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 way 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 hundred 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 (1, 2) 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.

Sincerely,

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

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.

Sincerely,

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

Links to additional Transcripts:

Peter Kaufman on The Multidisciplinary Approach to Thinking: Transcript

Last week I had the great pleasure of attending a talk by Peter Kaufman on the Multidisciplinary Approach to Thinking.  I would like to thank Mr. Kaufman for delivering such an engaging and insightful talk.

Mr. Kaufman does not normally allow his talks to be on the record, but is making a rare exception in this case.  He believes the message within this talk – that it is possible to succeed in business, yet fail in life – is critical for anyone interested in living a full, meaningful life, with minimal regret in later years.  He hopes that “going positive and going first”, “win/win”, and “going far by going together” are ideas that aspiring money managers will take to heart in their own lives.

I transcribed the full event from my audio recording which you may listen to on SoundCloud.  Throughout the transcript you will find;

  1. Time stamps, each linked to its corresponding recording location.
  2. Links to relevant supporting information.

Furthermore, I’d like to thank Spencer Hoff, President of the Cal Poly Pomona Economics Club, who graciously invited the Latticework Investing Community to attend.  I would also like to thank the Cal Poly Pomona Economics Club for hosting such a great event.

Transcript: Peter Kaufman on The Multidisciplinary Approach to Thinking

0:00 Talk Begins

Spencer Hoff: Thank you for coming. Today we’ve got Mr. Peter Kaufman, CEO of Glenair, who wrote this book, Poor Charlie’s Almanack about Charlie Munger. It’s an excellent book, the best book I’ve ever read, by far, in my life. He serves on the board of Daily Journal with Mr. Charlie Munger and he’s going to give us a few words today. So please welcome Mr. Peter Kaufman everybody.

0:26

Peter Kaufman: Thank you. Now I’m happy to talk about a subject. I was asked to talk about the multidisciplinary approach to thinking. So I’ll start out with that. But if you guys get bored or something and say ‘Well I thought we were supposed to have fun listening to this today.’ You can raise your hand and say ‘Could you talk about leadership or team building or business strategy or ethics or something else?’ I gave a talk recently at Google, in fact I’ve given three talks at Google. And the first talk I gave they said ‘What are you going to talk about?’ And I said, ‘Well, what do you want to talk about?’ They said, ‘About whatever you want. What do you usually talk about?’ Well I usually talk about leadership, culture, team building, strategy, ethics. And they said, ‘We don’t want to hear about that team building crap. We get that all the time. We want to hear about self-improvement.’ So I will mix in with our multidisciplinary topic a little bit of self-improvement as well. Is that OK? OK.

So why is it important to be a multidisciplinary thinker? The answer comes from the Austrian philosopher Ludwig Wittgenstein (link 1, 2, 3) who said, ‘To understand is to know what to do.’ Could there be anything that sounds simpler than that? And yet it’s a genius line, to understand is to know what to do. How many mistakes do you make when you understand something? You don’t make any mistakes. Where do mistakes come from? They come from blind spots, a lack of understanding. Why do you need to be multidisciplinary in your thinking? Because as the Japanese proverb says, ‘The frog in the well knows nothing of the mighty ocean.’ You may know everything there is to know about your specialty, your silo, your “well”, but how are you going to make any good decisions in life…the complex systems of life, the dynamic system of life…if all you know is one well?

2:33

So I tried to learn what Munger calls, ‘the big ideas’ from all the different disciplines. Right up front I want to tell you what my trick was, because if you try to do it the way he did it, you don’t have enough time in your life to do it. It’s impossible. Because the fields are too big and the books are too thick. So my trick to learn the big ideas of science, biology, etc., was I found this science magazine called Discover Magazine. Show of hands, anybody here ever heard of Discover magazine? A few people. OK. And I found that this magazine every month had a really good interview with somebody from some aspect of science. Every month. And it was six or seven pages long. It was all in layperson’s terms. The person who was trying to get their ideas across would do so using good stories, clear language, and they would never fail to get all their big ideas into the interview. I mean if you’re given the chance to be interviewed by Discover Magazine and your field is nanoparticles or something, aren’t you going to try your very best to get all the good ideas into the interview with the best stories etc. OK. So I discovered that on the Internet there were 12 years of Discover Magazine articles available in the archives. So I printed out 12 years times 12 months of these interviews. I had 144 of these interviews. And I put them in these big three ring binders. Filled up three big binders. And for the next six months I went to the coffee shop for an hour or two every morning and I read these. And I read them index fund style, which means I read them all. I didn’t pick and choose. This is the universe and I’m going to own the whole universe. I read every single one. Now I will tell you that out of 144 articles, if I’d have been selecting my reading material, I probably would have read about 14 of them. And the other 130? I would never in a million years read six pages on nanoparticles. Guess what I had at the end of six months? I had inside my head every single big idea from every single domain of science and biology. It only took me 6 months. And it wasn’t that hard because it was written in layperson’s terms. And really, what did I really get? Just like an index fund, I captured all the parabolic ideas that no one else has. And why doesn’t anybody else have these ideas? Because who in the world would read an interview on nanoparticles? And yet that’s where I got my best ideas. I would read some arcane subject and, oh my god, I saw, ‘That’s exactly how this works over here in biology.’ or ‘That’s exactly how this works over here in human nature.’ You have to know all these big ideas. Or there is an alternative, find somebody who did what I did and just get all the ideas from them. Now when I was your age and I was in school I thought the asymmetry of it was very unfair because I had to do all the work. So every time I go back and meet with a group of students I change the asymmetry around. I did all the work for you…

