. But I think basically the culture of the world will become more and more anti-business in the big democracies. And I think taxes will go up, not down. So I think the investment world is going to get harder for everybody. But it’s been almost too easy in the past for the investment class. It’s natural that it would have a period of getting harder. I don’t worry about it much because I’m going to be dead. You know, it won’t bother me very much when I’m lying there dead.

Becky Quick: I guess you want to point out to people, you’re 99. Nobody lives forever. That’s what you’re referring to. You’re not sick at the moment, right?

Charlie Munger: No, I’m eating this. Good peanut brittle. That’s what you want to do if you want to live to be 99. I hate to advertise my own product, but this is the key to longevity.

Becky Quick: Sees peanut brittle. I can see. I saw the box earlier. We did get a lot of people who wrote in questions just asking what your daily habits are, what you do every day. If you exercise, if you think exercising a lot when you’re younger is important to longevity.

Charlie Munger: Well, that’s a very… I have almost no exercise except when the Army Air Corps made me do exercise. I’ve done almost no exercise on purpose in my life. If I enjoyed the activity like tennis, I would exercise. But for the first 99 years, I’ve gotten by without doing any exercise at all.

Becky Quick: And you’re not planning on changing that anytime soon?

Charlie Munger: No, I’m not changing it.

Steven Myhill-Jones: Other people’s mileage may vary.

Becky Quick: What would the 100th day of your life look like and how would you want to spend it when you step out of bed in the morning?

Charlie Munger: Well, I step out of my bed these days and then sit down in my wheelchair. So I am paying some price for old age, but I prefer it to being dead. And whenever I feel sad, me being in a wheelchair, I think, well you know, Roosevelt ran the whole damn country for 12 years in a wheelchair. So I’m just trying to make this wheelchair thing last as long as Roosevelt did.

Becky Quick: That’s a good plan. I like it. Charlie, in your 1995 talk, the psychology of misjudgment, you listed senescence as a cause of misjudgment. You said old people like me get pretty skilled without working on it at disguising age related deterioration because social convention like clothing hides much decline. You went on to say that such decline was inevitable. He says, You’re my hero, Charlie, and I offer you this question with the utmost respect, but feel it needs to be asked what 71 year old Charlie must trust the judgment and mental capacity of 99 year old Charlie?

Charlie Munger: Well, there’s no question about the fact that you lose some mental acuity as you get older, but some people get shrewder at adapting to their limitations, and they do pretty well. And so far, I’ve had plenty of decline, but I’m pretty shrewd about the way I handle it. And so far, the results have not been that bad in my old age. Now my sex life would be a different subject.

Becky Quick: Okay, how do I follow that up? Given the increasing rate environment, what are the ramifications of moving away from a close to zero interest rate policy? Warren and yourself have frequently spoken about Aesop and a bird in the hand is worth two in the bush to describe the essence of investment decision making. So what do you do now that the interest rate environment is changing?

Charlie Munger: Well, there’s no question about the fact that as the interest rates have gone up, it’s hostile to stock prices, but they should go up. We couldn’t have kept them forever at zero. And I just think this is one more damn thing to adapt to an investment life is that there are headwinds and they’re tailwinds. And one of the headwinds is inflation. And I think more inflation over the next 100 years is inevitable given the nature of Democratic politics and politics in a democracy. So I think we’ll have more inflation. That’s one of the reasons the Daily Journal owns securities instead of government bonds…owns common stocks instead of government bonds.

Becky Quick: When you say the nature of Democratic policies and I forget exactly how you worded it, are you talking about the Democratic Party? Are you talking about democracy as a whole?

Charlie Munger: No, I’m talking about…Listen, Trump ran on a deficit that was bigger than the Democrats did. All politicians in a democracy tend to be in favor of printing the money and spending it, and that will cause some inflation over time. It may avoid a few recessions, too. It may not be all bad, but it will do more harm than good, I think, from this point forward.

Becky Quick: On that point, should we continue to maintain a debt limit? The adjustment process seems to be a very simple and mechanical process. However, such a measure only seems to create an environment rife with political jockeying and sniping. What’s the purpose if we continue to budget beyond our means? And then the bill comes due?

Charlie Munger: Well. If you take the history of democracy in the world and go back far enough, it fails a lot and gets succeeded by dictatorships and all kinds of awful things. And as a matter of fact, the worst thing that happened to the human race in my lifetime was when an advanced civilization like Germany was taken over by a dictator as awful as Adolf Hitler. That happened as a consequence of a big worldwide depression. It would never have happened if we hadn’t had the big depression. And once Hitler got in, that meant World War II was inevitable. And that could have worked out a lot worse than it did for the people like the United States. So these things are quite important and they’re not going to be done perfectly in the future, no more than they were done perfectly in the past. So, of course, you’ve got to expect a certain amount of future trouble in the world, and your government’s going to do some things that aren’t exactly right. On the other hand, I would argue that the US government did some things magnificently right. I have said on many an occasion that the thing that makes me proudest of my own government is the way we handle the sequel to (World War I), instead of punishing the Germans and the Japanese, we made them into some of our best friends on Earth. Now, that was a stunt, and it was to the credit of our country that that was done and it was done on a bipartisan basis. And I think we can all be proud of that. That was a smart thing to do. It took some generosity. We had to give up some of our money to help them rebuild. It was a credit to our species that we behaved that well on that occasion. And I don’t think our future behavior will lack similar episodes of some kind. We’ll do some things very right and some things very wrong. That’s the way it happens.

Becky Quick: That’s very Churchill-esque, right? They’ll try all the wrong things until we do the right thing?

Charlie Munger: No. We’ll keep doing both wrong and right as far ahead as you can see.

Becky Quick: Charlie, do you think we might have on and off waves of inflation like we did prior to when Volcker stepped in at the Fed the seventies era.

Charlie Munger: Of course, it will happen some in the future. Yes, I think we’ll have some of that in the future.

Becky Quick: Do you think we’ll have it immediately right now with what Jay Powell is dealing with?

Charlie Munger: I don’t regard myself… I think I’m pretty good at long run expectations, but I don’t think I’m good at short term wobbles. I don’t have the faintest idea what’s going to happen short term.

Becky Quick: Okay. Well, let me ask this one as a follow up. Do you have faith in Jay Powell? Are you expecting a soft landing?

Charlie Munger: Well, I’ll tell you the way I feel about Jay Powell is that I feel he’s about as good as we have any right to expect. I think he’s honorable and intelligent and doing the best he can. And I have no feeling that I know a lot of people who’d do it a lot better. So I’m glad we have him.

Becky Quick: Charlie, you’ve recommended the use of an index fund for the average investor. As these index funds continue to expand in size, their influence on corporate boards and ultimately management is ever increasing. This concentration of voting in the hands of a few index funds is alarming to me. Do you see this concentration as alarming as well? And what reforms would you suggest to address that issue?

Charlie Munger: Well, of course, it’s a very serious issue because it’s an enormous amount of power. And for a while, all these index funds got the feeling they were suddenly made god-like to clean up the world. But Vanguard has retreated from that policy, and I think wisely so. And I have some hope that Larry Fink will follow. I don’t think it’s smart for these index funds to try and influence the policy and politics of the country just because they’re an index fund. I think they should be satisfied to eliminate some of the folly from investment management and do a better job for their clients, which I think they do very well. And I think they should be pleased with that and not try and run the whole damn country as a matter of corporate governance. I have no feeling that anybody at Vanguard or Larry Fink’s operation has any special genius at how American corporations ought to be run. And to the extent they ask Berkshire to this or that, I wish they’d stop.

Becky Quick: To ask Berkshire to follow their guidance?

Charlie Munger: Anything. I’m just not interested in their views as to how Berkshire should behave.

Becky Quick: Stock based compensation is a popular means of incentive compensation in many companies. In some cases, these take on alarming proportions. It feels like companies are competing to outbid each other. In some companies, 20% of sales are paid out in stock-based compensation. How do you perceive this development in recent years? And what’s a healthy level of incentives?

Charlie Munger: Well, I think you will find in American corporations very good incentive systems and others that are too liberal and others that are too niggardly. And what else would you expect of human nature but a certain amount of variety? And I agree that some of this… In many a corporation, everybody would vote to being allowed to have stock based compensation that you didn’t count it in computing the earnings. They just want any damn way of making the earnings appear higher. It’s just human nature. Of course they want their… It’s like a little kid goes off to school, they want to bring home good grades, not bad grades. And sure, there’s a big problem of excess corporation pay in some places. Other places like Costco, I would say the compensation system is damn near perfect. And there’s a fair amount of stock-based (compensation). But we always buy in enough stock in Costco to pay for the stock we’re issuing. A lot of people in high tech, they issue the stock, and they don’t buy it in, so it’s a net dilution. I think there’s a lot that’s wrong in American compensation systems. But why wouldn’t there be? By the way, when I was young, it wasn’t so bad. This is something that’s happened in the last 50 years.

Becky Quick: Why?

Charlie Munger: I don’t know. It’s just the history of the way things came up and the greater hardship and the pioneering ethos or God… Whatever it was. When I was young executive, nobody complained about executive compensation. Now, practically everybody in the investment world thinks in many cases the executive compensation has gotten too high. Take General Electric in its heyday. Think of all the big compensation packages they paid and think of how they were phony-ing up the earnings and so forth to pay for it. It was disgusting. And of course, if that kind of crap creeps in everywhere and our civilization, the civilization will perish. We need more honor, not less. But I have no suggestion as to how to fix the places where it’s excessive. It’s a difficult issue, really difficult.

Becky Quick: Geoffrey Malloy writes in and asked this question. He’s from San Francisco. He says, do you think Elon Musk’s ownership of Twitter, specifically his hands off approach to content moderation is good or bad for American society?

Charlie Munger: Well, you know, I don’t use Twitter, so I’m not a good judge on that subject. And my policy on Elon Musk is that he’s a very talented man, but also quite peculiar. And so I, I don’t buy him and I don’t sell him short. I just say, well, he’s a very unusual person.

Becky Quick: You said some nice things about him the last time I talked to you and what he’s done with Tesla.

Charlie Munger: Oh, it’s unbelievable. Who else has done it except BYD? It just shows how tough capitalism is. Even if you’re a genius like Musk is, in some ways, there’s always some little BYD that comes out and does better. Capitalism is not easy.

Becky Quick: Charlie, last year in 2022, a Missouri court awarded a victim $5.2 million in compensation from Berkshire’s subsidiary Geico after a woman was infected with an STD in a car that was insured by GEICO Auto Insurance. The claimant says that the man was negligent and didn’t tell her about his health diagnosis. Your grandfather was a judge and you have a background in law. Did the Missouri court get this verdict right?

Charlie Munger: Well, I would doubt it myself, but it’s in the nature of things that not every court is going to be right in every verdict or every judgment. And I do think that allowing… You again, you raised a very tough subject. You will get occasional verdicts that are just totally outrageous and that’s inevitable. And, of course, that’s what appellate courts are for. But sometimes the appellate courts are very sympathetic with crazy verdicts. Again, I can’t fix everything that’s wrong with human life, including a few crazy verdicts.

Becky Quick: You’d put that in the category of a crazy verdict, though?

Charlie Munger: Yeah, sure.

Becky Quick: There was a lot of excitement about the relationship between Berkshire and 3G for the Kraft Heinz transaction. Has your perception of the private equity business changed on the back of that partnership?

Charlie Munger: Well, like every other human being on earth, some deals work out better than others for 3G, and they would love to have a way of going back and turning all our bad deals into good deals. Berkshire would like to have the same option, but we don’t get it either. Average out, 3G did pretty well, but recently they’ve had some… Their approach hasn’t worked as well in recent years as would be ideal. Again, welcome to human life. It isn’t so damned easy.

Becky Quick: The Florida governor and legislative body has recently taken a stand to try and control Disney’s exclusive self-governing authority previously set up in Florida under the founder, Walt Disney. As your organization and I guess by this they mean Daily Journal Corporation still owns Disney shares. You think Disney shares are still a good investment given this backdrop?

Charlie Munger: We’ve never owned Disney shares.

Becky Quick: That’s my mistake.

Charlie Munger: But Disney is an interesting case. Practically every business that Disney has gotten tougher than it used to be. Again, welcome to human life. Think of how Disney once owned the world. Lion King was running a long run on the theater district of New York. They went from triumphs with marching, marching, marching. All of a sudden, on practically every front, it’s more difficult. This is what happens. Imagine Kodak, which totally dominated photography in the world, and they invented this new technology. Kodak wiped out its common shareholders.

Becky Quick: Do you think Disney is headed down the same path or do you think that they’ll be able to pivot? I mean, I know you followed the company.

Charlie Munger: No, I think Disney has a lot of assets in it. But it’s unpleasant to have something… How would you like running the sports, ESPN, now at Disney compared to its heyday? It’s going to be way harder for them.

Movies look to me like it’s going to be a bloodbath, too. So it’s not a bit easy. And it was easy in the heyday of ESPN, Disney made nothing but money out of ESPN. It was a total goldmine.

Becky Quick: What about other movie businesses? I’m thinking of Paramount, which is a huge holding that Berkshire now owns.

Charlie Munger: I live within a few blocks of Paramount Studios, and I don’t even know anybody at Paramount. I have avoided the movies like the plague as an investor all my life. I’ve never made an investment in a movie business in any way, shape, matter, or form. It always gives me the (willow-whas.) I don’t like the unions. I don’t like the crazy agents. I don’t like the goddamn crazy lawyers. I don’t like the crazy movie stars. I don’t like the people who sell dope to the musicians. I mean, everything about it is not my culture. I like those old English actors when they came over. You know, I grew up with them. But basically, movies is not my scene, so I’ve avoided it. It’s always been very hard for the people who put up the money. It may be a very good place to make a living as an actor or a writer or something, or a musician. But it’s a hard place to make money if you’re an investor.

Becky Quick: The population of the world is thought to have increased by more than fourfold time since you were born. Is there a point where the biggest existential threat to humanity is the growth of the population and humanity? If so, how do we discern when that point has arrived?

Charlie Munger: Well, that’s an interesting subject. If you’d looked at the way things have happened in the past, you would have concluded, like Paul Ehrlich did, that the world is headed for an absolute population disaster. But what actually has happened is quite different. What’s happened is that as the world has gotten more and more prosperous, including in places like China, the birthrate has gone down, down, down, down. And so that there’s actually sort of a population shortage in a place like Japan. So the prediction of all the great experts, based on extrapolating the past graphs, it turned out to be totally wrong. It now looks as though the world’s population in the advanced countries will sort of self-limit.

Becky Quick: I mean, that kind of puts you in the same camp with Elon Musk. He’s made some of the same arguments that it’s really shrinking population that’s a bigger threat to humanity.

Charlie Munger: Well, as I said, he’s a smart man…sometimes, sometimes like all the rest of us.

Becky Quick: When assessing the character and competence of a business’s management, have you ever made a mistake? If so, when did this occur, and what did you learn from the experience?

Charlie Munger: Well, everybody makes mistakes, and I’d say one of the most interesting things that happened in my lifetime was the rise of IBM and the fall of IBM. IBM was the most admired company in America for most of my young life. They just marched from triumph to triumph to triumph. And in the last ten or 15 years, they’ve slipped and they’re falling back in relation to other people in their field as the Apples and the Googles and so forth came ahead, IBM just kind of missed the boat. I think that’s almost inevitable. Kodak missed the boat of the change to digital photography, too. And I’ve heard Bill Gates say that it’s almost the rule as a really disruptive technology comes along, the incumbents screw up their reaction to it. It’s hard to change your ways when they’ve been successful for a long time and go into a totally different way of behaving and thinking.

Charlie Munger: Look at where we’re sitting. We’re sitting in Daily Journal Corporation. We’re adapting to the new world. Think of how different it is publishing a newspaper and inventing software for courts to automate. These are two radically different businesses.

Becky Quick: Mr. Munger, Do you think that currently in the United States we have systemic racism?

Charlie Munger: Well, I suppose we’ve got some, sure. Of course you’re going to have a certain amount of animosity, one group toward another. In the whole history of the human race, we’ve had a certain amount of that. I think it’s gotten way better in my lifetime however. I would argue that the racism has gone down a lot.

Becky Quick: What, if any, impact do you think the insurance industry will see because of climate change over the next 25 years?

Charlie Munger: Well, I’m not sure I am any good at answering that kind of a question.

Becky Quick: Are you raising rates in any of the Berkshire insurance companies?

Charlie Munger: I don’t think I know particularly how well… I think there’s a good chance that climate change will be less important than a lot of people think. That doesn’t mean it’ll be unimportant, but I think it won’t be an absolute full blooded horror capacity with no possibility to adjust.

Becky Quick: Question from Tony Hwang. He’s teaching the introduction of personal finance and the introduction of corporate finance to undergraduates at Indiana University in Bloomington. Most of his students are non-finance majors, and this will likely be the only finance class that they take in college. What should he teach them? Incorporating as many writings and speeches that you’ve given over the years so that they have the foundations and common sense to effectively deal with their personal or corporate finance problems later in life?

Charlie Munger: Well, that’s a good question, but of course it’s a big question. If you have good judgment, your life will work a lot better than if you have bad judgment and you get good judgment gradually over time. Partly we’re making bad judgments and having them work out poorly. So my counsel has always been to start trying to be better and keep trying to improve all your life, and you’ve got about half a chance. If you don’t do that, you’ve got like no chance. And so. I used to say I could only teach what the other person almost knows, and I can just turn him over to the brink when he’s hanging on the edge. But if the guy is not within miles of even starting, I never make any public. I never succeed. So in removing idiocy, I have no I have a 100% failing talent. I’ve never succeeded.

Becky Quick: What would you push in that direction, if you’ve got a class full of finance students in college? What are a few lessons.

Charlie Munger: I would teach to the people who can learn and if the others couldn’t keep up, to hell with them. What can’t be improved, can’t be improved. Can’t be improved. I don’t believe in putting my head against the wall. And that, by the way, that’s the way most education works. They just throw out those who can’t keep up. That’s the way academia works. That’s the reason it gets so good at the top. I talked yesterday on Zoom with a law professor at a great place. And my God, this is an admirable guy. He’s just so goddamn smart…Incredible. But he’s a very senior law teacher at one of the great law schools of the world. So I would expect him to be pretty good. But he was more than pretty good. He was awesome. And I thought, My God, academia is quite competitive. You know, by the time you get to the top, the professors at a good place, you find some very remarkable people. But there’s a limit to what they can accomplish. One of the reasons that they turn out such good people is they take in such good people. That’s their secret. They can’t fix the (inaudible). Nobody can. There’s an old saying, Dumb is forever.

Becky Quick: Reading many entrepreneurs and famous people, they always say that you have to dream really big. Instead, you say, Charlie, that the secret to a happy life is having low expectations. Could you please expand on that?

Charlie Munger: Well, yes. You climb as hard as you can by just advancing one inch at a time. That’s the secret of life. Now there’s always somebody who’s a little nuts and who succeeds. But for every guy who succeeds, there’s a thousand failures.

Becky Quick: Is this an under-promise over overdeliver situation?

Charlie Munger: Well, of course. Who in the hell in his right mind would like going around making a lot of commitments and failing time after time after time at doing what you promised to do? Everybody would hate you, right? There’s no more guaranteed way to make people hate you than to fail them in their reasonable expectations. So of course, you want to live a life where by and large you’re meeting the reasonable expectations of other people. That’s what civilization requires of all of us.

Becky Quick: Did you get COVID during the pandemic? And how do you stay healthy? What’s your advice to elders?

Charlie Munger: I did get COVID, but I got it after I was vaccinated and I had like a tiny sniffle for about 10 minutes, and that was my COVID. But I tested positive during that time. And in terms of the general idea of cautious adjustment, I’ve had a lot of elderly friends who either died or had terrible injuries from falls. And so when I got old myself and it got time to use something to avoid falling down, people tried to sell me on the cane. But I noticed that my friends who use canes would fall down occasionally. So I never used the goddamn cane. Instead, I bought one of these modern walkers, and wherever I was worried about falling down, I pushed my walker. I did that for six and a half years and I never fell down once in six and a half years just because I was more cautious. That is my advice to old people. Just be a little more cautious. Now I’ve gone to the wheelchair, and I’ve got another six and a half years probably, but some of it I’ve already used up. And I’m just as cautious with my wheelchair. What is the harm of having a little extra caution?

Becky Quick: Berkshire previously took a position in Exxon and then exited fairly quickly, if I recall correctly, I believe you had stated that Berkshire thought it was a good alternative to cash at the time. Is it the same type of thinking with Berkshire’s new position in Occidental and Chevron? Or is it likely to be more of a long-term type of holding for Berkshire going forward?

Charlie Munger: Well, that is a very good question. And I think having a big position in the Permian Basin through those two companies is likely to be a pretty good long term hold. So I like that aspect of that position. And Ben Graham used to say, if it’s a good investment, it may be a good speculation. And I think that’s generally true. But I don’t do those short-term speculations, at least not very often. But I like the big position that Berkshire has in the Permian through those two. I kind of admire both places a lot. Both Occidental and Chevron are very admirable places. By the way, Oxy didn’t start like that. If you go back 30 or 40 years, Oxy was run by a crook. It’s evolved into a wonderful place, but it started as a sleazebag.

Becky Quick: Who was running at 30 or 40 years ago.

Charlie Munger: A man named Armand Hammer. Before your time, Becky, you’re too young.

Becky Quick: Charlie, you’re largely credited with Warren Buffett’s evolution to buying great businesses at a reasonable price or, in simple terms, a willingness to pay up for a great business. Given Ben Graham’s exceptional insights and understanding of investing, how or why did he himself not evolve to foresee the inability to scale his net-net cigar butt approach? What do you attribute your early willingness to pay up stems from?

Charlie Munger: Well, remember, a lot of Ben Graham’s rise in life was during a period when there was plenty of low hanging fruit among mediocre businesses that were way too cheap. And he was relatively rare in doing his hunting in that garden. And so he made a pretty good living for himself buying these… What happened is that low hanging fruit eventually went away as the aftermath of the Great Depression went away. And Ben Graham actually made more than half of all the money he made in his life out of one stock. And that stock was Geico, which was a great business. So if you actually look at the great man’s own life, you see that what he taught wasn’t the way he got rich himself. And by the way, he told that story on himself late in life. He carefully computed how much he’d made in Geico compared to everything he had ever done in his previous life. And so you can argue that Ben Graham himself woke up once.

Becky Quick: Why do you think that you, so early on, were willing to come up with this idea of paying up for great businesses?

Charlie Munger: Well, because it’s so obvious and I’m good at doing things that are obvious. Of course, it was obvious that if you wanted to have a particularly good result, you got to (own) a great company, you know? I recognized that greatness was good, you know? Big deal. Charlie Munger, genius, recognizes greatness is good. Of course greatness is good!

Becky Quick: When you’re evaluating a company for potential investment. What do you place the most emphasis on the business or the management? And do you differ with Warren when it comes to what you place first?

Charlie Munger: No, I think we’re the same. I think we like the business great first and then second we want a great manager. But we have not made a huge success by investing in great managers who take over lousy businesses. That is not the way we rose. If you’re a lousy manager you really need a great business.

Becky Quick: And can a great business be run by a lousy manager? The inverse?

Charlie Munger: Sometimes. Coca-Cola was run for years by a man with very severe mental impairment, and the directors just assumed he was drunk and let him stay there year after year. Now, that’s my idea of a wonderful business that you can be mentally defective and run it pretty well. That was Coca-Cola in its heyday.

Becky Quick: How far back are we talking?

Charlie Munger: Well, 25 years.

Becky Quick: Charlie, you’ve described too much diversification as de-worsification, being, at best, an average return producing strategy. In light of that thought, if one was allowed only one stock to hold for a very long time and it would be the most important asset to him and his family and their future well-being. Please describe what you would look for in that stock or company and also talk about the features that you would consider most important when you’re trying to figure that out.

Charlie Munger: Well, it helps to have somebody that’s lucked into a good position. So a great business should be what you’d like. And of course you’d like a great management, too. And occasionally we’ve had both (arrive) together for a long, long period. But of course, everybody’s looking for the same thing. And the trouble with it is you will find when you get into those good businesses in a place that’s as picked over and analyzed as American stocks are…You can imagine the amount of time spent thinking about American stocks… And you will find, by and large in America, (if) it’s really a great business, it’s at least 25 times earnings and maybe 30 or 35 or something. So that makes it much harder of course, because if something goes wrong, you can lose a lot of your investment. And, of course, that’s what makes investment so difficult is the fact that the good businesses don’t stay cheap. You have got to somehow recognize a good business before it’s recognizable as a good business. That’s very hard to do. Some people get good at it, but not many. I don’t think I would want 95% of the people who are America’s professional asset managers, I wouldn’t want working for me. I think it’s that hard. I think you’d need to be in the top 5% to have a reasonable chance. It’s very difficult. Now, it’s not difficult to just buy an index fund and sit on your ass. That’s the great default position. And by the way, if you look at the Daily Journal Corporation, we just put in a 401k plan, what are the investment options for the people at work? Zero. It’s all index funds. What percentage of American 401k’s have our plan? Index funds required. About zero. Am I right or am I wrong? Well of course I’m right. That’s the logical thing to do.

Becky Quick: So is an investment manager worth 2 and 20?

Charlie Munger: Sometimes. Being worth 2 and 20, I would say that is way less than 5%. The man who is worth 2 and 20, that is really… That’s getting very rare indeed. Particularly under modern conditions where every niche is occupied. If you take early stage venture capital like Sequoia does, how many people have a Sequoia like record? I don’t think there’s 1 in 100 that has a Sequoia type record. By the way, even Sequoia makes even Sequoia makes an occasional mistake. You know, everybody does.

Becky Quick: You’ve said previously that you should destroy at least one good idea that you have each year. What good idea did you destroy in 2022 and anything in 2023 so far?

Charlie Munger: Well, the idea that I destroyed that was… It wasn’t a good idea, it was a bad idea. When the Internet came in, I got over-charmed by the people who were leading in the online retailing. And I didn’t realize it’s still retailing. You know, it may be online retailing, but it’s also still retailing. And I just, I got a little out of focus. And that made me overestimate the future returns from Alibaba. I have never gotten so I eliminate mistakes. What I do though is I keep rubbing my own nose in my own mistakes like I’m doing now because I think it’s good for myself.

Becky Quick: A notable theme during the last Daily Journal conversation revolved around positive and negative tradeoffs between different systems, frameworks and choices. Can you discuss your views on the health care industry, specifically the tradeoffs between capitalist systems like the United States and single payer systems like Canada and the UK? And I’m asking this single payer health care question because for those who don’t know, you serve for a long time as chairman at a hospital in Los Angeles. So you do have some insights into what this situation is.

Charlie Munger: When somebody asked Warren what happened when their experimental with JPMorgan Chase and Amazon and so forth. And they were going to change…what was wrong with American medicine and its cost. And when they gave that up it was a total failure. Warren just said, “The tapeworm won.” And that’s what happens. I think the American system costs way too much.

Becky Quick: Charlie, I’m a big fan of your disciplined approach to life. Do you get up at the same time every day and go to the bed at the same time? And finally, what’s the first thing you focus on each day?

Charlie Munger: Well, I vary a little in my time, but I’m pretty regular and I’m a pretty good sleeper in my old age. So I’m very lucky in that respect. And… you got sound again?

Becky Quick: Yeah. I’ve got you.

Charlie Munger: Modern technology it really works…Sometimes.

Becky Quick: If you could inaugurate anyone for president in 2024, who would you choose?

Charlie Munger: Well, I think I’ll duck that one. I don’t want to get into presidential politics.

Becky Quick: I can understand that. Charles writes in and first of all he wants to thank you, for gifting some DJCO shares to establish that new Daily Journal management equity incentive plan. Is there a new edition of Pure Charlie’s Almanac forthcoming? And you said that you admire Benjamin Franklin. Can you please elaborate on this subject and highlight the qualities that you admire in Ben Franklin?

Charlie Munger: Well, Ben Franklin was a genius. It was a small country. But remember, he started in absolute poverty. His father made soap out of the carcasses of dead animals that stank. Now, that is a very low place to start from. And he was almost entirely self-educated, two or three years of primary school and after that, he had to learn it all himself. Well, to rise from that kind of a starting position and become…by the time he died, he was the best inventor in his country, the best scientist in this country, the best writer in his country, the best diplomat in this country. You know, thing after thing after thing, he was the best there was in the whole United States. So he was a very unusual person. And he just got an extremely high IQ and a very kind of pithy way of talking that made him very useful to his fellow citizens. And he kept inventing all these things. Imagine inventing the Franklin Stove and bifocal glasses and all these things that we use all the time. I’m wearing bifocal glasses as I’m looking at you. These are Ben Franklin glasses. What the hell kind of a man that just goes through life and his sight gets a little imperfect… He invented the goddamn bifocals! And it was just one of his many inventions. So he was a very, very remarkable person. And, of course, I admire somebody like that. We don’t get very many people like Ben Franklin. He was the best writer in his nation and also the best scientist and also the best inventor. When did that ever happen again? And he played four different musical instruments in addition to everything else. One of which he invented…they still play it occasionally. But he actually played on four different instruments. No, he was a very amazing person. Of course, the country was lucky to have him.

Becky Quick: Is it true, is there a new poor Charlie’s Almanac coming out?

Charlie Munger: Well, they’re creating an online edition. By the way, the Chinese edition sold way more than the one in the United States.

Becky Quick: Well, there’s more people there.

Charlie Munger: That’s not the sole reason.

Becky Quick: Why else?

Charlie Munger: Well, a rich old man looks like Confucius. In their system, there’s nothing better than a rich old man.

Becky Quick: This is about delayed gratification. Taken to the extreme, how rational is it for a person of your age and wealth to practice delayed gratification. If it’s not rational at your age, how is it rational to delay gratification for the average adult? So what’s the rational point in life to live with no delayed gratification too?

Charlie Munger: I’m still… I’m still doing deferred… Now that I’m older, I buy these apartment houses. It gives me something to do. And we’re different from the way we run them and the way everybody else runs them. Everybody else is trying to show high income, so they can (have high) distributions. We’re trying to find ways to intelligently spend money, to make them better. And of course, our apartments do better than other people do because the man who runs them does it so well for me. There are two young men that do it with me. But it’s all deferred gratification. We’re looking for opportunities to defer other people that are looking for ways to enjoy. It’s a different way of going at life. By the way, you get more enjoyment out of life doing it my way than theirs.

Becky Quick: Did you start out having to work at delayed gratification, or is that just how you were born?

Charlie Munger: No, I learned this trick early. You know, they’ve done that experiment with the two marshmallows with little kids. They offer them two marshmallows if they’ll wait. They’ve watched them, how they work out in life by now. The little kids who were good at deferring the marshmallows are also the people that succeed in life. It’s kind of sad that so much is inborn, so to speak. But you can learn it to some extent, too. But I was very lucky. I just naturally took to deferred gratification very early in life. And of course, it’s helped me ever since.

Becky Quick: We’ve come to know Warren Buffett as a learning machine because of your candid descriptions. Aside from this quality, what others would you credit to Warren that has helped make him one of the greatest investors and compounders that the world has ever seen?

Charlie Munger: Well, Warren is not only a very good thinker and a good learner, which is important, but Warren has a big, strong fiduciary gene. He cares about what happens to the shareholders. Warren and I were lucky in that the early shareholders were people who trusted us when we were young and didn’t have a reputation and so on. And naturally, we feel an exceptional loyalty to those people. And of course, naturally they’re all dead now, but we’re still loyal to them. Warren and I still care what happens to the Berkshire shareholders a lot. And I think that helps us. I think that it helps if you’re good at loyalty.

Becky Quick: Many large companies, including Meta, which owns Facebook and various insurances, are choosing to self-insure against liability, either for directors or for the business risks. If it’s carried to extremes, as it no doubt will be over time, this could cause potential systemic issues. Would you share your thoughts on this, please?

Charlie Munger: In my own life, I’m a big self-insurer and so is Warren. It’s ridiculous for me to carry fire insurance on my houses because I could so easily rebuild a house that had burned down. So why would I want to bother fooling around with a claims process and all kinds of things. You should insure against things you can’t afford to pay for yourself. But if you can afford to take the bumps, you know, some unusual expense coming along doesn’t really hurt you that much, why would you want to fool around with some insurance company if your house burned down? I would just write a check and rebuild it. All intelligent people do it my way. I won’t say all, but maybe I should say all intelligent people should do it my way. There should be way more self-insurance in life. There’s a lot of waste. You’re paying when you buy insurance for the other fellow’s frauds. And there’s a lot of fraud in life. And if you can afford to take the risk yourself and not fool around with claims and this and that and commissions and time, of course you should self-insure it’s simpler and so forth. Think of what I’ve saved in my life. I never carried…I think once, but with one exception, I never carried collision insurance on a car. And once I got rich, I stopped carrying fire insurance on houses. I just self-insure. And that’s the right way to do it.

Becky Quick: That’s a little bit of a surprising take from a guy who’s a Vice Chairman at Berkshire, which has so many insurance companies.

Charlie Munger: Well, but I’m not… I’d rather tell it the way it is than tell it in a way that helps Berkshire. I’m not going to tell it differently than I think it really is, just because it’s better for Berkshire, even though it’s bad for Berkshire. I want to tell you, if you can afford to self-insure, self-insure.

Becky Quick: Even on things like medical?

Charlie Munger: That is different, the insurer pays the doctor in the hospital a small fraction of what you pay. So that’s a different kind of calculus. Everything in medicine is… The cost of American medical care and the medical insurance, it’s a disgrace. If you go to Singapore, you will find that they do the whole thing better than we do, and it cost 20% of what we pay. By the way, I have no idea of how to get from where we are to where Singapore is, because all the people that are getting all that extra money fight like fierce tigers to hold on to it. And they control boards and cities and states and every other guy. So I don’t know how to fix the costs in American health care. They’re totally out of control. And Warren tried to fix it with Amazon and all that stuff. He failed to. Everybody’s failed. Everybody in America has a marvelous record failing in handling our cost of medicines.

Becky Quick: What are some of the most important things that we need to know about Greg Abel? Have you experienced examples of him also being a learning machine? And if so, could you share one?

Charlie Munger: Yeah, well, Greg is just sensational at being a business leader, both as a thinker and as a doer. And he’s also sensationally good at smoothly getting things done through other people. So he’s a very remarkable human being, and Berkshire is very lucky to have him. He’s also just a tremendous learning machine. You can argue that he’s just as good as Warren is learning all kinds of things. One of the interesting things about Greg is there’s some things he’s better at than Warren is. And Warren knows that, and he just keeps dumping on Greg everything that Greg can do better. And it’s a lot. So the system at Berkshire is working pretty damn well. We’re very lucky to have a 92 year old that’s a good shape as Warren and we’re very lucky to have a chief executive like Greg. Greg is very remarkable. Greg is trusted by utility regulators and rightly so. He is trying to run all those utilities as if he were the regulator. Now, how many people think that way? But it’s such a smart way to think.

Becky Quick: You mean just from a show of good faith?

Charlie Munger: Yeah. Why not do it the way that you would want it done if you were on the other side of the transaction? How can you fail if you treat other people the way you’d like to be treated or yourself? It’s the golden rule. Of course it works.

Becky Quick: Would you recommend I take Social Security when I’m 67 or wait till I’m 70 when I’ll receive more per month?

Charlie Munger: Well, I can’t make that choice for you. It depends. If you know you’re going to be dead pretty soon I’d go ahead and have more money to spend. If you think you may live a long time you may have a different calculus. And I would say that most people who are healthy and so forth and who have a pretty good life expectancy, generally they’re wise to defer the Social Security taking and take more money later.

Becky Quick: I guess it’s optimistic thinking, too, if you’re thinking that you’re going to live a long time, that’s the way to play it out.

Charlie Munger: Well, what do you do, Becky?

Becky Quick: Well, I’m not 65 yet, so I haven’t thought about it yet. I’m waiting.

Charlie Munger: I don’t think you’re going to need Social Security, Becky. I’m not worried about you.

Becky Quick: You urged the US government to ban cryptocurrencies, as China has done. I have a more general question. With boom-and-bust cycles in different countries in history, what should a good government do and not do for economic growth?

Charlie Munger: Well, what you’ve got to do if you want growing GDP per capita, which is what everybody should want, you’ve got to have most of the property in private hands. So that most of the people who are making decisions about how properties should be cared for own the property in question. And that makes the whole system so efficient that GDP per capita grows, in a system where you have easy exchanges due to a currency system and so on. That’s the main way of a civilization getting rich is having all these exchanges and having all the property in private hands. If you like violin lessons and I need your money and we make a transaction, we’re gaining on both sides. So of course, GDP goes like crazy when you got a bunch of people who are spending their own money and owning their own businesses and so on. Nobody in the history of the world that I’m aware of has ever gotten from hunter gathering to modern civilization, except through a system where most of the property was privately owned and a lot of freedom of exchange. By the way, I’ve just said something that’s perfectly obvious but isn’t really taught that way in most education. You can take a course in economics in college and not know what I just said. They don’t teach it exactly the same way. Anyway.

Becky Quick: Throughout your experience with Berkshire Hathaway, what are a few of the things that have surprised you most based upon some of your previous rational thoughts and ideas? Also, how have you used some of those surprises in your quest to become a better learning machine?

Charlie Munger: I would say, some of the things that surprised me the most was how much dies. The business world is very much like the physical world where all the animals die in the course of improving all the species so they can live in niches and so forth. All the animals die and eventually all the species die. That’s the system. And when I was young, I didn’t realize that that same system applied to what happens in capitalism, to all the businesses. They’re all on their way to dying is the answer. So other things can replace them and live. And it causes some remarkable deaths. Imagine having Kodak die! It was one of the great trademarks of the world. There was nobody who didn’t use film. They dominated film. They knew more about the chemistry of film than anybody else on Earth. And of course, the whole damn business went to zero. And look at Xerox who once owned the world. It’s just a pale shrinking… It’s nothing compared to what it once was. So practically everything dies if you are big enough time scale. When I was young enough, that was just as obvious then. I didn’t see it for a while. You know, things that looked eternal and had been around for a long time I thought would likely be that way when I was old. But a lot of them have disappeared. Practically everything dies in business. None of the eminence lasts forever. Think of all the great department stores. Think of how long they were the most important thing in their little community. They’re way ahead of everybody in furnishing credit, convenience, and all seasons. You know, convenience back and forth, use same banks of elevators and so forth, multiple floors. It looked like they were eternal. They’re basically all dying or dead. And so once I understood that better, I think it made me a better investor I think.

Becky Quick: I mean, the same can be said for managers. I’ve talked with Doug McMillon of Walmart, who carries around in his wallet a list of the top retailers over the decades, and nobody’s ever the same.

Charlie Munger: Yes. Who are gone. Yes. Yes. Of course, retailers live in terror because you can die. Some guy gets a better way of doing it, you just die. Like those department stores did.

Becky Quick: The ones that you invested in early on you mean?

Charlie Munger: Well, no. Most of the… Think of the department stores that are gone. Just chain after chain after chain in big downtown. They’re not weakened, they’re gone, dead. And to have IBM have the huge position it once had in terms of utter dominance, and now it’s just one of the also rans. And it’s still an admirable place. I’m sure they have a lot of talent left in IBM. It doesn’t help. You die, even though you’re talented and hardworking.

Becky Quick: Who were some of the people you most admired and looked up to? What was it about them that made them so special?

Charlie Munger: Well, some of the best people… I would argue that, Jim Sinegal at Costco was about as well adapted for the executive career he got. And by the way, he didn’t go to Wharton, he didn’t go to the Harvard Business School and he started work at age 18 in a store, and he rose to be CEO at Costco. And in effect, he was a founder under a man named Saul Price. And I would argue that what he accomplished in his own lifetime was one of the most remarkable things in the whole history of business, in the history of the world. Jim Sinegal, in his life. He’s still very much alive, but he’s, he had one business throughout his whole life basically. And he just got so damn good at it. There was practically nothing he didn’t understand, large or small. And there aren’t that many Jim Sinegals. I’ll tell you somebody else for a job of the kind he has, Greg Abel, in a way, is just as good as Jim Sinegal was. He has a kind of a genius for the way he handles people and so forth and problems. And I can’t tell you how I admire somebody that has enough sense to kind of run these utilities as though he were the regulator. He’s not trying to pass on the cost because he can do it. He’s trying to he’s trying to do it the way he’d want it done if he were the regulator instead of the executive. Well of course that’s the right way to run a utility. But how many are really run that way? So there are some admirable business people out there, and I’ve been lucky to have quite a few of them involved in my life. The guy who ran T.T.I. was a genius. T.T.I. is a Berkshire subsidiary. You Daily Journal people think about how lucky you’d be if we still had our monopoly on publishing our cases or something. We’d be like, T.T.I. Well, T.T.I. has just marched some triumph to triumph. And it was run by a guy. He got fired and created the business.

Becky Quick: You got fired from where?

Charlie Munger: A defense contractor. I forget which. I can’t remember exactly. But he was a terrific guy, and he ran the business for us. He wouldn’t let us raise his pay. How many people have the problem with their managers, they won’t allow you to raise their pay?

Becky Quick: It’s pretty rare.

Charlie Munger: Yeah.

Becky Quick: Charlie, I spoke with a friend of yours yesterday, and his question that he had for you is what quality has helped you the most in life?

Charlie Munger: Well, that’s easy. Rationality. If you’re just not crazy, you have a big advantage over 95% of the people, because most people have all kinds of crazy patches. And if you just are consistently not crazy, you had you get a big advantage in life. And if you’re patient and gratification deferrer in addition to being not crazy, then it’s practically a cinch. And then if you’re exceptionally good at satisfying your commitments to other people, you just automatically improved your resources and your chances in life enormously. And it’s so simple. And why don’t more people do it? It’s an interesting question. I don’t think you can educate your children to do it automatically. In fact I think if you have ten children, you’ll have some that are a lot better than others in doing this.

Becky Quick: Is it harder with success, age, wealth, to hold onto rationality?

Charlie Munger: I think it’s always hard, but you get better at it if you get good at it young and keep practicing. But it’s never easy. That question somebody asked, what one stock would you buy if you had to just rely on that one stock only for your sole living expenses? You weren’t allowed to have any or earn any income at all, you just had to invest a million dollars and live on that one stock. How many people would give an intelligent answer to that question in America? I don’t think it’s 1 in 100. They wouldn’t even know how to begin.

Becky Quick: I think one of my favorite things that I’ve heard you say, is whatever you are, age and wealth makes you more so. You came up with that a while ago. What led you to that?

Charlie Munger: Yes, yeah, of course. I think that’s true that we all tend to get a little more so in every way. And I thought of that when I woke up this morning and put on my trousers and I thought, you know, I really economized in buying those trousers, you know, why am I economizing in my trouser buying? But the habit is just so ingrained I can’t stop.

Becky Quick: I’d like to circle back to a question on Daily Journal to wrap things up. In a previous shareholder meeting back around 2018, you spoke about BYD and said Journal Technologies is not quite BYD, but added that, by the way, it might work out just like BYD. Now, a few years on, do you still find Journal Technologies can turn out similar to BYD?

Charlie Munger: Well, it won’t be as fast that I guarantee you and it won’t be as great, I can also practically guarantee that. BYD is one of the most remarkable venture capital type successes in the history of the world. He was the eighth son of a peasant, had an older brother that recognized his younger brother was a genius, and the older brother sacrificed himself to get this peasant son into some good engineering school. And he became an engineering professor and then an entrepreneur. How many times do you get a story like that? And imagine buying a little bankrupt auto company in China and turning it into something that this year they’re going to sell more electrical cars than anybody else in the world at a time when electrical cars are hot. It’s a remarkable story. But again, a very unusual human being Wang Chuanfu. And by the way, in his case, it wouldn’t have happened if Wang Chuanfu hadn’t been so unusual.

Becky Quick: Unusual how?

Charlie Munger: He’s a damn genius and he’s been thinking about the right things 17 hours a day all his life. He’s a workaholic. And he can do things that ordinary human beings can’t do.

Becky Quick: Is that the favorite stock you’ve ever purchased, BYD or Costco?

Charlie Munger: Well, I would say… I have never helped do anything at Berkshire that was as good as BYD, and I only did it once. Our 270 (million) dollar investment there is worth about $8 Billion now or maybe nine. And that’s a pretty good rate of return.

Becky Quick: Yeah, that’s more than pretty good.

Charlie Munger: Yeah, well, we don’t do it all the time. We do it once in a lifetime. Now, we have had some other successes, too, but I don’t think hardly anything like that. We made one better investment. You know what it was? We paid an executive recruiter to get us an employee, and he came up with Ajit Jain. The return that Ajit has made us compared to the amount we paid the executive recruiter, that was our best investment at Berkshire was paying an executive recruiting firm to get us Ajit Jain. But again, it only happened once.

Becky Quick: Yeah, that’s quite an investment, too. Charlie, I just want to thank you for all your time today and being so generous with us. And we’ll turn it back over to Charlie and Steven.

Charlie Munger: All right? We’re all through. I guess our meeting is over, and I’m glad I’m still here to do one more with you people. We’ve been at this quite a few years. So my best to all of you. Bye.

Steven Myhill-Jones: Thanks, everyone. Thank you, Becky.

Becky Quick: Thank you, Steven. Thank you, Charlie.

End of Transcript

Thank you for reading. I hope you thoroughly enjoyed it!


Richard Lewis, CFA

White Stork Asset Management LLC

Partner, Investments

Links to additional Transcripts:

Daily Journal Meeting 2023; Audio Recording (Time Saver Edit)

Hello Latticework Investing Community,

Please enjoy my “time saver” audio recording of the 2023 Daily Journal Annual Meeting. I reduced the meeting runtime by ~36 minutes by editing out the formal business meeting, eliminating long pauses & fillers, and trimming questions down to their core components.

And as always, check back soon for my full transcript of the annual meeting! Or subscribe if you’d like it emailed directly to your inbox after it’s posted.



Charlie Munger: Full Transcript of Daily Journal’s 2022 Annual Meeting

It’s always a wonderful pleasure to hear Charlie Munger speak at the Daily Journal Annual Meeting. Once again, the wit and wisdom of Charlie Munger was on full display at the deceptively youthful age of 98!

This transcript has been enhanced with clickable links to various curated resources. In addition to the transcript, you may also listen to my “time-saver” edit of the meeting’s audio, or watch the entire meeting on YouTube.

I would like to thank Mr. Munger for energetically entertaining our questions and graciously sharing his wisdom, insights, and time with all of us.

I hope you all enjoy!

(Note: I frequently summarized the questions that were presented by the host Becky Quick, but as for anything that Charlie or Gerry said, I translated them verbatim and as accurately as possible.)

Start of Transcript

Charlie Munger: The sole business of the meeting is to elect four directors; Munger, Conlin (link 1, 2), Maryjoe Rodriguez and John Frank (link 1, 2, 3). We have the proxies, we have the inspector of elections, we have everything here, that is now done. The Daily Journal’s former business is over. Now we’re going to answer questions in the tradition that’s come to both the Daily Journal and Berkshire Hathaway. So you’re on for the first question.

Becky Quick: How does the Daily Journal plan to handle its investment portfolio after Charlie steps back?

Gerry Salzman: Charlie, I think you should answer that.

Charlie Munger: Well, I’ll handle it as long as we can, and when I’m gone or sufficiently impaired, we’ll get somebody else to do it.

Becky Quick: Ok, the second part of that question is, what are the reasons for Gerry and Peter Kaufman leaving the board?

Charlie Munger: Well, we are going to have to make changes in the future because Gerry and I are so superannuated. And Peter didn’t want to do it anymore, and that’s all we have to say.

Becky Quick: What is the current Daily Journal’s management succession plan and who will be in charge after Mr. Salzman’s retirement?

Charlie Munger: Well, our long-term plan (is) to replace both Gerry and I because he’s eighty-three and I’m ninety-eight. So obviously, we have a succession planning to do in the near future, and we’ll do it as fast as we can.

Becky Quick: I notice that the Daily Journal is using margin debts to purchase overseas securities, and the overseas security is not reported in the SEC filing. As a shareholder, am I entitled to know what overseas security we own on margin?

Charlie Munger: Well, the practice at Daily Journal and Berkshire is the same. We disclose what we have to under the rules because we don’t want people to know what we’re buying and selling, so we tell everybody what we have to under the rules, and we keep it confidential until then. That’s our system.

Becky Quick: Our company stated that Journal Technology serves 30 states in the United States on the website and all the other older 10-Q and 10-K. It said that JTI serves 42 states. I just wonder what is the reason for the decline? I would appreciate any explanation.

Charlie Munger: Gerry, you take that one.

Gerry Salzman: The reason for the decline, to a certain degree, is several years ago, we decided not to support a very old legacy system. Which had a number of smaller agencies, in addition to a number of larger agencies, and as we expected, many of the smaller agencies decided not to go to our main system, which we call eCourt, eSystems, eProbation, eProsecutor and ePublic Defender. And so that’s the reason the decline in those numbers.

Charlie Munger: And by the way, other software companies avoid obsoleting a system because they lose some business. But we want the customers to have the more modern system.

Becky Quick: Who are your principal competitors in supplying software to court systems, and do you have a guess as to who has what market share?

Charlie Munger: Well, Journal Technologies has the big share, and the rest is scattered. Now, pardon me, I mean, Tyler Technologies has the big market share.

Becky Quick: In the annual report, you noted that the prospects in software now seem especially interesting, would you care to expound on that thought?

Charlie Munger: Well, I’m glad to. What’s interesting is that. The courts of the world have been in the Stone Age, and there’s no reason where lawyers should go down through heavy traffic and wait for some little motion, it should all be done on Zoom and so forth. And the filing should be done electronically… What there is a huge market for the automation of the courts, and it’s early. That’s the good news. It’s a big market and the bad news is it’s a slow damn tough way to grind ahead in software because it’s very bureaucratic…RFP, Government bodies. It’s a huge market, and it’s intrinsically going to be very slow to get done. That’s the good news and bad news, we have a huge market and it’s going to be slow and bureaucratic. There isn’t any doubt about what’s going to happen, the courts are going to get more efficient and get with the modern world. And also the district attorney’s offices and the probation offices.

Becky Quick: In January Jeff Gundlach was quoted, “China is uninvestable, in my opinion at this point. I’ve never invested in China long or short. Why is that? I don’t trust the data. I don’t trust the relationship between the United States and China anymore. I think that investments in China could be confiscated. I think there’s a risk of that.” Obviously, with a significant percentage of the Daily Journal’s marketable securities invested in BYD and Alibaba, you feel differently. Please explain why you are right.

Charlie Munger: Well, of course, only the future knows who’s going to be right. But China is a big, modern nation. It’s got this huge population and this huge modernity that’s come in the last 30 years. And we invested some money in China because we could get more value in terms of the strength of the enterprise and the price of the security than we could get in the United States. Other people, including Sequoia, the leading venture capital firm in the United States, have made the same decision we have. But I’m sympathetic to Gundlach. If he’s nervous he doesn’t have to join us. Different folks have different opinions. I feel about Russia the way he feels about China. I don’t invest in Russia, so I can’t criticize the Gundlach’s point of view. It’s just I reached a different conclusion.

Becky Quick: Charlie, you and Warren have been making concentrated investments since the nineteen fifties. Many of these investments have led to gains, but even more impressively, none of them have led to significant losses. As far as I can tell, neither one of you has lost more than a few percentage points of equity on any single investment. Daily Journal has recently bet a large amount of its capital on Alibaba (link 1, 2) and foreign traded stock. It’s also taken on an additional $40 million in margin debt to make these investments. What makes you so sure that these investments won’t lead to a substantial impairment of Daily Journal’s equity capital, which would impact the company’s ability to reinvest the resources needed to develop the company’s software operating business?

Charlie Munger: Well, of course, if you invest in marketable securities, you have the risk that they’ll go down and you’ll lose money instead of make it. But if you hold a depreciating currency, that’s losing purchasing power. On balance, we prefer the risk we have to those we’re avoiding, and we don’t mind a tiny little bit of margin debt. (link 1, 2, 3)

Becky Quick: I got lots and lots of questions on Alibaba. That was the one question that I received more than any other, so I’ll dig a little deeper through some of these. As a Daily Journal owner, do we own local shares of Alibaba? Does that actually give us legal ownership of that business, or do we have a variable interest? And is that the same? Net-net, what do we own? And I did get a series of questions related to that same sort of sort of thought.

Charlie Munger: When you buy Alibaba, you do get sort of a derivative. But assuming there’s a reasonable honor among civilized nations, that risk doesn’t seem all that big to me.

Becky Quick: Got a lot of questions just about the investing in China risks. He’s interested in your take on China and Chinese stock exposure for the long term. He says it’s becoming quite evident that Chinese companies could be banned from doing business in the western world or maybe some of the eastern countries too, because of the number of the following reasons. One, the security threat issues. Two, the potential conflict over Taiwan. Three, inability to meet western accounting standards and number four, human rights issues. Considering all of the risks mentioned above, why would anyone as smart as Munger or Buffett consider investing in China or any of the Chinese companies?

Charlie Munger: Well, we did it for a very simple reason we got more strength per dollar invested in China. The companies we invest in are stronger relative to their competition and priced lower. That’s why we’re in China. (link 1, 2)

Becky Quick: Although the financials seem strong, do the political pressures from the Chinese government worry you at all?

Charlie Munger: Well, the Chinese government is worrying all the capitalists in the world way more than it used to. And of course we don’t like that, and we wish that China and the United States got along better. If you stop to think about it, think about how massively stupid both China and the United States have been to allow the existing tensions to arise. What bad is ever going to happen to China or the United States if we two are close? If we make good friends out of the Chinese and vice versa, who in the hell is ever going to bother us?

Of course we should make friends with China. And of course we should learn to get along with people who have a different system of government. We like our government because we’re used to it, and it has advantages of personal freedom. China could never have handled its life with a government like ours. They wouldn’t be in the position they’re in. They had to prevent five hundred million or six hundred million people from being born in China. They just measured the women’s menstrual periods when they came to work and aborted those who weren’t allowed to have children. You can’t do that in the United States. And it really needed doing in China. And so they did what they had to do using their methods. And I don’t think we should be criticizing China, which has terrible problems, because they’re not just like the United States. They do some things better than we do. They should like us, and we should like them… I think nothing is crazier than people who foment resentments on either side of that one.

Becky Quick: How do you think the Ukraine situation will be resolved in your opinion?

Charlie Munger: Well, I have no insight that’s any better than anybody else on that one. Most of these things in the days when both parties have huge numbers of hydrogen bombs get resolved because the alternative is so awful that even an idiot can see that the question ought to be resolved. That’s the way it’s worked so far, and I hope it keeps working that way. We live in the ‘pax nucleana‘. We’ve gotten an absence of World Wars for a long time because we had these nuclear weapons, it’s been a blessing to humanity. But it does make you nervous every once in a while, and it’s quite irresponsible when the leaders in the modern age get over tensions over border incidents and so forth.

Becky Quick: You said that we should partner up with China. Does it concern you to see Russia partnering up with China and that relationship getting a little cozier?

Charlie Munger: It’s hard to think of anything that’s more stupid. And both sides are doing it. The political leaders on each side are trying to make points with their own constituencies by showing how tough they are. That is massively stupid on both sides.

Becky Quick: Charlie, Alibaba is a top three holding for you. It sells at a steep discount to its U.S. peers. Best comparable is Amazon, which is triple Alibaba’s P/E. So what discount should U.S. investors seek when buying Chinese stocks considering the political, regulatory and especially the ownership structure risk? Oh, and considering the fortune Berkshire made on your bid suggestion, why doesn’t Buffett buy Alibaba?

Charlie Munger: Well, Warren, like many other intelligent people, likes to invest where he’s personally comfortable. And for some reason I’m more comfortable with the Chinese than he is. That’s a minor difference. But I have all kinds of places where I’m just like Warren. I have all kinds of things where I’m not comfortable and I just don’t go near them. I think an old guy is entitled to invest where he wants to invest. It’s OK to have some things that you just don’t want to bother with. I don’t think Alibaba is as entrenched as something like Apple and Alphabet. I think the internet is going to be a very competitive place, even if you’re big internet retailer.

Becky Quick: Crypto was another question that I got a lot of, I’ll ask this one. Crypto is a two trillion-dollar asset class. Are you willing to admit you missed something?

Charlie Munger: Well, I certainly didn’t invest in crypto. I’m proud of the fact I’ve avoided it. It’s like, you know, something venereal disease or something. I just regarded as beneath contempt. Some people think it’s modernity and they welcome a currency that’s so useful in extortions and kidnappings and so on and so on…tax evasion. And of course the envy. Everybody has to create his own new currency. And I think that’s crazy too. So. I wish it had been banned immediately, and I admire the Chinese for banning it. I think they were right, and we’ve been wrong to allow it.

Becky Quick: Mr. Munger, you’ve been warning of the evils of cryptocurrency in the past. How do you feel about the Federal Reserve preparing to launch a central bank digital currency? Do you think that this will be beneficial or harmful to the strength and resilience of our markets?

Charlie Munger: No, no, the Federal Reserve could have a currency if they want one… We’ve got a digital currency already, it’s called a bank account. The banks are all integrated with the Federal Reserve System. We already have a digital currency. I like digital currencies for the United States.

Becky Quick: Two years ago at this meeting, you said, I think there are lots of troubles coming, there’s too much wretched excess. Since that meeting, we have seen something like 860 SPACs, IPOs like Rivian and Robinhood and the GameStop phenomenon. I can’t imagine you’ve changed your mind. I wonder what your favorite story of wretched excess is from the last year.

Charlie Munger: Well, certainly the great short squeeze in GameStop was wretched excess. Certainly, the bitcoin thing is wretched excess. I would argue that venture capital is throwing too much money, too fast, and there’s a considerable wretched excess in venture capital and other forms of private equity. And so…

We have a stock market which some people use like a gambling parlor. And the transactions of the people who love the gambling parlor aspect of the business and those who want to make long term investments, to take care of their old age and so forth…I mean, muddle that in one market and it goes out of control because the stock market becomes an ideal gambling parlor activity. I don’t think that ought to have been allowed, either. If I were the dictator of the world, I would have some kind of a tax on short term gains that made the stock market very much less liquid and drove out this marriage of gambling parlor and legitimate capital development of the country. It’s not a good marriage, and I think we need a divorce.

Becky Quick: How would a divorce work?

Charlie Munger: Well, you’d have to have some kind of a rule that just made stocks way less liquid. We have all the real estate we want, all those shopping centers and auto agencies and so forth without having a perfect liquid market. We would have a stock market that was way less liquid. When I was young, we had a stock market that was way less liquid, way fewer shares. When I was at the Harvard Law School, we seldom traded a million shares in a day. Now we trade billions. We don’t need a stock market that liquid. What we’re getting is wretched excess and danger for the country, and everybody loves it because it’s like a bunch of people get drunk at a party, they’re having so much fun getting drunk that they don’t think about the consequences. We don’t need this wretched excess. It has bad consequences, you can argue that the wretched excesses of the twenties gave us the Great Depression and the Great Depression gave us Hitler. This is serious stuff. But it’s awfully hard. A lot of people like a drunken brawl. And so far, those are the people that are winning. And a lot of people are making money out of our brawl.

Becky Quick: You mentioned we’re in a big bubble. Can you elaborate on that and how is this likely to play out?

Charlie Munger: Well, I think eventually there will be considerable trouble because of the wretched excess that’s the way it’s usually worked in the past. But when it’s going to come and how bad it will be, I can’t tell you.

Becky Quick: Charts, technicals, momentum and A.I. seem to dominate the market these days. Are old school Ben Graham valuation methods dead?

Charlie Munger: They’ll never die. The idea of getting more value than you pay for, that’s what investment is, if you want to be successful, you have to get more value than you pay for. And so it’s never going to be obsolete. Now you can get a whole body of people that don’t even know what they’re buying, they just quote quotations on the ticker. I don’t think it’s helpful to have… Think of the past crazy booms and how they worked out, the South Seas bubble, the bubble in the late 20s, so on and so on. We’ve had this since the dawn of capitalism. We’ve had crazy bubbles.

Becky Quick: Do you think it’s likely that we will experience a major increase in interest rates in the upcoming decades, like, for example, in the period between 1950 and 1980?

Charlie Munger: Well, that of course is a very intelligent question and a very difficult question. When you throw money…when you print money on the scale that modern nations are printing it, Japan, the United States, Europe, et cetera. We’re getting into new territory in terms of size. The Japanese bought back not only a lot of their own debt, but a lot of their common stocks. So the Federal Reserve system… You can’t imagine how much money printing Japan has done, and they haven’t had all that much inflation and it’s still a very admirable civilization. In fact, you could argue that Japan is one of the more admirable civilizations in the whole world. And in spite of all this very extreme government money printing they’ve done, they haven’t had terrible consequences. Now they’ve had 25 years of stasis, with living standards not improving very much. I don’t think that came from their macroeconomic policies. I think that came from the rise of tough competition for their export powerhouse from China and Korea.

But at any rate, it’s weird what’s happening, and nobody knows for sure how it’s going to work out. I think it’s encouraging that Japan could print as much money as it has and remain as civilized and calm and admirable as it has. And so I hope to God the United States has a similar happy outcome. But I think the Japanese are better adapted for stasis than we are. I think it’s a duty filled, civilized bunch of people. A lot of them older, not many young people. And they just suck it in and cope. In our country. We have terrible tensions. It’s way harder to run a country which is not monoethnic like Japan. There’s some professor at Harvard that has written extensively on this subject. It’s way harder to run a nation like the United States with different ethnicities and groups and so forth than it is to run Japan. (link 1, 2) Japan is basically sort of a monoethnic civilization which is proud of its ethnicity. And of course they can cope with troubles…better than some other people can. There’s never been anything quite like what we’re doing now, and we do know from what’s happened in other nations if you try and print too much money, it eventually causes terrible trouble. And we’re closer to terrible trouble than we’ve been in the past, but it may still be a long way off. I certainly hope so.

Becky Quick: What are your current thoughts on the inflationary environment, and please compare and contrast it to the 1970s?

Charlie Munger: Well, when Volker, after the seventies, took the prime rate to 20% and the government was paying 15% on its government bonds, that was a horrible recession. Lasted a long time, caused a lot of anger and agony. And I certainly hope we’re not going there again. I think the conditions that allowed Volcker to do that without an interference from the politicians were very unusual, and I think in 20/20 hindsight, it was a good thing that he did it. I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of a recession. So I think the new troubles are likely to be different from the old troubles. You may wish you had you had a Volcker style recession instead of what you’re going to get. The troubles that come to us could be worse than what Volcker was dealing with. And harder to fix.

Becky Quick: Like what?

Charlie Munger: Think of all the Latin American countries that print too much money. They get strongmen and so forth. That’s what Plato said happened (link 1, 2) in the early Greek city state democracies. One person, one vote. A lot of egality and you get demagogues, and the demagogues lather up the population and pretty soon you don’t have your democracy anymore. I don’t think that was a crazy idea on Plato’s part. I think that accurately described what happened in Greece way back then, and it’s happened again and again and again in Latin America. We don’t want to go there. At least I don’t.

Becky Quick: Conventional economic theory argues that excessive monetary and fiscal stimulus over the last two years has triggered the highest inflation in 40 years. Do you broadly agree with this thesis? And more importantly, do you think there will be a high economic price to pay as the Fed attempts to bring inflation back under control?

Charlie Munger: Well the first part, I agree with it, we’ve done something pretty extreme, and we don’t know how bad the troubles will be, whether we’re going to be like Japan or something a lot worse. What makes life interesting is we don’t know how it’s going to work out. I think we do know we’re flirting with serious trouble. I think we also know that some of our earlier fears were overblown. Japan is still existing as a civilized nation. In spite of unbelievable excess by all former standards in terms of money printing. Think of how seductive it is. You have a bunch of interest-bearing debts, and you pay them off with checking accounts, which you’re no longer paying interest. Think about seductive that is for a bunch of legislators. You get rid of the interest payments and the money supply goes up. It seems like heaven. And of course, when things get that seductive, they’re likely to be overused.

Becky Quick: How will (inflation) all play out and what’s the best advice you have for individual investors to optimally deal with the negative impact of inflation other than owning quality equities?

Charlie Munger: Well. It may be that you have to choose the least bad of a bunch of options that frequently happens in human decision making. The Mungers have Berkshire stock, Costco stock, Chinese stocks through Li Lu, a little bit of Daily Journal stock and a bunch of apartment houses. Do I think that’s perfect? No. Do I think it’s OK? Yes. I think the great lesson from the Mungers is you don’t need all this damn diversification. That’s plenty of… You’re lucky if you’ve got four good assets. I think the finance professors…that sell the idea that perfect diversification is professional investment. If you’re trying to do better than average, you’re lucky if you have four things to buy. And to ask for 20 is really asking for egg in your beer. Very few people get have enough brains to get 20 good investments.

Becky Quick: Which part of Berkshire Hathaway bought the Activision’s stake and if Berkshire had any inkling about the likely Microsoft bid for Activision Blizzard?

Charlie Munger: I’ve got no comment about that, except that I really like Bobby Kotick (Interview; link 1, Articles; 2, 3, Boards; 4, 5, 6, 7), who one of the smartest business executives I know. And I do think gaming is here to stay. But there again, I’m an old man, I don’t like a bunch of addicted young males spending 40 hours a week playing games on the TV. It does not strike me as a good result for civilization. I don’t like anything which is so addictive that you practically give up everything else to do it.

Becky Quick: Could you please ask his views on the Metaverse and the recent acquisition of Activision Blizzard? Was this something that Charlie Munger had any input on? Does he think that there is value in the metaverse or is this something similar to the bitcoin and cryptocurrency hype?

Charlie Munger: Well, without any metaverse, just the existing technology of games on the internet, Activision Blizzard and a lot of other companies have gotten very large and some of the games are kind of constructive and social and others are very peculiar. Do you really want some guy 40 hours a week running a machine gun on his television set? I don’t. But a lot of the games are harmless pleasure, it’s just a different technique of doing it. I like the part of it that’s constructive, but I don’t like it when people spend 40 hours a week being an artificial machine gunner.

Becky Quick: Recent appointees, Lina Khan as Chair of the FTC and Jonathan Kanter as Assistant Attorney General of the Antitrust Division of the Justice Department, have each pledged to follow an aggressive approach to antitrust enforcement. Do you believe there’s a need for new antitrust legislation and or more stringent antitrust scrutiny with respect to the largest technology companies?

Charlie Munger: Well, I think what’s happened is so important and so tied up with national strength, that I’m not trying to weaken the internet companies of the United States. I like the fact that we have strong national champions that are big, strong companies, and I think other nations are proud of their big, strong companies too. So I don’t think business is bad in the end. I don’t want the whole internet to be dominated by foreign companies. I want big, strong American companies that stand well in the world. So I’m not as worried about anti-trust aspects of the internet.

Becky Quick: Are you worried about the aspects of antitrust breaking it down though?

Charlie Munger: Well, there’s no question about they’re going to get more attacks from the present administrators than they got from the previous ones. That doesn’t worry me that much, no. I don’t think it’ll have that much practical consequence.

Becky Quick: Currently, Congress is considering legislation to address the trading and ownership of individual stocks by members of Congress. What are your views on this subject?

Charlie Munger: I don’t think we’ve had big, serious moral lapses in Congress. Maybe a fairly scattered minor amount of minor miscreancy. So I’m not much worried about it.

Becky Quick: Charlie, in the past, you’ve stated that the USA should keep all oil and gas production domestic and let the rest of the world deplete the supplies of other exporters. Do you still believe that position has merit? What’s your opinion of President Biden’s position on oil and gas energy production here in the USA, given that he’s cancelled the Keystone Pipeline and is curtailing drilling on Bureau of Land Management lands? Is this just a concession to the Green Progressives? Will we ever have a stable supply of renewable energy given the issues of wind power we’ve seen in Europe? And do you believe there’ll be enough renewable electrical generation capacity to offset the use of coal and petroleum to generate electricity?

Charlie Munger: Well that’s a lot to talk about. There is no question about the fact that we’ve got a lot of renewable energy we can get from solar and wind and that it’s gotten pretty efficient and competitive. And I am in favor of conserving the hydrocarbons instead of using them up as fast as possible. And I’m in favor of all this new generating capacity now that it’s gotten so efficient from solar and wind. If there were no global warming problem, I would be in favor of exactly what the government is now doing which is encouraging a hell of a lot more solar and wind. I think it would be smart to do that just to conserve the petroleum. The petroleum has enormous chemical uses in fertilizers and chemistry and so on and so on, it’s precious stuff, and I don’t mind having a goodly part of it that remains in the ground. It’s a good place to store it. I regard the petroleum reserves of the United States about the way I regard the black topsoil of Iowa. I regard it as a national treasure. And just as I’m not in favor of sending all the topsoil of (Iowa) down and dumping it in the ocean, I’m not in favor of using up all the petroleum as fast as possible.

So I love the idea of conserving the natural resources. They’re all going to be used eventually. And I’m in no hurry to use them up rapidly. That is a very unusual attitude, but it’s mine. And I’m very encouraged by how much energy we can get that is renewable from solar and wind with modern technology. We have a huge potential for getting renewable energy that way. And I think now that it’s so efficient, we ought to go ahead and do it. But, global warming… I’ll be very surprised if global warming is going to be as bad as people say it’s going to be. The temperature of the Earth went up, what, one degrees centigrade in about Two hundred years? That’s a hell of a lot of coal oil that was burned and so forth, and it was one degree. I’m just skeptical about whether it’s as bad as these calamity howlers are saying.

Becky Quick: Berkshire recently announced plans for an in-person annual meeting. What are yours and Warren’s thoughts on COVID and Omicron, both here in the United States and around the world? And then in terms of the Berkshire meeting, will attendees be required to show proof of vaccination to enter the arena?

Charlie Munger: Well, I’m not familiar with it. I’m not sure that’s all even been decided. We’re going to make it a real meeting if we can. And that’s the current plan… My personal guess is it’s going to happen.

Becky Quick: The other part of that question was just your thoughts on COVID and Omicron here in the United States where do you think things stand with what we’ve been through?

Charlie Munger: Well, if we get lucky, it’ll fade away due to a minor problem. We kill 30,000 people a year with flu every year in the United States. Suppose that were 60,000 and it included Omicron. You know, I think we’d get used to it.

Becky Quick: Pandemic has made the difference between big business and small business more clear than ever. It also made it harder for harder than ever for small businesses to thrive. All businesses were ordered closed in some states, yet Home Depot and Shop & Stop were allowed to operate. Do you think that we will ever see small businesses have a more even playing field? Or is this a never-ending spiral down the rabbit hole until there’s nothing but big business left?

Charlie Munger: Well, I think we will have small business as far ahead as you can see. And if you stop to think about it, every shopping center is full of small business. Now they’re not flourishing as they were a while ago. But we’re not going to get rid of the small business in the United States. In a sense, we need a big business. It makes sense to have something like Apple and Google as big as they are and serving as well as they’re doing. And just as I didn’t mind AT&T when it ran the whole television network, I don’t mind Apple or Google being a big company. So I’m not worried about having some big companies and a lot of small ones, I think that’s our system.

Becky Quick: You think it’s an uneven playing field right now, the Russell 2000 is more than 15% off its all-time high right now. It’s had a pretty rough go, especially in recent months.

Charlie Munger: Well, if you stop to think about it, my way in life was not predicting little short-term differences between the Russell Index and the Standard & Poor’s index. I don’t have any opinion about which index is better at any given time. I never even think about it. I’m always just looking for something that’s good enough to put Munger money in. Or Berkshire money in or Daily Journal money in. I figure that I want to swim as well as I can against the tides, I’m not trying to predict the tides. I expect to be suffering in the… If you’re going to invest in stocks for the long term or real estate, of course there’s going to be periods when there’s a lot of agony and other periods when there’s a boom. And I think you just have to learn to live through them. As Kipling said, treat those two impostors just the same. You have to deal with daylight at night, does that bother you very much? No. Sometimes it’s night and sometimes it’s daylight. Sometimes there’s a boom, sometimes there’s a bust. I believe in doing as well as you can and keep going as long as they let you.

Becky Quick: Do the great tech franchises of our day, specifically Microsoft, Apple and Alphabet, have the same long-term durability that Coca-Cola had 30 to 40 years ago.

Charlie Munger: Well. Of course, it’s a lot easier to predict who flourished in the past because we know what happened in the past. But you know, (inaudible) what’s going to happen in the future, of course that’s harder. It’s very hard for me to imagine…it doesn’t mean it couldn’t happen…but I would expect Microsoft and Apple and Alphabet to be strong fifty years from now. Really strong, still strong. But, if you’d asked me when I was young what was going to happen to the department stores that went broke, the newspapers which went broke and so on, I wouldn’t have predicted that either. So I think it’s hard to predict how your world is going to change if you’re going to talk about 70, 80, 90 years. (link 1, 2, 3) Just imagine, they wiped out the shareholders of General Motors, they wiped out the shareholders of Kodak, who in the hell would have predicted that? This technological change can destroy a lot of people. And I think it’s hard to predict for sure in advance. But the telephone company is still with us, it’s just, it uses a different way of doing it. So some things remain and some vanish.

Becky Quick: Geoffrey Malloy from San Francisco writes in, he says, much media attention has been focused on the large numbers of Americans who’ve resigned from their jobs over the last year. What do you make of this trend and what advice would you give to CEOs seeking to retain their employees?

Charlie Munger: Well, this is a very interesting thing that the pandemic has given us. An awful lot of people have gotten used to not being in the office five days a week. And I think a lot of those people are never going back to five days a week. It’s amazing the percentage of the people in computer science that don’t want to be in the office for a normal life. They want to do a lot of it from locations that are more convenient to them. I think a lot of that’s going to remain forever. I don’t think we’re going back to… I don’t think the average corporation is going to fly its directors around so they can sit at the same table for every meeting of the year. Maybe they’ll have two meetings where the directors are together. By the way, Berkshire’s directors have done that forever. The Berkshire directors have met face to face twice a year forever and done everything else on the telephone or with consent minutes, and it’s worked fine for Berkshire. I don’t think we needed all these goddamn meetings and airplane flights. So I think part of what’s happening is quite constructive that it’ll make life simpler and cheaper and more efficient.

I don’t think we’re going back for some kinds of work. Now on the other hand, they made the welfare so liberal with just helicoptering this money out, that it was just hell to even man your restaurant so you can serve the patrons. I think we probably overdid that a little. I think Larry Summers is quite possibly right that we overshot a little with some of the stimulus and we would have been smarter to do a little less. If you stop to think about it. What makes capitalism work is the fact that if you’re an able-bodied young person, if you refuse to work, you suffer a fair amount of agony. And it’s because of that agony that the whole economic system works. And so, the only effective economies that we’ve had that brought us modernity and the prosperity we now have, they imposed a lot of hardship on young people who didn’t want to work. You take away all the hardship and say you can stay home and get more than you get if you come to work. It’s quite disruptive to an economic system like ours. The next time we do this, I don’t think we ought to be quite so liberal.

Becky Quick: What about the last part of that question where he asks, what advice would you give to CEOs who are seeking to retain their employees?

Charlie Munger: Well, every CEO I know is adapting somewhat to some people who work differently than they did in the past. So I think some of these changes are here, here forever. If your job in life is to get on the telephone and talked to other engineers all over the world while you solve problems, why do you have to do it from an office? And the commutes get harder and harder with more traffic, and it’s harder and harder to handle more traffic and more people, it may be a good thing that more people are going to commute less.

Becky Quick: There’s many examples of public company executive compensation programs that produce misaligned outcomes for executives and for shareholders. What are some of the most important compensation related changes investors and boards of directors could make to create a better alignment of interests between the shareholders and the management?

Charlie Munger: Talking about what the economists call agency problems, if you’re managing your own affairs you’re going to be pretty efficient because taking care of your own property. If you’re working for somebody else, the truth of the matter is you care more about yourself and your future and your family than you care about the telephone company you’re working for. So, capitalism is efficient when the people who are making the decisions, they’re doing it about their own property instead of just as hired employees of some say, state owned enterprise. That’s just the way it is and it’s just amazing to me how important it is to have a majority of the property of a civilization owned by somebody who’s in charge of caring for it. That way, the property is properly taken care of. When the Chinese went away from collectivist agriculture and let each peasant have his own plot of land, and he got to keep the crop after his costs. The grain production went up 60% the first year. Now, who in the hell would want collectivist agriculture when it was that inefficient compared to capitalist agriculture? Well, the Chinese communist decided the hell with this communism. When it comes to collectivist agriculture, they’d rather have the extra 60% of the grain production. And they just change the whole system. I greatly admire what they did.

I think Deng Xiaoping is going to go down as one of the greatest leaders that any nation ever had because he had to give up his own ideology to do something else that worked better. You don’t see the Catholic cardinals suddenly deciding there’s no afterlife. But that’s what Deng Xiaoping did, he gave up his ideology, his communist ideology, in order to make the economy work better. And being an absolute ruler, he could arrange it. And he brought that whole nation out of poverty into prosperity over the course of 30 years after he made the decision. That is a very admirable thing to have done. And it was kind of a miracle. It’s just amazing how well capitalism has served the communist Chinese. Deng Xiaoping called it communism with Chinese characteristics, he meant one party government, but with most of the property in private hands and a fair amount of free enterprise. That’s what he meant when he said communism with Chinese characteristics. I don’t care what he calls it, he was right. It was a marvelous thing to have done for China, and it worked wonderfully well. And of course, we shouldn’t be trying to transfer more and more functions to the government… What they gave up on, we don’t want to go that way I don’t think.

Becky Quick: How do you value Mr. Gensler and the SEC’s role in protecting the integrity of the American financial system?

Charlie Munger: Well. It’s hard to fix. What happens of course is that people rationalize their own way of making a living, there’s some moral compromise in most activity that people are in where they make a living. Particularly so in things like finance and wealth management and so forth. And of course the people making the decisions care more about their own families than they care about the people whose money they’re managing because that’s just the way human beings are constructed. And that means that when you hire somebody else to manage your money to take care of your old age, it’s very hard to get the job done right. It’s very difficult. Nowadays, every director in a big company gets $300,000 a year, and everybody thinks we arranged all this wonderful independence. A man who needs $300,000 extra a year as a director is not an independent. The one thing you can guarantee is he’ll try and stay a director. I don’t think that’s an ideal system. And yet, I don’t think there’s anything easy to do about it. I just think it’s hard to get things managed as well as they should be. In the early days of my life I was I worked a little bit on the fringes of the motion picture industry, and I would say practically everyone sort of took advantage of the shareholders. That was just the culture. That is just deeply into human nature that people are going to behave that way. And of course it makes it makes it hard to run a proper civilization.

If you look at Berkshire and the Daily Journal, look at the Daily Journal Corporation. Charlie Munger age 98. Gerry Salzman age 83. Enormous delegations of powers to Gerry Salzman. As I say, the Berkshire Hathaway system of managing a subsidiary is just short of abdication. And look at how well it’s worked. Of all the newspapers in the United States, most of them are going out of business. The Wall Street Journal will survive. The New York Times will survive. The digital newspaper of Thomson Reuters will survive. But most of the other newspapers are going to go out of business. And yet in that climate, this little Daily Journal Corporation has…one business is dying, and we have all this liquid wealth and marketable securities, and we got another business that we’re trying to make into a respectable big business. It’s quite an achievement. If there were five hundred newspaper companies there maybe two or three that have had a result like that. And look at how old the people are that have done it. Neither Guerin or I ever took one penny out of the Daily Journal all the years we worked here.

No directors fee, no President’s fees, no expenses, no nothing. And Gerry’s been a miracle worker wearing five six different hats at once and so forth, doing everything and very little cost. And Berkshire has like 30 people in headquarters who aren’t internal auditors and look at how well Berkshire has done. It’s hard to run a bureaucracy that doesn’t get terrible slowness and terrible waste… It’s a very serious problem. Think of the big bureaucracies that have died, U.S. Steel, Eastman Kodak, Federated Department Stores, Sears Roebuck. Yet some things have come through and survived, and in some cases the whole business had to die, and they had to take the capital out, and we owned a new businesses, that’s just to survive. That’s what Berkshire did. Look at the three companies that Berkshire had, they all they all went out of business. And yet we wrung enough money out of before they died. Berkshire now has more audited net worth on its balance sheet than any other corporation in the United States. Now, that’s weird. And we don’t have this bureaucracy that other places have. There isn’t anybody at headquarters to be bureaucratic. Just a little handful of people are running an empire. I don’t think there’s any chance for the rest of the world that it’s going to be like Berkshire.

I think we were kind of a fluke that lasted for a while. And the Daily Journal is a mini-Berkshire. What are the chances that a little flea-bitten newspaper in Los Angeles would be as prosperous as it is after all this trouble, which is making all the other newspapers go broke? By the way, we’re going to miss these newspapers terribly. Each newspaper, all those local monopolies, was an independent bastion of power. The economic position was so impregnable, they were all monopolies…and the ethos of the journalist was to try and to tell it like it is. They were really a branch of the government. They called them the Fourth Estate, meaning the fourth branch of the government. It arose by accident. Now about 95% of (them are going) to disappear and go away forever. And what do we get in substitute? We get a bunch of people who attract an audience because they’re crazy. I have my favorite crazies and you have your favorite crazies, and we get together, and all become crazier as we hire people to tell us what we want to hear. This is no substitute for Walter Cronkite and all those great newspapers of yesteryear. We have suffered a huge loss here. It’s nobody’s fault, it’s just the creative destruction of capitalism. But it’s a terrible thing that’s happened to our country. And having these new journalists come in and tell the nuts on each side, the right-wing nuts and the left nuts only what they want to hear and slant all the facts so that they hear a lot of stuff that isn’t so.

This is not good for our Republic, and I don’t have the faintest idea what to do about it. I sometimes think maybe we should have a third party. In almost every state now, it doesn’t matter whether the Democrats or the Republicans are in charge, they rejigger all the maps so everybody has a safe district. Now we get these permanent careerist people with their safe districts. The only fear they have is in the primary they face a another might throw them out. And every 10 years or so, the nutty rightist is the nutty leftist get together and maybe there are 10 sane people in the California Legislature…(and) they throw them out! One group of nuts throws out the people in the middle and so does the other. The one thing they can both agree on is they don’t want any balanced, sensible people in the Legislature. This is a very peculiar kind of government. This was not our ideal when we went to democracy. But it’s what has happened and it’s getting worse and worse, and it’s quite serious. I haven’t the faintest idea what we’re going to do about it. It’s not good.

Becky Quick: How would you fix it?

Charlie Munger: Well, you could have a third party. We did that once before, we got rid of slavery. And maybe we’ll get a third party. There are rump sessions… There are members of Congress who have some little organization, maybe there’s 40 of them, and they say, “we’re the same core”. And they’re half Republican and half Democrats. I welcome anything like that. We may need a new party. This thing is getting so dysfunctional, and people hate each other so much that it’s just not constructive. How would you like to have your life as full of hatred as the average state legislature? They really don’t like or trust each other at all. And if you took my generation, my generation after World War II, we said politics stop at the water’s edge and we took our enemies… Japan had marched our soldiers to death in the Bataan March, Hitler had killed all the Jews and also slaughtered everybody…and we made our best friends on Earth, practically, are the Germans and the Japanese. That was a real achievement. But can you imagine our legislators as now constituted doing anything like that? Well, with that cheerful thought, let’s go on to some other question.

Becky Quick: Mr. Munger, how do you see the value proposition of college certificates and degrees for future students and the role of the federal government in terms of increasing Pell Grants, student loans and student debt forgiveness?

Charlie Munger: Well, that’s another complicated subject. Of course, one of the glories of modern civilization is modern education. The American universities have been perfectly marvelous in their achievements. And modern technical civilization has been perfectly marvelous in its achievements. We owe a lot to all the free education we provided, and we probably ought to do more of it. However, the way we’re constructed… We’ve had a lot of for-profit educators that sort of pretended to educate the people who weren’t really very educatable and they send the bills to the federal government. So there’s been a fair amount of disreputable private education that kind of lures people in with dreams and cheats them. And that’s not a credible part of the past. But we’re going to end up with more public education. Once you start a social safety net. Everybody wants more and more of it. The people who have the loans, they want the loans forgiven. And it gets to be a big body of people clamoring for money. Benjamin Franklin was suspicious of this, he said that when the citizens of a republic learn they can vote themselves money, the end of the Republic is near. Well, it may not be as near as Benjamin Franklin thought, but we’re probably closer to the end than we were two hundred years ago. It is not good when everybody wants to get their money by a lot of government help. (Inaudible) ought to be not to need any help. Not to maximize this help from the government.

Becky Quick: What was it specifically that prompted the idea for windowless dorm rooms? Please walk us through this decision. I guess this is in regard to your design for student housing with no windows.

Charlie Munger: Nobody in his right mind would prefer a blank wall in a bedroom to a ball with a window in it. The reason you take the windows out is you’re getting something else from the design considered as a whole. If you stop to think about it, a big cruise ship has a huge shortage of windows in bedrooms because too many of the state rooms are either below the waterline or they’re on the wrong side of the aisle. And so in the very nature things, you get a shortage. You can’t change the shape of the ship. You have to do without a lot of the windows to have a ship that’s functional, that’s required by the laws of hydrodynamics. And so, we get the advantage of a big ship, but it means a lot of the staterooms can’t have windows. Similarly, if you want a bunch of people who are educating each other to be conveniently close to one another, you get a shortage of windows and in exchange you get a whole lot of people who are getting a lot of advantage from being near one another and they have to do without a real window in the bedroom. It doesn’t matter, the air can be as pure as you want it, and the light that comes in through an artificial window can mimic the specter of daylight perfectly. It’s an easy trade off. You pay twenty thousand dollars a week or something in a big cruise ship to have a stateroom with an artificial window. And for a long time on a Disney cruise ship, they had two different kinds of staterooms, one with a window and one without a window. And they got a higher price in rent for the one with an artificial window than they got for a real one. In other words, they reduced the disadvantage to zero. In fact, they made it an advantage. And so it’s a game of tradeoffs. That poor, pathetic architect who criticized me is just an ignoramus. He can’t help himself. I guarantee the one thing about him, he’s not fixable. Of course you have to make tradeoffs in architecture.

Becky Quick: Charlie, another question came in about Costco. You recently talked about bubbles and high valuations in your home conference talk. Is Costco a part of that? Costco has never traded at a higher price to sales or price to earnings multiple. How should new investors think about Costco given its record run?

Charlie Munger: Well, that’s a very good question, and I’ve always believed that nothing was worth an infinite price. So at some, even an admirable place like Costco could get to a price where you would say that’s too high. But I would argue that if I were investing money for some sovereign wealth fund or some pension fund on a 30, 40, 50-year time horizon. I would buy Costco at the current price. I think it’s that strong and enterprise and that admirable place. Now I’m not saying I would. I can’t bring myself with my habits to pay these big prices, but I never even think about selling a share of Costco just because it’s selling at a high price. So. If you stop to think about it, I bought at Christmas time, a flannel shirt, a bunch of flannel shirts at Costco. They cost seven dollars each more or less. And it was a soft flannel, and it was better and so forth. And then I bought pants, I think they were Orvis pants, and I pay like seven dollars, and they stretch around my waist and they’re partly water resistant and what have you. Costco is going to be an absolute titan on the internet because it got curated products that everybody trusts and huge purchasing power on a limited number of stocking units. So, I’m not saying I’m buying Costco at this price, but I’m certainly not selling any. I think it’s going to be a big, powerful company as far ahead as you can see. And I think it deserves its success. I think it has a good culture and a good moral ethos. I wish everything else in America is working as well as Costco does. Think what a blessing that would be for us all.

Becky Quick: Can you please update us, Charlie, on your view of 3G Capital and zero-based budgeting? Has your thinking evolved over the last five years?

Charlie Munger: Well, of course, if you have a very rich corporation, human nature, what it is, it will get a lot of bureaucracy and a lot of excess cost in it and a lot of meetings and so forth. And there’s huge waste in that. In fact, a lot of the extra meetings make you worse off, not better off. So you’re not only spending a lot of extra money… It’s not that you aren’t getting as much as you’re paying for… Many places after they’ve wrung out 30% of the excess costs, they run better than they did before. In other words, getting rid of the people and changing things around, it runs better, not worse. So there’s a lot of over-manning in big successful places. And of course, it’s human nature that people kind of relax a little when they get prosperous and so forth. I have a friend who was on a corporation with headquarters in Europe, and they would fly him from Los Angeles to Europe on a Concorde! It cost them $100,000 just to take one director from Los Angeles to Germany and back. I mean, the excess just creeps into these places. And of course it isn’t good.