6:15

I have (multiple examples) of models that I derived from what I call my ‘three buckets’. Let’s see if I’ve got my three buckets in here. I do. I do have my three buckets. Ok. So this is how I use ideas that no one else in the world uses and yet I can be comfortable that they’re right. A statistician’s best friend is what? A large, relevant sample size. And why? Because a principle derived from a large relevant sample size can’t be wrong can it? The only way it could be wrong is if the sample size is too small or the sample itself is not relevant. So I want to tell you what my three buckets are where I derive my models, my multidisciplinary models. Number one is 13.7 billion years. Is that a large sample? It’s the largest one in the whole universe. There is no larger sample. Because what is it? It’s the inorganic universe. Physics. Geology. Anything that’s not living goes in my bucket number 1. 13.7 billion years.

Bucket number 2 is 3.5 billion years. It’s biology on the planet Earth. Is that a big sample size? Is it relevant? We’re biological creatures. Let me ask you this, inorganic, bucket number one, is it relevant? We live in it. So bucket number one we live in, 13.7 billion years. Bucket number two is what we’re part of, biology. 3.5 billion years. And number three is 20,000 years of recorded human history. That’s the most relevant of all. That’s our story. That’s who we are.

So we’re going to take a couple of examples here of multidisciplinary thinking. We’ll ask this question, is there a simple two word description that accurately describes how everything in the world works? That would be very useful wouldn’t it if you know how everything works in just two words? So we go to bucket number one. How does everything work? We go to Newton’s Third Law of Motion. We’re getting very multidisciplinary here. Does anybody in the room know what Newton’s Third Law of Motion says? (Answer: “For every action there will always be an equal and opposite reaction.”) That’s beautiful. He wins one of my pens here for answering that question correctly. I always give out rewards. It’s like operant conditioning from psychology, right? So there you go.

Yes if I put this bottle of water on this table, Newton’s Third Law of Motion says that if the bottle pushes down on the table with ‘force x’, and it also strangely says that the table pushes back with equal ‘force x’. That’s very strange. But you know how long that’s been true? 13.7 billion years that’s been true. Now what if I push down twice as hard, what does the table do? Well if I push down twenty one and a half times as hard? What does the table do? Twenty one and a half! OK. Now is there a good word, a catchall word to describe what we’re talking about here when this pushes down and this thing pushes back? Yeah, it’s reciprocation isn’t it? But it’s not mere reciprocation. It’s perfectly mirrored reciprocation. The harder I push, the harder it pushes back. Does everybody buy that? That’s bucket number one. That’s how the world works. It’s mirrored reciprocation. Everything in the inorganic universe works that way.

We go to bucket number 2. I’m going to introduce a little humor into this. Even though this is a dog, pretend it’s a cat. OK? This is a cat for the time being. Mark Twain said that a man who picks up a cat by its tail will learn a lesson he can learn in no other way. What is this cat going to try to do? It’s going to do what? (Answer: “Attack you.”) Yeah it’s going to try and scratch me with its sharp claws. And why? It doesn’t find being picked up by its tail very agreeable does it? Now what if I start swinging this cat around by its tail. What does the cat do now? Now it’s trying to scratch my eyes out. It said, ‘You escalated on me pal, I’m going to escalate back on you.’ Does that sound a lot like mirrored reciprocation? But what if instead of doing something disagreeable with this cat we do something very agreeable with this cat? And this cat’s sitting here and we come over and we gently pick it up by its tummy and we put it in the crook of our elbow and we gently stroke it. Does the cat try and scratch us? What does it do? It licks our hands. And as long as I sit here and stroke it, it’s going to continue to try and lick my hand. It wants to show me what? ‘I like this. This is agreeable. You’re a good guy. Keep it up man!’ It is mirrored reciprocation isn’t it? If I act in a disagreeable way to the cat, the cat acts in a disagreeable way back, and mirrored. If I act in an agreeable way, what do you think we’re going to find when we go to bucket number three? It’s exactly the same thing isn’t it? Your entire life. Every interaction you have with another human being is merely mirrored reciprocation. Now you’re going to say to yourself ‘This is too simple. It can’t be this simple.’ It is this simple! It doesn’t mean it’s not sophisticated. This is a very sophisticated model we just derived isn’t it? We did it in a multidisciplinary fashion didn’t we? We looked into the three largest sample sizes that exist, the three most relevant, and they all said exactly the same thing. Do you think we can bank on that? 100 percent we can bank on that.

13:04

So, if you think about things being complex as being sophisticated like most people do, you think the more complex it is, the more sophisticated it is. I want you to remember, as best you can, what I’m about to say. It’s very, very important. Albert Einstein once listed what he said were the five ascending levels of cognitive prowess. Now there’s nobody in this room that doesn’t want to be level number one. Right? That’s why we’re here. You don’t want to be level number five. You want to be level number one. Wait until you hear what these levels are, it’s going to blow your mind. So number 5 he said, at the very bottom, was smart. OK. That’s the lowest level of cognitive prowess is being smart. The next level up, level 4, is intelligent. Level 3, next up, is brilliant. Next level up, level 2 he said is genius. What? What’s higher than genius? He must have that backward. No he doesn’t. Wait until you hear what number one is according to Albert Einstein. We just demonstrated it. Number one is simple. Simple transcends genius.

Why is simple, the right kind of simple, better than genius? Because you can understand it! I bought this book I usually take it when I’m giving a talk like this. It’s the Ethics by Spinoza. Spinoza’s ethics book was written by a true genius. And guess what? You can’t understand anything in it. But can you understand what I walked you through, mirrored reciprocation? OK.

14:59

Now, because this is an economics club, right, everybody here is interested in economics? So let’s give an example of a model derived, multidisciplinary, same way we did before, but is just about as pure an economic model as you can find. So now we’re going to ask the question, what’s the most powerful force that we as human beings, both as individuals and groups, can potentially harness towards achieving our ends in life?

Ok. We go to bucket number one. We ask, what’s the most powerful force in bucket number one? I’m going to quote Albert Einstein again. He said, ‘The most powerful force in the universe is compound interest.’ But that’s not all he said about compound interest. He not only said that it’s the most powerful force in the universe, he said it’s the greatest mathematical discovery of all time. He said it’s the eighth wonder of the world. And he said that those who understand it get paid by it and those who don’t pay for it. He said all these things, Albert Einstein, about compound interest. Now what’s a good working definition of compound interest? I will propose one. You can have your own, but this is mine. I say compound interest is dogged incremental constant progress over a very long time frame. Is that a fair definition? Alright? I think that’s the answer from bucket number 1. The most powerful force that could be potentially harnessed is dogged incremental constant progress over a very long time frame.

We go to bucket number 2. 3.5 billion years of biology. What’s the most powerful force in three and a half billion years of biology? It’s the machine of evolution. How does it work? Dogged incremental constant progress over a long time frame. This is the beauty of deriving things multidisciplinary. You can’t be wrong! You see these things lined up there like three bars on a slot machine. Boy do you hit the jackpot.  

What do you think we’re going to find when we go to bucket number three? 20,000 years of human experience on earth. You want to win a gold medal in the Olympics. You want to learn a musical instrument. You want to learn a foreign language. You want to build Berkshire Hathaway. What’s the formula? Dogged incremental constant progress over a very long time frame. Look how simple this is. This is above genius. It’s absolutely above genius because you can understand it. This isn’t somebody drawing all these formulas and things up here about, you know, how numbers multiply and amplify over time. The problem that human beings have is we don’t like to be constant. Think of each one of those terms. Dogged incremental constant progress over a very long time frame. Nobody wants to be constant. We’re the functional equivalent of Sisyphus pushing his boulder up the mountain. You push it up half way, and you go, ‘Aw, I’ll come back and do this another time.’ It goes back down. ‘I’ve got this great idea, I’m going to really work hard on it.’ You push it up half way and,’ Aw, you know I’ll get back to this next month.’ This is the human condition. In geometric terms this is called variance drain. Whenever you interrupt the constant increase above a certain level of threshold you lose compounding, you’re no longer on the log curve. You fall back onto a linear curve or God forbid a step curve down. You have to be constant. How many people do you know that are constant and what they do? I know a couple. Warren Buffett and Charlie Munger. Everybody wants to be rich like Warren Buffett Charlie Munger. I’m telling you how they got rich. They were constant. They were not intermittent.