On the other hand, you can cut too much. And there should be some mercy for people who’ve been around a long time and have served well in the past. So you don’t necessarily want 100% perfect efficiency. But you wouldn’t want a rule that nobody could ever go to some over-manned place and cut out a lot of the fat. The director’s table in the Heinz Corporation cost $600,000. The goddamn director’s table. The director’s table at Costco cost about three hundred dollars. They’re different places, different ethos. And of course, if you get fat like that, somebody like 3G comes along and says, I want to buy you and cut you back to normal. And of course, it’s possible to overcut. But my guess is there’s a lot of fat in our successful places. Think of the fat on the average rich family. I don’t think we want unlimited fat in these places, on the other hand, we don’t want too much brutality and too much… It’s complicated like everything else.

Becky Quick: This other question is what impact does passive investing had on stock valuations?

Charlie Munger: Oh, huge! That’s another thing that’s coming. We have a new bunch of emperors, and they’re the people who vote the shares in the index funds. Maybe we can make Larry Fink and the people at the Vanguard Pope. All of a sudden we’ve had this enormous transfer of voting power to these passive index funds. That is going to change the world. And I don’t know what the consequences are going to be, but I predict it will not be good. I think the world of Larry Fink, but I’m not sure I want him to be my emperor.

Becky Quick: Who will fill the gap of lending to global governments after quantitative easing ends. As an example, as FOMC paper matures and rolls off their balance sheet, where were the additional money needed to run governments come from? Who’s the lender and at what expected rate? Please remember, the FOMC has also…

Charlie Munger: Are you talking about the China or the United States?

Becky Quick: United States.

Charlie Munger: That’s a big problem because the (Chinese) government has been living by land sales and of course they’ve had a boom. They’re having to shrink that sector a little. So it’s creating an awkward problem. In the United States. We have a hugely strong economy and a hugely strong technical civilization, and that’s not going away. And the knowledge and so forth. And you can’t believe what a modern factory looks like when you fill it with robots. And that’s coming more and more and more, and it’s coming to China too for that matter. And so those trends are inevitable. And I don’t know how it’s all going to play out, but I think it does create adjustment problems. If you have a fine unionized job and they replace you with a robot, you’ve got a difficult problem. And if you got a company like Kodak and they invent something new that obsolete your product, you have a problem too, and you solve that by dying. A lot of people don’t like that solution. I don’t much care for it myself.

Becky Quick: Prior to the pandemic, it seemed like the U.S. was getting used to borrowing and running revenue deficits of close to 20%. There are all kinds of reasons for this through multiple administrations of either party. Now we’re marching closer to the well-known demographic storm that will drive deficits still higher. He estimates that we are currently running about a 33% total deficit if you include unfunded future Social Security and Medicare obligations. Meantime, we’re headed to higher interest rate costs on top of our 30 trillion in debt. Today interest comprises 6% of our spending and the potential to double or triple interest expense is only going to make the problem worse. How can we get the public companies and politicians to recognize the seriousness of this problem and begin to take action?

Charlie Munger: Well, because all those problems are real, and because it’s so tempting to get rid of your debt by just giving a guy a non-interest-bearing checking account where you used to have to pay him interest every month… Not only do we have a serious problem, but the solution to it that is the easiest for the politicians, and for the Federal Reserve too for that matter, is just to print more money and solve the temporary problems that way. And that, of course, is going to have some long-term dangers. And we know what happened in Germany when the Weimar Republic just kept printing money, the whole thing blew up. And that was a contributor to the rise of Hitler. So all this stuff is dangerous and serious, and we don’t want to have a bunch of politicians just doing whatever is easy on the theory that it didn’t hurt us last time so we can double it and do it one more time and then we double it again and so forth. We know what happens on that everlasting doubling, doubling, doubling. You will have a very different government if you keep doing that enough. And so you’re flirting with danger somewhere, unless there’s some discipline in the process. But I don’t regard Japan as in some terrible danger. They’ve done a huge amount of this and gotten by with it. I don’t think we’ll be as good at handling our problems as Japan is.

Becky Quick: If taxes were not an issue, what are your thoughts on going to cash today and waiting for better opportunities to deploy that cash over the next 12 months? Is it a sensible idea in your mind?

Charlie Munger: In my whole adult life I’ve never hoarded cash waiting for better conditions. I’ve just invested in the best things I could find, and I don’t think I’m going to change now. And the Daily Journal has used up its cash. Now Berkshire has excess cash. Quite a bit of excess cash. But it’s not doing that because it thinks it knows how to time investments. He just can’t find anything he can stand buying. So we don’t have a solution to your problem. We’re just coping with it as I’ve described.

Becky Quick: Given the valuation and market correction in early 2022, why is Berkshire not picking up or adding any new companies to its profile? Is the management getting too conservative with M&A?

Charlie Munger: No. The reason we’re not buying is we can’t buy anything at prices we’re willing to pay. It’s just that simple. Other people are bidding the price up. And a lot of the buying is not by people who really plan to own them. A lot of it is fee driven buying. Private equity buys things so they can have more fees by having more things under management. Of course it’s a lot easier to buy something when you use somebody else’s money. We’re using our own money. Or at least that’s the way we think of it.

By the way, it’s not a tragedy that Berkshire has some surplus money they’re not investing. And you can argue that the little old Daily Journal, what a good thing it was we had 30 million extra coming in from a foreclosure boom and that we invested it shrewdly. It gives us a lot of flexibility. And by the way, that piled up money helps us in wooing these governmental bodies who we are selling the software to. We look more responsible with the extra wealth, and we are more responsible with the extra wealth. But the shareholders who are worried about the future because it looks complicated and difficult and there are hazards, I want to say to them with my old torts professor said to me, “Charlie”, he’d say, “Charlie, tell me what your problem is, and I’ll try and make it more difficult for you.” And he did me a favor by treating me that way. And I’m just repeating his favor to you. When you’re thinking the thoughts…at least you’re thinking in the right direction, you’re worried about the right things. All you people that are worried about the inflation and the future of the Republic and so forth.

Becky Quick: Seeking investing advice for a 22-year-old neighbor. Is it better to advise him to continually slow drip into monthly income and dividend investments, as opposed to swinging for the fences with A.I. and growth stocks? What would you advise?

Charlie Munger: Oh, I don’t think I have a one size fit all investment for… I think some people are gifted enough that they can invest in hard to value, difficult things, and other people, I think, would be very wise to have more modest ambitions in terms of what they choose to deal with. So I think you have to figure out your level of skill, or the level of skill your adviser has, and that should enter the equation. But, to everyone who finds the current investment climate hard and difficult and somewhat confusing, I would say, welcome to adult life. But of course it is hard. It’s going to be way harder for the group that is graduating from college now. For them to get rich and stay rich and so forth, it’s going to be way harder for them than it was for my generation. Think what it costs to own a house in a desirable neighborhood in a city like Los Angeles. And I think we’ll probably end up with higher income taxes, too and so on. No, I think the investment world is plenty hard and I don’t think the… In my lifetime, 98 years, it was the ideal time to own a diversified portfolio of common stocks that updated a little by adding the new ones that came in like the Apples and the Alphabets and so forth. I’d say the people got maybe 10-11% if you did that very intelligently before inflation and maybe 8 or 9% after. That was a marvelous return. No other generation in the history of the world ever got returns like that. And I don’t think the future is going to give the guy graduating from college this year nearly that easy an investment opportunity. I think it’s going to be way harder.

Becky Quick: What worries you most about our economy and the stock market, and on the other hand, what makes you optimistic?

Charlie Munger: Well, you have to be optimistic about the competency of our technical civilization. But there again, it’s an interesting thing. If you take the last hundred years, 1922 to 2022, most of modernity came in in that 100 years. And in the previous 100 years, that got another big chunk of modernity. And before that, things were pretty much the same for the previous thousands a years. Life was pretty brutal and short and limited, and what have you. No printing press, no air conditioning, no modern medicine. I don’t think we’re going to get things in what I call the real human needs. Think of what it meant to get… Say first, you got the steam engine, the steam ship, the railroad, and a little bit of improvement in farming and a little bit of improvement in plumbing. That’s what you got in the hundred years that ended in 1922. The next hundred years gave us. Widely distributed electricity, modern medicine, the automobile, the airplane, the records, the movies, the air conditioning in the south and think what a blessing it was if you…wanted three children, you had to have six because three died in infancy, that was our ancestors. Think of the agony of watching half your children die. It’s amazing how much achievement there’s been in civilization in these last two hundred years and most of it in the last hundred years.

Now the trouble with it is, is that the basic needs are pretty well filled. In the United States the principal problem of the poor people is they’re too fat. That is a very different place from what happened in the past, in the past they were on the edge of starving. And what happens is it’s really interesting, is with all this enormous increase in living standards and freedom and diminishment of racial inequities and all the huge progress that has come, people are less happy about the state of affairs than they were when things were way tougher. And that has a very simple explanation. The world is not driven by greed, it’s driven by envy. The fact that everybody’s five times better off than they used to be, they take it for granted, all they think about is somebody else has more now and it’s not fair that he should have it and they don’t. That’s the reason that God came down and told Moses that you couldn’t envy your neighbor’s wife or even his donkey. I mean, even the old Jews were having trouble with envy. And so it’s built into the nature of things. It’s weird for somebody my age because I was… In the middle of the Great Depression, the hardship was unbelievable. I was safer walking around Omaha in the evening than I am in my own neighborhood in Los Angeles after all this great wealth and so forth. I have no way of doing anything about it. I can’t change the fact that a lot of people are very unhappy and feel very abused after everything’s improved by about 600% because there’s still somebody else who has more.

I have conquered envy in my own life. I don’t envy anybody. I don’t give a damn what somebody else has. But other people are driven crazy by it. And other people play to the envy in order to advance their own political careers. And we have whole networks now that want to pour gasoline on the flames of envy. I like the religion of the old Jews, I like the people who were against envy. Not the people who are trying to profit from it… Think of the pretentious expenditures of the rich, who in the hell needs a real Rolex watch so you can get mugged for it, you know? Yet everybody wants to have a pretentious expenditure, and that helps drive demand in our modern capitalist society. My advice to the young people is don’t go there. The hell with the pretentious expenditure. I don’t think there’s much happiness in it. But it does drive the civilization we actually have. And it drives the dissatisfaction. Steve Pinker (Video 1, 2) of Harvard is one of our smart modern academics. He constantly points out how everything has gotten way, way, way the hell better. But the general feeling about how fair it is has gotten way more hostile. And as it gets better and better, people are less and less satisfied. That is weird, but that’s what’s happened.

Becky Quick: What’s the toughest moment you’ve shared with Warren, and of course, what’s the very best memory you’ve shared during your life with him? You two seem like you are brothers by a different mother. May God continue to bestow his blessings on you together. You’re one of the United States of America’s greatest treasures, and individually, you ain’t too bad either.

Charlie Munger: Well. God is about to give a different kind of a blessing on word than me, he’s going to give us whatever afterlife there is. And of course, nobody knows anything about that. It’s been a great run. Warren and I have had a great run. And one of the really great things about it is that we’ve been surrounded by wonderful people. The people we shared in our work lives and what Gerry and I have done in this little business, it’s been a pleasure, hasn’t it, Gerry?

Gerry Salzman: Yes, sir.

Charlie Munger: It’s been a privilege to do it and a privilege to be here and so forth. And we haven’t had a dumb bureaucracy like a lot of other places, and we’ve managed to cope pretty well with the problems that came to us and the opportunities to. And so we’ve been blessed. It’s all old-fashioned virtue, Gerry and I don’t have any secrets. We tend to get the day’s work done and be as rational as we can in coping with whatever we have to cope with and that will always work for people who get good at it. But Warren and I have been very fortunate, and of course, there are lessons you can learn from our… There are so many people that live surrounded by tyranny. There are a lot of bosses in the world that are absolutely impossible to be under. They’re really psychotic and you really can’t do anything about it in many cases. Warren and I haven’t had those problems. That’s a blessing.

Becky Quick: You seem extremely happy and content, what’s your secret to lead a happy life?

Charlie Munger: Well, I always say the same thing, Realistic expectations, which is low expectations. If you have unreasonable demands on life, you’re like a bird that’s trying to destroy himself by bashing his wings on the edge of the cage, and you really can’t get out of the cage. It’s stupid. You want to have reasonable expectations and take life’s results good and bad as they happen with a certain amount of stoicism. They’ll never be any shortage of good people in the world. All you got to do is seek them out and get as many of them as possible into your life and keep the rest the hell out.

Becky Quick: In your storied investor career, which investment did you like the most and why? And which one was a dog?

Charlie Munger: Well, that’s rather interesting. One of the investments nobody ever talks about at Berkshire is a World Book Encyclopedia. I grew up on it, you know they used to sell it door to door. They had every word in English language graded for comprehension and had a vast amount of editorial input. So it was easy for a child who wasn’t necessarily a brilliant student to understand that encyclopedia. It was more understandable. And Berkshire made $50 million a year pre-tax out of that business for years and years and years. And I was always so proud of it because I grew up with it and it helped me and so forth. And of course I like the 50 million a year. And then a man named Bill Gates came along and he decided he’s going to give away a free Encyclopedia with every damn bit of his personal computer software. And away went our $50 million a year. Now we still sell the encyclopedia to the libraries, maybe make a few million a year doing that, but most of the wealth just went away and all that wonderful constructive product. It’s still a marvelous product. And it wasn’t good that we lost what World Book was doing for the civilization, and I was so proud of World Book… But now it’s pretty well gone away in terms of its worldly significant and the money went with it. That’s just the way capitalism works. It has destructionAnd some of the things you lose, you’re really going to miss. And you’re not going to replace them. I don’t think these TV programs that charm our children are as good as the World Book was for them. World Book helped me get ahead in life. And the people who aren’t going to read the World Book and who are hanging in front of the TV set, they’re not blessed, they’re cursed. Now there advantages too in to having a television. By the way I’m not weeping any tears that I don’t have my World Book anymore. I’ve adjusted. I miss it, but I…

Becky Quick: Of the five people or so you most admire, could you please name a few so that we might become more familiar with and potentially learn from these individuals?

Charlie Munger: Well, I don’t have any one person that I admire. I would argue that the greatest governmental leader whose life overlapped mine was Lee Kuan Yew of Singapore. I would argue that he was the one that taught Deng Xiaoping of China how to fix China the way Singapore had fixed itself. And so it was a huge achievement. So I’ve seen some remarkable… I think the Marshall Plan that my country did after World War II, was a marvelous thing and that was a credit to the human race. I’ve seen a lot that I’m proud of. On the other hand. I see a lot now that I’m not proud of. I don’t like this crazy hatred in our party system. I don’t see anything wrong with having a good size government safety net that goes up as GDP… I think we’d be crazy to be as rich as we are without a good governmental safety net. By the way, you know where that came from? Otto Bismarck. He was the “Iron Chancellor” of Germany, exercising the unlimited power of a German king. That’s who gave us Social Security and so forth. Nobody thinks of Otto Bismarck as a great hero of democratic capitalism, but he really was. It shows how complicated life is. Strange things happen. My hero, Otto Bismarck. I’ve never seen Otto Bismarck’s picture on an American wall. He should be there. Well, Becky, have you had enough?

Becky Quick: Yes, Charlie, I want to thank you very much for your time today, Gerry, thank you too and thank everybody for all the questions today. Appreciate everybody coming to the Daily Journal meeting today.

Charlie Munger: The weirdest thing happened. It isn’t that we want to be the guru for the world or something. We used to know all the shareholders and we felt they only come in once a year, we ought to at least stand here and answer questions. And they started asking these odd questions and we kept answering it. And there was a market for it we kept doing it. So Warren and I are artificial, accidental gurus. I used to be sort of bothered by it because I don’t ordinarily make this many pronouncements. But I’ve gotten used to it, and I hope you people have to.

Becky Quick: We have.

Charlie Munger:  All right I guess we’re through.

End of Transcript

Thank you for reading. I hope you all thoroughly enjoyed the transcript. If you found any errors, kindly let me know and I will fix them. Furthermore, if you’d like to be informed of future posts, transcripts, or events, please subscribe.


Richard Lewis, CFA
White Stork Asset Management LLC
Partner, Investments

Links to additional Transcripts:

Daily Journal Meeting 2022; Audio Recording (Time Saver Edit)

Hello Latticework Investing Community,

Please enjoy my “time saver” audio recording of the 2022 Daily Journal Annual Meeting. I reduced the meeting runtime by ~15 minutes by eliminating long pauses and trimming questions down to their core components.

And as always, check back soon for my full transcript of the annual meeting! Or subscribe if you’d like it emailed directly to your inbox after it’s posted.



Li Lu: Value Investing in China, Full Transcript

Li Lu gave a wonderful talk at the 13th Annual Columbia China Business Conference last week. The fireside chat was chock full of great insights into value investing and its application in China.

I felt this talk, more than most, would benefit from being transcribed. And no doubt, the wisdom of Li Lu jumps off the page.

I would like to thank Li Lu, Bruce Greenwald, the Columbia Business School, and the Greater China Society for putting on this talk and making it available to the general public.

For more details about this conference, visit

I hope you all enjoy!

(Note: Throughout the transcript I made minor grammatical fixes to improve clarity, but beyond that, transcribed it as accurately as possible.)

Start of Transcript

Bruce Greenwald: I think this is going to be a rare privilege for everybody. I’ve known Li Lu now for more than 20 years, and not only is he a great investor, but he’s a great conversationalist. So why don’t we just start out by talking about how your investment philosophy has changed? Because value investing is, after all, always an evolving field since you began the field, literally, I think I would say, 25 years ago, 20 years ago?

Li Lu: More like 28 now. Time really flies.

Bruce Greenwald: So how has it evolved? So how have you been influenced by people like Charlie Munger?

Li Lu: Well, so before I started, I just want to first of all, thank you and all the organizers of this great conferences. Look at the way the speaker are just really unbelievable. So the quality of the student has dramatically improved since I was a student there. So thank you all for that wonderful work of putting together these great conferences. And it just really gives me such a pleasure to be on the same panel as my professor, Bruce Greenwald. In fact, I got into this field really because of Professor Greenwald’s class. I think, you know, basically you got Buffett to come to speak to the students roughly 28 years ago. And it was really out of that first lecture that we got into this field. So thank you so much. And of course, later, as a business school student, I took all of the courses that Professor Greenwald offered and learned a great deal and made a lot of money, too. So thank you.

So the philosophy is relatively simple. The practice is really hard. So I wouldn’t say the philosophy really evolved all that much for me. Before I got really exposed to value investing through Buffet’s lecture at Bruce Greenwald’s class, I think my whole approach to life was pretty much a set along similar lines. And so there was not much of a jump for me. The idea of buying something at a discount of something that is really worth more is simply intelligent. So (I would assume) that all intelligent investing involves some kind of value investing. And now the difference is, is that your focus on value evolves over time and two different individuals they tend to focus on different areas of that.

For me, when I first started as a value investor, this is now 27, 28 years ago when I bought my first stock. I didn’t really know much about business. I was born and raised in China during the Cultural Revolution. There was not much of a private business or market economy back then, so I had to learn everything new. So at the beginning, obviously look for value primarily on the balance sheet in the classic style of Benjamin Graham, looking for a cigarette-butt, looking for the last puff basically. Looking for a statistically cheap businesses and ignore what the business really is. And that served me well.

Then over time, I evolved into understanding smaller businesses. Because I was just intensively curious about how business run. So much so, actually I evolved to help funding or co-created a dozen or so early-stage startup companies. And that experience has taught me a lot about how business is run, what constitutes bad or mediocre businesses. And so over time I evolved into looking for really good businesses, small maybe, but really good businesses. And then that leads me to look for good businesses in Asia, and eventually for businesses with an enduring competitive advantage with a long growth trajectory ahead of it. And so the places where we’re looking for value evolves over time, but the basic philosophy I have pretty much remained the same. But it’s just our core competence expanded over time.

Now, I have been very fortunate to be influenced at the very beginning by the investment giant Buffett and Munger and later on I was really, really lucky. It was just a stroke of luck that you can’t even make up in fiction, that I struck a good connection with Charlie Munger and he became an investor in 2003, 2004. And we’ve been partners since then basically. He has been a mentor, an investor, a business partner and a great friend all these years. And for many, many years we have dinner every Tuesday night. So that’s my version of Tuesday night with Charlie, every week. That lasted for years until just around a pandemic. And we talk a lot more. So obviously, I had a great deal of influence by him. But I have to say that the greatest influence from Charlie was really beyond just investment.

It was more of a role model in the way he conducted himself in real life. Now I think for every profession, for everybody, it is wonderful to have role models in life. And often the role model is among the eminent dead because it’s safer. So it’s pretty risky to pick a role model that’s still alive. And it is always a risk of disappointing. But in my case, I got really, really lucky in the sense that my role model never failed and instead continued to inspire me, right into his 97th year, basically. And so mostly it’s really based on his attitude towards life and his ability to keep equanimity in a sense, in the face of ups and downs, successes or setbacks. And I’ve witnessed quite a bit of them over the 17 years or so we’ve been working closely to maintain that rational composure, commonsensical approach to all problems in investment or life. That is extraordinarily hard, and it is a bit against our natural tendencies. And I’ve really watched up close and personal, how Charlie has conducted himself. And it is in that regard that he’s probably the most influential person in my life. And I have been very, very lucky in that regard.

Bruce Greenwald: Ok, so, in this concentration, in sort of now investing in great businesses, can you be specific about what kind of business you look for? What are the characteristics of a great business in particular, what detailed characteristics you look for and how you put a value on those businesses?

Li Lu: Yeah, well, great businesses are the ones who really have above average returns on invested capital. But that kind of a business traditionally attract imitators, competitors, everybody wants to have above average returns on reinvested capital. And so truly good businesses are the ones who can fend off competitors, who can really have an enduring competitive advantage and have that higher than average return on invested capital and hopefully also have a long run-rate of continuous growth. Those are the businesses we’re looking for. And they could really come in all industries, in all shapes and forms. But they’re rare. They’re really, really rare to have a business that generates above average returns over a long time on a compounded fashion is, again is really against the natural order of things. It’s really only a small slice of all businesses (that) belong to that category.

So if you’re really lucky enough to really find one of those long-term compounders, all you have to do is really to own them for the longest period of time. Now, it helps when you really buy them at the time when they happen to be traded at a discount to their intrinsic value so that if you were wrong about them, you won’t lose money, and if you’re right, you have more returns over time. But over the longest period of time, if you do own them through the ups and downs, your return roughly approximates basically the actual business return to actual capital invested in the business itself over the long term. The two tend to really converge pretty closely.

And so understanding and studying the nature of that business, the dynamic of the competition is of really the most important thing as the investor, and as a student of the business. And as I said, there isn’t really a set of things that really made them that way. Every business really build their fortress slightly different, and you just have to really actually be honest with yourself and study them from every possible angle until you’re really convinced that they are actually currently enjoying truly enduring (competitive advantages), and they truly have a long runway ahead of them. And if they prove to be exactly as you predicted over the years, we really want to stay on them through the up and down, thick and thin, not to be really dissuaded easily.

Bruce Greenwald: Ok, can I actually talk a little bit about those businesses, I mean, in limiting competition and I think Charlie Munger is the master of this, we’re really interested in moat’s. That is the barriers to entry into the business because it’s keeping people out. That’s going to limit competition. If you think about a moat, there are probably only two elements to that moat. So think of it from the point of view of a company trying to get into the business.

One is economies of scale. How big do you have to get? How big a market share do you have to capture in order to be viable as a competitor? So in automobiles, in the global automobile market, it’s really large. And if you have got 1-2% share, you’re going to be fine. In other markets, like, for example, local distribution of caffeinated soft drinks, you’ve got to get to 20-25% of the market to support the infrastructure that you need to compete. So the first thing is economies of scale.

The second thing I think and again, I’m sort of thinking about Charlie Munger here, is how hard is it to get that market share? Which is all about customer captivity in a contested environment where unique technology will help you with that and so on. So suppose you’ve got to get to 25% share, we know for caffeinated soft drinks that two tenths of a percent share changes hands every year in a contested market. So to get to 25% you’re talking about a 125-year moat.

Do you do a calculation like that for the companies you’re looking at? Do you look at those two elements explicitly?

Li Lu: Well, that and more.

Bruce Greenwald: Ok. So what’s ‘the more’?

Li Lu: Scale is important in there, actually, there is a scale economies in those businesses, not everything actually has a scale. Sometimes that scale becomes a counterpoint, they could actually be more difficult to really manage. But in a scale economy, scale does really become a competitive advantage. But the dynamic will change after a certain scale, you mentioned automobiles, that’s an interesting example, you know what happens at different phases of the industry. The consumer side is also important in a sense that if you have quite a bit of consumer addiction to certain products and brand loyalty, obviously that is important and they’re good for a long time until they’re not good. Things do change. New product categories would come along, and brands get tired and old, and not refreshed. The new generations really don’t like to have the same taste as their parents and grandparents. So that’s really the most interesting aspect of businesses is, (the) only constant is the constant change. All great business changes over time. And (there’s) absolutely no business that can really maintain that competitive edge for forever. But some of the businesses can really keep it for a very, very long time. And of course, when it changes it’s really upon the management team to be able to really reallocate capital towards those businesses, (that are) actually now enjoying a robust competitive advantage.

Take example with Berkshire. It started out as a lousy business, losing business of textile in New England. And Warren and Charlie’s skill is that they took the last bit of the cash flow and skillfully invested in some other businesses, really on the right side of the trajectory. But over time, some of those businesses began to lose its competitive advantage and then they took that capital and allocated to the ones that…so obviously the management capability of allocating capital also plays a very important role. And, of course, that the culture of a company in the industry that’s rapidly changing so that you are always a few steps ahead of your competitors, which allows you to always (inaudible) on the edge, that also becomes enduring competitive advantage if that culture endures. So in every specific businesses, what really make them successful are very, very different and they change over time. And so that is the most fascinating aspect of the competitive dynamics and those are the most fascinating aspect of being an investor as well.

Bruce Greenwald: As of today, how do you view this differently, would you say from most other investors? Are there things that you look at specifically? Are there ways that you approach companies?

Now, I’ll tell you the thing that when I started investing with you, and I’m honored to say that I made a lot of money doing it, that appealed to me was what you mentioned in your introduction, which is small…markets are necessarily markets where you have to get a big share because one firm can dominate. And that’s not something that most investors look at. So in what other ways do you do things differently from most other value investors and investors?

Li Lu: Well, you’re right. You invested with me or you begin to invest in me. Thank God you’re still with me. So thank you for your continued trust and confidence. No, back then we were looking for smaller businesses because those are the businesses I feel I can understand them. And as we evolve, we began to look for big businesses that we can also understand. That bigger business does come with a whole set of advantages, that if they are right in a sense, they also come in with a whole bunch of problems. And so we’re not really looking at just big or medium or small. Size is one consideration, but it’s not the most important, certainly not a determining factor is when we’re looking for businesses. There are big businesses that because of a certain dynamic, are still growing at a robust pace that are becoming even more entrenched as they become bigger. And they still have long runs of growth. So that just exist. You know, the most recent phenomenon of the technology platform, because of the network effect, some of the business are fitting that characteristics. Now, they don’t necessarily always grow forever, but they have been growing for a long, long time and likely to continue for some time. And so just the size itself is certainly not the most determining factor.

Bruce Greenwald: But then what other dimensions do you do things differently today than other investors who are less successful?

Li Lu: I don’t spend my time studying a hundred people doing that. We spend most of our time studying industries, study specific companies. We’re looking for the ones who are already successful. Try to answer what really make them successful. Can that success be continued? And some of the time we have answers and some of the time we don’t. We just continue to really study them and continue at it, until we have an answer. I think one thing that really that is always important for us is this intellectual honesty, basically knowing what we really don’t know. What we do know and what we don’t. In other words, if we claim a circle of confidence, we have to understand the edge of the competence. You have to know what falls in and what falls out. You have to be very honest with yourself. So we really insist on knowing inside and out a particular businesses, to the point we’re able to predict it’s outcome, for example, in the next 10 years. At least I want to know, at worst case scenario, what the business would look like 10 years from now. And so we do have a long-term horizon in terms. We can’t really predict it forever, but I want to see whether I can predict with a very high degree of confidence, 90% of confidence, that at a minimum what the business will look like in 10 years under all different contingencies. And most of the time by the way, we don’t have an answer and we just keep study and keep at it. Sometimes we study for years and years before we see, ok, we really get it. And then we wait for the price to come to our striking zone, and a lot of the time they don’t. And so that makes our selection very, very difficult. And so when we do select them, we tend to own them for a very, very long time because the businesses that are really good and we really fully understand are very rare. (Inaudible) So anything that we would buy a lot more as they go down.

Li Lu: If they go down 50% to 60% we buy more, so that really gives you a measure of our definition of when we understand them.

Bruce Greenwald: Ok, so what about the market today? I mean, it seems highly valued. I mean, if you look at fixed income, it seems unprecedented. That said, does the market today remind you of any historical periods you lived through in good ways or bad? And would you have advice for anybody I’m having now?

Li Lu: Well, we usually don’t study too much about the market except when they are really extreme. And this happens to be one of the more extreme periods of time. It is truly, in many ways, somewhere in unchartered territory. The amount of liquidity that’s been printed, the level of interest rates, and also the slow pace of growth. All of those are quite really remarkable in this period of time. So how do you really deal with them. We don’t necessarily think that history would repeat. And so every time is slightly different. Instead of guessing the patterns of history and whether they would repeat, we focus on selecting companies that can really live through the thick and thin, whatever the environment, business will continue. Somebody will do well. So we just want to really be invested in those companies who are capable of dealing with those extraordinary set of uncertainties. (Inaudible)

Bruce Greenwald: And how much is management a part of that. And how do you look for managements that have that capability?

Li Lu: Well, in a lot of the companies, the management will make a big difference. The culture of the management will make a big difference. But in a small set of experiences, management really matters almost nothing. The strength of the business itself really has a dynamic of its own that really almost anybody can run it and run it well, relatively. Now, those businesses are really rare, not that many. You can probably put them in one hand or two hands. And so…again, I come back to the situation, each time is different. You have to really look for each specific company in specific ways and ask all kinds of probing questions and study them over a long period of time in order to really honestly say that you actually understand them. Understand them enough that you could predict the outcome in 10 years, even given all the up and downs in the macro environment.

Bruce Greenwald: So you’ve lived through in your 23 years running Himalaya, a number of major financial crises, the Asia crisis in ’97, the tech bust in 2000, the financial crisis in 2008 and actually last year, the covid-19 situation. Are there specific things you learn about managements or companies that you look for in those crises?

Li Lu: Yeah, well, so as you said, in my 24 years of managing Himalaya Capital, we have gone through several of those big crises. Each time when that happens, it was billed as once in a century crisis. It probably was, except it happens on the time frame of every 5 to 10 years. So a financial market boom and bust has been a constant phenomenon since the beginning of the financial market several hundred years ago. And it was driven by human nature, as long human nature remains that way, it will never change. It will always be with us. As a product of evolution, we humans are basically run not necessarily in a very rational way. Now we’re very good at rationalization, but we’re really not very good at being rational…In a sense, we’re governed by some set of hard wired, hard coded instincts. And looking for a zero sum and we’re looking for fast money, and they’re really totally scared when things goes against you. So that’s basic sense of greed and fear, it will always drive the financial market up and down. Particularly when it comes to money, humans are very funny. They tend to evoke a primal part of human nature. And so particularly as it relates to financial markets, a security market, money, that that human tendency of the extreme instincts become more amplified and more extreme. And that’s why the financial market from the very beginning has always been characterized by boom and bust and will remain so. And how do you deal with such an environment that will be constant? One way to deal with that is to anticipate that it’s always on the corner at all times. And that’s basically our attitude, that financial crisis will happen all the time. People will always be driven by fear, by euphoria, by this extreme kind of ups and downs. And so we’re looking for businesses that are capable of living through that and even businesses that could really thrive in that environment. In a sense, have a certain characteristic of antifragile and so that up and down becomes somewhat friendly for us. In the sense that when our favorite company is on sale discounted by 50, 60, 70 percent, if we have money, will buy more of it. If we don’t have the money, it is the hallmark of a good investor, you can sit through watching your portfolio down by 50% and not being affected at all.

On the other hand, the other side of the coin is that you’re equally unaffected when everybody around you are making fast money, fast and furious, a lot of them. Now you’re really seemingly totally left behind. And that’s really part of the temperament that most people don’t have. And that’s why not everybody can succeed in this game of investment. And so to succeed in this game requires a certain temperament and a certain understanding of human nature. Also a certain commonsensical approach. Knowing that your investment return eventually will mirror the actual business return by actual business. You know, in real life, real businesses don’t really change by day, by hour, by week, by months. It took years for them to either go up or down. And so you should expect your investment result that come in slowly, gradually over a long period of time. So the short-term phenomena should not really impact you as much, either on the up or on the down. So if you have that basic temperament and basic approaches, what you’re going to find is that most euphoria, as well as the crash, actually can serve you well. And this is really going back to Ben Graham’s basic concept of Mr. Market that is there to serve you, not instruct you. Except in the real game of investment, those phenomena, those on the up and down tend to be quite extreme and testing. And so the other thing that will be very testing is that we really do need to understand the business itself. And if you really try to pretend you understand and you are really driven by something else other than deep understanding, you’ll be tested. And so that’s the salient nature of the of the financial market. I sometimes almost feel that they exist to really catch human weakness. That if you really don’t understand something that you pretend to, you will be busted at some point. But if you truly understand, you will be able to add when the security will be down 50, 60, 70%.

Bruce Greenwald: Can I actually talk a little bit about a specific example there and maybe get you to talk about an example? Because one of the things that you talked about was the stability of these companies and their managements in the face of a crisis. So a crisis tells you a lot. And the one company that obviously recently has done extremely well and you could see it is John Deere.

So if you looked at John Deere in 2000, demand fell by 5% and their profit margins fell to zero. If you look at what happens to them in ’13, ’14, demand falls 35% and their profit margin stays at roughly half of what it was before, which is higher than it had been historically. So clearly, that’s a company that’s changed and in the face of sort of catastrophic external conditions, has gone from doing quite badly to doing much better. Do you have examples of that from the companies you’ve invested in, where you’ve seen them perform through a crisis?

Li Lu: I do in my 27, 28 years of investment, that’s the kind of things you’ll collect. But normally we don’t talk about specific companies.

Bruce Greenwald: But could you share maybe a historical experience of that so that the students in the audience might have a sense of what to look for in looking for this stability?

Li Lu: Well, Bruce, we’ve tried this multiple times in your class. I’m not going to change.

Bruce Greenwald: I know, it’s very familiar to me.

Li Lu: And there is a simple logic, a reason why we don’t do that. Once you achieve a certain notoriety in a certain field that people tend to really copy that. And that’s not the kind of behavior we want to encourage. Instead of giving people fish, it is much better to really teach people how to fish.

Bruce Greenwald: Ok, so let me do one last question. Do you prefer to be a generalist or a specialist investor and would one work better in the Chinese market than another?

Li Lu: Well, in a sense, you always want to be a generalist in terms of a student of businesses that you’re interested…To be good at this game, you have to have the innate intensive curiosity about a business, all kinds of businesses. It doesn’t mean you’re going to really, really get to the bottom of it. Oftentimes you don’t if you’re honest with yourself. But by the time you really get into the companies you really decided to invest, you really better become a true specialist. And to the point of really know, hopefully better than anybody in the world you can find, including the top management team. And the top management team, because they manage the company, they tend to be deeply personally vested in their own biases and may not be able to look at the business as objectively, rationally as you do. And so that’s really the test.

So you want to be a true specialist in the company you chose to really invest. You want to be a generalist always of business in general, so that your core competence, your circle of competence is constantly evolving and enlarging over time. If I still really know what I knew when I started my first took your class or when you first invested with me, we would not have…anywhere near the results that we both enjoyed, so luckily we continue to expand and we continue to learn. But on the other hand, it is fascinating to see that how business evolved over the last few decades will continue to evolve in the next few decades. And that really makes me feel that boy I am lucky to choose this field that I get paid to really satisfy my curiosity and to learn all those great people and great enterprises serving society. So I feel happy every day doing what I do.

Bruce Greenwald: Ok, so let’s talk about the evolution of markets and in particular at a 2010 panel at Columbia Business School, you mentioned that Asia’s role in the global financial system was becoming increasingly important. Looking back, how has Asia’s role evolved in the last 10 years, and what about China’s role going forward in both the world’s business economy and in the financial?

Li Lu: (Inaudible) turned out exactly as we predicted, Asia indeed became a lot more important, in particularly China in it, has becomes even more important. As I look at in the next few decades, I would say that the Chinese market, and Asia in general, will become even more important. The set of dynamics that are already set in place, will continue to play out in a robust way, so the Chinese security market in general and Asia economy, that will become increasingly a very, very important, evermore important component of the global market.

Bruce Greenwald: Well, all right, so let me give you some data that I don’t think is widely appreciated. I mean, the Chinese numbers are obviously very difficult to interpret, at least the official numbers. And whenever you see that from a company, the data you really want to look at is the data where there’s a reliable counterparty, and the trade data is where there’s reliable counterparty, because every Chinese export has to be an import from another country and every Chinese import has to be an export from another country.

Over the last 8 to 10 years, China trade has grown by only about 2.5% per year. That’s less than 1% faster than US trade. What does that say about Chinese growth? I mean, that’s clearly much slower than the trade growth prior to 2010, 2011, and it’s fluctuated obviously, but if anything, it’s been slowing down. What does that say about China’s future?

Li Lu: It tells you about the characteristics of the Chinese economy has changed fundamentally. You know, up until 10 years ago, what really propels the Chinese growth…was international trade to a certain extent. And I would say back in 2010, the net trade, meaning the export/import netted out, was roughly about 9% of GDP. And so China’s economy was heavily dependent on the global market…And they were growing really double-digit growth at the time when the rest of the global economy was growing at much, much less, a fraction of that. And so at a certain point, once you become the largest trading nation, you can’t really grow, the rest of the world wouldn’t be able to keep up. And the other thing that is happening is after the citizens become middle classes, their demand changes from basically just work, saving, into really work and saving and consumption. It’s just also human nature.

So roughly around 10 years ago, as you point out, the Chinese economy has slowly evolved into more of a consumer driven economy to the point that interestingly, last year was a watershed year in a sense that the retail sales, the total volume of retail sales for the first time overtaking the United States. China was the largest retail market in the whole world at a $6 trillion. The US was roughly $5.5 trillion. Now grant it that was a special year in the sense that a global pandemic hit other countries harder than China, it’s (also said) that China did a better job in managing the pandemic. But basically the trend is there. China is emerging to become the most dynamic, fastest growing consumer market in the whole world, and that is likely to continue for many, many more decades to come. And so that really makes China even more attractive to the global economy in terms of people who want to sell to the consumers, to the middle class in China. And the characteristic of the economy would change and would also really provide unique and interesting opportunities for global investors.

Bruce Greenwald: Let me just talk a little bit about that. I mean, the thing about retail sales is that it’s selling goods. The thing about the developed economies is that they’re overwhelmingly service economies, they’re not goods economies. And on that dimension, it doesn’t look like China’s doing particularly well. And as I say, the export data, you could understand that would slowdown, but the fact that the import data has slowed down just as much or more tells you something about the nature of domestic growth in China. What about the challenges in the service sector in China?

Li Lu: Well, you’re certainly right that at the current stage, the service sector has yet to become as powerful and dominant as most of the matured and developed economies in the West. And that’s really (inaudible) a new set of opportunities for the decades ahead of them. And that’s, by the way, not that much different than all the other developed economies at a comparable stage in the development of, say, $10,000, $11,000 per capita GDP, which is where China is today.

But if you look at the underlying dynamics of the various different businesses, different performance, both consumption, retailers and the services are basically the ones that are growing the fastest. And overall, trade internationally is still growing at a robust rate, but not nearly as much as the domestic side of the economy. And so that’s why their share of the GDP has gradually began to shrink. So domestic consumption becomes far more important, both goods and the services, as you point out. So that just tells you that a different stage of the economy where it is today.

Bruce Greenwald: So where do you see the unique challenges and opportunities in sort of finding value investment opportunities in China?

Li Lu: Well, China remains, I think, one of the best market, if you were a value investor. In a sense, the market is still somewhat underdeveloped. The market today is not as representative as the real economy the way, for example, the United States is. And so there’s a lot of the development in that regard. And the trading and the investors are still not as mature. And there’s still a mentality of fast trading, high turnovers, which actually render some of the companies, again, go through a faster pace of this boom and bust. Again, that usually provides opportunities for those mature patient investors who truly know what they’re doing. And also, as you said, in the service sector of the economy when it comes to financial services, is still yet to be developed. And China was really right at this stage in the financial services industry, actually is about to take off in a big way for many reasons. And it just so happens that the Chinese government is quite keen in making macroeconomic policies quite conducive for the development of the financial services industry. And they’ve begun to open up to the global firms as well in a way that they’ve never done that before. So all those confluence of factors really make the market that much more attractive today than it was before.

Bruce Greenwald: Yeah, can I say something about that? Financial services is probably the fifth and sixth largest service sector. The biggest is housing by far. The second biggest is medical care. The third biggest is education. And the fourth and fifth biggest are like wholesale and retail distribution and personal services and then financial services, although in the US it’s a little higher than that. What about those sectors in China.

Li Lu: That sector is also growing…

Bruce Greenwald: Right, but do you see opportunities in housing…

Li Lu: Virtually every industry are going through robust growing stage, some more than the others. And even if industry, they’re not growing as fast, you can still find interesting companies, values. And I don’t have to…you’re the guru for this field. So different people tend to focus on different aspects of the industries and different aspects of the growth profile, some looking at value and high growth companies, some looking for values at moderate growth companies. Some look for value in places that don’t grow at all. In fact, they’re probably declined and therefore they find even bigger markets. And so if you are a true good investor in that sense, you can find value everywhere. But you will probably be more capable of finding values in dynamically growing economies such as China. They are still growing at multiple times of the matured economy in the West, and there’s still enormous amount of inefficiency in this securities market. So that combination of those two really make it enticing.

On top of that one, a whole series of government reform will make those inefficiencies gradually be more efficient. And so that transition offers even more interesting opportunities. So this is a good time for global investors and certainly for U.S. investors as well.

Bruce Greenwald: Ok, in those terms that as Chinese financial markets are developing. Do you have certain reforms or other things you’d be interested in seeing implemented? You sort of have a top development that you like to see happen in the China financial markets or even in the China economy?

Li Lu: Well in a sense, it’s already happening. That’s what I mean by the Chinese government regulator has been very keen to develop the Chinese security market. For years and years the Chinese security market is not very representative of China’s economy, partially because really the of the IPO rules are based on what they call approval model. You have to go through…layers of approval process in order to be listed. And so the ones who are listed are the ones who really approved by government, for whatever reason, often not really market driven. Compare with other markets such as the United States, that it is registration based. And so it is market driven. As a result…the security markets here are quite representative of the true economy. And as the Chinese economy moving from an export import driven economy into more of consumer demand economy, the entrepreneurial companies with market driven dynamics are increasingly playing a larger role. And therefore the financial markets have to reflect the changing dynamics and the Chinese government is determined to reform this IPO process from one of approval process model into one that is much like the United States of registration-based model.

And so we are probably still early in that process. But as that process began to play out, we’ll see the financial market become more reflective of the real economy. And the other big changes that is happening is that most of the financing are done through the banking sectors up to the point, 80 plus percent. And over time, the financing is best to really do through what they call ‘direct financing’, mostly through market driven dynamics of fixed income, equity, etc. And so we see the overall financing model, the Chinese economy, from one that is more indirect, into more direct. And so thus is the reason for opening up this financial service industry, both for domestic players and global players. As we’re seeing that dynamic play out over the next decade or so there will be a lot more opportunities and the financial market will become more mature and there will be more institutional players coming into it. And the financial markets will become much, much bigger than what it is today. So those area really all bode well for investors who truly understand what they’re doing in China.