19:37

Let me give you an example of why intermittency is perhaps the most important thing in your lives whether you realize it or not. We’ll begin with the example of bringing home a puppy from the pet shop. Brand spanking new puppy from the pet shop. And the kids are so excited, they’re so excited. What’s your goal of bringing home this puppy to your household? I say it’s to have an engaged, contributing, all-in, new member of your household. And night number one, how are we doing? It’s a disaster. This thing’s over in the corner shaking like a leaf. It’s anything but engaged. It’s anything but contributing and it’s anything but all-in. It’s shaking like a leaf. Human beings are really good at solving this problem. We know we need to create a calm, reassuring, secure, and safe environment.

We know that even though this puppy can’t understand what we’re saying, we need to communicate in soothing tones. And we also know that we need to provide food and water for this puppy. But underlying all these things, stitching them all together, we really know we have to be constant don’t we? You can’t not feed the puppy one day or what happens? Well, the puppy freaks out. The puppy becomes a neurotic puppy. It doesn’t know whether it can trust you or not. This trust that this puppy needs to go all-in is dependent upon you being constant in these behaviors. Does everybody accept that? So, if we are constant, usually in about seven days more or less, if we are constant this little puppy will trot over to our side and it will attach itself to us. And for the rest of its life it will be willing to die for us. That puppy just went all-in, didn’t it? Now did it go all-in because it’s our idea that we want an engaged contributing all-in new member of our household? It doesn’t even know what our idea is, does it? Why did it just go all in? It was the puppy’s idea!

21:57

Now let me tie this to your lives. I did this at Google and they really couldn’t figure out what I was doing. And then afterwards they said ‘You know that was really good. Your eight dollar crystal ball that’s really a good trick. So I’ll do my eight dollar crystal ball trick. And I told them…I had rows bigger than this one, full of the smartest people in the world. And I said guess what I’m going to do with my eight dollar crystal ball? I said, I’m going to do a psychic reading of anybody in this room. Anybody. And I said to Google, ‘If you think that I’ve got a stooge in the room where I’ve got this prearranged. I don’t. Go out in the corridor and bring somebody in. I’ll do the psychic reading.’ This eight dollars I spent on Amazon is the best money I ever spent. So I’m going to select you. What’s your name? (Answer: “Emily”) We’re going to take Emily, we’re going to do a psychic reading of Emily right in front of you. You’re not going to believe this. I’m going to nail this. You’re all going ‘This guy’s a nutcase.’ Spencer’s going, ‘Man why did I invite this guy?’ Just be patient Spencer, this is good stuff. I’ll pull it off. So I’m going to tell Emily what she’s been looking for her whole life. Is there anybody here who thinks I can do this? Well wait until you hear my answer and then for the rest of your life you’re all going to go, ‘I know what everybody in the world is looking for.’ Emily, your entire life you’ve been on a quest, an odyssey, a search for that individual that you can 100 percent absolutely and completely trust. But who’s not just trustworthy, but principled, and courageous, and competent, and kind, and loyal, and understanding, and forgiving, and unselfish. I’m right aren’t I? (Answer: “Dead on”) You know what else my eight dollar Crystal Ball tells me? If you ever think you may have encountered this person, you are going to probe and probe and test and test to make sure that they are real, that you’re not being fooled. And the paradox is that it looks like you’re probing for weakness but you’re not. You’re probing for strength. And the worst day of your life is if instead of strength you get back weakness. And now you feel betrayed. You know why? You’ve got to start your search all over again. It’s the worst thing in the whole world isn’t it? Does everybody here agree with me on this? Look how simple this is.