Bruce Greenwald: Now, let me ask another question in that connection. I mean, the thing about a service economy is that services are overwhelmingly locally produced and consumed. There are very few global universities, for example, there are very few global high schools, very few global hospitals. That means that typically if you look at developed economies like the United States with big service sectors, the firms which tend to be local, the service firms that tend to be local, tend to be locally financed. So I assume you know that local banks in the United States are much more profitable than the big global banks. Do you see a comparable trend developing in China that you can take advantage of?

Li Lu: Some yes and some no. I wouldn’t say that…

Bruce Greenwald: No, I’m just thinking in terms of local experts within China (inaudible) local service businesses, that would include, of course, local banks.

Li Lu: Yeah, well, they tend to really know their local area. But the Chinese regulation in banking is slightly different. So there are only roughly about 15 banks that really have the mandate of being able to take deposit on a national basis. And all the rest of the financial institutions are able to really take deposits in a very, very small, well-defined local region. Whether they’re a town, or villages, or the cities, etc. And so it is a heavily, heavily regulated business. And so that really gives them almost an oligopoly type of a status in terms of taking deposit, which is very important and of course, in terms of the source of capital.

So that dynamic is a slightly different than the United States, for example. That the license ability to really be able to open a bank is much, much more relaxed in the United States than in China. As a result, basically the dynamics of the larger national versus local or regional banks and other financial institutions, are more driven by basically the business dynamics and market dynamics. And this is very different than in China. It is driven first and foremost by the regulation regime. And so, that makes the comparison of the banks really quite different in China than the United States.

Bruce Greenwald: So somebody investing in banks in China have to be an expert in Chinese regulation?

Li Lu: Absolutely.

Bruce Greenwald: A specialist?

Li Lu: Yes. (Inaudible) if you invest anything, I recommend you better become the most knowledgeable specialist on the planet before you really invest and hold it through the ups and downs and the thick and thins. And if you do understand them and they are good, it is far more profitable to hold over the long period of time.

Bruce Greenwald: Ok, so why don’t we talk more broadly about new trends in value investing? So among them many popular and rising technological fields such as 5G, Bitcoin, AI, has any of that attracted your interest as a value investor and why?

Li Lu: Well, as I said, if you’re an investor, you really want to find out what really influenced the change of your companies. The one big forces that are really quite prominent is the fast acceleration of technological changes. And of course, you need to be well aware of those mega technological trend. This current wave that started 40, 50 years since the invention of the semiconductor, particularly the integrated circuit, that really ultimately led to personal computer and computational proliferation, the computation power to ordinary citizens. And from there, there’s also the evolution of communication technologies and then the invention of the internet somewhere 25, 30 years ago. From there, the mobile internet.

So the intersections of computing as well as the omnipresent and instantaneous communication really led to this new phenomena of artificial intelligence and the data economy as a result of it. And so this wave of technological change over the last 40 years has fundamentally altered the business landscape of all kinds, basically. And so whatever kind of investor you are, we do need to be aware of these huge changes. And how do you deal with that in a sense? Well you’re investing in businesses that are either well insulated from those technological change or in companies whose management team is quite capable of adapting to those technological changes better than their competitors. Or in companies that are leading those changes or enabling changes so that those changes are really on your side. And so, now do you have to be a true expert to the point of an engineer? I don’t think you do, but you do need to be broadly aware of all of us have big technology changes. Now, if you happen to be a venture capitalist in those fields then of course you do, but if you’re a generalist and study all the businesses, you need to be aware of those trends. How does it really impact in the industry, in the companies that you’re invested in? So we are still really in the middle of that gigantic wave that started with the invention of the semiconductor.

Bruce Greenwald: By the way, do you know when the transistor was invented?

Li Lu: Well, that’s a longer I know that.

Bruce Greenwald: That was 1942.

Li Lu: Yes, yes, yes.

Bruce Greenwald: And the first (integrated circuit) was 1961.

Li Lu: Yes, yes. You’re referring to the time (technology) really gets integrated into industry. So that really started this whole revolution that we’re actually still in the middle of it. And the current wave of neural network based artificial intelligence is just kind of the recent iteration. And the data economy that as a result of it is the newest adaptation by industries in response to that new technology. We’re going to see more of it as time evolves from here.

Bruce Greenwald: Do you see opportunities to invest in new technologies? Do you have an example, maybe in your past where you did invest successfully in a new technology?

Li Lu: We have, in a sense, back in the days I was trying to learn about businesses, I invested in a number of startups. And so I am fascinated about the technologies. And today we have somewhat smaller exposure to that. But it is fascinating. It’s not really that (I’m) not interested in technology. It’s just that it’s not that easy to predict their impact because of the pace of change. It does require a different aptitude, different domain expertise, etc. The other things is we chose to have other set of easier opportunities. We just happened to be lucky.

Bruce Greenwald: All right. So let’s talk about a specific example. A lot of smart people believe that renewable energy is the next big revolution. And you’ve done a lot of work on battery technology and BYD. So is that something that you think about beyond batteries? What’s your outlook for the electrical vehicle industry say in the next five years, or is it overheated now? Where is Tesla going?

Li Lu: So the car industry is simultaneously kind of being impacted by you know, four or five big megatrends. Electrification, ride sharing, autonomous driving, and the intelligent design. All of those really going into the industry simultaneously. And so that really attracted more entrants and that really heated the competition. Also, against the broad background of climate change, the carbon neutral revolution in the sense. So as a result of the industry that really has last for 100 years is really being turned upside down. On the other side, it is a gigantic industry. So other than housing, that’s probably one of the biggest industry. So the prize is also in the end. In the process though, the competition is going to become very, very intense. Still it does still have that characteristic of being a scale economy, as we talked about it in the beginning of our dialogue. So the survivors or the winners do need to have a certain scale in order to be able to win in the end. So it is still early to predict who will be the ultimate winner, but it is not early at all to predict those mega trends are here to stay.

So five years there will be far more electric cars sold. We have seen the European countries began to declare a deadline to stop basically gasoline powered cars. China is following that up, I think, in due course. And we are going to see those megatrends here to stay. And five years from now, that trend will become even more prominent than what it is today. But it is very difficult to predict the ultimate winner…and it continues to attract new entrants at this point. But I do think that the ones that really possess unique technology, have the scale, and have the right strategic focus ultimately will do well.

Bruce Greenwald: Do you have a sense of which companies will do well?

Li Lu: Well I bet once. So I let my money speaker for itself. But we’re not going to be the only ones, there will be a few. It is a gigantic industry.

Bruce Greenwald: Ok, so in terms of value investing education, you actually played a big role in promoting and advocating value investing from the books to actually you underwrote this class that we talked about where I went to Peking University and I think it still survives. What’s your vision for the kind of education that a new investor should embrace and where that education might be available?

Li Lu: Well, first of all, thank you Bruce for coming to teach at the Peking University value investing classes that my colleague Jing Chang and I started six years ago. And now it’s six year and it’s still running and running very well. And you have played an important role to that. And I think our original inspiration for that class was really based on pretty much your class and your class was pretty much inspired and a continuation of Ben Graham’s class…Graham and Dodd, which had, among others, Warren Buffett as a student. And I’m your student. (There’ll) be many more much brighter investors coming after us. And that’s a good thing. So we’re trying to really do our part to pass on both the philosophy, the thinking, and the practical art of investing to the next generation, in a sense. So in terms of the younger students when you start today. So I think a few things will be important. When I talk to young students and people who started out trying to get into the field, I say several things that are important.

‘A’ to always adopt an owners mentality. And so I like to really ask a student or analyst at our firm basically to imagine that all of a sudden that one of your unknown uncles died and handed over 100% ownership of the company to you. And that’s the business you were going to study. So any company, think starting point that way. And once you really kind of think you own 100 percent of it, your mentality is totally different. So you never know that business existed, now you own 100%. You have no idea how to run it. You don’t know the people who run it. What do you do? You want to know everything, everything you can possibly get your hands on.

And a lot of the things you know, you don’t really understand. You just know the facts. You don’t understand it. But that’s OK. You’re going to continue to learn until you get a handle of it. And even if then because of the constant change, you’re going to continue to evolve your knowledge of it. Now, if you adopt that mentality, study any businesses, you have really started the process of becoming a real value investor. So that’s the first thing.

The second thing is you really want to maintain intellectual honesty. And that is very, very important. You have to be really honest about what you know, what you assume…what you pretend…subconsciously…and what you don’t know. How do you know that? One of the things that Charlie has talked about that I think makes the most sense is, (he’s) said that “I’m never entitled to have a view until I can find the smartest people on the planet who took the other side of that view and I can argue better the opposition than he does. When I can do that, I would be entitled to have a view.” The same thing applies to investing in a sense. That intellectual honesty is a good life philosophy to begin with. It is critical. It is vital when it comes to investment. Because, as I said, the security market almost exists to really find your weaknesses, your dishonesty, your pretension, your mushy knowledges. And if you do not really possess that fundamental attitude of intellectual honesty, you’ll get destroyed at some point during your career by the financial market. It was almost designed that way to catch you.

Bruce Greenwald: Can I say something about that? Because it is better than designed that way. Every time you buy a security thinking it’s going to do well, somebody else is selling you that security, thinking it’s going to do badly, and vice versa. And one of you is always wrong. So you better be sure that you’re the one that’s on the right side of that transaction.

Li Lu: Well, there is some zero-sum aspect, but not always.

Bruce Greenwald: Oh no! It’s 100% zero sum. The average return to all investors in any asset class and therefore in all those asset classes is the average return to all those assets.

Li Lu: Hey Bruce, I take a slightly different view. But I’m never going to argue against my professor, so let’s just agree to disagree on that point.

Bruce Greenwald: Ok. That’s fair. Keep going.

Li Lu: That is a fair point. Fair point. And another thing I want to say is that you want to really devote as much time as possible to study of the history of  businesses and the history of great businessmen in the past. The more you study more companies, the better you are when it comes to judgment on good opportunities and the judgment about the fundamental characteristic of the company you’re interested in. And so I say all three things are important. To start with the 100% owner mentality, to continue to train yourself, to have a high degree of intellectual honesty. And lastly, to be a very thorough student of the history of the businesses. All three things are really going to be very helpful if you are beginning to get into the field of investment or really want to improve your game. So that’s my advice to your students.

Bruce Greenwald: Good advice. I’m not going to argue with that. When you look back over your own career. Are there things that, whether at Columbia Business School or in your career since then, you would have done differently that would have helped you get to where you are today sort of more quickly and more easily?

Li Lu: Yeah, well looking back I feel I’m extraordinarily lucky and I feel nothing but gratitude. I feel lucky to accidentally step into Buffett’s lecture at your class, basically. The first time he came. I feel extraordinarily lucky that I got into the business and to strike a relationship with Charlie Munger. I feel extraordinarily fortunate to live in a period of time when both the United States and China are going through a fundamental economic growth and providing enormous amount of opportunity and that I happen to really know both markets well. And so looking back at my career, nothing I regret. I feel nothing but really gratitude. But in terms on the transition from U.S. to China. I think a lot of people, myself included, went through a period of time to really try to understand the nature of the Chinese economy and the nature of the Chinese market, the nature of the Chinese company…investment in Chinese companies.

So one of the key learnings that I have, and it is not that obvious, is the role that the Chinese government played in that whole equation. If you have been successful investor in the United States, for example, or in the developed market, you tend to come with a set of assumptions about the role of the government and the role of the market participants. And when you really look into the Chinese market, that assumptions, you will see a lot of challenges.

And so you might really, from time to time, arrive to views that are inconsistent with your own experiences, partially because historically the Chinese government and the U.S. Government, Western governments, perform very different roles. And that’s one of the key aspect of really investing in China that really requires much deeper understanding and also a systematic comparison to get rid of those biases. And that’s why that you could really get rid of this typical global investor (inaudible) fear or enthusiasm or basically pessimistic kind of ‘coming collapse of a China’ type of mentality when things are not going to at all. And so that is the education of most of the international investors, particularly when it comes to China that they have to go through. And that is important. But bearing in mind the other aspect to understand to the Chinese economy is that the nature of the modern economy is its ability to generate sustained, compounded economic growth, something that is only recently emerged as the human phenomena. And this is where we talk about the zero-sum versus win-win type of mentality.

Now for the longest period of time that almost all natural or human affairs are characterized by cycles in the sense that everything goes up cycles. You know, we’re born and then we grow old, and we die, or the trees it goes up and they die. So entropy basically, is always increased. Energy goes from hot to cold things. From order to disorder. Great businesses eventually loses its edge. So that is the nature of things. And economy goes from boom and bust.

But something unique happened over several hundred years ago with the beginning of the Industrial Revolution. We began to see this phenomenon of continued, sustained, compounded economic growth. And that is really when value investing become very important. And that’s why you begin to have a phenomenal record such as the one produced by Warren Buffett and now by a few other people as well. The basic logic behind that, as I said, over the long term, your investment returns are likely to approximate the actual business returns of the company you’ve invested in. And so the fact that you were capable of generating that long term results is a reflection of a changing nature of the economy. What really drives that phenomenon is something that is utterly fascinating. I literally spent 30, 40 years thinking about that. Until I think I come to a certain knowledge, I wouldn’t say really know it all, but I think what really produced in that phenomena is, is a combination of free market enterprise, way of organizing social economic affairs. And combine that one with the invention of modern science and technology, a combination of those two produced a modern form of economy. And it’s a paradigm shift.

So what has happened in China is that roughly around 40 years ago, China has really stumbled finally into that magic formula of free market economy. Now, with Chinese characteristic, of course, along with modern science and technology. And any economy that has really strike that magic formula, begins to produce the phenomenon of compounding economic performance. Now that has to be combined with the stability of overall political environment to allow the market force that a new economy to really release that power. And that is when a sustained investment record can be possible in China. It’s not always there, it’s not always possible. And often it was a zero sum. But I think from that period on, that a sustained win-win type of a compounded investment return becomes possible. And notice that I didn’t really include the political component of it. Most of the Western observers believe that political democracy has to be part of the equation, except they forgot that political democracy wasn’t there when that phenomenon began to take place in the West. In fact, the political democracy happened later, almost as a result, but not because of it. Anyways, so that is another layer of understanding the phenomena of investment opportunities in China that could be interesting.

Bruce Greenwald: Ok, so what about, let’s just talk briefly in these last eight or so minutes about your personal interest. So you’ve devoted efforts to improving equality and welfare for Asian-Americans. And given the recent elevated attention on this community, what are you doing and planning to do or you think ought to be done for that community?

Li Lu: Well, I was really, like many people around the Asian-American community in America, just utterly dismayed, heartbroken over the last year and a half. Particularly since the later years of the Trump administration, it got worsened because of the pandemic, this new wave of anti-Asian hate crimes. And by all statistics that instance of racial discrimination against Asian-Americans has dramatically increased over the last year and a half. For a variety of different reasons. The pandemic, the Trump policies, the U.S./China tension, and the systematic historical root. Suffice to say that many people in Asian-American community are living in fears, literally physical fears today after being here for so many years, of being such an important part of the American experiment. Particularly to the Chinese American community. After 150 years, it feels like the Chinese Exclusion Act has come back again. And so I have been thinking long and hard at what can we do to change the paradigm? Now I had a different experiences when I came to America. I had a wonderful, wonderful experiences. America embraced me with open, warm heart. And I have gotten an enormous amount of opportunities like Columbia University and all the great people I met along the way. And the opportunity I was given to be successful way beyond my wildest dreams when I first came here as an immigrant. Not a penny and nobody to speak the language, to be where I am today.

And so one thing that I always believed about America is this. I think America is not defined by geography. It is not defined by race. It is not defined by a culture. Not defined by religion. America is defined by a set of ideas and ideals. Anyone, no matter your race, religion, culture, background, if you sign up to that set of ideas, ideals, can be America. I was one of those who believe in those ideas and ideals that became a successful American. And I want that experiment to really continue. And obviously, when you look at history, it was never a perfect experiment. In that it was often marked by the (inaudible), and sometimes actually outright cruel, malicious, if you think about it, experiences with the African Americans and all the other minorities. But I think America remains the only country on Earth, so inspired and such constructed. And for that experiment to continue, it calls constantly to our better angels inside each one of us. And to really restrict the worst instincts of all of us. And throughout a different period of time, people need to rise up to counter those worst instinct and fight them and face them down.

And this is one of those periods again. So I think the entire community of Asian-Americans have to come together. The entire American community need to really come together to really fight this wave of Anti-Asian discrimination. So along with a number of wonderful colleagues, we are cofounding a new national organization whose mission is to serve Asian-Americans in their pursuit of belonging and prosperity. Free from discrimination, slander or violence. And one of the things that our (inaudible) needs is, an enormous amount of funding. The statistics tell us that only 0.2% of all philanthropy in America goes to Asian-American causes. And we want to fundamentally change that. And hopefully with this new organization, new group of people, we really want to fundamentally change that picture.

And the other thing is that with the global economy, the center of the global economy shifting from the Atlantic Ocean to the Pacific Ocean, Asian American, 20 million strong are going to play an increasingly important role to position America as the new Pacific economic power. And that group of people more than other ones, if fully integrated as the very fabric of American society, could help lead America to better integrated with the better economic ties in Asia.

Bruce Greenwald: Ok Li Lu. That’s terrific. It’s a great note to end on. Unfortunately, we have two minutes left. Thank you very much for this really encyclopedic and enlightening talk. I think I have to turn it back over, however, to the M.C. For the last two minutes.

Li Lu: Ok. Thank you for really having that class 28 years ago, without that class I wouldn’t know what I’m doing today, so thank you.

End of Transcript

Thank you for reading. I hope you all thoroughly enjoyed the transcript. If you found any errors, kindly let me know and I will fix them. Furthermore, if you’d like to be informed of future posts, transcripts, or events, please subscribe.


Richard Lewis, CFA
White Stork Asset Management LLC
Partner, Investments

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Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2021

It’s always a wonderful pleasure to hear Charlie Munger speak at the Daily Journal Annual Meeting. Once again, the wit and wisdom of Charlie Munger was on full display at the deceptively youthful age of 97!

Throughout the transcript below, I have included clickable links to my notes and articles which you may find insightful.  In addition to the transcript, you may also watch the entire meeting on YouTube.

I would like to thank Mr. Munger for energetically entertaining our questions and graciously sharing his wisdom, insights, and time with all of us.

I hope you all enjoy!

(Note: I frequently summarized the questions that were presented by the host Julia La Roche, but as for anything that Charlie or Gerry  said, I translated them verbatim and as accurately as possible.)

Start of Transcript

Charlie: As usual, we’ll go through this formal agenda very rapidly and then we’ll stay here and answer questions for a very long time. The questions have all been submitted by actual shareholders of the Daily Journal and Yahoo! is just delivering them to us. Ladies and gentlemen, wherever you are, via Yahoo! Finance’s website. The meeting will come to order. I am Charlie Munger, chairman, and to my right is Gerry Salzman, CEO.

[Note: The audio of the formal business affairs has been edited out of the transcript]

We will now proceed to the question period. Go ahead.

Question 1In this year’s annual letter, you mentioned the share price increase was driven by speculative frenzy and forced index buying. I would imagine that applies to the broad market too. What are the psychological implications of this type of market behavior? What could investors do to cope better with periodical frenziness?

Charlie: Well, these things do happen in a market economy, you get crazy booms. Remember the dotcom boom? When every little building in Silicon Valley rented at a huge price and a few months later about a third of them were vacant. There are these periods in capitalism, and I’ve been around for a long time and my policy has always been to just ride them out. And I think that’s what shareholders do. In fact, what shareholders actually do, is a lot of them crowd in to buying stocks on frenzy, frequently on credit, because they see that they’re going up. And, of course, that’s a very dangerous way to invest. I think that shareholders should be more sensible and not crowd into stocks and just buy them just because they’re going up and they like to gamble. And of course, Kipling once wrote a famous poem called “The Women”, and the concluding line was, to the effect that you should learn about women from him instead of doing it yourself, but he says, “I know you won’t follow my advice.”

Go ahead. Next question.

Question 2: What are Mr. Munger’s thoughts on the recent GameStop short squeeze by social media and the resulting implications on short selling in the future? And please share your thoughts on the recent Wall Street Bets GameStop short squeeze. It seems to involve a lot of your standard causes of human misjudgment.

Charlie: Well, it certainly does, and that’s the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on racehorses. And that’s what we have going on in the stock market. And the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And, of course, when things get extreme, you have things like that short squeeze. It’s not generally noticed by the public, but clearinghouses clear all these trades. And when things get as crazy as they were in the event you’re talking about, there are threats of a clearinghouse failure. So it gets very dangerous and it’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack betters. And of course it’s going to create trouble as it did. And I have a very simple idea on this subject. I think you should try and make your money in this world by selling other people things that are good for them. And if you’re selling them gambling services where you rake profits off the top, like many of these new brokers who specialize in luring the gamblers in, I think it’s a dirty way to make money and I think that we’re crazy to allow it.

Question 3: What do you hope the future of the Daily Journal Corporation looks like in a decade?

Charlie: Well, I certainly hope that they succeed mightily in their software endeavor to automate all these courts for the modern world. And I think that could happen, but of course that’s not a sure thing. I hope the newspaper survives, too, and that’s not a sure thing either.

Question 4: The highly configurable JTI product may help e-suites integrate deeply into new jurisdictions as agencies and citizens become familiar with the courthouse software. Today, the majority of contractual revenue that can be identified is from implementations and licenses. What are the main sources of ancillary revenue expected once the products have gone live? And how meaningful will the products like E-file-it, E-pay-it, cloud hosting services and others become?

Charlie: Well, we don’t really know where it’s all going. We do know one thing, and that is the courts of the whole world are going to be taken into the modern age. And as Gerry just said to me just after breakfast, you wouldn’t want to invest in a parking lot by a courthouse for the future because an awful lot of the court proceedings are going to go to the Internet. And this is a highly desirable thing. And if you go to a little country like Estonia, the whole damn country is on the Internet and it’s a very good idea.

So I think you can count on the fact that what we’re doing is going to be a…it’s in a big growing field. That’s the good news. The bad news is it’s not clear who’s going to win all the business. Or how much money is going to be made. Generally speaking, people assume that we’re a normal software company like Microsoft or something. We are in fact in a more difficult type of software business than Microsoft. When you respond to software by the RFP process, it’s a very difficult, demanding business and it’s less profitable and less sure than what Microsoft does. But we love it anyway, it’s doing a big public service. Go ahead.

Question 5: We had a couple of questions about J.P. Rick Guerin. If you all would share a few stories about him and your fondest memory.

Charlie: Well, of course he was one of my closest friends for many decades and he was very good company and a splendid gentleman, and, of course, we accomplished quite a bit working together. Rick was part of the group which consisted of Warren Buffett, Rick Guerin, and Charlie Munger that bought control of Blue Chip Stamps when it was widely distributed in an anti-trust settlement. And we were together in that for a long, long time. And then Rick and I did the Daily Journal together on another occasion.

Rick was always humorous, always intelligent. I tell a story on Rick that he took the Navy’s IQ test and he got one of the highest scores ever recorded and left early. That doesn’t happen. That’s the reason he rose so fast in life. He was just so damn smart. And, of course, he was fun to be with because he was always jumping out of airplanes in parachutes and running marathons and so on, doing all kinds of things I would never consider doing. He was a lot of fun and he was a great kidder, he loved to kid people. And of course he was very courageous and generous in helping everybody around him all his life. We miss Rick terribly. But he was 90 years of age, he had a long and wonderful run. Of course when you’re as old as I am, when these people go, there’s no replacing them.

Gerry, can you ever remember Rick down? He was always upbeat.

Gerry: Always upbeat, yes. And interested and up to speed and didn’t have to take a lot of time to get background information to make his comments. Always on point.

Charlie: Well, it helps to be able to leave the IQ tests early with the highest score.

Question 6: Now that we are cash flow positive, assuming the software business is investing organically as much as it can, what is the philosophical thinking with respect to capital allocation at the Daily Journal? Are traditional dividends and share repurchases the likely end state, assuming our software business grows into a bona fide company, or will buying and holding securities from time to time be what the board is comfortable with? Everyone knows this isn’t a small cap Berkshire Hathaway, just trying to get a feel for what the long term capital allocation is.

Charlie: Well, the business around here that has the most promise is our software business automating the courts. And we’re going to play that as hard as we can and we hope to do well in it.

Our marketable securities are just a…we prefer owning common stocks to holding cash under current conditions. And it’s kind of an accident that we have so much in marketable securities.

Question 7: We had a couple of questions around succession planning. In recent years, Berkshire Hathaway has provided much greater insight into the company’s succession thoughts and has made available at the annual meeting the company’s leading managers that will steer Berkshire’s future. These actions have given some shareholders more visibility and comfort on their investment. Can you provide similar insight regarding the future at the Daily Journal? And would you consider implementing policies like those at Berkshire so shareholders can get to know the up and coming leaders in the organization?

Charlie: Well, the people doing the computer software are doing magnificently well, the people under Gerry, Mary Jo and Danny, and we hope they’ll continue doing magnificently well. But of course, it’s a very difficult field and there’s a lot of competition and we’re a very small company compared to our main competitor. And so we can’t promise we’re going to succeed. All we can promise is we’re going to try. And so far as I can tell, we’re doing pretty well. Gerry, don’t you think we’re doing pretty well?

Gerry: I think so Charlie.

Charlie: Yeah, I would go further. I don’t think Gerry’s surprised that the people doing the work, Mary Jo and Danny are doing well. But I’m flabbergasted at how well they’re doing.

Gerry: Charlie refers to the courts many times. The JTI software has been configured for other judicial and justice agencies, including district attorneys, prosecutors, public defenders, probation, etc. So we have one basic system configured a number of different ways, including workers comp for a large state in the United States.

Charlie: Well, it’s huge field in which we have a very interesting toehold with the strongest toeholds in Australia and California, but we can’t promise what the outcome will be. But we’re trying pretty hard and we get some favorable impressions of progress. The one thing I can promise is that I won’t create much to it because I don’t understand it.

Question 8: Many observers see market behavior that reminds them of the Dot-com bubble, wild speculation, endless SPACs and IPOs soaring on their first day of trading. Do you agree that there is a close parallel to the late 90s and this is therefore “must end badly?”.

Charlie: Yes, I think it must end badly, but I don’t know when.

Question 9: Another shareholder asks about SPACs. It seems like everyone, including actors, athletes, singers and politicians, are getting into the business of promoting their own SPAC. What do you think of all these SPACs and the promoters pushing them?

Charlie: Well, I don’t participate at all, and I think the world would be better off without them. I think this kind of crazy speculation, an enterprise is not even found or picked out yet, is a sign of an irritating bubble. It’s just that the investment banking profession will sell shit as long as shit can be sold.

Question 10: Charlie last February, you spoke about the wretched excess in the financial system. Given the developments over the past year, could you give us an update on your assessment of wretched excess in the system? Where does it appear most egregious?

Charlie: Well, it’s most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robin Hood. And I think all of this activity is regrettable. I think civilization would do better without it. You’ll remember that when the first big bubble came, which was the South Sea bubble in England back in the 1700s, it created such havoc eventually when it blew up that England didn’t allow hardly any public trading in securities of any companies for decades thereafter. It just created the most unholy mess. So human greed and the aggression of the brokerage community creates these bubbles from time to time. And I think wise people just stay out of them.

Question 11: Charlie, in your past speeches, you have mentioned the term “functional equivalent of embezzlement” to describe situations where bubbles can form because both parties involved in a bubble believe the asset to be worth more than it truly is. Can US Treasury bonds be such a case today? And what are the implications since Treasury assets underpin the value of every other asset? Thank you for all you do to educate us.

Charlie: Well, no, I don’t think we have a bubble in Treasury securities. I think they’re a bad investment. When interest rates are this low, I never buy any and neither does The Daily Journal. But, no, I don’t think Treasury securities are a big problem. I do think that we don’t know what these artificially low interest rates are going to do, or how the economy is going to work in the future as governments print all this extra money. The only opinion I have there is that I don’t think anybody knows what’s going to happen for sure. Larry Summers has recently been quoted as being worried that we’ll have too much stimulus and I don’t know whether he’s right or not.

Question 12: You have said, “It takes character to sit with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” In the past few years, equity prices have increased significantly and cash has arguably become riskier due to central banking policy. Have you considered amending this quote or lowering your standards?

Charlie: Well, I think everybody is willing to hold stocks at higher price earnings multiples when interest rates as low as they are now. And so I don’t think it’s necessarily crazy that good companies sell at way higher multiples than they used to. On the other hand, as you say, I didn’t get rich by buying stocks at high price earnings multiples in the midst of crazy speculative booms. And I’m not going to change. I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower. Everybody is.

Question 13: Do you think value investing is still relevant in a GDP decreasing world? And what about passive investing?

Charlie: Well, that is easy. Value investing, the way I regard it, will never go out of style because value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock. And that approach will never go out of style.

Some people think that value investing is you chase companies which have a lot of cash and they’re in a lousy business or something. But I don’t define that as value investing. I think all good investing is value investing. It’s just that some people look for values in strong companies and some look for values in weak companies. But every value investor tries to get more value than he pays for. What is interesting is that in wealth management, a lot of people think that if they have 100 stocks, they’re investing more professionally than they are if they have four or five. I regard this as insanity. Absolute insanity. I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they’re way above average. I think it’s much easier to find five than it is to find 100.

I think the people who argue for all this diversification, by the way, I call it “diworsification”…which I copied from somebody…and I’m way more comfortable owning two or three stocks which I think I know something about and where I think I have an advantage.

Question 14: Why is Berkshire Hathaway selling shares of Wells Fargo as quickly as one can and the Daily Journal has sold one share. If it’s not good enough for Berkshire, shouldn’t we have the same standards?

Charlie: Well, I don’t think it’s required that we be actually the same on everything. We have different tax considerations. There’s no question about the fact that Wells Fargo has disappointed long term investors like Berkshire because the old management, which is now removed, were not consciously malevolent or thieving, but they had terrible judgment in having a culture of cross-selling where the incentives on the poorly paid employees were too great to sell stuff the customers didn’t really need. And when the evidence came in that the system wasn’t working very well because some of the employees were cheating, some of the customers, well they came down hard on the customers instead of changing the system. That was a big error in judgment. And, of course, it’s regrettable.

So you can understand why Warren got disenchanted with Wells Fargo. I think I’m a little more lenient. I expect less out of bankers than he does.

Question 15: What is the wisdom behind holding bank stocks compared to other stocks? Are they more stable?

Charlie: Well, I think all stocks can fluctuate. And I do think banking run intelligently is a very good business. But a very wise man once said, “Our trouble with banking is we have more banks than we have bankers.” The kind of executives who have a Buffett-like mindset and never get in trouble are a minority group, not a majority group. And so it’s hard to run a bank intelligently. There’s a lot of temptation to do dumb things which will make the earnings next quarter go up, but are bad for the long term. And some bankers yield to the temptations. So it’s difficult, but it’s not impossible investing in bank stocks successfully.

Question 16: What is the biggest competitive threat to U.S. banks like Bank of America and US Bank, both equity holdings of the Daily Journal Corporation, over the long term? Is it digital wallets like PayPal, Square, or Apple Pay? Is it Bitcoin, decentralized finance or something else?

Charlie: Well, I don’t think I know exactly what the future of banking is, and I don’t think I know how the payment system will evolve. I do think that a properly run bank is a great contributor to civilization and that the central banks of the world like controlling their own banking system and their own money supplies. So I don’t think Bitcoin is going to end up the medium of exchange for the world. It’s too volatile to serve well as a medium of exchange. It’s really kind of an artificial substitute for gold, and since I never buy any gold, I never buy any Bitcoin, and I recommend that other people follow my practice.

Bitcoin reminds me of what Oscar Wilde said about fox hunting. He said it was the pursuit of the uneatable by the unspeakable.

Question 17: What’s your opinion on cryptocurrency and would the Daily Journal consider Bitcoin or any other cryptocurrency as an asset on the balance sheet, similar to what Tesla recently did.

Charlie: No, we will not be following Tesla into Bitcoin.

Question 18: BYD is in the Daily Journal stock portfolio with a very big paper gain. The stock has gained so much this year and last year, the stock appreciated probably way more than intrinsic value. How do you decide to hold on to a stock or sell some?

Charlie: Well, that’s a very good question. BYD stock did nothing for the first five years we held it and last year it quintupled. And what happened was, BYD is very well positioned for the transfer of Chinese automobile production from gasoline driven cars to electricity driven cars. You can imagine it’s in a wonderful position and that excited the people in China, which has its share of crazy speculators. And so the stock went way up. Since we admire the company and like its position and we like its…We have a tendency to…and we pay huge taxes to a combination of the federal government and the state of California when we sell something.

On balance, we hold in to certain of  these positions when normally we wouldn’t buy a new position, practically everybody does that. One of my smartest friends in venture capital is constantly getting huge clumps of stocks at nosebleed prices. What he does is he sells about half of them always. That way, whatever happens, he feels smart. I don’t follow that practice, but I don’t criticize it either.

Question 19: Do you believe the valuations for electric car manufacturers are in bubble territory? Both Berkshire and Li Lu own BYD, a company you spoke highly of in the past. BYD sells at nearly 200 P/E. This is cheap compared to Tesla, currently valued at over 1,100 times P/E and twenty four times sales. I know Berkshire is a long term owner and rarely sells securities of high quality companies it owns in its portfolio simply because it’s overvalued. For example, Coca-Cola in the past. However, is there a price too high that the company’s future profits simply cannot justify, since we are on the subject of selling a potentially overvalued security, could you provide your systems for selling securities?

Charlie: Well, I so rarely hold a company like BYD that goes to a nosebleed price that I don’t think I’ve got a system yet. And so I’m just learning as I go along.

I think you can count on the fact that if we really like the company and like the management, and that is the way we feel about BYD, we’re likely to be a little too loyal. And I don’t think we’ll change on that.

Question 20: Why almost two years ago, did you believe that Costco was the only U.S. stock worth buying at that time? And why did you feel that Amazon had more to fear from Costco than Costco had to fear from Amazon? And if you believe Jeff Bezos is one of the best businessmen you have ever known, would you consider investing early in any of the new projects he will now inevitably focus his attention on now that he will not have to be as concerned about the day to day responsibilities of Amazon.

Charlie: Well, no, I’m a great admirer of Jeff Bezos, whom I consider one of the smartest businessmen who ever lived. But I won’t be following him. We have our crotchets and I just don’t know enough about it to want to go into that activity. Every investor, when you get into these hard questions, there’s a lot of very intelligent, honorable people who reach opposite conclusions.

Costco, I do think, has as one thing that Amazon does not. People really trust Costco to be delivering enormous values, and that is why Costco (52:30) presents some danger to Amazon, because they’ve got a better reputation for providing value than practically anybody, including Amazon.

Question 21: How do you control your investments in a world where reasonable companies with a good image, like GE, sink rapidly into the bottom land of the stock market? How do you recognize a potential downfall in a company you hold/invest in? Or is it impossible to realize a deterioration quickly enough to exit without a loss?

Charlie: Well, I never owned a share of General Electric because I didn’t like the culture and I was not surprised when it blew up. I do think the present CEO [Lawrence Gulp] is an extraordinarily able man and the directors made a very wise choice when they put him in charge. And I think the directors of GE deserve a lot of credit for making Larry Gulp the CEO. If anybody can fix it, he can.

Question 22: You famously run investments through your mental checklist. Is there anything that you wish you had added to your checklist sooner?

Charlie: Well, I’m constantly making mistakes where I can in retrospect realize that I should have decided differently. And I think that is inevitable because it’s difficult to be a good investor. I’m pretty easy on myself these days. I’m satisfied with the way things have worked out, and I’m not gnashing my teeth that other people are doing better. And I think that the methods that I’ve used, including the checklists are the correct methods, and I’m grateful that I found them as early as I did and the methods have worked as well as they have.

And I recommend that other people follow my example. It reminds me of the key phrase in Bunyan’s Pilgrim’s Progress, he says, “My sword, I leave to him who can wear it.” I’m afraid that’s where we all have to leave our swords.

Question 23: You and Warren have been adept at quickly sizing people up business leaders and potential business partners. What do you look for in a leader? And do you and Warren have any tricks or shortcuts to size people up quickly and accurately?

Charlie: Well, of course, if a person is a chronic drunk, we avoid him. Everybody has shortcuts to screen out certain hazards and we probably have more of those shortcuts than others. And they’ve served us well over the years.

One of the great advantages of the way Berkshire operates is that we associate with a lot of marvelous people, and if you stop to think about it, that is also true at the Daily Journal. What little newspaper company has come through the crisis that’s destroying all the newspapers better than the little Daily Journal. And we’ve had marvelous people here who’ve help us do it through very difficult times. And one of them is Gerry Salzman. And Gerry and I have been together how many years, Gerry?

Gerry: [since] Early 70s.

Charlie: Early 70s. And it’s rather interesting. I recognized early that Gerry could run anything he wanted to run and when the old CEO of the Daily Journal died, Gerry was managing the business affairs of the Munger Tolles law firm. But he previously worked for Rick Guerin and me in running a little mutual fund that we bought control of. And he made a very favorable impression. And I said to Rick, we’re going to make Gerry the head of the Daily Journal. And he gasped and said, “But he’s never had anything to do with newspapers or anything else.” I said, it won’t matter. He’ll be able to do it. And he immediately assented and we put Gerry in and he’s made every decision wonderfully ever since. That’s our system.

Tom Murphy used to say his system of management was delegation just short of total abdication, and that’s the way we handled Gerry.

Question 24: Which do you think is crazier, Bitcoin at $50,000 or Tesla’s fully diluted enterprise value of one trillion? What do you make of these two price scenes?

Charlie: Well, I have the same difficulty that Samuel Johnson once had when he got a similar question and he said, “I can’t decide the order of precedency between a flea and a louse.” And I feel the same way about those choices, I don’t know which is worse.

Question 25: Should there be a tax on buying stock now that Robin Hood trades are free?

Charlie: Well Robin Hood trades are not free. When you pay for order flow, you’re probably charging your customers more and pretending to be free. It’s a very dishonorable, low grade way to talk. And nobody should believe that Robin Hood’s trades are free.

Question 26: As a student of Chinese history, my question concerns China. In 1860, GDP per capita in China was $600. In 1978, the year Deng Xiaoping took over, it was $300. Today, it hovers around $9,500. Never before in the history of mankind have we seen such a rapid eradication of poverty pulling approximately 800 million people out of destitution. You are on record as a zealous fan of the Chinese work ethic and Confucian values system. As we can see from the deteriorating U.S. relationship with China, the Western world does not understand China. What can we do to increase knowledge, understanding and appreciation of the Chinese civilization?

Charlie: Well, it’s natural for people to think their own civilization and their own nation is better than everybody else, but everybody can’t be better than everybody else. You’re right that China’s economic record, among the big nations, is the best that ever existed in the history of the world. And that’s very interesting. A lot of people assume that since England led the Industrial Revolution, and had free speech early, that free speech is required to have a booming economy as prescribed by Adam Smith.

But the Chinese have proved you don’t need free speech to have a wonderful economy. They just copied Adam Smith and left out the free speech and it worked fine for them. As a matter of fact, it’s not clear to me that China would have done better if they’d copied every aspect of English civilization. I think they would have come out worse because their position was so dire and the poverty was so extreme, they needed very extreme methods, totalitarian methods, if you will, to get out of the fix they were in. So I think what China has done was probably right for China and that we shouldn’t be so pompous as to be telling the Chinese they ought to behave like us because we like ourselves and our system. It’s entirely possible that our system is right for us and their system is right for them.

Question 27: Mr. Munger is a champion of Chinese stocks. How concerned is he about Chinese government interference as seen recently with Ant Financial, Alibaba, and Mr. Jack Ma? What, for example, is to stop the Chinese government from simply deciding one day to nationalize BYD?

Charlie: Well, I consider that very unlikely. And I think Jack Ma was very arrogant to be telling the Chinese government how dumb they were and how stupid their policies were and so forth, considering their system, that is not what he should have been doing. No, I don’t think that…I think the Chinese have behaved very shrewdly in managing their economy and they’ve gotten better results than we have in managing our economy.

And I think that will probably continue. And sure, we all love the kind of civilization we have. I’m not saying I want to live in China. I prefer the United States. But I do admire what the Chinese have done. How can you not do it? Nobody else has ever taken a big country out of poverty so fast and so on, and what I see in China now just staggers me. There are factories in China that are just absolutely full of robots and are working beautifully. They’re no longer using peasant girls to beat the brains out of our little shoe companies in America. They are joining the modern world very rapidly. And they’re getting very skillful at operating.

Question 28: It seems likely that the current Fed policy of keeping interest rates near zero will only exacerbate the income disparity in this country by benefiting those who own the financial assets. What do you think we can do to help those who are currently falling behind as a result of this pandemic?

Charlie: Well, it’s hard to know what exact macro-economic policy is correct, because no one knows for sure just how much government intervention is wise and at what point the government should stop intervening. I don’t think we have any great gift at making macro-economic predictions about how the money…And I think that to some extent the complaint about the rich getting richer as a result of the Covid panic, I think that’s a misplaced concern. Nobody was trying to make the rich richer. We were trying to save the whole economy under terrible conditions. And I think, by and large, we made the most practical decisions that were available to us. And we made the rich richer, not as a deliberate choice, but because it was an accidental by-product of trying to save the whole civilization.

And it was probably wise that we acted exactly as we did. And it wasn’t some malevolence of the rich that caused it. It was an accident. And the next time around, why the poor will get richer faster than the rich. That things circulates…Who gets rich faster by class is going to vary over time and I don’t think anybody should be too concerned by it. As a matter of fact, what happens is that, to make a nation rich you need a free market system. And if you have a free market system that’s trying to get rich in the way recommended by Adam Smith, what happens is that it’s a very irritating system because the poverty that causes so much misery is also causing the growth that makes everybody get out of poverty. In other words, to some extent, it’s a self-correcting system and that makes the whole thing very awkward. And it’s a shame that the economics textbooks don’t emphasize how much a growing economy needs poverty in order to get out of poverty. And if you try and reduce the poverty too much, it’s counterproductive.

And these are very difficult questions. And most people assume that it’s simple. If we could make the world richer by just raising the minimum wage to $100,000 a second or something, of course we would do it. But we can’t.

Question 29: Mr. Munger recently raised the alarm about the level of money printing taking place, what are his thoughts on modern monetary theory?

Charlie: Well, modern monetary theory means the people are less worried about an inflationary disaster like Weimar Germany, from government printing of money and spending it. And that’s modern monetary theory. Now, so far, the evidence would be that maybe the modern monetary theory is right, put me down as skeptical. I don’t know the answer.

Question 30: The Federal Reserve appears to be supporting asset prices. Do you think this is a worthwhile policy objective, given the effect it has on creating financial excesses and income inequality? What do you think the long term consequences will be?

Charlie: Well, I don’t know how well the economy is going to work in the future. And, I don’t think that we or the Daily Journal is getting ahead because we’ve got some wonderful macro-economic insight. I do think that I’m way less afraid of inequality than most people who are bleating about it. I think that inequality is absolutely an inevitable consequence of having the policies that make a nation grow richer and richer and elevate the poor. So I don’t mind a little inequality. And what I notice is that the rich families generally lose their power and wealth…and pretty fast. And so I don’t worry that the country is being ruined by a few people who are getting ahead a little faster than the rest of us. I think the Chinese were very smart. Imagine a bunch of Chinese communists turning a whole lot of Chinese into billionaires in a big hurry. And what are the Chinese communists do with respect to death taxes? The death tax in China is zero. That’s what the communists are doing. I think they’re probably right, by the way.

Question 31: Many believe that inequality accelerated by this pandemic has reached alarming levels that demands drastic solutions, such as a wealth tax. Do you agree with the premise? And if so, how would you address inequality?

Charlie: Well, I think any rich nation ought to have a social safety net that expands a little with its wealth, and that’s what we’ve been doing through my whole lifetime and I applaud the result. And I think the result would have been worse if either party had been in control all by itself for the whole period.

In other words, I think the system of checks and balances and elections that our founders gave us actually gave us pretty much the right policies during my lifetime. And I hope that will continue in the future. But I do think politics is getting more full of hatred and irrationality than it used to be in America, and I don’t think that’s good.

Question 32: Many major businesses and high net worth individuals have been leaving California. Can you speak to the causes, the trend and make some predictions?

Charlie: Yes, I think that is rising as we sit here. I just see more and more of the rich people leaving. And of course, I think it’s vastly stupid for any state to be less friendly to the rich people. They do way more good than harm and they lose their money fast enough. You don’t need to worry about them. Washington state is actually considering a wealth tax at the state level. I think that would be insanity. I predict that if they do that, a lot of people will leave Washington.