24:53

Here’s your 22 second course in leadership. That’s all it takes. You don’t have to go to business school. You don’t need books. You don’t need guest speakers. All you have to do is take that list that’s in Emily’s head, and every single other person in this room, every single other person in the whole world, has this list in their head – trustworthy, principled, courageous, competent, loyal, kind, understanding, forgiving, unselfish, and in every single one of your interactions with others, be the list!  Remember how that puppy went all in? You do this with the other human beings you encounter in life. They’re all going all-in and not because it’s your idea. Most people spend all day long trying to get other people to like them. They do it wrong. You do this list, you won’t be able to keep the people away. Everybody’s going to want to attach to you. And be willing to do what? Just like them puppy, they’d be willing to die for you. Because you are what they’ve been looking for their whole lives. This is pretty profound isn’t it?

Look at this picture. I love this picture. Does this woman look like she’s having a good time? OK. So I helped teach this high school class in Los Angeles, and the first class of each semester, a brand new group just like you guys, and I make them go through the following exercise. And believe me just like my eight dollar crystal ball, afterwards you’re going to go ‘I’m really glad I heard that. Because now I really understand things at a level I didn’t understand them before.’ And to understand is to what? To know what to do.

This will clear up all your blind spots about yourself and other human beings. I asked the group, show of hands, how many of you think all human beings are alike? Why? (Answer: “We all have the same basic needs. We express them differently. Tremendous diversity in how we go about meeting them, but ultimately we all have the same needs.”) You get two pens! That’s a beautiful answer. So we’re going to identify what those needs are. What’s your name? (Answer: “Craig”) Craig nailed it. Show of hands. How many of you want to be paid attention to? I mean is there really anybody here who doesn’t want to be paid attention to? You’re a different kind of human being if you are. OK. How many of you want to be listened to? How many of you want to be respected? How many of you want meaning satisfaction fulfillment in your life in the sense that you matter? And then I tell the high school kids, number five. I put it number five, even though it’s the most important of the five I put it last, because if I put it first you wouldn’t raise your hands because it’s awkward. They’re just going to think I’m weird. But then they do raise their hand because I soften them up. How many you want to be loved? Everybody’s exactly the same. The only difference is, as Craig said, is the strategy the that they’re employing to try to get to fulfill those needs. OK.

28:30

Now I’m going to tell you the strategy that dogs use. The dog is going to be very unhappy with me for telling you this. I’m ratting them out. So when your dog is in the backyard and he goes to the fence between your house and the next house and he talks to the dog next door, I’m going to tell you what he says, no one has ever divulged this before. You’re the first group to hear this. Your dog says to the dog next door, ‘Can you believe how easy it is to manipulate human beings and get them to do whatever you want them to do for you?’ And the dog next door goes, ‘I know it’s a piece of cake.’ And your dog says ‘Yeah. All you have to do is every single time they come home, you greet them at the door with the biggest unconditional show of attention that they’ve ever gotten in their whole life. And you only have to do it for like 15 seconds and then you can go back to doing whatever you were doing before and completely ignore them for the rest of the evening.’

However, you do have to do this every single time they come home. And what will the person do? They’ll take care of them. They’ll do anything for this dog. OK? Now do you think that this woman feels she’s being paid attention to? And listened to? And respected? Do you think she’s getting meaning, satisfaction, and fulfillment? Do you think she matters to this dog? And do you think she thinks this dog loves her? And what does the dog get in return? Everything.

All you have to do, if you want everything in life from everybody else, is first pay attention, listen to them, show them respect, give them meaning, satisfaction, and fulfillment. Convey to them that they matter to you. And show you love them. But you have to go first. And what are you going to get back. Mirrored reciprocation. Right? See how we tie this all together? The world is so damn simple. It’s not complicated at all! Every single person on this planet is looking for the same thing. Now why is it that we don’t act on these very simple things?

31:08

So I have an example I use with the class, my elevator example. I’m famous for my elevator story. You’re standing in front of an elevator. The doors open. And inside the elevator is one solitary stranger, you’ve never met this person before in your whole life. You walk into the elevator you have three choices for how you’re going to behave as you walk into this elevator. Choice number one you can smile say ‘good morning’. And I say, at least in California, if you do that 98 percent of the time the person will smile say good morning back. You can test it. OK. My guess is you’re going to find that 98 percent of the time that people say ‘good morning’. Choice number two, you can walk in and you can scowl and hiss at this stranger in the elevator. And they have no idea why you’re scowling and hissing at them. And I say 98 percent of the time, they may not hiss back at you, but they will scowl back at you. And option number three. This is where the wisdom comes. You can walk into the elevator and you can do nothing. And what do you get 98 percent of the time if you walk into an elevator and you do nothing from that stranger in the elevator? Nothing. It’s mirrored reciprocation isn’t it? But what did you have to do? You have to go first. And you’re going to get back whatever you put out there.

This is why these bars are full of people at 2:00 a.m. drowning their sorrows. Knocking down these drinks. ‘When’s the world going to give me something man? When am I going to get mine?’ Well what did you ever do? Did you ever get up of the morning and smile at the world? No. You either did nothing or you scowled and hissed at the world. You’re getting back exactly what you would expect to get back if you understood how the world really works. Which is why we study multidisciplinary things right? We can’t be wrong on this can we? It’s all mirrored reciprocation. So what do you want to do? You want to go positive, you want to go first. What’s the obstacle? There’s a big obstacle. This is an economics club. Certainly you have all heard of Daniel Kahneman, Nobel Prize winner in economics. Behavioral economics. And what did he win his Nobel Prize for? For answering the question, why would people not go positive and not go first when there’s a 98 percent chance you’re going to benefit from it, and only a 2 percent chance the person’s going to tell you to ‘screw off’ and you’re going to feel horrible, lose face, and all the rest of that. And that’s real. That’s why we don’t do it. He said there’s huge asymmetry between the standard human desire for gain and the standard human desire to avoid loss. Which one do you think is more powerful? 98 percent versus 2!

34:14

Now I gave this same talk at Fairfax up in Toronto, Prem Watsa’s outfit. It’s the Berkshire Hathaway of Canada. And I said ‘Of all people in the whole world, you guys should not be making this mistake.’ Why? Because you’re in the insurance business. How does insurance work? You’re supposed to spend 2 percent to protect 98 percent, right? Look what you’re doing. You’re spending 98 percent to protect against the 2 percent probability that somebody makes you look foolish. Lou Brock set the Major League record for stolen bases with the St. Louis Cardinals many years ago. And he once said, ‘Show me a man who is afraid of appearing foolish and I’ll show you a man who can be beat every time.’ And if you’re getting beat in life, chances are it’s because you’re afraid of appearing foolish. So what do I do with my life? I risk the two percent. I was so proud the other day, I was reading Bono on Bono. Bono’s the lead singer of U2. He’s the only other person I’ve ever encountered in my entire life, and I asked all my cronies, ‘Has anybody else ever encountered this elevator model before?’ ‘No. No that’s yours Peter.’ And I said, ‘You know how I said 98-2? Guess who’s got the exact same model? Bono! Well he doesn’t have 98-2, he’s got 90-10.’ Those are his numbers 90-10. Can I be wrong on this? That guy is really squared away. I hope some day I’m as squared away as he is. It’s incredible to think, he figured it out. That’s why that guy’s had such a great life. He goes, ‘You know, I know 10 percent of people are going to screw me. That’s OK. If I’m not willing to be vulnerable and expose myself to that 10%, I’m going to miss the other 90%.’ Does that make sense? Now Charlie Munger one day, you know he turned my whole life upside down. I was over at his house one day and he said, ‘Peter, I’ve been hearing about you going around giving all these talks. You don’t have to go around the country telling people how to make more money.’ I said, ‘Well that’s not what I do Charlie.’ I was very nimble on my feet. I said there’s a catch. I do tell how to make more money but, by the way, if you do these things that get people all-in and whatnot, you’ll make all the money there is to be made. You really will. That’s not why I’m here. I’m here to give you the second half of the message, which is how to be a good person!  What’s your name? (Answer: “Albert”) Albert, How many lifetimes do you have Albert? (Answer: “One”) That’s correct, you get a pen. You see Albert lucked out, he got an easy question. Is your lifetime important to you Albert? (Answer: “One of the most important. Absolutely)

37:15

Now what do we know in economics, it’s an economics model, what do we know we need to use as our decision making prism whenever something is both finite, like one, and important like your life? How do we have to make decisions? You had Mankiw here right? He didn’t talk about opportunity cost? Have you all heard of opportunity cost? It’s the classic illustration of opportunity cost. You have a finite number of something, it’s important. If you’re doing ‘A’ with it, it means what? It means you’re not doing B or C or D or E. What do you have to do? You have to evaluate all the different alternatives and pick the one that’s most optimal. Is that fair? So you’ve got one lifetime. How do you want to spend your one lifetime? Do you want to spend your one lifetime like most people do, fighting with everybody around them? No. I just told you how to avoid that. And in exchange have what? A celebratory life. Instead of an antagonistic fighting life. All you have to do is go positive, go first, be patient enough.  You know we have to be patient for a week with this puppy. Do you know how long it usually takes for a human being to do all the probing and testing that Emily was going to do and to find out that you’re for real? It takes six months. This is why nobody does it. ‘Oh it takes too long.’ Compared to what? Look at the plan B that everybody uses. It’s terrible! It doesn’t work. They spend their whole lives fighting with everybody.