Question 33: With all the work from home with Zoom and other technology, what do you think the future of commercial real estate looks like?

Charlie: Well, real estate has always been a difficult field and some types of real estate in recent years has been particularly difficult. I think office buildings are now in some trouble and of course, commercial real estate rented to stores has been in a lot of trouble for a long time. Apartments have come through better. But I don’t think I’ve got a lot to contribute. I own some apartment houses, so I like that investment provided you’ve got a perfect management, which is hard to get.

Question 34: Could share some thoughts on Haven [the healthcare partnership formed by Amazon, JPMorgan Chase and Berkshire Hathaway], particularly why it was ultimately closed and what were the lessons learned?

Charlie: I don’t know anything about Haven. Give me a new question.

Question 35: You’ve said several times that the best way to learn about business is to study the multi decade financial results of great companies. You’ve even said business schools that don’t adopt this method are doing their students a disservice. Would you mind elaborating on how a professor or individual should go about building a curriculum around this approach? What, for example, would you recommend as course materials?

Charlie: Well, here’s what I meant, and by the way the Harvard Business School, when it started out way early, they started out with a history of business. They’d take you through the building of the canals and the building of the railroads and so on and so on. You saw the ebb and flow of industry and the creative destruction of the economic changes and so on. And it was a background which helped everybody. And of course, what I’m saying is that if I were teaching business, I would start the way Harvard Business School did a long time ago. I think they stopped because if you taught that course you’d be stealing the best cases from the individual professors of marketing and so on and so on and so on. And I just think it was academically inconvenient for them. But of course, you should start out by studying the history of capitalism and how it worked and why before you started studying business.

And they don’t do that very well. I’m talking about the business schools. If you stop to think about it, business success long term is a lot like biology. And in biology, what happens is the individuals all die and eventually so do all the species. And capitalism is almost as brutal as that. Think of what’s died in my lifetime. Just think of the things that were once prosperous, that are now in failure or gone. Whoever dreamed when I was young that Kodak and General Motors would go bankrupt. You know, it’s just…it’s incredible what’s happened in terms of the destruction. And, of course, that history is useful to know.

Question 36: In regards to a commencement address you gave in 2007 at the USC Law School, I’ll paraphrase here, you said, “If a civilization can progress only when it invents the method of invention, you can only progress when you learn the method of learning. I was very lucky. I came to law school having learned the method of learning, and nothing has served me better in my long life than continuous learning.” What’s Charlie’s method of learning?

Charlie: Well, I think I had the right temperament and when people gave me a good idea, and I could see it was a good idea, I quickly mastered it and started using it and just used it for the rest of my life. And you’d say that everybody does that in their education, but I don’t think everybody does. It’s such a simple idea. And of course, without the method of learning, you’re like a one legged man in an ass kicking contest. It’s just not going to work very well. Take Gerry. You think the Daily Journal would have hundreds of millions of marketable securities now if Gerry didn’t know how to learn something new. He didn’t know one damn thing about the Daily Journal when we made him head of it, but he knew how to learn what he didn’t know. Of course that’s a useful thing. And by the way, I think it’s hard to teach. I think to some extent you either have it or you don’t.

Question 37: Why are some people incapable of learning new ideas and behaviors?

Charlie: Well, it’s partly culture, but a lot of it’s just born in. It’s a quirk. Some people have a natural trend toward good judgment, and other people their life is just a series of mistakes over and over again.

Question 38: You have revised your famous talk on the Standard Causes of Human Misjudgment with considerable new material back in 2005. Now, 16 years have passed. Is there any new material?

Charlie: No, I would say that, of course, there’s some new material in misjudgment, but by and large, most of the knowledge has been available for a long time. What prevents the wide use of helpful psychological insight is the fact that psychology gets really useful when you integrate it with all other knowledge. But they don’t teach that in the psychology department because the academic system rewards little experiments that develop more insight into psychological tendencies instead of synthesizing what’s already been discovered with the rest of knowledge. The psychology professors don’t know all that much about the rest of knowledge, and they have no incentive to master it. And if you don’t master the rest of knowledge, you can’t synthesize it with psychology. So that’s an interesting example of self-learning. When I saw that psychology was necessary and I didn’t have it, I didn’t just learn the little tendencies well enough to get A’s in psychology, I learned those tendencies well enough to synthesize some of the rest of the knowledge. And that’s the right way to do it. But show me a psychology department that knows how to do that. It’s one of the most ignorant professions in the world.

Question 39: Charlie, you are known as an advocate for learning from one’s mistakes. What did you learn from the Barry Dutton’s book store building in Brentwood? (1, 2) And how would you apply that new knowledge or experience in the future?

Charlie: Well, I think I have learned to avoid zoning work. When I was young, I re-zoned some properties very successfully and I was like Rip Van Winkle [short story by the American author Washington Irving, first published in 1819]. When I tried to come back to it, I found the world had changed. And I don’t think you’ll find me engaged in any massive re-zonings in the future.

Question 40: What advice would you give to someone who is trying to stay within their circle of competence, but finding that the pace of technical technological innovation is rapidly reducing that circle?

Charlie: Well, of course, if they bring in a brand new technology you don’t understand at all you’re at something of a disadvantage. And my advice would be if you have a fixable disadvantage, remove it. And if it’s unfixable, learn to live without it. What else can you do? Fix what can be fixed and what can’t be fixed, you endure.

Question 41: You are one of the oldest and greatest thinkers of our time. Any tips for someone who wants to work on and improve their ability to hold two opposing views at the same time? Any tips on how to generate insight in these types of situations?

Charlie: Well, I do have a tip. At times in my life, I have put myself to a standard that I think has helped me. I think I’m not really equipped to comment on this subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time, if you’re looking for disconfirming evidence and putting yourself on a grill, that’s a good way to help remove ignorance.

What happens is that every human being tends to believe way more than he should, in what he’s worked hard to find out or what he’s announced publicly that he already believes. In other words, while we shout our knowledge out we’re really pounding it in, we’re not enlarging it. And I was always aware of that, and so except at these damned annual meetings, I’m pretty quiet.

Question 42: Gene Abegg (1, 2) seems like he was one of the best bankers of the last century, achieving both an extremely low loan loss rate and earning around 2% on assets over a long time period. I think the bankers of today could learn a lot from Gene, but little is known of him. How did Gene achieve incredibly low loan losses over the long term while so many other bankers have failed miserably?

Charlie: Well, that is an easy one. He was a very smart man. He lived in a particular town. He knew everybody and everything. He had excellent judgment. He cared terribly about not making bad loans or incurring dumb expenses. So he was just a perfect banker if you wanted never to have any trouble. And of course, it really helped to know everybody in town. If I had stayed in Omaha, where I was raised and gone into the banking business, I would have been a hell of a good banker. Because even as a boy, I knew a lot about who was sound and who wasn’t sound in Omaha. And that’s the way Gene was in his community. Furthermore, he’d gone through the Great Depression. He’d been a receiver for a bank. Well, of course that made him very leery of dumb loans. And of course he hated costs. He was just a very old fashioned sound thinker. And of course that will still work. But it’s hard for anybody else. He really knew everything you had to do to avoid credit losses in a small town in Illinois.

Question 43: You have been a long-time admirer of Singapore and Lee Kuan Yew. You once said that, “Study the life and work of Lee Kuan Yew, you are going to be flabbergasted.” How did you start your interest about Singapore and Lee Kuan Yew and have you met Lee Kuan Yew in person? And if there is one thing the world could learn from Singapore now, what would that be?

Charlie: Well, Lee Kuan Yew had the best record as a nation builder. If you’re willing to count small nations in the group, he had probably the best record that ever existed in the history of the world. He took over malarial swamp with no army, no nothing, and pretty soon he turned that into this gloriously prosperous place. His method for doing it was so simple. You know the mantra he said over and over again, it’s very simple, He said, “Figure out what works and do it.” Now it sounds like anybody would know that made sense. But, you know, most people don’t do that. They don’t work that hard at figuring out what works and what doesn’t. And they don’t just keep everlastingly at it the way he did.

And again, he was a very smart man and he had a lot of good ideas. And he absolutely took over a malarial swamp and turned it into modern Singapore in his own lifetime. It was absolutely incredible. And he did not have…it was a one party system, but he could always be removed by the electorate, he was not a dictator. He was just so good. He was death on corruption, which was a very good idea. In fact there’s hardly anything he touched that he didn’t improve. When I look at modern Singapore’s health system, it costs 20% of what the American system costs. And of course, it works way better than our medical system. And that’s entirely due to the practical talent of Lee Kuan Yew. Just time after time, he would choose the right system.

In Singapore, you get a savings account the day you’re born, and if you don’t spend the money, you and your heirs get to spend it eventually. In other words, it is your money. So that to some extent, everybody buying medical service in Singapore is paying for it himself. And of course people behave more sensibly when they’re spending their own money. He just time after time, he would do something like that that recognized reality and worked way better than other people were doing.

And there aren’t that many people like Lee Kuan Yew that have ever lived. So, of course, I admire him. I have a bust of Lee Kuan Yew in my house. I admire him that much.

Question 44: What is the biggest lie currently being perpetuated by the investment complex?

Charlie: Well, commission free trading is a very good candidate if you want to emphasize disgusting lies. Commission free trading is not free.

Question 45: Do you think it’s best to invest in the common stocks of businesses early or while they are more nascent and the industry is smaller or wait until they are the clear winner of a more mature industry?

Charlie: Well, I think Warren and I are better at buying mature industries than we are at backing start-ups like Sequoia. The best venture capital operation, probably in the whole world, is Sequoia’s, and they are very good at this early stage investing. And I would hate to compete with Sequoia in their field. I think they’d run rings around me. So I think for some folks, early stage investing is best and for other folks, what I’ve done in my life is best.

Question 46: Last year, almost every e-commerce, internet and internet adjacent stock was up 100%+. You’ve said recently that Sequoia is the greatest investment firm ever. Do you think the digital economy has reached a tipping point such that, “This time is different”. And that conventional valuation measures for these types of companies are dead? Or does this environment remind you of 1999? How do you reconcile the idea of paying 50 or 60 times revenue for a growing but unprofitable business with the more traditional value investing concept of a margin of safety?

Charlie: Well, generally speaking, I don’t try and compete with Sequoia. You can argue that I got close to Sequoia with Li Lu, we bought into BYD. That was not a startup, but it was so small and thinly traded that we were buying into a venture capital type investment, but in the public market. With that one exception, I’ve stayed out of Sequoia’s business because they’re so much better at it than I would be and I don’t know how to do it the way they do it.

Question 47: Of the various types of moats and competitive advantages, which types do you think will be most important in the years ahead and what combinations of competitive advantages can you imagine will create any new types of moats.

Charlie: Well, that’s too hard in general a question for me. The one they will say is that a lot of the moats that looked impassable, people found a way to just…Think of all the monopoly newspapers that used to be, in effect, part of the government of the United States. And they’re all dying. Every damn one of them, almost. A lot of the old moats are going away and of course people are creating new moats all the time. That’s the nature of capitalism. It’s like evolution and biology. New species are created, and old species are dying. And, of course it’s hard to negotiate in such a field. But there’s no rule that life has to be easy on the mental side, of course it’s going to be difficult.

Question 48: I enjoyed your Caltech interview and wanted you to elaborate and provide more insights on your point of great investors and great chess players. How are they similar or different? And have you have seen the television show Queen’s Gambit on Netflix.

Charlie: Well, I have seen an episode or two of the Queen’s Gambit, and what I think is interesting about chess is to some extent, you can’t learn it unless you have a certain natural gift. And even if you have a natural gift, you can’t be good at it unless you start playing at a very young age and get huge experience. So it’s a very interesting competitive field. And I think that great investment…I think people have the theory that any intelligent, hard working person can get to be a great investor. I think any intelligent person can get to be pretty good as an investor and avoid certain obvious traps. But I don’t think everybody can be a great investor or a great chess player.

I knew a man once, Henry Singleton, who was not a chess champion, but he could play chess blindfolded at just below the grandmaster level. But Henry was a genius, and there aren’t many people who can do that. And if you can’t do that, you’re not going to win the chess championship of the world. You’re not going to do as well in business as Henry Singleton did.

I think some of these things are very difficult. And I think by and large, it’s a mistake to hire an investment management, to hire armies of people to make conclusions. Better off to concentrate your decision power in one person, the way the Li Lu partnership does, and choose the right person. I don’t think it’s easy for ordinary people to become great investors.

Question 49: You identify the opportunity in electrification and invested in BYD. How do you think about the hydrogen opportunity for transportation and how does it compare to the electric opportunity? Specifically thinking about trucks versus cars, will we have less gas stations or truck stops in the future?

Charlie: Well, I hope we don’t have less truck stops because Berkshire Hathaway is deeply involved in truck stops (1, 2, 3, 4). But of course, I think there will be more automation in transportation of all kinds in the future. I don’t think I’ve got any great insight about hydrogen. I do think having a whole system to sell hydrogen is difficult, on the other hand, the buses in Los Angeles work on natural gas. All the buses. And it saved Los Angeles a fortune because gas is so much cheaper than gasoline.

And so I’ve seen a whole bus system shift from gasoline or diesel to a gas. And so it obviously isn’t impossible. But you have to create a whole new system of supply for it, and of course I don’t even know how much more difficult…how much more dangerous it would be to deal with hydrogen than it is to deal with gasoline, which is also a dangerous substance. No, you’ve reached the limit of my circle of competence. I can’t help you.

Question 50: We have a couple of Daily Journal related questions from shareholders. What would management do with a sudden windfall of profits? How would they think about current opportunities with low rates and low inflation?

Charlie: Well, it’s not easy to handle accumulated money in the current environment when these stocks are so high and many parcels of real estate of certain kinds is also very inflated. So it’s very difficult. And all I can say is we’ll do the best we can. But when it gets difficult, I don’t think there’s any automatic fix for difficulty, I think when difficulty comes I expect to have my share.

Question 51: Does management, in your opinion, have a moral responsibility to have their shares trade as close to fair value as possible?

Charlie: Well, I don’t think you can make that a moral responsibility, because if you do that, I’m a moral leper. Because the Daily Journal stock sells at way above the price I would pay if I were buying a new stock. So no, I don’t think it’s the responsibility of management to ensure where the stock sells. I think the management should tell it like it is at all times and not be a big promoter of its own stock.

Question 52: In 1999, the year the Daily Journal bought Sustain, the traditional business employed 355 full time employees and 61 part time employees. In 2010, that was down to 165 full time employees and 15 part time employees. This year’s annual report suggests that the traditional business has 97 full time employees. Has the quality of the publications suffered as the employment levels have decreased, or has the digital revolution caused enormous productivity improvements in those businesses?

Charlie: Well, of course the place has downsized, it had to because the traditional newspaper business is shrinking. And of course, Gerry being a sound thinker, did the very unpleasant work of shrinking it appropriately and without bothering me or Rick, showing how wise we were to putting there in the first place. Has the quality gone down? Well, I don’t think the quality and publishing public notice advertising has gone down, but I hardly think the editorial quality could go way up while employees were going down. My guess is that we have suffered some editorial quality. Gerry, you have a comment on that?

Gerry: There are a number of factors that come into play here. And you mentioned technology that’s very, very important. Many of our systems are in the cloud, all except for the legal advertising system, which we had to build because nobody else has the volume that we have. Our editorial system, our advertising system, all in the cloud. Accounting is also in the cloud. And the disruption from the decline in newspapers has had a significant impact. Classified advertising is down significantly. In display advertising, for example, we now utilize a very friendly company that worked with us for 25 years and now they are helping us sell advertising.

Also, fortunately, before the pandemic, we got out of the conference type events and we were not subjected to the problems of no conferences, nobody to attend. And when you look at what’s happened in California, the price of real estate and rentals, we’ve reduced the number of officers we have, both for Journal Technology and for the Daily Journal. Very difficult to hire reporters in the San Francisco area with all the demands coming from the internet companies wanting to have editorial product. All those factors come into play and also, if you go back a little further, we eliminated California Lawyer magazine and we had at one time an office in Seattle and one in Denver, and about the same time we bought a newspaper in Phoenix and that worked out extremely well. The ones in Seattle and Denver, difficult to break into the legal advertising system, which supports so many newspapers, not only in California but elsewhere.

Charlie: It’s very hard to have a shrinking business, and Gerry has done it magnificently well, and it was totally required.

Question 53: Do you believe the market is going through a long term value slump similar to 1999, or do you believe technology has caused a permanent change in how companies should be valued?

Charlie: Well, I don’t know how permanent it’s going to be, but it certainly caused a change. Of course it’s hard to know what the future holds in a complex system where you can’t predict a lot of things. Generally what people do is they have financial reserves so they have some options if trouble comes. And they adapt the way Gerry has to require downsizings or required upsizings. One of the interesting things about The Daily Journal is that we made all that money in the foreclosure boom. So we were like an undertaker who suddenly got prosperous in a plague year. And it’s a funny way to make money.

And that happened because Gerry and I bought these little flea-bitten newspapers all over the state for just as a precaution to make sure we could serve public notice advertising wherever it arose in the state.

Gerry: One stop center.

Charlie: Yes, and that turned out to be a wonderful idea, and that’s one of the reasons we made all this money. So the shareholders have been lucky to have somebody like Gerry here who could learn what he didn’t know and fix it.

Question 54: You’ve spent much of your life contributing your wisdom to schools and hospitals. How would you advise these institutions to manage their endowments over the coming decades?

Charlie: Well, the one charitable institution where I have had some influence for a very long time, has a whole bunch of hotshot financiers in every branch of wealth management there is on the board. And that institution has two assets in it’s endowment account. One is a big interest in Li Lu’s China Fund, which is a limited partnership and the other is a Vanguard index fund. And as a result of holding those two positions, we have way lower costs than anybody else and we make more money than practically everybody else. So you now know what I do in charitable institutions. By the way, that’s not the normal outcome in America.

The wealth management industry has a crisis on its hands, they really need the world to stay the way it is. And that isn’t necessarily right for its customers.

Question 55: It is estimated that the Gates Foundation has saved well over 100 million lives. Buffett’s donations to the [Gates] Foundation has obviously helped to save many millions. Are Berkshire’s managers aware that through their efforts to create business success at Berkshire, that they have been involved in saving millions of lives?

Charlie: Well, I’m sure some are, but by and large, that’s not what Warren is known for. He doesn’t mind at all not getting credit for his charitable donations.

Question 56: Is the oil and gas industry the new newspapers?

Charlie: I don’t think so, I think the oil and gas industry will be here for a long, long time. As a matter of fact, it’ll be here for a long, long time if we stop using much hydrocarbons in transportation. The hydrocarbons are also needed as chemical feedstocks and I don’t think that hydrocarbons are going…I’m not saying that oil and gas is going to be a wonderful business, but I don’t think it’s going away. And I don’t I don’t think it’s like the newspaper business.

Question 57: Do you believe global warming is an existential threat to humankind? And if so, how do you think society should address it, especially because poor countries require much more cheap energy to reduce poverty?

Charlie: Well, of course, it’s very hard to fix the global warming problem when the poor countries need to burn coal to stay alive and so on. And so it’s a serious problem. On the other hand, we have a fair amount of time to do it and a rich civilization can afford to do it if we absolutely have to. If the seas were to rise 60 feet, which could happen in another 100 years or so, 60 feet, we’d have to build enormous barriers to sea entry. Florida would have a really serious problem. On the other hand, it could be handled.

Bill Gates has written a book on this subject recently, which he concludes that it would be expensive, but it could be handled. And his conclusion is that mankind should just step up to it and do it. And I don’t want to quarrel. I kind of admire the way Bill takes on these very hard problems. I tend to avoid the ones which I’m not good at and I’m not good at a lot of different problems.

Question 58: What books are you currently reading and what books do you recommend?

Charlie: I think I’ll skip that one. Go on.

Question 59: Ben Franklin said, “Were it offered to my choice, I would have no objection to a repetition of the same life from its beginning, only asking the advantages authors have in second editions to correct some faults of the first.” If you were offered a fresh start today, what would you do differently in life and in investing?

Charlie: Well, Ben Franklin was one of the wisest men who ever lived, and yet he made a lot of mistakes in the course of living his life. And of course, if he had a chance to do it over again, he would avoid those mistakes. We would all say that. He was very amiable the way he talked about it. But of course, if we got a chance to do it again, we would do it better. And the number of people who ever got a chance to do it again is zero. So it’s a very theoretical discussion.

But, of course, there’s an old German proverb I’ve always liked, and it says, “Man is too soon old, too late smart.” And that’s true whether you’re Benjamin Franklin or Joe Klutz. And we all live with that problem. And we’re all pretty forgiving of ourselves, too, which is probably a good thing. I wouldn’t change my life…I think most people are, assuming tolerable success in life, are about as happy as they were ordained to be. And they wouldn’t have been a lot happier if they were richer or a lot less happy if they’d been poorer. I think most people are born with a happy stat and they’re happy stat has more to do with their happiness than their outcomes in life.

Question 60: Mr. Munger, your advice given on choosing a good spouse in Poor Charlie’s Almanac is terse. You have said that, “The single best way is to deserve a good spouse because a good spouse is by definition, not nuts.” That is true and makes sense. However, could you be more specific? You used examples of Lee Kuan Yew’s good judgment in choosing someone with brains over certain physical attributes in your past interview. Could you give more examples, both good and bad ones from your personal observations or through vicarious readings?

Charlie: Well, I can’t top Lee Kuan Yew’s example. In his early education, he was the second ranked student in the school, he was that smart. And there was one woman who was a year older than he was who was the first ranked student in the school. So he married her. And of course, his son who was a bright man, is now what? Prime minister of Singapore. A little wisdom in spouse selection is very desirable. You can hardly think of a decision that matters more to human felicity than who you marry.

Question 61: Given all of your donations to physics, what is your favorite way of applying physics to society’s problems and also to investing?

Charlie: I don’t think I use much physics in solving my investment problems, but it occasionally helps me. Occasionally, some damn fool will suggest something that violates the laws of physics, and I always turn off my mind the minute I realize the poor bastard doesn’t know any physics.

Question 62: How important is the analysis of company culture in the investment process?

Charlie: Well, it’s quite important. Part of the success of a company like Costco, and it’s been amazing that one little company starting up, not all that many decades ago, could become as big as Costco did as fast as Costco did. And part of the reason for that was cultural. They have created a strong culture of fanaticism about cost and quality and so forth, and efficiency and honor, all the good things. And of course, it’s all worked. And so, of course culture’s very important.

Question 63: You often advocate for learning from other people’s big calamities and stupidities, what would be a mistake at the Daily Journal where we can all learn from?

Charlie: Well. Gerry, what’s the biggest mistake we’ve made?

Gerry: Well, we don’t think about mistakes, we take the situation as it is and try to solve it.

Charlie: I can’t think of a…We paid high prices for some little companies in the course of trying to enter the court software business, but I don’t think that’s going to end up a mistake. God knows it was difficult, but I don’t think it’s a mistake. I don’t think we have made a lot of horrible mistakes. Look around these real estate, we bought all these buildings cheaply, they’re in a place that’s gotten more valuable. And I don’t think it was a mistake to buy the Daily Journal when we did, paying the price we did. We paid $2.5 million for it, we got a dividend of $2.5 million shortly thereafter. Everything you see is profit. I think we’ve coped pretty well so far.

Question 64: If you had a chance to make an addition or revision to Poor Charlie’s Almanac, what would that be?

Charlie: Well, I don’t have any wonderful new thoughts. You know, to the extent that my thoughts have helped my life, I think I’ve pretty well run the course and I don’t think I’m likely to have any new thoughts that are going to work miracles either. But I find that the old ways of doing things still work. I’ve been engaged in recent years in trying to create a better type of student dormitory. And I find that by working at that I can actually make some improvements even though I’m old. So I’m kind of pleased that I’m still functioning at all. I’m not trying to move mountains.

Question 65: Do you believe any psychological personality tests such as the Myers Briggs type indicator personality test, to be of any good in choosing a compatible partner, given that choosing a spouse is probably the most important decision one can make in life, could you please elaborate on the subject? And could you consider giving a talk on this particular subject?

Charlie: Well, you know, I had a failed marriage, so I don’t think I’m in a perfect position to advise the young about marriage. No, I don’t have anything to contribute.

Question 66: What have you done to live such a long life? What is your secret to living a long and healthy and happy life?

Charlie: Well, I think I am alive because of a lucky genetic accident. And I don’t think I can teach you how to retroactively get a new accident yourself. And Gerry’s lived a long time too. I think we’ve both been lucky. No, I don’t have any secrets. I think I would have lived a long time if I had lived a different life.

Question 67: Any sort of wisdom on what it takes to live a happy life? What are those kind of principles?

Charlie: Oh, yes, well a happy life is very simple. The first rule of a happy life is low expectations. That’s one you can easily arrange. And if you have unrealistic expectations, you’re going to be miserable all your life. And I was good at having low expectations, and that helped me.

Also, if when you get reverses if you just suck it in and cope, that helps if you don’t just fretfully stew yourself into a lot of misery. Then there are certain behavioral rules, some of them, you know, Rose Blumkin had quite an effect on Berkshire culture. She created a business with like 500 depression dollars, that became a huge business. You know what her mottos were? “Always tell the truth and never lie to anybody about anything”. And those are pretty good rules and they’re pretty simple. And a lot of the good rules of life are like that, they’re just very simple. And “do it right the first time” (1, 2),  Lee Kuan Yew. That’s a really good rule.

Question 68: It’s been a year since the coronavirus pandemic came to the US. What have you all learned about running a business in the past year? Has there been anything that has surprised you? And what would be your best advice to someone starting a business now?

Charlie: Well, I don’t think I have a lot of wonderful advice about starting a business, but what we’ve learned in the pandemic is that we can do with a lot less travel and a lot more Zooming. And I don’t think that when the pandemic is over, I don’t think we’re going back to just the way things were. I think we’re going to do a lot less travel and a lot more Zooming. No, I think the world is going to be quite different. A lot of the people who are doing this remote working, a lot of people are going to work three days a week in the office and two days a week at home. A lot of things are going to change. And I expect that and I welcome it.

Question 69: Could you share some parting thoughts with the viewers who are watching all around the world?

Charlie: Well Gerry, we’re really old, both of us, and I think both of us have done the same thing. We just suck it in and cope. We don’t have any other secrets, do we Gerry?

Gerry: None. You have to be concerned about employees’ lives, that’s very, very important. For example, here we must have 30 or 40 deaths and we expect many of our employees to always be at client court offices because we work with them very closely to make sure they get what they need. And so we do, as Charlie indicated, have a lot of travel and that’s been greatly curtailed. And we can’t go to many offices because they’re closed.

And some of our technology, like e-filing for example, the courts are closed, and we are very excited to look forward to enabling the courts to function as we know that they want to and will in the future. So you have to be a little closer to the employees’ needs and desires and babysitting and all those activities that were kind of taken for granted in the past. It doesn’t happen anymore. Everybody’s got a different situation. Nothing is particularly obvious for everybody to do the same thing. And we have to function as an informal committee in that we have to bring our employees and our clients/staff together to work out what they already know and how we can help them do a better job and a more efficient job.

So the people part has changed quite considerably. Being a small company, we’re beholden to the guidelines of the county of Los Angeles and other counties. We have offices in all the major cities in California and also in Logan, Utah. And we are subject to the orders and directions of those counties which before really didn’t impact anything.

Charlie: There’s one thing that we’re quite passionate about and that is serving the customers who have trusted us. We are really interested in doing a good job in Australia and in California and in all the other places where people have trusted us. You can hardly think of anything more important in life than being reliable for the people who trust you. And we’re going to bust our ass to try and do a good job. And the Daily Journal shareholders will have to take whatever outcome comes from caring more about our customers than is at all common.

End of Transcript

Thank you for reading. I hope you all thoroughly enjoyed the transcript. Special thanks to Barry McEwan who contributed significantly to the review and editing of the transcript.

If you found any errors, kindly let me know and I will fix them.

Furthermore, if you’d like to be informed of future posts, transcripts, or events, please subscribe.


Richard Lewis, CFA
White Stork Asset Management LLC
Partner, Investments

Links to additional Transcripts:

Charlie Munger: Full Transcript of Caltech Zoom Talk, Dec. 2020

This month Caltech hosted a Zoom talk with Charlie Munger, its 2020 Distinguished Alumnus. It was heartening to see Charlie full of his trademark wit, wisdom, and energy as he fielded a series of questions for 53 minutes.

I have transcribed this talk and have included clickable links throughout to relevant articles. The video recording of this talk is available on Caltech’s YouTube channel.

I would like to thank Caltech for hosting such a wonderful talk and to Mr. Munger for once again energetically entertaining all questions and graciously sharing his wisdom, insights, and time with all of us.

I hope you all enjoy!

(Note: You will find that I frequently summarized the questions from the moderator, but as for anything that Charlie  said, I translated them as accurately as possible.)

Start of Transcript

Moderator: What was Caltech like in 1944?

Charlie: Well, the main campus looked very much the way it does now. And, uh, the Athenaeum was exactly the way it is now.

Moderator: How’d you compare your meteorology program to the rest of what was going on campus?

Charlie: Yes, I was in the part of the campus where Thomas Hunt Morgan was. And of course he was the world’s greatest geneticist and he used fruit flies and they stank. And so my whole part of the campus had the odor of dying fruit was the whole time I was there. By the way, I liked the campus and I got used to the fruit fly odor.

Moderator: But presumably you didn’t spend all your time with fruit flies…

Charlie: I was so ignorant in those days. I could have walked over and introduced myself and he would have been quite courteous with me. And he was a very great man, and I was too dumb to do it. It didn’t occur to me.

Moderator: So at the end of the war you decided not to return to mathematics at the University of Michigan or to stay and go to college somewhere else. Instead you went to law school.

Charlie: My father had gone to the Harvard law school and my grandfather was a distinguished judge in Nebraska. So that was a natural course of activity for me.

Moderator: In thinking about these career changes, which a lot of people go through over the course of their lifetime. What could our fellow alumni and in particular, our soon to be new alumni can borrow from your experiences in those early days of your life, when you were choosing a career that still has resonance today?

Charlie: Well, it’s very important when you choose a career. If you go into a career that’s very tough, you’re not going to do very well. And if you go into one where you have special advantages, and you like the work you’re going to do pretty well. And so I went into law because I didn’t want to be a surgeon. I didn’t want to be a doctor. I didn’t want to be a… And when I finally got through, it was the only one…I just went down the family path. And it wasn’t the wisest decision I ever made.

Moderator: And once you started to get into investment, your legal training, your mathematical background, your experiences…what came to be resonant for you?

Charlie: Well, what happened was there were things I didn’t like about law practice, and I had an army of children to support, and no family money or anything to start with. So I had to make my way in life for this army of children. And…it was going to be a little difficult. And there are things about law practice I saw that were quite limiting. And what happened was, my pitifully small earnings as a young man, I kept underspending them. I kept investing fairly wholly and fairly smartly. And at the end of my first 13 years of law practice, I had more in liquid investments than I made in all those years law practice pre-tax. I’d done that in my spare time with these little tiny sums. So it was natural for me, partly prompted by Warren Buffett’s success, to think I should just start working for myself instead of for other people. I had made (300) thousand dollars in my spare time, and I thought ‘What will happen if I do it full time’.

Moderator: So one of the things that connects Caltech to investing is of course the process of discovery, which creates new technologies. And for an economic historian, one thing that we’re very aware of is that technological change has driven a lot of the growth of the American economy over the last several centuries. But from your perspective, as an investor, what have been the most dramatic transformation you’ve seen over those 75 years, that Tom Rosenbaum reminded us connected to us…

Charlie: Well of course there have been huge booms and huge busts. And that has been very interesting. And of course, the government has tried to do things that will dampen down the fluctuations and make recoveries from the busts happen faster.

And of course, that’s caused a fair amount of inflation in a life that’s lived as long as mine. And what’s happened in the investment field is, of course, that so many people have gone into it. And people have made so much money. And its driven an almost frenzy of activity in the investment field. When I was young, there was practically nobody in it and they weren’t very smart. And now almost everybody’s smart, even the Caltech graduate, a good proportion of them are sucked into finance by the money. And so that’s been a hugely important development. I don’t welcome it myself at all. I don’t think we would want the whole world trying to get rich by outsmarting the rest of the world in marketable securities. But that’s what has happened. And there’s been frenzy of speculation and so on. So it’s been very interesting, but it’s not been all good.

Moderator: At some level, once you make an investment, you’re putting your money into the hands of an entrepreneur who is going to actually produce something. The value investing that you practice has that characteristic relative to a pure arbitrage approach to try to make money in finance.

Charlie: Well, I did not make my origin by and large on the cutting edge of technology. My first investment with my pitiful savings…I invested in a company right in Pasadena. And it was called William Miller Instruments. And I damn near lost all my money. It was hell on earth. We just barely squeaked out with a substantial outcome. And what did us in was the oscillograph that we’d invented…and we were so proud of, and we thought it was going to knock the world flat…somebody invented magnetic tape without telling me and by the time we got the oscillograph ready to go to market, we sold three. Three total in the whole country. Technology is a killer as well as an opportunity. And my first experience had damn near killed me.

Moderator: And so that’s sort of the other part, right? Over those 75 years that you’ve been, you’ve been involved in investing…

Charlie: (My attitude) for a long time was ‘Keep me out of venture capital on the edge of technology. I tried to avoid it.

Moderator: But even so, in the companies that you deal with, some of them are market leaders at one point in time, and as you just suggested, some technological change or change in preferences will lead those companies to be with less of a market than they used to have for their products. And so how does one think about this over the long-term?

Charlie: Over the long-term, big companies of America behave more like biology than they do anything else. In biology, all the individuals die and so do all the species, it’s just a question of time. And that’s pretty well what happens in the economy too. All of the things that were really great when I was young have receded enormously. And new things have come up and some of them started to die.

And that is what the long-term investment climate is, and it does make it very interesting. Look at what’s died. All of the department stores, all the newspapers, US Steel, John D Rockefeller’s Standard Oil is a pale shadow of its former self. It’s just like biology. They have their little time and then they get clobbered.

Moderator: And, and so how does one…sort of deal with change? So you can think about an investment portfolio that you’ve created at any point in time will only have validity for a certain amount of time. And so how does one learn to deal with change? It’s a question that I always ask my students. How does somebody who has to take the resources of very large numbers of people deal with this change? Any thoughts on that matter?

Charlie: Well, some people try to get on the cutting edge of change. So they’re destroying other people instead of being destroyed themselves. And those are the Googles and the Apples and so forth. Other people, like me, do some of that, joining things like Apple, and in some ways, we just try to avoid big change (inaudible) that’s likely to hurt us. And so Berkshire for instance owns the Burlington Northern Railroad. You can hardly think of a more old-fashioned business than a railroad business. But who in the hell is ever going to create another trunk railroad? So that’s a very good asset for us. So… we’ve made that successful, not by conquering change, but by avoiding it. Now, Burlington Northern itself has been quite clever at adapting technology to their railroad. Imagine the good luck of being able to take an existing railroad and double deck all the trains and raise the heights of the tunnels a little and so forth. And all of a sudden, you’ve got twice the capacity at very little incremental cost, which is what that railroad is done. Everybody uses new technology, but it really helps to have a position that almost can’t be taken away by technology. How else are you going to carry goods from the port of Los Angeles to Chicago except on our railroad?

Moderator: So it’s, so it’s an innovation within an economy that continues to follow certain sets of rules rather than looking for the new economy? Is that another way to think about it?

Charlie: There are different ways all successful investment involves trying to get into something where it’s worth more than you’re paying. That’s what successful investment is. There are a lot of different ways to find something that’s worth more than you’re paying. You can look for it right on the cutting-edge of technology, the way Sequoia does. The most remarkable investment firm in America is probably Sequoia. That venture capital firm, which absolutely fanatically stays right on the cutting edge of modern technology. They’ve made more money than anybody, and they have the best investment record of anybody. It’s perfectly amazing what Sequoia has done.

Moderator: So you’ve also talked repeatedly about people’s mental biases. As you said, you don’t want to be the smartest person, but you want to avoid doing stupid things. So how does one guard against mental biases in one’s decision-making?

Charlie: I’ve spent a lifetime trying to avoid my own mental biases.

“A” I rub my own nose into my own mistakes.

“B” I try and keep it simple and fundamental as much as I can.

And I like the engineering concept of a margin of safety.

I’m a very blocking and tackling kind of a thinker. I just try and avoid being stupid. I have a way of handling a lot of problems. I put them on what I call my “too hard pile” and I just leave them there. I’m not trying to succeed in my too hard pile.

Moderator: Do they sometimes come back and require for you to…

Charlie: Oh, I sometimes get into things that are too hard, and when that happens, I fail.

Moderator: So one has to accept limitations. Is that one of the really important pieces of avoiding these biases?

Charlie: What I would say is the single most important thing, if you want to avoid a lot of stupid errors, is knowing where you’re competent and where you aren’t. Knowing the edge of your own competency. And that’s very hard to do because the human mind naturally tries to make you think you’re way smarter than you are.

Moderator: So, as a question, that’s almost personal, given my research, I can’t resist asking about innovation and finance over the last half century. It’s a sector that’s gone through several upheavals…radical change. To go back to the time when you were born, there were 30,000 banks in the U S none of them were very, very large. A few New York banks were big, and now the top 20 banks count for almost everything. But the rate of innovation in finance has been huge. And there’s a debate in academic finance about how much of this innovation is helpful to the markets versus how much actually creates instability.

Charlie: Well, I have a very clear opinion on that. I think the early innovation that the Bank of America did under Giannini, where he helped all these immigrants with these loans of all kind. And he kind of knew which ones were good for it. And which ones weren’t. I think that was all-to-the-good. That brought banking help to a lot of people that deserved it. It helped the economy, it helped everybody. But once banking got so they wanted to be in soft white hands and make zillions as speculators, I don’t think those developments have been a plus. I like banking when they’re trying to avoid losses prudently.

Moderator: I have one more question, which I think a lot of people have in mind. COVID has been extremely disruptive to American society and the American economy. How do you think the economy is going to emerge over the next 12 months from this period of difficulty? And how much of the change that we’ve seen start to happen is going to be persistent?

Charlie: Well, my opinion on that is no better than anybody else’s. But…I think it’s quite likely that a year from now, the worst of that will be very thoroughly behind us. It’s amazing. I watched the polio get totally killed by the vaccinations. And I think they’ll spread these vaccines over the world so fast it’ll make her your head swim. So I think this horrible COVID thing is very likely to shrink to insignificance in of course the next year.

Moderator: And what about the transformation of retail? So you said the department stores are gone, but there seems to be quite a massive transformation of retail. Are we going to go back to old town Pasadena for example? Or is the shift to online retail…

Charlie: Well, I don’t think retailing is going to go away after-all it has been around for thousands of years. But certainly it’s been a very difficult place to make money because of what the internet has done. I recently had a friend send me a blue blazer made in China. Bought on the Chinese internet. And it cost $42, delivered. And it may not have been a perfect blazer, but it was an amazing blazer for $42. The person that created that blazer gave some little factory an order for a hundred thousand at once. And those have been pre-sold using the internet. And so it’s the most extreme kind of kill-all-your-competitors type of selling I’ve ever seen. Of course, retailing hasn’t coped with something like that. How it good is it for Brooks Brothers when somebody can deliver things with internet, from China, for $42? And it didn’t look like that bad a blazer to me either. Retailing has gotten very tough. And I think this online stuff is here to stay and it will get more and more efficient.

Moderator: So that could be actually good for the consumer but more difficult for certain sets of investors? In particular, sort of commercial real estate?

Charlie: Of course. These changes are always bad for some investors and good for others. But when they’re bad, they’re very bad. I don’t (inaudible) full brunt of the changes that are coming in terms of this online shopping. I’m a director at Costco, and in the last reporting period, their online sales were up 86% over the same quarter last year. Now that is a significant development. Is it good for other retailers? No, it’s good for Costco, but it isn’t good for them.

Moderator: But how much of this is people who would have shopped at Costco in the in the store?

Charlie: The brick-and-mortar stores are already doing well, but their brick-and-mortar stores have been enormously destructive because of their low prices and efficiency to other retailers. And now they’re doing all this internet thing. The last thing I’d ever want to do in retail is compete with Costco.

Moderator: So we’ve talked a bit about retail and the reorganization of the American labor force is also going to… You think that that is going to be a more transitory phenomenon? That once we get vaccinated, the jobs are going to return? Or are we likely to see a slow return of employment in the same way that we did after 2001, 2010?

Charlie: You’ve got to remember that I did not make my fortune, such as it is, by predicting macroeconomic changes better than other people. What Buffett and I did was we bought things that were promising. And then…sometimes we had a tailwind from the economy and sometimes we had a headwind. And either way we just kept swimming. That’s our system. Now, after all, that’s the system Caltech has too. Caltech just gets up in the mornings and keeps swimming and pretty soon they’re eminent. Caltech’s not trying to play the game of getting big advantage out of the booms and busts. We’re just like Caltech.

Moderator: We do hope that we are committed to our path of discovery and not the victims of the current fashion. And that we have our own decisions about what we think is really important research…

Charlie: Yeah. Oh no, you’re trying to get the right answers, but you’re not really trying to predict what the economy is going to be like 18 months from now.

Moderator: So we now have a large number of really interesting and imaginative questions from the audience. So perhaps I could actually have your answers to some of these, and I will just read them to you. I saw one from Dr. John Victor, who was a Bachelor of Science in chemical engineering, 1971. And he has two questions. The first one is he has a theory that really smart people foresee the future better than others. And so we can ask, what did you think about that? And then the second question is, did you ever make a bad business decision?

Charlie: Well, the answer is, to the second one, is of course I have made bad business decisions. You can’t live a successful life without doing some difficult things that go wrong. That’s just the nature of the game. And you wouldn’t be sufficiently courageous if you tried to avoid every single reverse. And what was the first question?

Moderator: Do smart people predict the future better than others?

Charlie: Well, that is a very interesting question. You could argue that both ways. A lot of smart people think they’re way smarter than they are, and therefore they do worse than dumb people. And if you ask me…and it’s very common to be utterly brilliant and think you’re way the hell smarter than you are.

I think Warren and I have been pretty good at avoiding that one. We’re pretty modest about how…I know what my mental capacity is, and it’s pretty low compared to the best that could possibly be. When I was at Caltech, I took the course in thermodynamics from Homer Joe Stewart. And one thing that I learned from…and by the way a lovely human being and gifted beyond compare…And one thing I learned, was that no matter how hard I would try, I could never be as good at thermodynamics as Homer Joe Stewart. And I think that is a very useful lesson. I knew what I could do and what I couldn’t. And I never even considered trying to compete with the Homer Joe Stewart’s of the world in thermodynamics.

Moderator: How did you study of meteorology influence your thinking?

Charlie: Well, not much. But you learn something from anything you do. It was a very empirical science in those days. We just made weather maps which laid out the weather on the map. And then we stacked up those maps. And by looking as one followed another, you could see whether the weather systems were moving. And that’s the way we were predicting the weather. And of course that’s a lot better than nothing. And, we did have some little tricks, like predicting icing and so forth. But basically, we just were doing two things. We were trying to prevent a pilot from going somewhere and not being able to land and therefore having to crash and die. Or we were trying to prevent a pilot from going into icing that was so tough that he couldn’t handle it. And if I did that in my Army Air Corps, I knew I wouldn’t kill a pilot. That’s not very complicated by Caltech’s standards…

Moderator: Well there’s a lot of uncertainty, right?

Charlie: Yes there is, but sometimes it’s pretty easy. And when it’s likely to be bad, you can tell them not to go. I was in the ferry command, so I didn’t have any bombing runs or anything like that. And so if it really was dangerous, I would just tell them not to go. It was such an empirical science, I never wanted to be in it. They throw the meteorology department out of Caltech early after World War II. And I think it was a correct decision. It was too empirical an activity for Caltech.

Moderator: So we’re back in climate science. So I think things have changed since then…

Charlie: Climate science is different from meteorology. That’s a very interesting subject about which there’s a lot of disagreement.

Moderator: Well we’re actually trying to make some progress and having a better predictive model over the long run evolution of the climate of the globe.

Charlie: Everybody is, but it’s proven very difficult. It’s better than nothing, don’t misunderstand me. But it’s proven very difficult. My attitude on that is that the worst that can happen, in terms of global climate, can be coped with by the advanced civilizations. If you had to erect sea walls to protect the entire present United States, that wouldn’t take that much of GDP per capita for that many years. And it could be done quite safely if we had to. So I don’t see that as the worst tragedy that man could get.

Moderator: What is one critique of Caltech or its alumni? Or how should Caltech or its alumni evolve in the future?

Charlie: I think Caltech is doing very well just the way it is. And I think one of its great advantages is that it doesn’t change too much. I think it was very smart to keep the undergraduate department pretty small and make the graduate department so outstanding. In other words, I think the whole idea was I think quite sound, and it hasn’t changed all that much. Remember I was there when Millikan was there. And I knew him, not well. And it hasn’t changed that much. And I think that’s been a strength.

Moderator: If I understand that history (of Caltech) is that we really wanted to focus on the ability of people with different backgrounds and different disciplines to talk to each other, because we thought that new ways of thinking about the world about science or about engineering emerged from that…But there are also having situation where scale matters. So in thinking about those investment opportunities or other kinds of activities in trying to be smart about things, how much of this is, is accepting information from a variety of different sources to cross-check the decision you want to make?

Charlie: Well I’m a big fan of knowing the big ideas in pretty much all the disciplines, the ones that are pretty easy to assimilate and then using those routinely in your judgments. That’s just my system. And I don’t believe in just constantly consulting with experts and doing things that way. I might do that if I were building a chemical plant or something, but in investment decisions I think it’s very helpful to be able to yourself be pretty comfortable with the big ideas in all the disciplines. And I think that also life’s more fun if you do that.

What I find is though, that academia is not very good at the interdisciplinary stuff. Academia rewards a researcher who knows more and more about less and less. And there are real difficulties with that approach.

Moderator: I mean, that is an inevitable part of the way we go about doing…

Charlie: I know (it’s) an inevitable way of doing it, but when you’re outside your own little field, it’s dangerous.

Moderator: So my next set of questions are more on the finance side. Do you expect the next 10 years to have lower returns in the equity markets than in the last 10?

Charlie: The answer is yes. Because so many people are in it. And the frenzy is so great. And the systems of management, the reward systems are so foolish. That I don’t think it’s going to work…I think that returns will go down, yes. In real terms, the returns will be lower.

Moderator: What do you think of the combinations of quantitative easing and large fiscal deficit? And where are they going to lead us?

Charlie: Well, there I got a very simple answer and that is, it’s one of the most interesting questions anybody could ask. And we’re in very uncharted waters. Nobody has gotten by with the kind of money printing we’re doing now for a very extended period without some trouble. And I think we’re very near the edge of playing with fire.

Moderator: It is remarkable how much we’ve expanded the money supply; how low interest rates are and how little initial response there has been on…

Charlie: Remarkable is not too strong a word. “Astounding” would be more like it.

Moderator: I will, I’ll let you choose the adjective Charlie.

Charlie: It’s unbelievably extreme. Some European government borrowed money recently for some tiny little fraction of 1% for a hundred years. Now that is weird. What kind of a lunatic would loan money to a European government for a hundred years at less than 1%?

Moderator: For a long time, a lot of the policy making in the world was because capital is scarce. For a long time the world economies were poor. And since World War II, we’ve been creating wealth at a very, very high rate. Have the rules change to some extent, because in some sense, the developed economies are just very wealthy?

Charlie: Well, of course it’s changed to some extent because the developing economies are very wealthy. It’s changed enormously. In my lifetime, advanced civilization has gotten ahead faster than any century that existed before. And nothing else is even close. It’s utterly without precedent in real terms.

It’s unbelievable. I watched the whole thing practically because I’ve lived so long. And it’s been absolutely astounding. I can remember having a five-course filet mignon dinner in Omaha for 60 cents when I was a little boy. The world has really changed.

Moderator: So our, our next question, which is the converse. Wealth can be high because we’ve accumulated a lot of wealth or because the value of wealth is high. So is it NASDAQ in a bubble? And will it blow up? And do we know when?

Charlie: Well nobody knows when bubbles are going to blow up, but just because it’s NASDAQ doesn’t mean it’ll have another run like this one very quickly again. This has been unbelievable. Again, there’s never been anything quite like it. If you stop to think about it, think what Apple is worth compared to John D Rockefeller’s old oil empire. It’s been the most dramatic thing that’s almost ever happened in the entire world history of finance.

The other thing that’s really remarkable. You take the last 30 years of China; they have had real economic growth at a rate for 30 years that no big country has ever had before in the history of the world. And who did that? A bunch of communists Chinese. Now that is really remarkable. So if you’re studying finance, you’ve got a lot of strange things to account for.

Moderator: So how would you rate investing in China with the current political tensions or you invested in China through the ownership of American companies that do business in China?

Charlie: Well, of course I’m investing partly in American companies that do business in China, including Coca-Cola. But I’m also invested very significantly in China through the management of Li Lu, who the Munger family backed heavily when he formed a little private equity firm to invest in China. And he has had a very successful record, and that’s made me follow very closely the leading companies in China. And of course, I’ve had very successful experience there. And I think it’s likely to continue. The Chinese story is the damnedest thing that ever happened to a big country in terms of economics. No other big country ever got ahead that fast for that long.

Moderator: Does that say that sort of the politics don’t matter so much?

Charlie: Yeah it does. That’s a very interesting observation. What that shows is exactly right. Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen? Of course it’s extreme. And I think it proves that it doesn’t…We Americans would like to think that our free expression and allowing all kinds of opinion, and all kinds of criticism of the government is totally an essential part of the economy. And what the Chinese have proved is you can have a screamingly successful economy with a fairly controlling government.

All the government has to do is create a lot of Smithian capitalism. If you do that, having a sort of a controlling one-party government doesn’t matter. That’s not a fashionable thing to say, but I think it’s true.

Moderator: So for those of us who can’t only rely on that form of growth…how do we encourage young mentees to take big bets on the edges? And how should this be taught at Caltech?

Charlie: Well, if you ask, ‘How can Caltech teach people how to win chess tournaments or poker tournaments?’, you would find that some people at Caltech are very good at that and the others aren’t. And if you want to win at those things, you better bet on the people that are really very good at it. And not everybody is. I don’t think Caltech can make great investors out of most people. I think great investors to some extent are like great chess players. They’re almost born to be investors.

Moderator: And that’s because of the tolerance for risk? Is it the patience? What are the traits to be a great investor?

Charlie: Obviously you have to know a lot. But partly it’s temperament. Partly it’s deferred gratification. You got to be willing to wait. Good investing requires a weird combination of patience and aggression and not many people have it. It also…requires a big amount of self-awareness and how much you know, and how much you don’t know. You have to know the edge of your own competency. And a lot of brilliant people are no good at knowing the edge of their own competency. They think they’re way smarter than they are. And of course, that that’s dangerous and it causes trouble. So I think Caltech would have a hard time teaching everybody to be a great investor.

Moderator: Could it help people discover that they have that temperament? Or is this something that you mostly should try on your own?

Charlie: I think you find out whether you’ve got the qualities to win at poker by playing poker.

Moderator: That’s a very empirical approach, Charlie.

Charlie: Yes, but I think it’s right. Obviously, it helps to know the basic math of Fermat and Pascal. But everybody with any sense knows that stuff. But having the temperament where Fermat and Pascal are as much as part of you as your ear and nose, that’s a different kind of a person. And I think it’s hard to teach that. I have found…Warren and I have talked about this…in the early days when we talked about our way of doing things, which was working so well, we found some people got it, and they instantly converted to our way and did very well. And some people, no matter how carefully we explained it, and no matter how successful they were, they could never learn what…they could never adapt it. They either got it fast or they didn’t get it at all. So that’s my experience.

Moderator: Sort of related to this…you talked about the search for psychological research and education ground in how humans truly operate. Have you found it yet?

Charlie: Well, no. I haven’t found anything yet, except how to get by fairly well. And that’s harder than a lot of people think. Just think of how hard it is to get far ahead in life. Imagine, suppose you want to get ahead in Caltech, you like the academic life. Caltech is very good at getting people tenure. If you’re very brilliant and work 80 or 90 hours a week for 9 or 10 years, you get tenure. That is not what I call an easy life…And competing with the Homer Joe Stewarts.

Moderator: Well some of us love it, that’s all I can say, Charlie.

Charlie: Yes, of course. I know. And that’s fine. And I chose to avoid it because I knew I wouldn’t win big at it. (I would have been) a perfectly successful professor by ordinary standards, but I would not have been a star.

Moderator: So finding your own path is something you really recommend to everyone?

Charlie: Well, no. What helps everyone is to get in something that’s going up and it just carries you along without much talent or work. And so if you pick a really strong place, like say Costco and you go to work at it, and you’re really reliable and nice, you’re going to do fine in life. You got a big tailwind. But in elite education, nobody wants to go to work for Costco, from Harvard or MIT or Stanford. And of course it’s the one place where it’d be easiest to get ahead.

Moderator: So I have a few more questions that are more on the finance side, but there is one I cannot resist asking you. “I’m 16. I want to take up investing as a full-time career. What is Mr. Munger’s best advice for me?”

Charlie: Well, if you pursue any career with enough fanaticism, that’s very likely to work better than not having the fanaticism. Look at Warren Buffet. He had this fanatic interest in investments from an early age and he kept making small investments even with his paper rout savings and so forth. And he finally learned how to be pretty good at it. If you want to succeed in investments, start early and try hard and keep doing it. All success comes that way by and large.

Moderator: What are you proudest of?

Charlie: Well. I’m proudest of avoiding some things I don’t like. I don’t like irrationality and I’ve worked to try and avoid it in my life. And I haven’t succeeded of course, nobody does. But I’ve done better than I thought I would, starting out at a fairly low state. And it has been a pleasant way of going. And Caltech by and large stands for that. Caltech really tries to figure things out, and that’s the value.

And having that just right into your gene plasm really helps. I work a lot these days with a Caltech postdoc who’s now a professor of physics at UCSB, and he’s a pleasure to work for. He never said anything stupid. He’s just so talented. Lars Bildsten is his name and he heads that visiting program for the physicists of the world at UCSB. But Lars, he is trying to figure it out right. And his graduate students are trying to figure out everything a little faster and better than other graduate students. That’s Caltech. He was at Caltech for two or three years as a postdoc. And Lars Bildsten is a wonderful man. Cal Tech is full of people like that. I don’t think Caltech has a lot of improvement that they can do in their physics department. I think it’s pretty good the way it is.

Moderator: Well, we are very glad of that and very proud…

Charlie: Well, you should be. You should be. It’s harder to be that smart in the liberal arts. Partly because many liberal arts professors or so leftist. It’s hard to be very smart if you’re a crazy leftist. You’re going to have the world a lot wrong.

Moderator: What was the most memorable thing for you when you were at Caltech.

Charlie: Well, it comes back to Homer Joe Stewart. Homer Joe Stewart was just exactly the kind of a person you want representing Caltech to the students. And I came back to my fiftieth anniversary from my time at Cal Tech, and there was Homer Joe Stewart. He must have been 88 or something. He was just sharp as a tack. And he started talking to me a little about thermodynamics. And he says, “You know,” he says, “what’s interesting about thermodynamics is how little of it was derived mathematically from Newtonian physics.” And that is such a good thing to say, and if you understand both subjects, it’s so correct. It’s weird! You would think that you could just derive all of thermodynamics from what Newton…but you can’t! In other words, as long as you have people like Homer Joe Stewart, you don’t have to worry about Caltech.

Moderator: Which of your acts of philanthropy are you proudest of?

Charlie: Well, I’m not that proud of my philanthropy. I regard it as an absolute minimal duty of somebody to be reasonably successful, you ought to be reasonably generous. So, I don’t think you get big merit points for philanthropy. Because you do that, you get a lot of discredit if you didn’t. And I don’t think I’ve been any record philanthropist. I’ve given away more money to my family than I’ve given to philanthropy. I am sort of a bad example. Now I think my philanthropy has been pretty intelligent. I think a lot good with the money that I’ve given away. But I don’t think I deserve any credit for giving away money that causes me pain. I don’t want to be under false pretenses on that.

Moderator: What are you most curious about in the next 30 to 40 years?

Charlie: Well, having been an investor for so long, I’m of course, interested in these weird present conditions and these weird economic conditions where they’re printing money like crazy and so forth. And of course that’s very interesting. And I’m interested in the fact that the world has come so far in having these undeveloped countries get ahead so fast like China. Now I compare India, which has a way worse economic record, even though they got more of our political institutions. You know, they got more free speech in India, and a way worse economic achievement. I think the economic development of the modern world is very interesting. It’s a very interesting subject. And I see why so many people in economics like it, because it is just so perplexing and so interesting. And of course, the achievements have been so great. And technology is the same. Who would guess that the whole world could have colloquia on Zoom? We weren’t doing it a year and a half ago. I mean, it’s just amazing what’s happened. Who would have guessed that…A lot that’s happened should surprise everybody. And it’s very interesting.

Moderator: Charlie, thank you very much for this conversation. I particularly appreciate your enthusiasm and ongoing curiosity, which is something that we very much value at Caltech. Is that there’s always something new to think about, a question to ask again. And please accept my congratulations on the distinguished alumni award and my thanks for participating in this event.

Charlie: Well, I liked Caltech when I was there. It wasn’t on the career path I was going to choose for myself, but I loved the detour that I got by accident of having to participate in a war. It was good for me to be in Caltech for my nine months. And it’s been good for me to live in the same community all these decades since. You know, I like the whole thing.

Moderator: Fantastic. And I want to thank the two twenty-four hundred people who have joined us for this conversation. Stay safe and goodbye.

End of Transcript

Thank you for reading. I hope you all thoroughly enjoyed the transcript. If you found any errors, kindly let me know and I will fix them.

Furthermore, if you’d like to be informed of future posts, transcripts, or events, please subscribe.


Richard Lewis, CFA
White Stork Asset Management LLC
Partner, Investments

Links to additional Transcripts:

Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2020

This month I had the great pleasure of hearing Charlie Munger speak at the Daily Journal Annual Meeting for the fifth time.  Once again, the wit and wisdom of Charlie Munger was on full display at the deceptively youthful age of 96.

Throughout the transcript below, I have included clickable links to my notes and articles which you may find insightful.  In addition to the transcript, you may also watch the entire meeting on YouTube, or listen to it through my SoundCloud channel.

I would like to thank Mr. Munger for energetically entertaining our questions and graciously sharing his wisdom, insights, and time with all of us.

I hope you all enjoy!

(Note: You will find that I frequently summarized the questions from the audience, but as for anything that Charlie or Gerry  said, I translated them verbatim and as accurately as possible.

Start of Transcript

Charlie: The meetings should now come to order. I’ll give you some time to sit down.

Welcome to the Catholic Cathedral. This is the most amazing place. Some of you who have never seen it should go look at it from the inside. It looks like hell from outside, but from inside it’s a startlingly good architectural work. And it’s quite interesting. Our director, Peter Kaufman, is on the committee who runs the cathedral. And if you want to be buried in the same column of the Ashes of Gregory Peck, he’ll arrange it for $100,000. (laughter) This is a very commercial crowd. You can’t even die without paying. OK, I have a script, I’m going to go through and after we’re through this script, let’s take care of the formal business of the meeting. We’ll answer questions in the usual way…After one brief little explanation from the chairman.

[Note: The audio of the formal business affairs have been edited out of the transcript]

Daily Journal “State of Affairs”

I will discuss briefly the state of affairs that’s reflected in our reports and then I will take questions.

This company, of course, started as a public notice rag, which made money by doing public notices and it morphed into a very successful legal daily newspaper which had a monopoly on publishing the opinions of all appellate courts in California and every law firm had to buy it. And did a lot of other useful things and was a small but very profitable paper occupying an ideal niche.

Many of the newspapers in America had similar niches where they just made regular substantial profits in a very easy simple business to run. Of course, what’s happened is that technological change is destroying the daily newspapers in America, including the little ones like ours. The revenue goes away and the expenses remain. They’re all dying. Berkshire Hathaway owns, what, about a hundred of them, and truth of the matter is they’re all going to die. And there’s nothing that can be done with good management to save them.

It’s a sad thing because those newspapers were an accidental part of the government. They called them the ‘Fourth Estate’. And each one had come into being sort of by an accident of capitalism without any planning by the founding fathers. And the people who ran them became very powerful people due to two great American institutions. One is nepotism and the other is monopoly. (laughter)

And all those nepotistic monopolists, many of whom drank too much, actually morphed into a function where they were more useful than our legislators. And of course, we’re losing them all. And what we get is these opinion services on TV that everybody watches, where everybody believes some ridiculous version of things that’s slanted as much as anybody could… And it’s not a good thing in America that we lose Newsweek, Time magazine and all of our daily newspapers and get back Rush Limbaugh. Or (inaudible) on the other side. But that’s what’s happened.

And it’s a sad thing. Nobody planned that we had a fourth estate, that it was really a branch of the government that worked very well for us and that took pride in being accurate and so on. And nobody planned that it would go away. It just happened.

Now The Daily Journal Corporation, strangely, is not going to disappear. If all of our business fails, we still have a lot of marketable securities. So we’re going to do better than these other newspapers. I’m not counting the ones like The Wall Street Journal and The New York Times, there are a few that will survive no matter what. But basically, they’re all going away.

And The Daily Journal is not going to go away and leave the shareholders with nothing because of our big marketable securities. We also have a second business which we’re trying to use to replace the economic strength of the newspaper that is imperiled. And that’s Journal Technologies. And that is a computer software business that helps courts and government agencies replace human error prone inefficient procedures with simpler and better procedures run by software.

That is a very difficult business. Ordinary software like the software a teacher uses to help teach a class or the software is used in accounting if you’re a dealer in Chevrolets or something. That stuff is a gold mine because it’s just standard and you crank it out and everybody uses it, it’s efficient. What we’re doing is servicing all these government departments of a lot of different kinds, and they all have special requirements, and they’re almost all quite bureaucratic, and they’re also political. And it takes forever, and they’re full of lawyers and consultants…The RFP process.

So it’s a branch of the software business that is intrinsically very, very difficult. Where everything takes forever, is very hard to do and so on. And a lot of people just totally avoid it for that reason. They just want to crank out a few bits of software, or distribute it on the cloud, whatever they do, and count the money. And of course, we’re in a business where we need armies of people to help all these courts all over the world automate probation officing work or court filings and so on. It’s all going to happen, so with all this automation and the effect of software, it’s going to happen, but it’s unbelievably difficult.

An RFP involving a government and a bunch of consultants is intrinsically very, very difficult. And you have to keep good nature. You have to have huge patience and you have to have huge talent. You have to just keep rolling with it. And then the money comes in very slowly and has more bureaucracy. It’s very, very difficult. In spite of all those difficulties and the fact that everybody at the very top of this company is very old, we’ve done fairly well. And don’t ask me why it was kind of a miracle. But a lot was done right just to make it to our present state. And it’s a big market, but it’s not going to be easy and it’s not going to be fast.

On the other hand, we all like the customers. I’ve fallen in love with the government of Australia. They’re just such nice people and I think it’s wonderful that Australia wants automated courts. And I think it’s wonderful they’re smart enough to hire us. Imagine hiring the little Daily Journal Company to run the courts of Australia. And my guess is it’s all going to work for them and for us. It’s a miracle they figured out that this little company would be a pretty safe choice. I think part of the reason we’ve been successful is so many of our competitors are so awful. So we don’t deserve as much credit as we’re claiming.

But it’s going to take a long, long time and it’s an everlasting struggle. It’s kind of fun to watch because we have the most unlikely cast of characters and a lot of them are quite successful. Gerry just made a big report to the board of directors. It’s just amazing the goodwill with which the people attack this very difficult work and just keep everlastingly at it. (And if) they have trouble so they go around, if somebody goes crazy they tell him ‘no’. You know, there are a million opportunities to do this wrong.

But I think it’s all going to happen. And I think we may end up with a big share of it, but when it’s all done you shareholders will need a lot of patience. It’s really hard. This is not the easy part of the software business. This is more like trying to create another Pricewaterhouse. That would be difficult. And this is difficult. And of course, we can’t guarantee that we will succeed. But I consider it likely. I just think it will be slow and awful. I don’t anticipate any really easy times for a long time, but I suspect it will keep growing. Gerry, why don’t you…How well do you think we’re going to do in the next two or three years?

Where’s Gerry? I’m blind in my left eye, so that…

Gerry Salzman: We certainly devoted a lot of energy and resources to Journal Technology. We have approximately 250 employees in Journal Technology and we have offices here in Los Angeles obviously.  In Corona, because we acquired a company in 2013 with an office in Corona, California. We have an office in Logan, Utah, where we acquired a company there in 2013. And we have an office in Denver because our original interests in this system of serving courts started because of our interest in providing… or seeing that the court of Los Angeles, the largest in the United States at least, has sufficient resources in a service provider. That’s how we got involved in 1999.

And we are seeing lots of changes. You take, for example, in Los Angeles. Los Angeles now uses our system to do electronic filing. Attorneys do the filing electronically. If you go down to the courts in Los Angeles where people used to have to stand in line or have a service provider stand in line on behalf of the lawyers, there’s nobody there. Also, in conjunction with L.A., we were able to enable lawyers to determine when they would come to court and see the judge. So attorneys are now setting their own schedule and that reduces some of the personnel requirements at the court.

These are some of the innovations that are taking place. If for example, you get a traffic ticket in in Riverside, you’re using our system to pay for that. So drive fast through Riverside. (Laughter) And we’ve made some good inroads into other California courts. We have one basic system and we have three, four, or five different configurations of the system. One for courts. One for public defenders. One for district attorney. And one for probation officers. So we have to only modify one system and make sure the configuration of the main system is appropriate for other agencies. This is a big advantage when we come to the point of doing installations.

And Charlie mentioned the…projects in Australia, the government of Australia, we now have four or five, six or seven people down in Australia. And we’ve worked for the state of South Australia and Victoria at the present time, which is Melbourne. So we have most of the courts, we have all the courts in in those two states. And they range from mineral courts to other types of courts that we sometimes don’t see here.

Los Angeles, in California, in East County, only has one court. If you went to other states, you’d find that there was a probate court, a civil court, a family law court, it just goes on and on and on. And in California, they’re are much more efficient than you can imagine when it comes by comparison, where they have all the administrators, four or five administrators, and separate systems, and separate I.T. departments. Very inefficient. That’s what we are confronted with all the time.

As we move forward, the financial results will depend upon the number of users in these various justice agencies. Yes, we do get implementation fees, but we can only take that into income when everything is delivered. And so we focus on trying to get to the point where everything is delivered. Then we can take it into income and reflected in the financial statements.

Charlie: This is a very important thing that everybody in this room should understand. We have no simple way of just counting up hours and sending little invoices to the government. That’s what most consultants like to do is bill hours. And we don’t get the right to collect money until the thing works. And we do that on purpose.

It reminds me of one of my favorite tales which really happened. When I was young, a lot of the earth moving was not done with bulldozers, it was done by teams of mules who were guided by contractors who ran these mule teams and their big plows. And there was a Latino contractor who had an enormous number of mules, and when the war came, the big builder called him and said, “I’ve got a cost plus contract with the government, I’m going to make you cost plus and I want your mules to start tomorrow morning on this big project.” Cost plus…Cost plus percentage of cost.  And this Latino said, “Oh, no.” He says, “I can’t do that.”  And he goes, “Why not?” He said, “Well”, he said, “I get business all these years because I’m so efficient.” And he said, “When I take it cost plus contract, even my mules seem to know it and they all go to hell.” (laughter).

And that’s the Daily Journal’s policy. We’re trying to avoid deteriorating, by taking this awful contracting (course). And we’re trying to be good like that Latino contractor. And my guess is it’s going to work. But you have to be very cheerful to take it because it’s agony. I can’t tell you how the people like Microsoft, Google, and so forth, they don’t want our branch of the software business. I kind of like it. Peter kind of likes it. Because he senses that…Peter Kaufman, raise your hand…Peter likes it difficult if he thinks he will keep it forever once he gets it. That’s our system.

But I certainly can’t guarantee it’s going to work. It’s a lot of very work. And I would like to tell you we’re just ass deep in talent. And that we have four qualified people for every job. We’re just the opposite. We’re like a bunch of well-armed paper hangers working away at this stuff, and so far it’s working.

And, of course, what’s happened in America, of course, is that software has grown enormously. If you take every big college in the engineering department, the most popular course is Computer Science. And if you go into venture capital, the most popular investment is some kind of software. And I do not find venture capital’s backing of software companies pretty because there’s just so much of it and there’s some wretched excess, and folly, and high prices and so on. It’s not a scene that attracts a normal Berkshire Hathaway type. I’m not saying it won’t work. For a great many of them it will do very well. But there’s also going to be a lot of casualties.

I don’t like it when bad stuff comes in… I don’t like it when investment bankers talk about EBITDA, which I translate as ‘bullshit earnings’. (laughter) And I don’t like all this talk about J-curves and all these private sales of software companies from one venture capital to another, and markups…it looks like a daisy chain to me. So I think there’s a lot of wretched excess in it. But it reflects an underlying sound development, which is this huge growth of software changing the technology of the world. But it’s going to have some unpleasant consequences because there’s so much wretched excess in it.

I bet (looking around) this room (that) almost everybody has somebody in software in the family. I’ve got two people in private equity in my family, and private equity is grown into the trillions. And of course it’s a very peculiar development because there’s a lot of promotion and a lot of crazy buying. It’s what I call ‘fee-driven buying’, much of it, where people are buying things to get the fees. I’m not used to that. I buy things because I think they’re going to work for me for the long pull…As the owner! I’m not thinking about scraping fees off along the way. So it’s a very different…it makes me very nervous to have all this fee driven buying. Wherever they’re successful, they just raise a fund that’s twice as big as the last one. Throw more money at more deals. And of course, with more money and more overhead, it’s an (inaudible) demand for fees. But will the world provide wonderful results for all these people? The answer is no, it won’t. It’s gonna be a lot of tragedy.

And in the past, the people who did well in venture capital were the clients of Sequoia, which is one of the best venture firms that ever existed in the history of the Earth. But there aren’t that many Sequoias and Sequoia had such a wonderful record because it kept itself small. And now everybody is trying to be enormously large and to grow enormously and hire more and more people and collect more and more fees. It’s weird and it’s not going to work perfectly. I am trying to give you the same service my old Harvard law professor gave me when he said, “Tell me what your problem is and I’ll try and make it more difficult for you.” (laughter) By the way, the guy that told me that was doing me a favor. It’s a pretty good way to proceed. I have this saying, ‘A problem thoroughly understood is half solved.’ It’s hard to understand it well.

Well, I guess that’s enough for The Daily Journal you’re in for a long, long difficult ride. And not only that, the damn leaders look like an old people’s home. (laughter) I’m 96. Rick is 90. Our CEO is 80. I mean, if you’re not decrepit you don’t belong here. I think we will gradually work things out in spite of this aged group of directors. After all we got a young man like Wilcox whose past retirement age. And of course we’ve got a new director, Mary Conlin, whose up here partly to make the rest of us look good…Or bad, rather.

All these odd results in capitalism…It is peculiar that one little newspaper is full of marketable securities, and it’s probably not dying, and a management that has succeeded in a business none of the people understood. None of the people I’ve named is a computer software engineer. It’s weird. And yet you people who come from all over the world to this place, you’re as nutty as we are. And if you ask me, I think it’s slightly more likely to work than not work. And it’s a very good thing to be doing. The world needs what we’re trying to do. And we’re trying to reward the right people. And really trying to serve the customers.

When it comes to customers…My ambition is to be as close to Costco as I can possibly be. I’ve never been associated with a company that works harder than Costco to make sure that customers are served well. I mean, I just love success that occurs that way. And I hate success where you deliberately trying to cheat people or sell them something that’s not good for them. Like gambling service in Las Vegas. By the way, I’m not trying to irritate our customers in Los Vegas. I’m doing it by accident.(laughter). Anyway…

But I do think there’s something to be said…You have the option for selling stuff that’s good for people instead of stuff that tricks them. And any rate, that’s our approach. I would choose that approach even if I made less money. In fact, I think you make more. It reminds me of Warren Buffet’s favorite saying, he says, “You always take the high road.” he says, “It’s less crowded.” And that’s the system.

I think the politics of the country are weirdly awful because of the excesses of hatred that you see everywhere. In California with a gerrymandered House of Representatives, the only danger of getting tossed out of the legislature is if you’re a leftist, somebody to the left of you may come in. Or if you’re rightist, somebody to the right of you may come into the primary.

And this…creates an awful legislature where the individuals hate each other. And there maybe will be 10 sort of sensible Republicans and 10 kinds of sensible Democrats in the California legislature. And every 10 years, these nutcases of the right and left get together and throw all the sensible people out by gerrymandering them out because they all agree that the people in their own party who are near the middle are horrible. Well that is a crazy way to be governed. And it is not pretty. And I have no solution. It’s just interesting. Warren said to me the other day, he said, “It’s so interesting now,” he says, “I would like to stay around for another 30 years if I couldn’t participate, if I could just watch.” And I said I’d sign up for that, too. It is very interesting. It’s weird.

Think about different television is when Cronkite is gone and we have all these clowns on the opinion servers lying to us in a very shrewd way. And they are really good at! You know, the ability to mislead people is greatly underestimated. Any good magician can make anybody see a lot of things happening that aren’t happening and not see a lot of things happening that are happening. And of course, we’re all dealing with various people who, through ‘practice evolution‘, have been good at misleading us. And so it is very very hard to be rational and to stay sane.

Of course, that’s part of the reason that some of the companies that I’ve been affiliated with have been successful. It’s not that we’re so smart, it’s that we stayed sane. Because a lot of what goes on is absolutely nuts. And we all see it in politics of course. It’s even sillier than it is in business. Although sometimes we businessmen try and get into our share of the stupidity.

You people come from all over the world, to this thing out of some deep hunger. I regard you as nerds because I was once one of you, and I know a nerd when I see one. (laughter) And you come here because some fellow nerd has managed to succeed despite his defects, and you need a similar result. (laughter) And you know something that’s really odd, is you’re right! If you could learn some of our tricks, you can get more success out of life than you deserve. That’s what’s happened to me.

And how did it happen? I’ll tell you how it happened, it’s obvious that I got better life outcomes than I deserve based on energy or intellect. And of course that’s an interesting process, and everybody would like more of it. Who doesn’t like to get a lot more than one deserves? I stumbled into a few metal tricks early in life, and I just use them over and over again. I mean, I take the high road because it’s less crowded. Of course that’s a smart thing to do. And then…I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself. And that notion, which was just inherited basically from my genes and my surroundings, has served me enormously well. It’s like Kipling said, “If you can keep your head when all around you are losing theirs.”, it’s a big advantage!

And just think of all the dumb things that are done by our politicians and our business leaders. And the wretched excess you see in the system and…I can remember one of the earlier crazy movements that caused one of our earlier recessions. All these traders would go to Las Vegas and people would hand them free stacks of chips and they had strippers…That was our securities market. It was grossly awful. And a lot goes on now that is grossly awful. Imagine politicians who never understood Adam Smith? It would be like hiring an engineer to design your airplane and he didn’t believe in gravity. (laughter) Well, I laugh too, but there are tears and my laughter. (laughter)

But this business of being determinedly rational does work, if you just keep everlastingly at it. Because it’s harder to say sane than it is (inaudible). Of course, one of the things that’s wrong with the present system is the way the heads get cabbaged up by the activity and the owners of the heads don’t know what’s happening. One of my favorite actors when I was young was Sir Cedric Hardwicke.  Was such a good British actor that was knighted by his Monarch. Sir Cedric Hardwicke got old and of course he kept acting right on and on and on, and toward the end of his life he made women with great statements in the history of acting. He said, “I have been a great actor for so long that I no longer know what I truly think on any subject.” If you stop to think about, that’s exactly what’s happened to most of our politicians, except they don’t know it! Sir Cedric Hardwicke at least new his brain had been turned to cabbage. Whereas our politicians, they like cabbage. (laughter) Anyway…

And of course the young people that want to shout out their resentment of this and that…You know, I always say what they’re doing is pounding it in. Nobody’s listening to them when they shout out, they’re just pounding a lot of nonsense in. It’s a big mistake to pretend to be practically anything because you become what you pretend to be. Now, sometimes that works. I knew a couple of no-goodniks in my youth who became leading philanthropists, and they did it just to mislead people. But after they had done it for a while, they became legitimate philanthropists. That always gave me conclusion that hypocrisy really is better than most people think. (laughter) Because It does change you to constantly pretend to be one thing or another, and of course it changes you to say something repeatedly. I always felt that Ronald Reagan was shifted from Democrat to Republican…Well, his acting career failed and he was hired by General Electric run around and give right-wing speeches. Of course, he became a Republican.

In a world where that’s the way your own mind tricks you, of course if you have some prophylactic measures where you’re more cautious about your views. Think of how we’d all love to have a bunch of children who we’re a little more cautious about their views. I’ve got some children in the audience. They’re by and large a pretty good bunch, but if I had my druthers, there’s a thing or two I would change. (laughter) Well you can laugh, but that’s the way life works. Well that’s enough of ruminations of one… Imagine coming to listen to some ninety-six-year-old man. Amazing. I’ll take questions now from anybody.

Question & Answers

Question 1: In the past, you’ve referred to value investors as a group of cod fishermen and suggested that they maybe fish in a different pond. Conversely, you’ve also discussed how over a long enough time frame an investor’s realized return would mirror the business’s return. So given that many of the highest quality businesses are in the U.S., wouldn’t some of our time be best focused on analyzing the quality of the businesses here in the U.S.? And I understand that the odds offered on the bet matters a lot. So I’d be curious to hear in your mind how you weigh the quality of the horse vs. the odds offered on the horse.

Charlie: Well, both are important, but basically all investment is value investment in the sense that you’re always trying to get better prospects than you’re paying for. But you can’t look everywhere at once, any more than you could run a marathon in 12 different states at once. And so you have to have some system of picking some place to look, which is your hunting ground. But you’re looking for value in every case.

And what is interesting to me is, you talk about the U.S., I don’t agree with you, I think the strongest companies are not in America. I think the Chinese companies are stronger than ours and they’re growing faster. And I have investments in them and you don’t. And I’m right and you’re wrong. (laughter) Well you can laugh, but I just spoke a simple truth. Li Lu is here, I saw his face in the audience. He’s the most successful investor in the whole damn room. Where does he invest? China. And boy was he smart to do that. And is he good at.

Oh, it really helps if you know witch hunting ground to look in. In fact, we all do better hunting, when we’re hunting where the hunting is easy. I have a friend who’s a fisherman and he says, “I have a simple rule for success in fishing. Fish where the fish are.” You want to fish where the bargains are. It’s that simple. If the fishing is really lousy where you are, you should probably look for another place to fish.  Somebody else?

Question 2: Over the years, you’ve shared lots of comments about India and China. I would love to hear any and all insights you have about your friendly neighbors to the north. Whether it’s our Canadian political system, banking system, housing sector, resources industry, health care system. Any and all insights, wisdom on Canada would be much appreciated.

Charlie: Well, I’m glad you gave me this opportunity. I’m very partial to Canada. And I think their socialized medicine system… I think they’re wise to have it. And I think they’re wise to pay their pharmaceutical prices instead of ours. And I think it’s wonderful that we’ve gotten along with Canada so well all these years. Oh, I think you should be quite pleased with Canada. I don’t think it helped you to have two different languages spoken. It was an unfortunate accident. But I basically like Canada and I think in some ways you do better than we do. Gerry points out that we have customers in Canada. He’s encouraging me.

Question 3: With computers and artificial intelligence rapidly getting better at investing than humans, what should analysts and portfolio managers in the investment management industry do to remain competitive?

Charlie: Well, that’s a very good question. I think what people in the investment management industry ought to do is prepare for tougher times ahead. I think this indexing thing is going to run and run and run. And I think that there are wretched excesses in a lot of well-paid hedge fund and private equity businesses that will in due time result in a lot of troubles that give pain.

So, everywhere I see the endowment managers have the same mantra. They want fewer and better investment managers. That’s not gonna be good for investment managers and the rest of the people are indexing. Now do you want any other cheery news? The cheery news is that if you think the way we nerds think and keep at it long enough, you’ll do all right. But if you go with this crowd, I think there’s pain ahead.

Question 4: In the past, you’ve recommended index funds for most people seeking wealth accumulation. And in the past, Warren Buffett has recommended using the selloff strategy for income as opposed to chasing dividends. If we synthesize those ideas, it seems like the best course of action for investing over a lifetime is to use index funds for accumulation and the selloff strategy for income in retirement. Would you agree with that? And if so, what benefits do you see in using that strategy?

Charlie: Well I think the reason it’s growing is that for most people it does work better. And on the other hand, there’s a huge proclivity to gamble. It’s very interesting to play in a game where the returns are variable, so that there’s a huge lure that comes to gambling. In China, the ordinary holding period for the individual investor is short. They love to gamble in stocks. This is really stupid. It’s hard to imagine anything dumber than the way the Chinese hold stock. And they’re so good at everything else. It shows how hard it is to be rational. But I don’t think investment management is going to…I think there are lots of troubles coming. There’s too much wretched excess.

Question 5: I had a question regarding the Stoics. Anybody who’s read your life, your testament to the idea to not be a victim, but to be a survivor. And it’s an attitude that has helped me in my short life so far. Could you perhaps expand on that idea, how it’s helped you, and how that is perhaps one of the greatest ways to live your life out regardless of what happens to you?

Charlie: Well of course, feeling like a… It’s fairly interesting…Some people are victimized by other people. And if it weren’t for the indignation that that causes, we wouldn’t have reforms that we need. But that truth is mixed with another. It’s very counterproductive for an individual to feel like a victim, even if he is. Best attitude is just to be cheerful about everything and keep plugging along. And therefore I don’t like politicians that get ahead by trying to make everybody else feel like a victim. It makes my flesh crawl. And I just don’t believe in it. Of course, who wants to be a victim instead of a survivor?

Of course, we want… But feeling like a victim… You can recognize your position as bad and try and improve it. That’s OK. But to have, a deep feeling of victimhood and it’s all somebody else’s fault is a very counterproductive way to think. People don’t even like being around it. It’s really stupid. And yet our politicians build on it and try and make their careers work by doing something that’s very bad for all the people they’re talking to. And they think they’re doing the world’s work. You know, it’s crazy. It’s absolutely crazy.

Question 6: The Daily Journal and Berkshire own a lot of the very large banks. My question is concerning some of the fintech technologies coming up. Your position on crypto is very clear. But do you see other fintech technologies as being a threat to the long-term profitability of those large banks?

Charlie: Well, I don’t know much about crypto technologies except to avoid them. And by the way, I have a lot of things…I have what I call the ‘too hard pile’. And if you (fit into) my ‘too hard pile’, I throw you into ‘too hard pile’ and I don’t think about them. Now every once in a while, I take something on or drift into something really difficult. And then I continue doing it just because I’m perverse. The Daily Journal is basically a ridiculous enterprise. It’s really difficult. And I’m enormously rich and I’m ninety-six years old. And yet I care terribly how it works out. It’s a little insane. Why would you come here and talk to a nutcase like me?

But, no, I hate things like Bitcoin. I mean, I hate things that are intrinsically anti-social. Of course, we need real currencies. And one of the interesting things about the current condition is that the Americans have created the reserve…by accident…have created the reserve currency of the world. And the world needs a reserve currency. And I don’t sense any great sense of trusteeship among my fellow Americans for behaving very well in our responsibilities to the rest of the world with our own currency. Our attitude is we’ll do what pleases us. That’s not my view. I think once you get a big responsibility to other people who are depending on you, you ought to think about them too.

Question 7: We have record budget deficits, record unemployment, and record expansion of the balance sheet. Why do you think we don’t have inflation? And secondly, could you recommend some good books you’ve read the last year?

Charlie: Well, regarding inflation. You know the economists of the world thought they knew a lot more than they did. What has happened is weird, that in response to the Great Recession, all the nations of the world have printed money like crazy and have bought all kinds of investment assets. And they’ve done things that nobody in the economics profession would have recommended on this scale. Even five or so years ago, and yet the inflation has been very low. I think we all have a lot to be modest about when we talk about economics. Lyndon Johnson said that giving a talk on economics was a lot like pissing down your leg, he says, “It feels hot to you, but it doesn’t influence anybody else very much.” (laughter) And I’m afraid I can’t do much better than Lyndon Johnson could.

Charlie: Oh books. People send me books, more than I can read. And I’ve gotten so I skim a lot of them very rapidly. I’m not sure I’m the right one anymore to… Books were so important to me all my life that I find that my…I used to read fewer books and read them better than I do now. And of course, I don’t see very well. So maybe you should talk to some younger man about your books.

Question 8: My question is about your outlook for global market and economy, especially given the slowdown in the global economy, driven by Chinese economy. And also the rising geopolitical risk. So what’s your take on market and economy going forward?

Charlie: Well, I am mildly optimistic about China for a variety of reasons. Nobody has ever taken a big nation ahead as fast as China has come ahead. And I think they’ve done a lot right. So I’m a big admirer of what’s happened there. If stopped to think about it. They we’re in a Malthusian trap and they prevented 500,000 babies from being born. They did it by methods that we wouldn’t like in the United States. But I think they were doing their world a favor. And I think that what they did was admirable.

So, basically, I don’t have this hostility toward China. I really admire what the Chinese people have achieved. And I think, considering that they started as communists, their leaders are pretty good. And it’s amazing. Imagine a communist country creating this enormous period of growth and prosperity and lifting 800 million people out of poverty. I like what’s happening in China. And I think the United States ought to get along with China. And China ought to get along with the United States.

And regarding the global situation. It’s so peculiar to have negative interest rates…Oh, another thing I greatly admire is…and this will strike you as very peculiar…There’s one modern nation which has had like 25 years of stasis. How can anybody admire twenty-five years of stasis? Well I think the Japanese have handled 25 years of stasis with my magnificent skill and philosophy. Japan is not going to hell. They don’t like 25 years of stasis, but they take it like men and they aren’t bitching and wailing and they don’t act like victims. And so I really admire the way the Japanese have handled their adversity. And I don’t think the adversity came from a lot of mistakes. I think the adversity to Japan…They were an export powerhouse and up came China and Korea. Of course they had some troubles. We’d all have troubles if we had way tougher competition.

And so I think that’s my…I don’t think Japan’s stasis was Japan’s fault. I think it just happened. And I think they bear up in it magnificently well and they’re to be greatly admired. And of course, they got into this defect free manufacturing ethos in a big way and led the world in it. So I think the United States has a lot to learn from Asians. Think about how everything’s clean in Japan. You don’t see any homeless sleeping in the…defecating in the street either. Oh, I think there’s a lot to be said for Japan.

Question 9: I was hoping that you might share with us some examples of how you used disconfirming evidence to change some of your important determinedly held beliefs.

Charlie: Well of course being able to recognize when you’re wrong is a godsend. If you take…A good bit of the Munger fortune came from liquidating things that we originally purchased because we were wrong. Of course, you have to learn to change your mind when you’re wrong. And I actually work at trying to discard beliefs. And most people try and cherish whatever idiotic notion they already have because they think if it’s their notion it must be good. And I think, of course you want to be reexamining what you previously thought, particularly when disconfirming evidence comes through. And there’s hardly anything more important than being rational and objective.

Just think of all the dumb things you can do in life. Think of the brilliant people who are just utterly brilliant, who do some of the dumbest things. You won’t have any trouble thinking of examples. In fact, most of us can think about our own action in the last year or two and we can all pull up an example or two. It’s hard to be rational.

Question 10: I recently watched a documentary that introduced the economic masters, Keynes and Hayek. I would like to know your comments on both of them and which economic theory you’d prefer. And to take a step further if applied to personal goal setting, which model would you advise us to follow? Between planning and flexibility?

Charlie: Well, Keynes of course, was a very interesting man. And he probably had more influence on the economics profession than anybody, maybe excepting Adam Smith. And of course, I lived in the Great Depression. And his ideas were exactly right for fixing the Great Depression. And what happened was we got out of it finally because accidental Keynesianism came in courtesy of Adolf Hitler in World War II. So, I don’t see how you could study economics without Keynes.