39:01

The three hallmarks of a great investment are superior returns, low risk, and long duration. The whole world concentrates on Category 1. But if you’re a leader of any merit at all, you should be treating these three as what? Co-priorities. How do you get low risk and long duration? Win-Win. This is the biggest blind spot in business. People are actually proud of a win-lose relationship. ‘Yeah we really beat the crap out of our suppliers.’ You know, ‘We’ve got these employees for…you know, we’ve got them on an HB1 visa, they can’t work anywhere else for three years.’ They’re proud of it! Total Win-Lose. You take game theory (link 1, 2) and you insert the word lose in any scenario in game theory and what do you have? A suboptimal outcome. What happens you insert win-win in any game theory scenario, what do you get? Optimal every time. What must you necessarily do if you’re interested in achieving win-win frameworks with your important counterparties in life? You must understand the basic axiom of clinical psychology, which I know because I’m multidisciplinary. I also learned psychology. The basic axiom of clinical psychology reads, ‘If you could see the world the way I see it, you’d understand why I behave the way I do.’ That’s pretty good isn’t it? Now there’s two corollaries to that axiom. And I say if you buy the axiom, which you should, you must buy the two corollaries as well because they’re logical extensions. They’re undeniable. Corollary number one, if that axiom is true and you want to understand the way someone’s behaving, you must see the world as they see it. But corollary number two, if you want to change a human being’s behavior and you accept that axiom, you must necessarily, to get them to change, change how they see the world. Now this sounds impossible. It’s not really that hard. You take a business. Most employees of a business see the world as employees. What if you could get them to see the world instead through the eyes of an owner? Do you think that’s going to change how they behave? It totally changes how they behave. Employees don’t care about waste. Owners do. Employees don’t self-police our place. Owners do.

42:05

This is the secret to leadership. The secret to leadership is to see through the eyes of all six important counterparty groups and make sure that everything you do is structured in such a way to be win-win with them. So here are the six. Your customers, your suppliers, your employees, your owners, your regulators, and the communities you operate in. And if you can truly see through the eyes of all six of these counterparty groups and understand their needs, their aspirations, their insecurities, their time horizons. How many blind spots do you have now? Zero. How many mistakes are you going to make? You’re going to make zero. People don’t think this is possible. It’s really easy. To understand is to know what to do. So I’m going to wrap up here because I’ve only got two minutes. There’s this great African proverb. It’s the definition of win-win. ‘If you want to go quickly go alone, if you want to go far, go together.’ Live your life to go far together. Don’t live it to go quickly alone. Most people grow up wanting to go quickly alone. It doesn’t work. You wind up like Ebenezer Scrooge in A Christmas Carol. You get to the end of your life. Yeah you’re rich, you’re powerful, you’re famous, and you want a do over because you realize at the end of your life, ‘I didn’t live my life right.’ I don’t have what really matters. What really matters is to have people pay attention to you, listen to you, and respect you, show you that you matter, and to love you. And to have it be genuine, not bought. Does that makes sense?

44:00

And I’ll leave you my last bit of wisdom. There’s another proverb, it’s a Turkish Proverb. ‘No road is long with good company.’ The essence of life is to surround yourself, as continuously as you can, with good company. Like I have today. You’re marvelous company. But how did I get that? I had to earn it, didn’t I? I’m not just some guy you picked off the street. I earned the privilege of coming here and the privilege of being with you. It gives me what? It gives me meaning in my life. It makes me feel I matter. To have people listening to me. This is my strategy for getting those five thing. You can develop your own strategy and I hope it involves going positive and going first. 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.

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Sincerely,

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

Links to additional Transcripts:

Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2018

Last week I had the great pleasure of hearing Charlie Munger speak at the Daily Journal Annual Meeting for the third time.  For two hours he captivated the audience with an abundance of whit, wisdom, stamina, and kindness.  At 94 years young, Charlie shows no signs of slowing down.

I transcribed the full event from my audio recording which you may listen to on SoundCloud.  Throughout the transcript you will find;

  1. Time stamps, each linked to its corresponding recording location.
  2. Links to relevant supporting information.

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.)

2018 Daily Journal Meeting Transcript

0:00 Meeting Begins (Note: Tedious meeting details of the first 4 min. 33 sec. were edited out of the transcript.)