Hayek is more complicated, and I don’t think I’m the world’s best understander of Hayek. I have read him. And I tend to rather admire him. But I’m not sure I totally agree with him. It’s too tough for me. Therefore, I (inaudible) to you.

Question 11: I want to ask you about Tesla. The company has a market capitalization of about $140 billion. It traded last week about $200 billion dollars in stock and traded about $500 billion in options. And the stock moved about 20 percent a day. Meanwhile, Mr. Musk seems thrilled to stoke this volatility. I wanted to know what your thoughts are on this situation and particularly what your thoughts are on Mr. Musk’s behavior.

Charlie: My thoughts are, two. I would never buy it. And I would never sell short. (laughter) I have a third comment. There’s a man known in Los Angeles for years named Howard Ahmanson, he once said something that I’ve taken to my heart. He said, “Never underestimate the man who overestimates himself.” I think Elon Musk is peculiar and he may overestimate himself, but he may not be wrong all the time.

Question 12: I have two questions. First, what do you think of the value investments in the next 50 or 100 years? And the second question is, do have any advice on the industrial research, or the industrial investments?

Charlie: Well, I don’t think I’ve got any wonderful comments to make about industrial investment. I do have the feeling that the world may change. And two changes that I think are possible are…I think they may extend life, average life duration, by fancy tricks. And I think they may reduce cancer deaths by fancy amounts. Well I think weird things may happen. (inaudible)…any of this if it happens to me.

But I think that…Think of what’s already happened in technology. Imagine the whole internet developing and whole different things. And all those old companies, all the daily newspapers dying, and total change in manufacturing processes. And there has been a lot of change and of course this caused a lot of loss to people who had owned stocks.

I do have the feeling that (what) is really important has probably already happened and it’s going to happen from this point forward. How much better can it be once you have enough to eat? (inaudible) and a few other things? What is extra money going to do for you?

So I do think that my generation had the best of all this technical change. You know, our children stop dying. Living standards have gone way up. Air conditioning came. There were a million good things that happened.  Medicine greatly improved. They could replace your achy joint when it caused agony. I don’t think we’re going to get as much improvement in the future because we’ve got it so much already.

Question 13: Earlier in the meeting you mentioned the benefits of taking the high road, treating the customers the right way, etc. There’s a sense, which may or may not be true, but there is a sense that in China there’s more moral flexibility in business, less respect for the rule of law, and less transparency than there is in the West. Do you share that concern?

Charlie: Well, I’m naturally more comfortable in my own country, with its traditions, than I am into what’s evolved out of Chinese communism. But I admire…Considering where they were, mired in this Malthusian poverty and also mired in some ignorance, and that leader who said I don’t care if the cat is black or white, I want to know if it catches mice. That was one smart leader. And I think that that smart leader of yesteryear has other leaders now who are as smart, and I think they’re going to keep improving. I even think the Chinese may get over their crazy love of gambling. I once talked to a bunch of Chinese leaders. (And I tell you, I got to Feng Shui) and I said, “Get over it.” Pure superstition.

Question 14: Any secret of longevity tips? And how many hours do you work a day? How do you stay so current with all the information as a lifelong learner?

Charlie: Well, I don’t think I deserve any credit for longevity. It just happened. There’s no male in my family that ever lived any such age. And it’s weird. Well, I can’t help you. (laughter)

Question 15: You mentioned earlier that some mental tricks have been helpful to you. One was taking the high road. The other is being perfectly rational. What other mental tricks have been helpful to you during your life? And also you touched how you’re worried about some excesses, whether it’s in venture capital, private equity, political sphere, and in government debt. What other excesses do you see in the system right now?

Charlie: I don’t think the wide use of opioids has helped us either. There’s always some miserable excess. And it’s a very complicated subject. Do you remember how the Chinese emperor got rid of opioid addiction when something like 1 male in 8, or something like that, in China was an opium addict? He didn’t have to kill very many people, he just said death penalty for users, no exceptions. And away went his addiction problem. I think somebody may try some of that stuff sooner or later if things get awful enough. It may not be the worst way to handle it. On that cheery note, I’ll go to the next question.

Question 16: I’m a father of three young children under the age of 14. And my question to you is, what would you recommend to teach children to prepare than to be successful in life?

Charlie: I think the best thing any parent can do is be a good example. Preaching doesn’t work worth a damn.

Question 17: There are over 10 trillion dollars of securities around the world with a negative yield. And by the president’s Twitter feed, it seems that he wants to bring negative interest rates to the United States. Are you for negative interest rates or against them?

Charlie: Negative interest rates make me very nervous. However, I don’t think the authorities had much choice. It’s politically impossible to do big stimulus rapidly and the only weapon they had in a crisis was to print money and change interest rates. And I think it was probably the right thing to be done. Of course it makes me nervous. And I think, having worked once, people will overdo it. And that’s the nature of governments and people. And of course, that makes me nervous. I don’t know what to do about this.

Question 18: My question is about the effects of low interest rates on insurance. Lower returns on float may be causing a tighter supply of insurance. For example, there used to be three main underwriters insuring all the taxi cabs in Southern California. Now it is heading towards just one underwriter who will have a monopoly on all commercial taxi insurance in Southern California. You have access to CEOs of Geico and Wesco and a Rolodex that we can only dream of. So do you see 10 years of low interest rates posing a systemic risk to the supply of insurance?

Charlie: I am made uncomfortable with the idea of extremely low interest rates, or negative interest rates even more extreme, lasting a long time. I don’t think anybody knows how those will work. If you are a little uneasy, welcome to the club. I think it’s dangerous and peculiar, but I think we had to do what we did. In other words, I don’t have any good solution for you. I think you’re right to be worried about it.

Question 19: Do large cap technology stocks today reflect the bubble environment of the Nifty Fifty, in that everyone is investing in the same 10 or 15 stocks?  Also, Berkshire Hathaway owns 26 percent of Kraft Foods, would it make sense to buy out Kraft Foods completely and take advantage of the low price?

Charlie: Well I don’t think I can comment about what Berkshire Hathaway might do next at what price. But Nifty Fifty is an interesting question. At the height of the Nifty Fifty craziness, which was created by the Morgan Bank of all places, you had a home sewing company that was selling for 50 times earnings. Home sowing! Great god. We are not that crazy yet. So I don’t think that…I think that a lot of what’s happened is not crazy. I think these companies are very valuable…While they may be selling at too high prices. But home sowing was sure to fail. I don’t think our leading tech companies are at all sure to fail. Well, I think it’s not nearly…The current situation is not nearly as crazy as what…The Nifty Fifty was absolute dementia.

Question 20: What advice do you give to your family that is starting careers in private equity? And what advice would you give to young people as a whole, starting careers in those sectors?

Charlie: My family is not very interested in what I think about their career choices. (laughter) And I respect their disinterest. But I do think we’ve got way too much wretched excess. Any time you’re inventing new names to sort of mislead people, like adjusted EBITDA? Think of the basic intellectual dishonesty that comes when you start talking about adjusting the EBITDA. You’re almost announcing you’re a flake. And yet our respectable people talk that way and charge fees for talking that way. It’s ridiculous.

And so I don’t like the wretched excess. I don’t like all these transactions were one private equity group sells to another and the guys who really own it are just sort of raising the fees higher and higher for owning the same intellectual mix. It says a lot that’s…Finance by its nature, the temptations are too great and it goes to wretched excess. And of course, I don’t like it. I don’t think it’s good for the country.

I would argue that the wretched excess that led to the Great Depression, which led to the rise of Hitler. I think we pay a big price eventually for wretched excess and stupidity and greed and so forth. I’m all for staying in control. In other words, I’m all for behaving a lot more like Confucius.

Question 21: Mr. Munger, it is well known that you’re an avid and voracious reader. Do you ever reread books that you’ve already read before? And if so, which books do you reread?

Charlie: Yeah, I do. Let me give you an example of something I want to reread that I haven’t re-read yet. The other day I was musing over the current situation. And it popped into my head that I had read a poem about 80 years ago by George Sand. And George Sand was a female writer, but you know, female writers to get ahead in those days sometimes used men’s names. George Sand wrote a poem and it was an ode to the goddess of poverty. She said, “Hail to the goddess of poverty! A wonderful goddess of poverty. She tills the fields, she mines the mines, and so on.” If I remember right toward the end, the goddess of poverty said, “If you try and banish me, you’ll live to want me back.” I kind of agreed with this poem and I’d like to see it again.

I don’t know how a punch notes on the internet and get George Sands poem to me. So if somebody will send me her poem, I’ll very much like it. But I’m telling you this because it’s an anecdote to our politicians who want to tell us that they’re going to abolish all poverty. It’s a stupid idea. You know, it’s like saying we’ll all be…Riches in a modern civilization are a relative thing. It’s status where we want. It isn’t that we need more means. The trouble with reaching for status is that the bottom 90 percent are always going to contain exactly 90 percent of the people, no matter how hard we work or how much we succeed. And we actually need some tough incentives in a civilization to make it work. In other words, George Sand was right. The goddess of poverty is not all bad. She’s partly good.

And of course, I like thoughts that I have that are different from everybody else. I think that a billionaire who talks about the glories of goddess of poverty, is making a contribution. (laughter) But only a bunch of nerds like you will appreciate it.

Question 22: You were an early proponent of electric vehicles, specifically your investment in BYD. I wonder if from your perspective today, other technologies like hydrogen fuel cells or others that may come to mind are equally important in terms of their emerging capabilities and what sort of impact they may have.

Charlie: Well, I think electric vehicles will be more popular than hydrogen fuel cells. Getting the sun’s energy transferred into electricity, and electricity into the vehicles is basically a good idea for the long pull. And I think all the technology is going to work. And some of it’s actually improving. We may get a lithium battery that’s actually quite safe and more energetic than those we have now.  I think that’s all to the good.

In fact, here in California…When I came to California, we had a Petroleum Club. We had wildcatters. We had a big oil industry. It was a little like Texas. I don’t think we’ve found any new oil to speak of in California in decades. I think it’s dangerous to rely on hydrocarbons for energy. Of course we’ve got to take more of it directly from the sun. I think that Texas will eventually get to be like California.

Question 23: Do you think it’s necessary for America to record a positive trade balance to keep its prosperity in the next century?

Charlie: The answer is no.

Question 24: To borrow words from another blind philosopher, John Milton, Berkshire, Costco, and Daily Journal. “Pleas’d be long choosing, and beginning late.” This question is for my five children who may be watching later, how do you nudge your kids and grandkids to hold on to their shares for as long as possible?

Charlie: I don’t think I’m a good model for you. My children seem to do pretty much what they please. I find I’m happier if I just do the best I can by my children and take the results as they fall. I wouldn’t sweat too much about whether your children hold the stock or not.

Question 25: I’m 18 right now, I’m in college and sometimes I lose interest in what I do. And your ninety-six and you’re so passionate about what you do. So what keeps you going? How do you still have the motivation?

Charlie: Well, maybe I’ve been lucky. I like what I do. I have wonderful partners and friends. I have a nice family. My problems are interesting to me. I have been a very fortunate man. And I don’t know how to make everybody else lucky. Well, I could have had a different hand and been some miserable alcoholic throwing up in the gutter. I don’t think I deserve any great credit for having stumbled into a reasonable amount of felicity. I do think that trying to be rational helped. That’s the only thing you’ve got if you’re fellow nerd. There’s no point in your...If you’re not going to be a sex object, you may have to rely on your rationality. (laughter)

Question 26: There’s a lot of talk these days about the climate and the environment and funds divesting fossil fuels and in countries trying to figure out how to generate electricity without polluting the environment. Could you give us your thoughts on nuclear power? I know Bill Gates has been a pretty vocal supporter of it. And I read that Warren used to invest in uranium back in the 50’s. And he more recently helped to fund a uranium bank in Central Asia. So if you had any comments on that as well.

Charlie: Well, I admire Bill Gates, who feels a duty to throw money at stuff that’s unpopular elsewhere, and that might possibly work. Oh, I think it’s an admirable charitable effort by Bill Gates and one for which he’s very well suited. I don’t know whether we’re going to get safe little atom plants or something. But I think it’s certainly worth thinking about. Problem with it of courts is that, how much additional (nuclear) material do you want a bunch of crazy humans to have? I don’t know the answer to that question.

And regarding energy, of course we’re going to have to get more directly from the sun and so forth. And I think it’s all to the good that everybody’s going into that in a big way. By the way, I would be in favor…if there were no global warming problem…I’d be in favor of substituting… getting power directly from the sun for fossil fuels starting today, even if we didn’t have a global warming problem. I think it’s a good idea to conserve the hydrocarbons and use more solar energy. That is, by the way, not the normal attitude of other people. But I’m right and they’re all wrong. (laughter)

Question 27: My question is on a universal basic income. So it is a government’s whole public program for a periodic payment delivered to everyone without any work requirement. So I’m just curious about your opinion plan like this.

Charlie: Well, if you did enough of it, you’d totally ruin everything. A little of it, we can afford. What the exact mix is? We’ll be determining through the political process forever.

Question 28: You talk frequently about having the moral imperative to be rational. And yet as humans, we’re constantly carrying this evolutionary baggage which gets in the way of us thinking rationally. Are there any tools or behaviors you embrace to facilitate your rational thinking?

Charlie: The answer is, of course. I hardly do anything else. One of my favorite tricks is the inversion process. I’ll give you an example. When I was a meteorologist in World War II. They told me how to draw weather maps and predict the weather. But what I was actually doing is clearing pilots to take flights.

I just reverse the problem. I inverted. I said, “Suppose I wanted to kill a lot of pilots, what would be the easy way to do it?” And I soon concluded that the only easy way to do it, would be to get the planes into icing the planes couldn’t handle. Or to get the pilot to a place where he’d run out of fuel before he could safely land. So I made up my mind that I was going to stay miles away from killing pilots. By either icing or getting him into (inaudible) conditions when they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.

And if somebody hired me to fix India, I would immediately say, “What could I do if I really want to hurt India?” And I’d figure out all the things that could most easily hurt India and then I’d figure out how to avoid them. Now you’d say it’s the same thing, it’s just in reverse. But it works better to frequently invert the problem. If you’re a meteorologist, it really helps if you really know how to avoid something which is the only thing that’s going to kill your pilot. And you can help India best, if you understand what will really hurt India the easiest and worst.

Algebra works the same way. Every great algebraist inverts all the time because the problems are solved easier. Human beings should do the same thing in the ordinary walks of life. Just constantly invert. You don’t think of what you want. You think what you want to avoid. Or when you’re thinking what you want to avoid, you also think about what you want. And you just go back and forth all the time.

Peter Kaufman, who is here today, he likes the idea that you want to know how the world looks from the top looking down and you want to know what it looks like from the bottom looking up. And if you don’t have both points of view, your reality recognition is lousy. Peter’s right. And an inversion is the same thing. Just such a simple trick to think, “How does this look from the people above me? How does it look from the people beneath me? How can I hurt these people I’m trying to help?” All these things help you think it through. And they’re such simple tricks. Like the lever, they really help. And yet our great educational systems that give out advanced degrees, they don’t teach people these simple tricks. They’re wrong. They’re just plain wrong.

Question 29: If you were researching a new company that you’ve never heard of, how would you approach the research process? How much time would you spend if you performed an intrinsic value estimate and the company was expensive, would you still continue following the company closely and researching it? Or do you kind of try to get to a valuation pretty quickly, and if it’s if it’s not cheap kind of move on? How do you balance the time you spend on companies?

Charlie: Well, of course if it’s complicated technologically I tend to leave it to others. I may make an occasional variation on that, but basically, I just don’t do it. I want to think about things where I have an advantage over other people. I don’t want to play a game where the other people have an advantage over me.

So if you have a pharmaceutical company and you’re trying to guess what new drug is going to be invented, I’ve got no advantage. Other people are better at that than I am. So I don’t play in a game where the other people are wise and I’m stupid. I look for a place where I’m wise and they’re stupid. And believe me, it works better.

God bless our stupid competitors, they make us rich. You know, that’s my philosophy. And I think you have to know the edge of your own competency. You have to kind of know, ‘This is too tough for me. I’ll never figure this out.’ I’m very good at knowing when I can’t handle something.

Question 30: My question is about electric vehicles and BYD. Why are electric vehicles sales at BYD down 50 to 70 percent while Tesla is growing 50 percent? And what’s the future hold for BYD?

Charlie: Well, I’m not sure I’m the world’s greatest expert on the future of electric vehicles, except I think they’re coming generally and somebody’s going to make them. BYD’s vehicle sales went down because the Chinese reduce the incentives they were giving to the buyers of electric cars. And Telsa’s sales went up because Elon has convinced people that he can cure cancer. (laughter)

Question 31: One of the more surprising opinions I’ve heard this year is that we never really had journalistic ethics, that the news has always been colored yellow with the voice of their proprietors. With nine decades of observation under your belt, does that ring true? Or does the recent business models shift from subscriptions towards…

Charlie: No, I think those old proprietors, the people that owned the networked news and Time magazine, and Newsweek, and the Monopoly newspapers, I think those people were pretty good and this current bunch are deliberately lying because it sells better. Oh, I like the old products of nepotism and monopoly. They were better for us than these new guys.

These guys are so good at marshaling hatreds. You know, politics was once called by some famous English politician ‘the art of marshaling hatreds’. We now have news outlets that we all follow and they’re good at marshaling hatreds. Now some hatred may have some constructive use, but they’re overdoing it. The hatred is too intense, it’s cabbaging up the minds. Pretty cabbaged up the minds of the broadcasters, and now it’s cabbaging up the people who watch.

Question 32: There’s this common sentiment that technology is both accelerating the pace of change and its impact is broadening across most industries, usurping traditional moats. So given your long career, I’m wondering, do you think the traditionally ‘moaty’ industries are being undermined at a pace that’s different from what’s been happening in the past?

Charlie: Yeah, I think the moats of have been breached time after time after time. Imagine the Eastman Chemical Company going broke. Imagine all these great department stores being on the edge of extinction. Imagine all those monopoly newspapers going down. Look at the strength of the American auto industry now compared to what it was, say in 1950. Oh, I think the moats are disappearing rapidly. I mean, the old classical moats. I think that’s probably a natural part of the modern economic system is that old moats stopped working. Let me know what your problem is and I’ll try and make it more difficult for you.

Question 33: I’m a current undergraduate student. What would you say is the best possible way for someone to expose themselves and expand their understanding of working in the business world, without actually currently being involved in it? And how can I maximize my potential value to a corporation in the future by what I do right now?

Charlie: Well, that’s a good question. There’s so many of you now who want to be rich by going into finance. And of course, that multitude is not going to all get rich. And of course, 99 percent will be in the bottom 99 percent. That’s just the way it’s going to work.

I look at the people in my generation who were the nerds who were patient and rational, eventually did well, who lived within their income and worked at being sensible and when they saw an opportunity, grabbed it pretty fiercely and so forth. And I think that’ll work for the new nerds of the world. The people who get ahead because they’re star salesmen or charismatic personalities, I’m not one of those, so I don’t know how to do that. So if you’re not a nerd, I can’t help you. And I think that the odds are that most people who try and do finance are not going to succeed.

And there’s a lot of wretched excess in it because easy money will always attract wretched excess. It’s just the nature. It’s like a bunch of animals feeding on a carcass in Africa. By the way that’s (inaudible) I chose on purpose. But so, I don’t think it’s so pretty. And I don’t think that modern finance is so wonderful. And in my day a lot of the finance were more like engineers. They were so chastened by the Great Depression and all the wretched failure that they really tried to make everything super safe. It was a very different plodding place. The people weren’t trying to get rich they were trying to be safe. This modern world is radically different. I’m not sure if I were starting out in your world how well I would do. It would be a lot harder than it was to get ahead in the world the way it was when I came up.

If I were you my best (advice), I think you’ll be happier if you reduce your expectations than if you try and satisfy them. And by the way, I think that’s generally a very good idea. It sounds silly, but it’s so obvious. You think of how many of us are fairly content with pretty moderate success. That is worth knowing because that’s what most of us are going to get.

Question 34: What are your thoughts on the errors in engineering and business generally at Boeing? And how you’ve been thinking about that as that’s unfolded recently?

Charlie: Well, I don’t like to jump on Boeing.  Boeing is a great company that had one of the great success rates…great safety records of the world. They lost their way. They made some dumb mistakes. And I think that’s almost the nature of things too when you try and do something very complicated with hundreds of thousands of people. That occasionally there may well be a slip up.

In most places, if you actually look at them, they have some near misses. Boeing had a near miss a few years ago when the rudder stuff failed and they had a few crashes. I was on the safety committee at U.S. Air when that happened and nobody could figure it out for months. Something in the rudder was not working and it caused three crashes. It took them six months or so to figure it out. And they must put an army on it. Well they survived that one and they’ll no doubt survive this one. But, it’s really expensive to make a big safety mistake. And of course, they should be avoided.

Question 35: I have two questions.  The first is, it’s been a while since you’ve had the psychology of human misjudgment as a talk. And I was wondering if there are any additions you would have, that you’ve seen more recently? And the second part is, you’ve mentioned how important being rational is throughout your life. Can you walk us through what steps we can take to become more rational?

Charlie: Well, it’s a long process. I don’t think anybody just flashes into it. It’s not like somebody who tells you all you’ve got to do is run down to the front of the revival meeting and shout out and you get a wonderful here after. Rationality is something you get slowly and it has a variable result. But it’s better than not having it. No, I just think that…you can just see how awful it is when people get into these furies of resentment and anger, and sure they’re right about everything. It’s hard to know exactly how human civilization ought to be organized.

In my own life, I’ve often reflected about how well the system has worked. What I concluded was that the social safety net is…it’s just come up enormously as the world has gotten more prosperous. That was a very desirable thing. And that the Republicans who always opposed it were wrong. And I’ve also…the Democrats that always wanted to push the safety net too far ahead, as they did for a while with the welfare program, that was also wrong. And that, by and large, what we have is about right. We wouldn’t have got it from either party alone. If either party had been totally in control in a one-party government, we wouldn’t have had the result that we had, which is close to right.

I think power does corrupt. I think too much power…Part of the genius of the American system is, is no one person gets too much power. If either party had all the power, I don’t think American civilization would’ve work as well as it has with this ebb and flow. And I don’t know what the exact right safety net is. I don’t think it matters that much. I think the United States would be about as happy if it had five percent more, or five percent less safety net.

Question 36: One of my favorite lines from your book is, ‘It’s better to be roughly right than precisely wrong.’…

Charlie: That comes from Keynes.

Question 36 continued: Could you elaborate a little bit on the Project Haven? What are you doing to improve health care, lower the cost, improve quality and access?

Charlie: Well, that’s a very interesting subject. If you take American health care, in many ways it’s the best in the whole world. We have more brains in our medical schools and our pharmaceutical companies than the rest of the world has per capita. In fact, we may have as much brains as all the rest of the world together.

On the other hand, if you actually went into American medicine, hospitals, doctor’s offices, or… You would find a huge amount of totally counterproductive, unnecessary activity that costs a lot and does no good or actually does harm. And you’d find that some people are not doing that. Or they don’t have the incentives to make money by doing it. You don’t get a lot of counterproductive medical care. Kaiser here in California does not do a lot of unnecessary stupid medical care, or prolonged death to make more money and do all the evil things that other people do. Other people, as hospitals and doctors get under pressure, introduce a lot of waste and folly. And some of the pharmaceutical companies, behavior is totally outrageous. They have some basic diabetes drugs and it’s trying to charge some woman ten thousand a month or something, it’s ridiculous. And I even go further. I think it’s evil.

And I think that the system should be changed. And I think it will be changed. I think there’s too much wretched excess in the medical system, and the really sad part of it is, the people who are doing it have no conscious malevolence. They’re not people who decide to do murders and maimings to make money. They think it’s good for the patients, what they’re doing. And of course, you go to do an unnecessary back operation on somebody, it’s a major evil. But the guy that’s doing it really thinks it’s good for the patient. In other words, he’s turned his brain into cabbage. And that’s not a good thing.

I think you have to change the incentives. I think there are places in America that are very admirable that don’t do a lot of unnecessary stuff and other places that do. And I think we’re going to have to change the system. If you take the medical system of Singapore, it costs 20 percent of what ours costs and it has better statistics. And it’s not opaque, it’s open. We have a whole industry that tries to make the payment things opaque so they can take advantage of people. And they think it’s free enterprise. I think it’s stealing.

Question 37: I’ve been working in the financial services industry for the past five years, and one of the things that has surprised me is how many of my peers in the industry have sat out the market over the last five years. Holding cash in anticipation of a market downturn. And, you know, I would think, given that we’re in our late 20s and we’ve accumulated savings and have what’s hopefully a multi-decade runway ahead of us, the right thing to do would be to start investing now. And my question is, first, do you agree with this assessment? And if so, how would you convince your friends to start investing?

Charlie: Well, it’s obvious that deferred gratifiers do better over the long pull than these impulsive children that have to spend money on Rolex watches and other folly. And not that I’m picking Rolex is any worse than Patek Philippe or something. But I think everybody should…save and not be stupid at spending money and defer gratification to get more later. All those good things that we were taught, you know, by Benjamin Franklin, thrift and so forth.

And the odd thing about it is that people were kind of born deferred gratifiers or not. They’ve done recent psychological work on that subject. Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. (laughter) But if you have a slight tendency to defer gratification, and you can feed that tendency, you’re on the way to prosperity and happiness. It’s that demand for immediate gratification, that’s the way to ruin. It may also give you a syphilis. (laughter)

They have a saying in vaudeville, ‘Give him the hook.’ My (friend) Guerin is just giving me the hook. You know, I’m an accidental guru. We didn’t set out to have an audience of people coming in and asking me questions about every damn subject in the world. It just kind of happened by accident and I went along with it because I think it did more good than harm and I kind of enjoy it as long as I don’t have to do it too often. But I feel sorry for people who have adulating multitudes. And I also wouldn’t like a normal multitude, I love these nerds.

Question 38: I wanted to go back to Singapore and ask you a question involving Lee Kuan Yew, particularly his housing policies. I’m curious how you think California should address the insane costs of construction, new development right now, and how you would try to create housing in California that would be affordable across all socio economic areas to avoid kind of the social evils that Lee Kuan Yew has managed to avoid back in Singapore.

Charlie: Well, that’s like asking some ordinary klutz, who’s drunk, if he can’t come up with something like Albert Einstein. It’s just too much. Lee Kuan Yew is the best nation builder that probably ever existed. And what he accomplished in Singapore considering what he started with, it was a miracle. And of course, I don’t know how to create that everywhere. I’m not sure Lee Kuan Yew could have done it if he didn’t have a bunch of fellow Chinese there. I’m not sure that any other ethnic group would have done it.

I think he had a very…it looked like a terrible hand. And by the way, there’s an interesting story there. He needed an army when he first took over and nobody would help him. And only one nation in the whole world would help him and that was Israel. And he said, “How can I accept? I’m surrounded by Muslims who hate me. How can I accept military advice from Israel?” And he finally figured it out. He accepted the help and he told everybody they were Mexicans. (laughter)

Well with that little joke we’ll end the meeting.

End of Transcript

Thank you for reading. I hope you all thoroughly enjoyed the transcript. If you found any errors, kindly let me know and I will fix them.

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Richard Lewis, CFA
White Stork Asset Management LLC
Partner, Investments

Links to additional Transcripts:

Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2019

Last month I had the great pleasure of hearing Charlie Munger speak at the Daily Journal Annual Meeting for the fourth time.  Once again, the wit and wisdom of Charlie Munger was on full display at the deceptively youthful age of 95.

In addition to the transcript provided below, you may also watch the entire meeting on YouTube, or listen to it through my audio recording on SoundCloud.

I would like to thank Mr. Munger for energetically entertaining our questions and graciously sharing his wisdom, insights, and time with all of us.

I hope you all enjoy!

(Note: You will find that I frequently summarized the questions from the audience, but as for anything that Charlie, Gerry, or Peter said, I translated them verbatim and as accurately as possible.)

Start of Transcript

Charlie: Gerry, is there anything else that I’m suppose to do?

Gerry Salzman: That’s it Charlie.

Charlie: It’s very burdensome. (laughter) So many of you have come from such great distances (that) I’m going to speak briefly on a number of topics that may interest you and then I’m going to take questions.

It’s amazing the number of people at the meeting of the little Daily Journal Corporation which after all is a pretty small operation. We’ve got two businesses one a steadily declining legal newspaper which now earns about a million in a year pre-tax and shrinking, and a computer software business where we’re trying to automate courts and justice agencies and various other governmental departments. And that is now bigger by far in terms of prospects and customers and employees and so forth than our shrinking newspaper business. It hardly can be imagined how hard it is to deal with a whole bunch of different courts in different states and their advisers and the RFP process and the bureaucracy. This is a part of the software business that the giants tend to hate. They like a business where you just stamp out an extra copy of something and 98 percent of the revenues go immediately into the till as cash and there’s no extra work. And that is not handling a bunch of justice agencies, attorney generals, state courts, federal courts, and so forth all over the country with different requirements, different consultants, and of course steady and aggressive competition. The nature of our business it’s more like technical consulting than it is just stamping out software. It’s a very high service business. It’s very difficult. The computer science is time consuming and difficult. But just dealing with that much bureaucracy over that many different fields with the political realities…it’s just immensely difficult. So it’s a very slow grinding business and that’s the nature of the game. We have always liked it because a business like this requires a company that’s very rich and very determined and is willing to keep plugging. And of course that’s what the Daily Journal has done.

How are we doing? Well that’s hard to judge, but I would say watching it quite closely that it’s like a pharmaceutical company with seven wonderful drugs in the pipeline. We have a lot in the pipeline that is very very important to us. Australia, Canada, California. We’re talking big big markets.

Our main competitor is Tyler Technologies which is listed on the New York Stock Exchange and of course they’ve been at it a long time and are way bigger, but we are getting some significant volume and we have some very pleased customers. How in the hell does the little Daily Journal Corporation attract the Government of Australia? Australia is a big place. But I’ve gotten to love the Australians and I think it’s going to succeed in Australia, mightily. And so it takes a long time and it’s hard work and it’s also very difficult work. Not everybody can do this. Just the mass of complexity. We would never be where we are if we didn’t have Gerry Salzman to do everything he’s done over the last ten years. Anybody else would have failed at this. Now Gerry is 80 and he and I have one thing in common, we both use canes. When I’m not in a wheelchair I use a cane. So the idea of taking on the whole world when the chairman is 95 and the vice chairman is 89 and the chief executive that does all the work is 80 and uses a cane…It’s a very peculiar place that you people have come a long way to. What the hell are you thinking about? (laughter)

It’s weird and what’s happened of course is that we’re standing a bit for some combination of basic morality and sturdy common sense. And it’s amazing how well Berkshire Hathaway, and the Daily Journal for that matter, have succeeded with nothing more than basic morality and sturdy common sense. But of course when people talk about common sense they mean ‘uncommon sense’. Every time you hear that somebody has a lot of common sense it means he’s got uncommon sense. And it is much harder to have common sense than it is generally thought.

Let me give you an interesting example. The investment world involves an enormous amount of high IQ people trying to be more skillful than normal. You can hardly imagine another activity that gets so much attention. And weird things have happened. Years ago one of our local investment counseling shops, a very big one, they were looking for a way to get an advantage over other investment counseling shops. And they reasoned as follows. We’ve got all these brilliant young people from Wharton and Harvard and so forth and they work so hard trying to understand business and market trends and everything else. And if we just ask each one of our most brilliant men for their single best idea then created a formula with this collection of best ideas, we would outperform averages by a big amount. And that seem plausible to them because they were ill-educated. That’s what happens when you go to Harvard and Wharton. So they tried it out, and of course it failed utterly. So they tried it again and it failed utterly. And they tried it a third time and it also failed. Of course what they were looking for is the equivalent of the alchemists of centuries ago who wanted to turn lead into gold. They thought if you could just buy a lot of led and waive your magic wand over and it turned into gold, that would be a good way to make money. This counseling shop was looking for the equivalent of turning lead into gold and of course it didn’t work. I could’ve told them but they didn’t ask me. Nothing.

The interesting thing about this situation is that this is a very intelligent group of people that’s come from all over the world. You’ve got a lot of bright people from China where people tend to average out a little smarter. And the issue is very simple. It’s a simple question. Why did that plausible idea fail? Just think about it for a minute. You’ve all been to fancy educational institutions. I’ll bet you there’s hardly one in the audience who knows why that thing failed. That’s a pretty ridiculous demonstration I’m making. How could you not know that? It’s one of the main activity of America with an obvious and important failure. Surely we can explain it! You have to have stayed awake in your freshman college courses to answer that question. But if you ask that question at a Department of Finance at a leading place, the professors wouldn’t answer it right. Now I’m going to leave you that question because I want you perplexed. (Laughter) And I will go on to another issue.

But that’s one you should be able to answer. It shows how hard it is to be rational on something very simple. How hard it is…How many kind of crazy ideas people have and don’t work, and you don’t even know why they don’t work even though it’s perfectly obvious if you’ve been properly educated. And by the way my definition of being properly educated is being right when the professor is wrong. Anybody can spit back what the professor tells you. The trick is to know when he’s right and when he’s wrong. That’s the properly educated person. And of course they’re frequently wrong particularly in the soft sciences. In fact if you look at a modern elite institution, it’s fair to say that a lot of the faculty are a little crazy. It’s so left wing now in the humanities and it’s very peculiar. That’s another thing. Why should 90 percent of the college professors in the humanities be very left wing? I leave that question for you too. But it happens.

Another issue of course that’s happened in the world of stock picking, where all this money and effort goes into trying to be rational, is that we’ve had a really horrible thing happen to the investment counseling class. And that is these index funds have come along and they basically beat everybody. And not only that, the amount by which they beat everybody is roughly the amount of cost of running the operation and making the changes in investments. So you have a whole profession that is basically being paid for accomplishing practically nothing. This is very peculiar. This is not the case with bowel surgery or even the criminal defense bar in the law or something. They have a whole profession where the chosen activity they’ve selected they can’t do anything.

Now in the old days the people in the profession always had some of this problem and they rationalized as follows. ‘We are saving our clients from the insurance salesman and the stock broker, the standard stock broker that serves the active trader.’ And they were saving people from the life insurance salesman and the hustling stockbroker who liked active trading. And I suppose in a sense that the investing class is still saving those people from an even worse fate.

But it is very peculiar when a whole profession that works so hard, and is so admirable, and the members of which we are delighted when they marry into our families, and they just can’t do what their profession is really trying to do, which is get better than average results. How is that profession handling this terrible situation, as index investing gets more and more popular and including a lot of fancy places?

Well it’s a very simple answer, they’re handling it with denial. They have a horrible problem they can’t fix, so they just treat it as nonexistent. This is a very stupid way to handle a problem. Now it may be good when you’re thinking about your own death which you can’t fix and it’s just denial all the way to the end. But in all the practical fields of life, this problem thoroughly understood is half solved or better coped with.

So it’s wrong to have all these people in just a state of denial and doing what they always did year after year and hoping that the world would keep paying them for it even though an unmanaged index is virtually certain to do better. It’s a very serious problem. And think of how much New York say needs a flow of money from finance. Think what would happen to Manhattan if there weren’t any fees for investment management or trading spreads and so on. So it’s a weird situation and of course it’s unpleasant. Big investment counseling shops, some of them shrink and some go out of business. And the value investors, of course who many of I know because we came from that tradition, the value investors who were honorable are quitting. Boom. Boom. Boom. And what worked for them for years stopped working and they’re honorable people they just quit. And they’re also rich which makes it easy. But those who aren’t rich have a hell of a problem. And it costs about fifty thousand dollars in the city of Manhattan to send your kid to pre-school. Non-deductible. And that’s just the start of an endless procession of years of vast expanse. So if your game is money management you have a serious problem. I don’t have any solution for this problem. I do think that index investing, if everybody did it won’t work. But for another considerable period, index investing is going to work better than active stock picking where you try and know a lot.

Now at a place like Berkshire Hathaway or even the Daily Journal, we’ve done better than average. And now there’s a question, why has that happened? Why has that happened? And the answer is pretty simple. We tried to do less. We never had the illusion we could just hire a bunch of bright young people and they would know more than anybody about canned soup and aerospace and utilities and so on and so on and so on. We never had that dream. We never thought we could get really useful information on all subjects like Jim Cramer pretends to have. (laughter) We always realized that if we worked very hard we can find a few things where we were right. And that a few things were enough. And that that was a reasonable expectation. That is a very different way to approach the process. And if you had asked Warren Buffett the same thing that this investment counseling did, “Give me your best idea this year.”, and you had just followed Warren’s best idea, you would find it worked beautifully. But he wasn’t trying to know the whole…he would give you one or two stocks. He had more limited ambitions.

I had a grandfather who was very useful to me, my mother’s grandfather, and he was a pioneer. He came out to Iowa with no money but youth and health and took it away from the Indians. He fought in the Black Hawk…he was a Captain in the Black Hawk Wars, and he stayed there and he bought cheap land and he was aggressive and intelligent and so forth and eventually he was the richest man in the town and owned the bank, and highly regarded, and a huge family, and a very happy life. He had the attitude…having come out to Iowa when the land was not much more than a dollar an acre, and having stayed there until that black topsoil created a modern rich civilization, and some of the best land in the world…His attitude was that in a favored life like his, when you were located in the right place, you just got a few opportunities if you lived to be about 90. And that the trick in coming out well was seizing a few opportunities that were your fair share that came along when they did. And he told that story over and over again to the grandchildren that hung around him all summer, and my mother who had no interest in money remembered the story and told it to me. But I’m not my mother’s natural imitator and I knew Grandpa Ingham  was right. And so I always knew from…when I was a little boy that the opportunities that were important…that were gonna come to me…were few and the trick was to prepare myself for seizing the few that came. This is not the attitude that they have at a big investment counseling thing. They think if they study a million things they can know a million things. And of course the result is that almost nobody can outperform an index. Whereas I sit here with my Daily Journal stock, my Berkshire Hathaway stock, my holdings in Li Lu’s Asian fund, my Costco stock, and of course I’m outperforming everybody. (laughter) And I’m ninety-five years old. And I practically never have a transaction. And the answer is that I’m right and they’re wrong. And that’s why it’s worked for me and not for them. And now the question is do you want to be more like me or more like them?

The idea of diversification makes sense to a point if you don’t know what you’re doing and you want the standard result and not be embarrassed, why course you can widely diverse. Nobody’s entitled to a lot of money for recognizing that because it’s a truism it’s like knowing that two and two equals four. But the investment professionals think they’re helping you by arranging diversification. An idiot could diversify a portfolio! Or a computer for that matter. But the whole trick of the game is to have a few times when you know that something is better than average and to invest only where you have that extra knowledge. And then if you get just a few opportunities that’s enough. What the hell do you care if you own three securities and J.P. Morgan Chase owns a hundred? What’s wrong with owning a few securities? Warren always says that if you lived in a growing town and you owned stock in three of the best enterprises in the town, isn’t that diversified enough? The answer is of course it is…if they’re all wonderful places. And that Fortune’s formula which got so famous which was a formula to tell people how much to bet on each transaction if you had an edge. And of course the bigger your edge, the more close the transaction was to a certain winner, the more you should bet…And of course there’s mathematics behind it…But of course it’s true. It’s perfectly possible to buy only one thing because the opportunity is so great and it’s such a cinch. There are only two or three. So the whole idea of diversification when you’re looking for excellence, is totally ridiculous. It doesn’t work. It gives you an impossible task. What fun is it to do an impossible task over and over again? I find it agony. Who would want to do it? And I don’t see a way…

My father had a client, he was a lawyer in Omaha, he had a client whose husband had a little soap company. The guy died and my father’s sold the soap company. This woman was one of the richest people in town in the middle of the depression, and what she had was a little soap company and the biggest mansion in Omaha’s best neighborhood. When they sold the soap company she had a mansion in the best neighborhood and three hundred thousand dollars. But three hundred thousand dollars in nineteen thirty something was an incredible amount of money. A little hamburger it was a nickel a big hamburger was a dime, and the all you can eat cafe in Omaha would feed you all needed to stay alive for two bits a day. I mean 300,000… Well she didn’t hire an investment counselor, she didn’t do anything, she’s a wonderful old woman. She just took that, she divided it into five chunks, and she bought five stocks. I remember three of them because I probated her estate. One of them was General Electric, one was Dow, one was Dupont, and I forget the other two. Then she never changed those stocks. She never paid any adviser. She never did anything, and she bought some municipal bonds, she never spent her income, and she bought some municipal bonds from time to time with the (inaudible). By the time she died in the 50s she had a million and a half dollars. No cost. No expenses. I said, “How did you decide to do that?” And “Well…” she said, “I thought electricity and chemistry were the coming things.” She just chucked it all in and sat on her ass. I always liked that little old woman. My kind of a girl. But it’s rare!

But if you stop to think about it, think of all the expense and palaver that she didn’t have to listen to and all the trouble she avoided, and zero costs. And of course what people don’t realize, because they’re so mathematically illiterate, is if you make 5 percent and pay 2 of it to your advisors, you’re not losing 40 percent of your future you’re losing 90 percent. Because over a long period of time that little difference causes a 90 percent disadvantage to you. So it’s hugely important for somebody who’s a long term holder not to be paying a big annual toll out of the performance. And of course there are a few big time advisors now who are using indexation very heavily. And of course they’re prospering mightily. And of course every time they get somebody it’s just agony for the rest of the investment counseling business. This is a very serious problem. And I think these people who were used to winning as old-time value investors who are now just quitting the profession. That’s a very understandable thing to do. I regarded it as more noble than staying in…you know…playing along with the denial. It’s an interesting problem.

You can see I’m not trying to make your morning. I’m just trying to describe things the way they are. But this business… Why does Li Lu succeed so mightily? Well partly he’s sort of a Chinese Warren Buffet. That really helps. And partly he’s fishing in China! Not in this over-searched, over-populated, highly competitive American market, and there’s still pockets of ignorance and lassitude in China that gave him so unusual opportunities. The first rule in fishing has always been fish where the fish are. And the second rule of fishing has always been ‘Don’t forget rule number one’. And Li Lu just went where the fishing was good and the rest of us are like cod fishermen who are trying to catch cod where the fish have been fished out. It doesn’t matter how much you work, when there’s that much competition. Every little idea I see in the world some are going after. I sat once on an investment committee at the University of Michigan and in came one of their successful investors located in London. And what had this investor done in London? He decided to invest in sub-Saharan Africa. And the only marginal securities were a few banks that traded in the Pink Sheets, so he would buy very tiny quantities of these banks. And every time some poor person got tired of having their money in the mattress and put it in a bank he did a little better. And of course he made a lot of money. Nobody else was investing in little tiny banks in Africa. But the niche was soon filled. What the hell do you do for an encore after you put your client’s money in a bunch of little tiny banks in sub-Saharan Africa? The niche gets filled quickly. How many wonderful niches are there going to be when some guy in London is buying all these tiny little bank stocks in Africa? It’s hard.

Then if you take the modern world where people are trying to teach you how to come in and trade actively in stocks. Well I regard that as roughly equivalent to trying to induce a bunch of young people to start off on heroin. It is really stupid. And when you’re already rich to make your money by encouraging people to get rich by trading? And then there are people on the TV, another wonderful place, and they say, “I have this book that will teach you how to make 300 percent a year. All you have to do is pay for shipping and I will mail it to you!” (laughter) How likely is it that a person who suddenly found a way to make 300 percent a year would be trying to sell books on the internet to you! (laughter) It’s ridiculous. And yet I’ve described modern commerce. And the people who do this all day think they’re useful citizens. The advertising agents who invent the lingo. In insurance they say, “Well” they say, “the two people who shifted from Geico to the Glotz insurance company save four hundred dollars each.” But what they don’t tell is that there are only two such people in the whole United States and they were both nuts. But they mislead you on purpose. I get tired of it and I don’t think it’s right that we deliberately mislead people as much as we do.

Let me tell you another story that I think is an interesting one about the modern life, but this goes back to a different time. This man has this wonderful horse. And it’s just a marvelous horse. It’s got an easy gait, good looking, and everything. It just works wonderfully. But also occasionally it just gets so he’s dangerous and vicious and causes enormous damage and trouble and breaks arms and legs for his rider and so on. And he goes to vet and says, “What can I do about this horse?” And the vet says, “That’s a very easy problem and I’m glad to help you.” And he says, “What should I do?” And the man says, “The next time your horse is behaving well, sell it.” (laughter) Think about it immoral that is. And haven’t I just described what private equity has to do? (laughter) When private equity has to sell something that’s really troublesome, they hire an investment banker. And what does investment banker do? He makes a projection! I have never seen such expertise in my whole life, as is created in making projections in investment banking. There is no business so lousy that it can’t get a wonderful projection. But is that a great way to make a living to have phony projections and use it to make money out of people you look right into their eyes of? I would say no.

By and large Warren and I, we never tried to make money out…stupidity of our dumb buyers. We tried to make money by buying, and if we were selling horseshit we didn’t want to pretend it was a cure for arthritis. (laughter) And I think it’s better to go through life our way instead of theirs. I think it’s always been this way, I think there’s always been chicanery. Think of the carnivals, the carny operator. Think of how much trickery there is in a carny operation. People just seek out the weaknesses of their fellow man and take advantage. And you have to get wise enough so you avoid them all. And you can’t avoid them if they’re in your family. I have no solution to that one. (laughter) But where you have a fair choice, there are just so many people that should be avoided.

My father had this best friend and client and he also had this other client who is a big blowhard and he was always working for the big blowhard and he wasn’t ever working for his wonderful client whom I admired. And I said, “Why do you do this?” And he said, “Charlie you idiot…” He says, “the big blowhard is an endless source of legal troubles. He’s always in trouble. Overreaching and misbehaving and so forth. Whereas Grant McFadden treats everybody right. The employees, the customers, everything. And if he gets involved with some psychotic he walks over there and makes a graceful exit immediately. A man like that doesn’t need a lawyer.” My father was trying to teach me something and it really worked. I spent my whole life trying to be like Grant McFadden and I want to tell you it works. It really works. Peter Kaufman is always telling me if the crooks only knew how much money you could make by being honest, they’d all behave differently. Warren has a wonderful saying that I like, he says, “You take the high road. It’s never crowded.” And it’s worked.

Take the Daily Journal Corporation. We made quite a few millions of dollars out of the foreclosure boom because we published legal notices and we dominated the publication of foreclosure notices in the worst real estate depression in the history of modern times. And we could have raised our prices at the time and made more tens of millions of dollars. But we didn’t do it. You know what your fellow citizens are losing their damn houses in the worst recession…’Charlie Munger billionaire raises prices’. It would look lousy on the front page of the paper (if people read the story). Should you do it? And the answer is no of course not. Warren always said it’s probably always a mistake to marry for money and it’s really stupid if you’re already rich.

And it’s really stupid when you’re already rich to get a reputation of being a total nogoodnik. Rick Guerin always loved the story about the guy who had been a total miscreant all his life, and (when) he died the minister said, “Now is the time in the funeral ceremony when somebody says something nice about the deceased.” And nobody came forward and nobody came forward and nobody came forward. Finally one guy stood up and he said, “Well” he said, “His brother was worse.” (laughter) Well you can laugh but there are people like that. When Harry Cohn died here the saying was that everybody went to the funeral to make sure he was dead.

So there are a few simple truths that really work. And when it gets to this difficult business the Daily Journal is in, I wouldn’t say it is a real pleasure to be serving these courts and agencies. They need the automation. Other people are trying to take advantage of them in ways that we aren’t. And we’re struggling against the odds (being) a little tiny company. And we’re taking a lot of territory. It’s slow going but the prospects are good. And of course the nice thing about being rich is that it doesn’t matter if it’s a little slow. And how do we get rich? Well we remembered Grandpa Ingham, and when one of the few opportunities came along we reached out and seized it. Think of how your life works?

In my life, to give another example, the Mungers would have twice the assets they now have if I hadn’t made one mistake of omission back in nineteen 70s. And…really stupid. I blew an opportunity that would have doubled my present net worth. That is a normal life. You get one or two. And how things work out…We all know people that are out married, I mean their spouses are so much better. Think of what a good decision that was for them. And what a lucky decision. Way more important than money. A lot of them did it when they were young, they just stumbled into it. Now you don’t have to stumble into it, you can be very careful. A lot of people are wearing signs, “Danger. Danger. Do not touch.” And people just charged right ahead. (laughter) That’s a mistake. Well you can laugh but it’s still a horrible mistake.

It’s been fun for the people on this board to know one another and work on these oddball things and handle life’s vicissitudes. Of course it’s very peculiar that we’re so old. I mean imagine a place where Gary Wilcox is one of the young men. The guy’s wife is still in golf champion. But that’s (not because she’s good when she’s old.) I mean it’s an amazing group. That’s an interesting example too. Imagine me as an old and as impaired as I am and having a pretty good time. How does that happen? Well you…That is another story.

I’ll tell a couple of other stories too because you like stories. Here’s an apocryphal story that is very instructive. A young man comes to visit Mozart. And he says, “Mozart” he says, “I want to write symphonies”. And Mozart says, “How old are you?” The man says, “I’m 23.” And Mozart says, “You’re too young to write symphonies.” And he says, “But Mozart you were writing symphonies when you were 10 years old.” And Mozart says, “Yes but I wasn’t asking other people how to do it.” Now there’s another Mozart story. Here’s the greatest musical talent maybe that ever lived. And what was his life like? Well he was bitterly unhappy and he died young. That’s the life of Mozart. What the hell did Mozart do to screw it up? Well he did two things that are guaranteed to create a lot of misery. He overspent his income scrupulously, that’s number one. That is really stupid. And the other thing was he was full of jealousies and resentments. If you over-spend your income and be full of jealousy and resentments, you’re going to have a lousy unhappy life and die young. All you’ve got to do is learn from Mozart. You can also learn from that young man who was asking Mozart how to write symphonies. The truth of the matter is that not everybody can learn everything. Some people are way they hell better. And of course no matter how hard you try there’s always some guy who achieves more. Some guy or gal. My attitude is ‘so what?’. Does any of us need to be the very top of the whole world? It’s ridiculous.

Another thing that people do that I regard as amazing is they build these enormous mausoleums. I think they figure they want people to walk by that mausoleum and say, “Gosh I wish I were in there!”. (laughter)

Anyway. You can see we’ve have had some fun as we go along and it’s worked so well. But if you actually figure out how many decisions were made in the history of the Daily Journal Corporation or the history of Berkshire Hathaway it wasn’t very many per year that were meaningful. It’s a game of being there all the time and recognizing the rare opportunity when it comes and recognizing that the normal human allotment is to not have very many. Now it’s a very competent bunch of people who sell securities who act as though they’ve got an endless supply of wonderful opportunities. Well those people are the equivalent of the race track tout. They’re not even respectable. It’s not a good way to live your life to pretend to know a lot of stuff you don’t know and pretend to furnish a lot of opportunities you’re not furnishing. And my advice to you is avoid those people, but not if you’re running a stock brokerage firm. You need them. But it’s not the right way to make money. This business of controlling the costs and living simply, that was the secret. Warren and I had tiny little bits of money. We always underspent our incomes and invested. And if you live long enough you end up rich. It’s not very complicated.

Now there is a part of life which is, how do you scramble out of your mistakes without them costing too much? And we’ve done some of that too. If you look at Berkshire Hathaway, think of its founding businesses. A doomed department store, doomed New England textile company, and a doomed trading stamp company. Out of that came Berkshire Hathaway. Now we handled those losing hands pretty well when we bought into them very cheaply. But of course the success came from changing our ways and getting into the better businesses. It isn’t that we were so good at doing things that were difficult. We were good at avoid things that were difficult. Finding things that are easy.

By the way, when we bought the Daily Journal that was easy. What we’re doing now in this software business is difficult. But due to the accident of these good associations and the fact that these old colleagues have lived so long, we’re doing pretty well in the new business. It has potential. And it’s fun to do. How many declining newspapers have hundreds of millions of marketable securities lying around and a new business with some promise? We’re like the last of the Mohicans. (laughter)

Well I’ll take some questions now. We need some system of order.

Question 1: In the book outsiders William Thorndike lists eight CEOs that achieved superlative performance to the S&P 500 and their peers, so other than Mr. Buffett and Mr. Murphy, did Berkshire or you invest in the other six companies? And if not, why?

Charlie: Well I can’t answer that question, I don’t know the others six companies. But I would say, generally speaking as things have gotten tougher, we’ve been better at sitting on our asses with what we have than we have in buying new ones. It’s been hard to buy new ones. We haven’t bought a whole company of any size since we bought the truck stop operator. So if you’re having trouble with the present time with anything, join the club.

Question 2: Could you please comment on proposed legislation in Washington to restrict or tax share buybacks.

Charlie: Oh…(laughter)…Well. Rick tells a story about an old Irishman that used to steal from the church and drunk all the time. And when he’s dying the priest asked him to renounce the devil. And he said I can’t do that because in my condition I shouldn’t offend anybody. And I don’t think I should…If you get me started on politicians, I may be impolitic. So let’s go on to another subject.

Question 3: My question is about smaller banks. If you look at banks with assets greater than about a billion dollars in the U.S. and go up and stop at the super regional level, there’s about 250 of those banks. And my question is, is that a hunting ground that you would think, applying the principles of value investing, is likely to yield one or two great businesses?

Charlie: Well thank you for answering that question, the answer is yes.

Question 4: You and Warren have advocated for decades that CEOs should tell shareholders everything they need to know to value a business. From visiting and calling courthouses around the country, I’ve personally seen the success that you’ve had being awarded contracts against larger competitors for JTI. However your opaqueness regarding contracts that have been awarded but not completed leaves a wide range that an estimated value could fall for. So if a shareholder unwilling to cold call 50 courts around the country to find these contracts that haven’t been accepted yet, could you please provide a little bit of detail for us shareholders as far as the willingness for courts to accept these? Have you had any contracts that haven’t been accepted after you put in the work?

Charlie: Well we’ve got contracts or possible contracts at every stage you could imagine. And it’s very complicated and I don’t purport to understand each one because I’ve trusted Gerry and the people who are doing it. But generally speaking I can see that the trend is favorable. But more than that I can only say you would be horrified if you watched it up close how difficult it is. It’s difficult. But in spite of its difficulties we’re doing pretty well. But we haven’t got any magic wand. If you read all the reports…If I read all the reports in great detail and spent all my effort trying to understand it, I wouldn’t understand it very well. So I think your chances are very poor.

Question 5: One of my favorite lines from you is you want to hire the guy with the IQ of 130 that thinks it’s 120 and the guy with an IQ of 150 who thinks it’s 170 will just kill you.

Charlie: You must be thinking about Elon Musk.

Question 5 (continued…): How do you assess someone when making a hiring decision?

Charlie: Of course I want the guy who understands his limitations instead of the guy who doesn’t. On the other hand I’ve learned something terribly important in life. I learned that from Howard Ahmanson. You know what he used to say? “Never underestimate the man who overestimates himself.” These weird guys who overestimate themselves occasionally knock it right out of the park. And that is a very unhappy part of modern life. But I’ve learned to adjust to it. I have no alternative. It happens all the time. But I don’t want my personal life to be a bunch of guys who are living in a state of delusion, who happen occasionally to win big. I want the prudent person.

Question 6: What did you see in Li Lu versus other investors in China? Because in his biography it looks like he’s more of an outsider. And how similar or different is he versus Todd Combs and Ted Weschler? And Is there any reason why you gave that interview last year with Li Lu in China?

Charlie: Well I did it because he asked me and I sometimes do that, I am foolish that way. And I said what I believed when they asked me the questions. The answer is Li Lu is not a normal…He’s the Chinese Warren Buffet. He’s very talented. Of course I’ve enjoyed bagging him, but it’s interesting that way…I’m ninety five years…I’ve given Munger money to some outsider to run once in ninety five years. And it’s Li Lu, and of course he’s hit it out of the park. It’s very remarkable but it’s also pretty picky. And of course once I’ve got Li Lu if I’m comparing to him, who else am I going to pick? And by the way that’s a good way to make decisions and that’s what we do. If we’ve got one thing we can do more of, we’re not interested in anything that’s not better than that. That simplifies life a great deal because there aren’t that many people better than Li Lu. So I just sit. It’s amazing how intelligent it is to spend some time just sitting. A lot of people are way too active.

Question 7: Good morning Mr. Munger. You said in the past that you expect the U.S. to adopt a single payer health care system or Medicare for all the next time that Democrats control all three branches of government…

Charlie: I Do, yes.

Question 7 (continued): What will this mean for health insurers, hospitals, and medical device companies?

Charlie: Well it will be a hell of a mess. It’ll still be a big business but it will be a hell of a mess. The existing system is so over expensive and over complicated and has so much unnecessary cost. So much unnecessary overtreatment of the dying. So much overtreatment of items that would be best left alone. So much unnecessary expense. Yet on the other hand it’s the best system there is in the world in terms of the quality at the top. So it’s a very complicated subject, but it’s a hell of a mess. I find it demoralizing to see in Singapore they spend 20 percent of what we spend in America on medical care and their system is way better. And what they’re doing is just the most elemental common sense. But of course it was created by one Chinese guy who was in control. Of course it’s more intelligent than the outcome of our political process.

That Singapore system was created by Lee Kuan Yew. Of course it works better. But to have it cost 20 percent and work better in an advanced place likes Singapore…So there’s a lot to be demoralized about in terms of the potential of our medical care system. And of course it isn’t that our politicians are good at fixing systems like that. So if you don’t like it now, I confidently predict you won’t like it later either. (laughter)

Question 8: I read a lot of the stoic philosophers last year. Epictetus, Seneca, Marcus Aurelius…

Charlie: Well I can see why you would. There’s a lot to be stoic about. (laughter)

Question 8 (Continued): And as I glean lessons from them there was one name that kept coming to mind, that is Munger, Munger, Munger….

Charlie: Well some people think that Marcus Aurelius is all right. (laughter)

Question 8: Can you talk to me about the influence that the Stoics had on you and some of your favorite advice from them.

Charlie: A lot. A lot have had (a lot of influence) on me, including Epictetus who started as a slave. No I like those old Stoics. And part of the secret of a long life that’s worked as well as mine is not to expect too much of human nature. It’s almost bound to be a lot of defects and problems. And to have your life full of seething resentments and hatreds, it’s counterproductive. You’re punishing yourself and not fixing the world. Can you think of anything much more stupid than trying to fix the world in a way that ruins yourself and doesn’t fix the world? It’s pretty stupid. I just don’t do it. I have a rule for politicians. It’s a stoic rule…I always reflect that politicians are never so bad, you don’t live to want them back. When I was young, the California legislature was full of small time insurance brokers and lawyers looking for an unfair advantage. They were being entertained by restaurants with prostitutes and bars, by racetracks, and liquor distributors and so on and so on. Fade in fade out. We have a different kind of a legislature now, and I just want all those old crooks and lobbyists and prostitutes back. (laughter) You laugh but you young people, you’re going to live to wish…Nancy Pelosi and Donald Trump we’re immortal. (laughter)

Question 9: Could you share a reading recommendation for us, potentially a new one, that maybe fundamentally change your viewpoint on something?

Charlie: Well there are very few ninety-five year olds that are changing their viewpoint on things. But I do find that there are amusing anecdotes and so forth that I occasionally read and like. But I like the old anecdotes pretty well too. Like that one about the vet and the horse. It’s so obvious though, some of these pithy stories. The storytelling really works to get messages around. One of the interesting things is look at our modern politicians and then think about Abraham Lincoln. (Which) modern politician reminds you of Abraham Lincoln? In either party? Lincoln at one time was hired by some guy whose partner had died, leaving practically no money to a wife and three children. And he owed some money to his surviving partner and the surviving partner came to Lincoln and said, “I want you to collect this money.” And Lincoln said to this guy, he says, “Well” he says, “You look like an enterprising fellow who could get that much money back pretty easily through a little effort. And if you want to ring a little money out of this poor widow and her three children then you’ll have to get a different kind of lawyer.” Does that remind you of any of our modern politicians? That was Abraham Lincoln. What a story. No wonder he’s remembered.

And you know who deserves the credit for Abraham Lincoln and never gets it? It’s his stepmother! Abraham Lincoln was the child of two illiterates. But the step mother, who his father just married in desperation to help raise the children, she took a shine to Lincoln and saw he was bookish and she helped him all the way along. I am going to donate a picture of that stepmother eventually to a particular place because I admire what that stepmother accomplished in life. Imagine being responsible more than any other person for the life of Abraham Lincoln.

Question 10: My question is about the intellectual property because you are a lawyer by training. Given the complicated landscape in this field, is there a better way to share intellectual property across nations, especially in the case of Huawei, is there better legal framework to handle intellectual properties?

Charlie: Well you know, I don’t know that much about the world of intellectual property. I made my way i n insurance, and furniture stores, and little legal newspapers and so on. So other people are good at intellectual property. I’m good at avoiding subjects which I’m not good at. And one of them is intellectual property. I’m not surprised that the Chinese are stealing a little intellectual property. We Americans did it all the time. We stole Dicken’s work. We just reprinted his copyrighted stuff. We stole the technology from the English textile manufacturers. It isn’t as though people haven’t been pretty aggressive about wanting to know other people’s ideas. This is an old problem. I do think that allowing intellectual property to have these profits is desirable. But the exact complexities of how you handle it, I don’t spend much time thinking about.

Question 11: In last year’s Daily Journal meeting, you talked about one of the five aces of a money manager was a long runway.

Charlie: Yes.

Question 11 (continued…): I’m young and have at least hopefully a 40 year runway ahead of me.

Charlie: How are your legs? (laughter).

Question 11 (continued…): I passed my physical with flying colors, so thanks a lot. I’d like to compound my money at the highest rate and then give most of it away at the end. Which money managers would you recommend besides you and Warren?

Charlie: Well I just said I’ve only hired one myself in a lifetime, I don’t think that makes me an expert. Although I must say that one did work out rather well. No I can’t help you. Everybody would like to have some money manager that would make him rich. Of course we all would want that. I would like to be able to turn lead into gold. But it’s hard. It’s very hard. And if you’re finding it difficult that just shows you understand it.

Question 12: Charlie and Peter Kaufman. I don’t have a question, I just want to thank you both for putting together Poor Charlie’s Almanac. It has been an incredibly foundational book in my life and it has really helped inflect my thinking on many different things. So thank you both very much for your work on that.

Charlie: It was really Peter Kaufman’s idea. He did the whole damn thing, and he paid for it himself, being a rich and eccentric man. I just wish there was one change in Peter Kaufman. Peter Kaufman has made me adored in India and China. I wish the hell he could do more for me in Los Angeles. (laughter) The Chinese version of Poor Charlie’s Almanac has been pirated enormously in China. Totally pirated. But the legal sales are three hundred forty thousand or something. Peter has made me very popular in China but he does nothing for me in Los Angeles. (laughter)

Question 13: You’ve paraphrased Ben Graham in saying that good ideas are wonderful but you can suffered terribly if you overdo them.

Charlie: Yes.

Question 13 (continued…): How do you balance that against the risk that you potentially forego an opportunity altogether? Or are late to an opportunity for fear that a good idea has been overdone?

Charlie: The problem that is thoroughly understood is half solved. The minute you point out there’s a big tension between good ideas yet over done so much they’re dangerous, and good ideas that still have a lot of runway ahead, once you have that construct in your head and start classifying opportunities into one category or the other. You’ve got the problem half solved. You don’t need me. You’ve already figured it out. You’ve got to be aware of both potentialities and the tensions.

Question 14: In your letter on Berkshire’s past and future, you wrote about the principles that have made Berkshire successful over the years. My question is, why is it that Berkshire’s organizational principles as a holding company have not been copied more by others given its incredible success and track record?

Charlie: Well it’s a good question. I think the main reason is that it looks impossible. If you were in Procter and Gamble, with its culture and its bureaucracy, and you sat down to figure out, ‘How can I make Procter and Gamble more like Berkshire Hathaway?’, it wouldn’t go immediately to the ‘too hard pile’. It’s just too hard. There’s too much momentum.

But you raise by your question a very interesting thing that deserves more attention than it gets. One of the reasons that Berkshire has been so successful is there’s practically nobody at headquarters. We have almost no corporate bureaucracy. We have a few internal auditors who go out from there and check this or that. But basically we have no bureaucracy. Having no bureaucracy is a huge advantage if the people who are running are sensible people. Think of how poorly all of us have behaved in big bureaucracy even though we have a lot of talent because we couldn’t change anything.

So bureaucracy has a standard bunch of evils on a standard and bunch of stupid wastes and so forth, and avoiding it is hugely important. Of course there’s a tendency of successful places, particularly successful governments, is to have more and more bureaucracy. Of course it’s terribly counterproductive. And of course the bureaucracy, the individual bureaucrats they’re benefiting from more assistance, more meetings, more this, more that. So what looks like poison to us from the outside, because the decisions are so terrible, looks wonderful for them, it’s opportunity. I’ve just described the great tragedy of modern life. Modern life creates successful bureaucracy and successful bureaucracy breeds failure and stupidity. How can it be otherwise. That’s the big tension of modern life. And some of these places that go into a stupid bureaucracy and fire a third of the people and then place works better? They’re doing the Lord’s work. But you wouldn’t think so if you were working there. But there’s a lot of horror and waste in bureaucracy and its inevitable. It’s as natural as old age and death. With that cheerful thought, we can go on to the next one.

Question 15: I’m researching personality psychology and what makes partnerships successful, such as you and Warren. What are your thoughts on that?

Charlie: Well I’ll tell you what makes a partnership successful. Two talented people working well the together. Of course that works better.

Question 16: In the past you’ve praised the significance of cultures at firms like Glenair, Kiewit, and Costco. What are your views on the culture at Daily Journal and in particular Journal Technologies and similar to your Berkshire 50 year essay, can you share a multi-decade vision for Journal Technologies.

Charlie: Well you got to remember that I was old when Journal Technologies came into being. I guess I had a weak moment when…Guerin talked me into it. And it worked because Gerry took a hold of it and work miracles. So I don’t deserve much credit. It’s Guerin and Salzman who are responsible for Journal Technologies. I just clap. I’m good at clapping.

Question 17: You speak about the importance of fishing in waters with ample fish. If you were starting out today, what sea would you be fishing in, other than China of course.

Charlie: Well other than China, but…if there’s one good place in the world that’s more than my share. There are others I’m sure, but it’s hard for me to believe that any can get better for the Mungers than China. So I can’t help you. I’ve solved my problem. You’ll have to solve yours. By the way, the water’s fine in China. Some very smart people are wading in. And in due course I think more will wade in. The great companies of China are cheaper than the great companies of the United States.

Question 18: I have a question regarding long term investment and compound interest. In the last few years with very low interest rates out there it’s been difficult to find opportunities for having a long term compound interest based strategy. So beyond investing in Berkshire, Value Investing, or index funding, where would you invite us to find opportunities for long term investment where compound interest is really that force?

Charlie: Well, my advice for a seeker of compound interest that works ideally is to reduce your expectations. Because I think it’s going to be tougher for a while. And it helps to have realistic expectations. Makes you less crazy. I think that…you know they say that common stocks from the aftermath of the Great Depression, which was the worst in the English speaking world in hundreds of years, to the present time may be an index that’s produced 10 percent. Well that’s pre-inflation. After inflation it may be 7 percent or something. And the difference between 7 and 10 in terms of its consequences are just hugely dramatic over that long period of time. And if that’s 7 in real terms, but achieved starting at a perfect period and through the greatest boom in history, starting now it could well be 3 percent or 2 percent in real terms. It’s not unthinkable you’d have 5 percent returns and 3 percent inflation or some ghastly consequences like that. The ideal way to cope with that is to say, “If that happens, I can have a happy life.” Because why shouldn’t you be happy in spite of the fact that civilization wasn’t quite as easy as it was for my generation. Now beyond that, when it gets more difficult, how should you do it? Well the answer is, because it’s going to be very difficult, you should work at it. And if all that gets you is 6 percent for a lifetime of work instead of 5, you should be cheerful about it. If you want to hit it out of the park easily, you should talk to Jim Cramer. (laughter)

Question 19: Building on the question about the corporate culture at Daily Journal Corporation, could we ask the other board members about the long term succession plan for the board.

Charlie: I don’t think we want to go to another speaker. (laughter)

Question 20: Has the Berkshire Hathaway equity portfolio outperformed the S&P over the last five or ten years? And if it has not, why wouldn’t Berkshire just invest in the S&P for its equity portfolio?

Charlie: I think Warren, who is after all a mere boy of 89, thinks that Berkshire can do a little better than the S&P. From this point. I don’t think many people can, but he may be right about himself and the team he has in place. It won’t be by huge margins, that I confidently predict.

Question 21: How do you think about downside protection and how do you know when to exit an investment?

Charlie: Well you’re not talking to a great ‘exiter’. My Berkshire I bought it in 1966. My Costco I bought… I mean I’ve been a good picker. But other people know more exiting. I’m trying never to have to exit. So you’re talking to the wrong…I think there are working styles of investments that work well with constant exits. It just hasn’t happened been my forte. So I’m no good at exits. I don’t like even looking for exits. I’m looking for holds. Think of the pleasure I’ve got from watching Costco march ahead. Such an utter meritocracy and it does so well. Why would I trade that experience for a series of transactions that make me a little…In the first place, I’d be less rich not more after taxes. The second place is it’s a much less satisfactory life than rooting for people I like and admire. So I say find Costco’s, not good exits.

Question 22: You mentioned that in an interview with CNBC on May 2018, Berkshire too restrained on buying more Apple stock. Do you still believe so?

Charlie: No I don’t. I don’t think the world would be improved by more comments from me on Apple. You know, I’m a very opinionated man and I know a lot, but I don’t know everything. I like Apple but I don’t have the feeling that I’m the big expert.

Question 23: Last year you said that you wish you had more of Apple stock, but now its price has declined by a lot, so what is your opinion about its moat or the competitive advantage. Why do you think it has declined?

Charlie: Well I don’t know why Apple stock is going up or down. I know enough about it so I admire the place, but I don’t know enough to have any big opinion about why it’s going up and down recently. Part of our secret is that we don’t attempt to know a lot of things. I have a pile on my desk that solves most of my problems, it’s called the ‘too hard’ pile. And I just keep shifting things ‘too hard’ pile. And everyone once in a while an easy decision comes along and I make it. That’s my system. Everything was the ‘too hard’ pile, except for a few easy decisions which I make, promptly.

Question 24: When you’re assessing the quality of a business do you place more emphasis on quantitative metrics such as return on invested capital or qualitative ideas like brand strength or quality of management?

Charlie: Well we pay attention to qualitative metrics and we also pay attention to other factors. Generally we like to pay attention to whatever’s important in the particular situation and that varies from situation to situation. We’re just trying to have that ‘uncommon sense’ I’m talking about. And part of our uncommon sense is just to refer a lot of stuff to the ‘too hard’ pile.

Question 25: The simple life is the obvious right answer, but most of America ends up like Mozart, in debt and overspending. How did you maintain the discipline to live the simple life in the face of all these other temptations?

Charlie: I was born this way. (laughter)

Question 26: I’m an engineer at BYD, and I was interested to hear your perspective on the current state of infrastructure in the U.S. and some areas of growth that you might see in the future for infrastructure.

Charlie: Well I think infrastructure will be a big deal. Practically everybody…in China where BYD is so active, by the way the Daily Journal owns some BYD, but BYD is going to be huge electric vehicles. They are already huge. And they’re going to be much more huge. And then they’re going to be huge in monorails which is also a business whose time has come. And they’re also huge in these lithium batteries, and the lithium batteries are being improved…materially improved. And the place is full of fanatics, and by the way they’re a big supplier to Apple and Huawei. And they’re a very satisfactory supplier to those things. So I am terribly impressed with BYD and its been one of the real pleasures of my life to…Wang Chuanfu is the eighth son of a peasant. An older brother recognizing a genius had been born into the family, he just gave up everything in life to nurture that little brother genius. Now that’s Confucianism. And by the way Confucianism will do a lot better for civilization than the Ford Foundation did. Confucianism with a strong family ethos like that is a really constructive thing. And Confucianism partly created BYD. That older brother of Wang Chuanfu was a hero. And of course what Wang Chuanfu has done is a miracle. And of course that was a venture capital type investment. We bought marketable securities, not Berkshire, but Li Lu did. And it’s been a wonderful investment and it’s been a very admirable company. And I like being part of something that’s inventing better lithium batteries and better monorails and so on and so on. So if you work for BYD, you’re a very fortunate person and you’re gonna have a wonderful life watching and participating. You could hardly have a better employer. At least if you like demanding achievement and 80 hour weeks.

Question 27: You mentioned earlier that when you had an opportunity to raise prices you didn’t want to raise them during the Great Recession because it didn’t seem right for Charlie Munger to be raising prices on people that were losing their houses. So I wanted to thank you for that as well.

Charlie: Nobody else ever has.

Question 27 (continued…): I wanted to ask you about the causes of the Great Recession, specifically the credit ratings agencies, and your twenty four standard causes of human misjudgment. I think they hit them pretty much all. Pavlovian Association, denial,…

Charlie: You’re right about that. The financial behavior in our leading financial institutions was inexcusably awful. When other people were making money in a disreputable stupid fashion, everybody piled in because they didn’t want somebody else to be making money and they’re not participating. The standards in lending, the standards in managing…It was disgusting intellectually, disgusting morally, and of course it caused a whirlwind that could have taken the whole civilization down into a Great Depression. That’s a pretty major sin. And none of those people’s been punished. It’s usual that I agree so thoroughly with Elizabeth Warren, but it was wrong to have that big of a mess and have nobody punished.

Question 27 (continued…): I’ve written a blueprint for a nonprofit credit ratings agency and I’d love to get your feedback.

Charlie: Things that far out I usually leave to other people and not because Berkshire Hathaway owns a big chunk of one of the credit rating agencies. But I can see why the existing situation would draw your concern. But there are some human problems I don’t want to bother with. And you have just produced one. But you’re right it wasn’t perfect.

Question 28: My question relates to the country’s national debt. We’ve just recently passed twenty two trillion dollars and our debt to GDP is above 100 percent now. At a time when our GDP may be near a peak and interest rates may be rising. It seems to me that politicians seem fine running the deficit because there when the crisis comes, and consumers are happy to take a deficit because it’s better to consume now than tomorrow. My question is, do you think that there’s something we can do about this? And if so, what should be done? Or is human psychology such that until the crisis is upon us, it’s hard to imagine anything it’s done?

Charlie: Well that’s a very interesting question. The whole science of economics had no idea 15 years ago that it would be possible to print money on the present scale, and get so awash in internal debt as we have. And certainly in a place like Japan, which is way more extreme, nobody dreamed that was possible. And the people who did dream what was possible…and they were few…they would not have predicted 20 years of stasis in spite of everything the Japanese did which was very extreme.

There’s a lot that’s peculiar in what we’re doing and eventually if you try and solve all your problems by printing money there’ll be some disaster. When it’s coming and how bad it will be, nobody knows. Nobody dreamed 15 years ago we could do as much as we have now with as little bad consequence. Churchill use to say that Clement Attlee had a lot to be modest about. Well that’s the way I feel about the economics profession. They have a lot to be modest about. They thought they knew a lot, but turned out not to be so. There was a Greek philosopher that said, “No man steps in the same river twice.” You know the river is different the second time he comes in and so is the man. And that’s the way with economics. It’s not like physics where the same damn principles are going to apply. You do the same damn thing at a different time and you get a different result. It’s complicated.

And of course you’re raising a very important question. And of course nobody really knows the answer. Who knows how much of this we can get by with. My personal bet is that these democracies will eventually borrow too much and cause some real troubles. I don’t know when.

Question 29: A lot of people ask how you determine what investment or deal to do, and you tell people that you can do this fairly quickly. My question is how do you tell if a money manager or management of a company has the right character or the right integrity? How long does it take you to do that and what are some traits that you look for?

Charlie: Well now that I found Li Lu I don’t look for anybody else. So I’m the wrong person. What are my chances I’m going to get somebody better than Li Lu. So it’s very easy for me. What you need is a Li Lu and I don’t know how to get you one.

Question 30: Last year we saw a record amount of share repurchases, and now we’re hearing rhetoric out of Washington D.C. specifically legislation to curb stock buybacks. What’s your take on stock buybacks and do you think politicians should be telling companies what to do?

Charlie: Well generally speaking I’m restrained in my enthusiasm for politicians telling corporations what they should do. But I will say this. When it was a very good idea for companies to buy back their stock they didn’t do very much. And when the stocks got so high price that it’s frequently a bad idea, they’re doing a lot. Welcome to adult life. This is the way it is. But it’s questionable at the present levels whether a lot of it is smart. Was Eddie Lambert smart to buy back so much Sears Roebuck? No. And there’s a lot of that kind of mistake that’s been made.

Question 31: Similar to your Mozart anecdote, I wanted to ask you, what advice would you have for someone my age looking to live a long successful life like yourself.

Charlie: Well I haven’t had that much success changing any of my children. And I don’t think I can give helpful advice to a perfect stranger. It’s hard to improve the next generation, and the standard result is going to be mediocre. Some people are going to succeed. They’re going to be few. That’s the way human significance is allotted. Human significance will always go to the few. There’s no way of creating enough (few in significance), to meet the demand. I think personal discipline, personal morality, good colleagues, good ideas, all the simple stuff. I’d say, if you want to carry one message from Charlie Munger it’s this, “If it’s trite it’s right.” All those old virtues, they all work.

Question 32: You point out a great deal of human folly, but you don’t seem to be that upset about it. Has that always been the case and is that a correct perception

Charlie: That’s a very correct perception. It’s my system. I’ve copied it from the Jews. I saw it work well from them, and it was my natural inclination anyway. And so, humor is my way of coping.

Question 33: What is your proudest accomplishment in life and why?

Charlie: I don’t have a single accomplishment in life that I’m all that proud of. I set out to try and have more uncommon sense than most. Pretty limited objective. I am pleased I did as well as I did in that game. If I had to do it all over again, I think it’d be a lot harder. I think part of my success was being born in the right place at the right time. So, I’m not particularly proud of success that came from being born in the right place at the right time. I’m pleased but not proud.

Question 34: Mr. Salzman. I have a question for you. Could please comment on how Journal Technologies implements the invariant strategy principles? Things like trust, getting employees to go all in, positive sum, and win/win relationships.

Charlie: Gerry that’s a simple question. How do you solve the problems of God?

Gerry Salzman: First of all you have to deal with each individual because each individual, each employee, each independent contractor that we have to work with, each client is different. And so you have to relate to their specific circumstance. You do not handle it because it’s in a checklist or something.

Question 35: This question is for both of Charlie and Peter. Charlie once said any year that you don’t destroy one of your best loved ideas is probably a wasted year. Have either of you destroyed any of your beloved ideas in 2018? And if so, what are they?

Charlie: Guerin have you destroyed any good ideas 2018?

Rick Guerin: …Probably unbeknownst to me.

Gerry Salzman: We always think into the future, we’re not worried about the past. It’s just that simple. The day ends, we’re on to something different. It’s a different challenge every day. And the good part about my job, it changes every day. So I face something different. I’m more like a newspaper editor. I start with the blank page every day. Well how do I go to the next situation? How do I solve a particular problem? That’s my day. That’s what I do.

Question 36: In October 2008, a month after Lehman filed bankruptcy and in the depths of the abyss, Mr. Buffett famously wrote an editorial saying that he was buying stocks and he was bullish on America. You’re famous for bottom ticking Wells Fargo in March of 2009. What made you decide to buy Wells Fargo in March of 2009 instead of October of 2008?

Charlie: Well I had the money in the later period. And the stock was cheaper. Those are two very important parts of the purchase.

Question 37: I’ve heard that you started some new real estate developments. What are you developing now and what’s going to be the key to its success?

Charlie: No I bought some apartment houses for my grandchildren. It seemed like a good idea at the time. By the way that phrase, ‘It seemed like a good idea at the time.’, came to me from a man I knew many years ago. In five minutes between trains he managed to conceive an illegitimate child by somebody he met in the bar car. And my father was asked by the young man’s father, he had a nice wife and three children, “What the hell were you thinking about?” And you know what the young man said? “It seemed like a good idea at the time.” (laughter)

Question 38: Herb Kelleher passed away recently and I’m hoping that maybe you have some anecdotes about Herb that you would like to share with us?

Charlie: Yeah well. Well he was a very remarkable business man. I never knew him, but he was an original and he created an amazingly sound company while drinking one hell of a lot of whiskey and smoking a hell of a lot of cigarettes. This is not my personal style. To do as well as he did with so much Bourbon and so many cigarettes, it set a new record in human life. So, we should all remember Herb Kelleher. And we should all wish we could have so much strength that we could abuse it so much and still perform. I didn’t get such a hand. I regarded it as a miracle.

Question 39: If you didn’t have access to Li Lu and to the Chinese exchanges through him, like many Americans don’t, would you feel comfortable investing in the American Depository Shares of most Chinese companies that are comprised of a V.I.E. Structure and offer shareholders few rights and minimal protections from the Chinese government?

Charlie: I don’t know much about depository shares. I tend to be suspicious of all investment products created by professionals. I tend to go where nothing is being hawked aggressively or merchandise…sold aggressively. So you’re talking about a world in which I don’t even enter. So I can’t help you. You’re talking about a territory I avoid.

Question 40: The derivative portfolios of major U.S. banks are getting quite large on the balance sheets. S.E.C. reporting doesn’t require much transparency. So do you worry about this kind of stuff in the banks that you own? And do you worry about other banks as well?

Charlie: All intelligent investors worry about banks because banks present temptations to their managers to do dumb things. There’s so many things you can easily do in a bank that looks like a cinch way of reporting more earnings soon, where it’s a mistake to do it, long-term considerations being properly considered. As Warren puts it, “The trouble with banking is there are more banks than there are good bankers.” And he’s right about that. So I would say that if you invest in banks you have to go in at a time when you got a lot going for you. Because there’ll be a fair amount of stupidity that creeps into banking.

Question 41: When you don’t have the luxury of picking your negotiation counter parties, what’s your best recommendation for dealing with somebody who, not only won’t negotiate rationally but will also criticize you for trying to negotiate rationally?

Charlie: You’re talking about a situation I try and solve by avoidance. If I can solve that problem I’d have a line around the block. I mean you wouldn’t be able to squeeze in here. Everybody who has an insoluble problem with a difficult person…Think of what we’d all do to solve that one? I’m afraid I don’t have a solution to that one. Avoidance is my general principle method.

Question 42: I have two questions. Both you and Mr. Buffett worked in Buffett’s grandpa’s grocery store during your teenage years. Do you think that your early working experience helped give you a strong advantage in this investing profession?

Charlie: Absolutely. I was able to learn from my dead great grandfather when I was a little boy. What I learned at a very young age when I was just a kid, I could see some of the adults around me were nuts and yet they were very talented. I could see how much irrationality there was in very talented people.

So I got interested in seeking out the patterns and understanding why it happened and learning tricks to cope and so on. And I did that when I was a little kid. And of course it helped me. Who is not helped by an early start in a promising activity? And what activity could be more promising than in diagnosing stupidity?

Question 43: What level of discount would you be applying to potential investments today?

Charlie: Well generally speaking, I think the professional investors have to accept less than they were used to getting under different conditions. Just as an old man expects less out of his sex life than he had when he was 20.

Question 44: I want to come back to William Thorndike books, and I now have the list of the eight companies. It is General Dynamics, Berkshire Hathaway, The Washington Post, DCI, Capital Cities, Teledyne, General Cinema, and Ralston Purina. I know that Berkshire Hathaway had the long-term investment in the Washington Post and Capital Cities and have been invested in companies of John Malone. But why did Berkshire not have a long-term investment into General Dynamics, Teledyne, General Cinema, or Ralston Purina?

Charlie: Well we did have a huge investment in General Dynamics for a long time and we made an enormous amount of money with it. After the defense business contracted, nobody else was willing to sell anything except for General Dynamics, which kept selling at higher and higher prices. And Warren noticed that. We had a huge position in general dynamics and made a fortune. We always admired the founder of Teledyne who was a genius. Henry Singleton. But we admired him from afar, we never invested. It’s just one of many mistakes of omission.

Question 45: I was happy to see you at this meeting turned 90, now you’re ninety-five…

Charlie: You think you’re happy, think of the way I feel! (laughter)

Question 45 (continued…): Well I hope you live to be 120 and I always thank you for your positive influence on our lives. My question is related to stress and sleep and longevity. In business, there are what I call ‘criminal competitors’. You’re honest and ethical but the competitor across the street is beating you by cheating and running a massive insurance fraud. Business and life can cause a lot of stress, but you’ve always seemed to stay cool. What mental tools do you use to de-focus and keep your equanimity for ninety-five years? How do you detach? And even during the Salomon Brothers scandal were you always able to get eight hours of sleep at night?

Charlie: Well that is not true. As a matter of fact, I had more difficulty sleeping when I was young, but I do have a tip that I’ve learned late in life. I never consciously blanked out my mind when I tried to go to sleep, so I allowed my mind to wrestle through my problems and keep me awake very very late while I lay in bed wrestling with problems. And then if I didn’t sleep well one night I figured, “What the hell I’ll sleep the next night.” But that was pretty stupid. But now I actually deliberately blank out my mind I can go to sleep rather easily and I recommend it to all of you. It really works. I don’t know why the hell I didn’t get to it before 93. (laughter)

Question 47: You gave Robert Cialdini one share of Berkshire for writing influence, and a twenty thousand dollar check to Atul Gawande for writing a New Yorker article on health care. Are there any other writers you gave something to for their writing or ideas?

Charlie: I’ve forgotten, but there aren’t many. Atul Gawande is a very remarkable person and so is Cialdini. So I do that kind of weird stuff occasionally, but I don’t do it all the time. I’m proud of those two by the way.

Question 48: If someone can invent a time machine and you can go back and have dinner with your 41 year old self, what piece of advice would you give your former self?

Charlie: Well I’d avoid that one mistake of omission that cost me half of the net worth I would now have if I’d been smarter. We can all go back and make some decision better. But it’s the nature of thing that you’re going to blow one occasionally. My general idea is there’s no point in fretting too much about what you can’t fix. It’s a big mistake to fill yourself with resentments and hatreds and so on. It’s such a simple idea but so many people ruin their lives unnecessarily. Envy is such a stupid thing to have because you can’t possibly have any fun with that particular sin. Who in the hell ever had any fun in envy? What good could envy possibly do for you? And somebody is always going to be doing better than you are. It’s really stupid. So my system at life is to figure out what’s really stupid and avoid it. It doesn’t make me popular, but it prevents a lot of trouble.

Question 49: Could you comment on why there’s so little health care in the Berkshire portfolio?

Charlie: I think we don’t understand it well enough and we don’t like a lot that we do understand. Those are two pretty good reasons for not investing.

Question 50: Do you have any thoughts on a winner-take-all business model, and have you seen it in the 50’s and 60′?

Charlie: That’s ideal if you can find one in advance and predict it accurately. It’s perfect. Winner take all. It’s obviously perfect. It’s very difficult to do because everyone’s looking for the same thing.

Question 51: I’m at a point in my life where I don’t really know my circle of competence, so I would like to know how you found yours.

Charlie: Well it’s a hugely important thing, knowing the edge. It’s hardly a competence if you don’t know the edge of it. You know, if you have a misapprehension regarding your own competency that means you lack competence, you’re going to make terrible mistakes. I think you’ve got to constantly measure what you achieve against other people of achievement, and you have to keep being determinedly rational, and avoiding a lot of self-delusion. But after a lifetime of observing it, I think the tendency to be pretty rational about one’s own competency is largely genetic. I think people like Warren and I were just born this way. Now it took a lot of education. But I think we were born with the right temperament to do what we did. And I have no way of taking you back and rebirthing you.

Question 52: In spite of being partners for so long, why is Warren so much richer than you?

Charlie: Well. He got an earlier start. He’s probably a little smarter. He works harder. There are not a lot of reasons. Why was Albert Einstein poorer than I was? (laughter)

We are coming to the end of our allotted time. I’ll take one more question and then we’ll quite

Question 53: You’ve been very positive on the investment prospects for China and you’ve said that most of Americans are missing out on China. What do you think we’re missing? And what should we be aware of when we invest in China?

Charlie: Well what you’re missing is that there’s more opportunities there than there is here. And I don’t see how I can guide you any more firmly than that. Are you finding things so easy here you don’t need China?

Well with that we’re through.

Gerry Salzman: Thank you all for attending the Daily Journal shareholder meeting this year. We welcome you all back for next year.

End of Transcript

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Richard Lewis, CFA
White Stork Asset Management LLC
Partner, Investments

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