Charlie: We are waiting for some of our directors who are in the restroom. If you have a group of elderly males, they never get together on time. (laughter)  Well I call the meeting to order, I’m Charlie Munger, Chairman, and here’s the rest of the directors… We will now proceed to the formal business of the meeting, and that will be followed by pontification and questions… (laughter)

Ellen Ireland: (Votes for independent accountants)…For the auditors, 1,283,388.  Against, 275.  And Abstaining, 244.

Charlie: That is very interesting.  That is a lot of votes to vote against an auditor.  Some of this stuff is really weird. (laughter)  Maybe they fired somebody who doesn’t like them. (link)

4:33 “Pontification” Begins

Now on to pontification and questions.  I’ll first comment briefly about the general nature of the Daily Journal’s traditional business.  We are surviving but at a very modest profit, and it’s quite interesting what’s going on.  There’s a huge…trove of valuable information burred in the court system that nobody could get out before under the computing power of the procedures of yore.  And of course lawyers want to know what their judge did in all previous cases.  And how many cases the opposing council has won or lost and so forth.  So it’s going to be a big business of delivering more information to people.  But of course there are a horde of people trying to get into that.  Some of them are computer science types and some are just other types.  God knows how it’s going to come out, but we’re doing our part of that struggle.  The chances that we get as dominant a position as we had before when we were the only newspaper that had timely publications and print, all the court opinions of course where lawyers needed to have them is zero.  In other words, our glory days are behind us in this traditional business.  It may well survive creditably, but it’s not going to be a big business.

Most newspapers by the way I think are going to perish.  It’s just a question of when.  I mean they’re all going to die.  You know the New York Times will continue because people will pay $5 for it in an airport.  So there will be a few survivors, but by and large the newspaper business is not doing well.  Berkshire Hathaway owns a lot of them.  And buying them we figured on a certain natural decline rate after which the profits would go to zero. (link)  We underestimated the rate of decline.  It’s going faster than we thought.

On the other side we have this second business in the Daily Journal Company which is this software business.  That of course has taken a lot of treasure and a lot of effort to get started.  But our software business now produces a lot more revenue than our traditional print business, and it’s generally doing quite credibly.  It’s a very competitive business, and it’s difficult.  A lot of people in the software business don’t want to deal with a bunch of government agents.  It’s just too much agony.  They’re use to just printing money automatically…(inaudible)…not being overwhelmed by it, the money rolling in.  And the way we’re making money is slow and hard.  It’s a software business, but it’s a slow hard software business.  We have internal arguments about whether the first real revenue comes four years after the first customer contact or seven.  That’s the kind of business it is, it’s constantly spending money now just to…(inaudible)…returns for a long, long time…before we have a lot of difficult bureaucracies to get through in the mean time.  And the funny thing is, we actually got to kind of like it.  If you do it right, these courts eventually trust us, and district attorney offices, etc. etc.  And it’s a real pleasure just slowly earning the trust of a bunch of customers by doing your job right and scrambling out of your glitches as fast as you can.  I would say that business is doing well.  Jerry would you make a few comments about this new business?

9:00

Gerry Salzman: The new business is slow in coming as Charlie indicated, but (it’s long-term) once you get there.  You have to understand it’ll be quite long because government agencies do not want to spend additional time changing software companies.  It’s very painful.  And one of the problems is always the conversions and the interfaces.  Some of our clients have upwards of 20 different interfaces and an appetite for many more because they recognize that if there’s an interface it probably takes a lot of effort.  And so we have maybe 25 people primarily based in our office in Denver doing nothing but interfaces and conversion.  And implementation of most systems depends on the implementation of the conversions and the interfaces.  That is one of the continuing headaches because most government agencies have old systems and it’s extremely difficult to convert information that went into their system 30 years ago.  That’s one of the problems we face on every single installation.

We have a large number of installations going on.  Most will take upwards of a year, some much longer, depending on the client.  Some clients have very few people that are assigned to work with us on the implementation.  And other clients have upwards of 15 people.  So we find that the 15 people is a great investment from the client’s standpoint because it’s much faster, and they learn how to do it and make changes into the future, and that’s our objective, is to have them be totally familiar with the system, and when their requirements change they are then able to configure it and create documents in a very effective way.  In contrast, historically, the government agencies would ask their IT department to do something, and it would take forever for the IT department to do it.  Now it’s much more efficient and very effective.  And it helps the IT department feel important, and it’s important for us that the IT department feel important because then the IT staff will stick around rather than find greener pastures.  That enables us to get in and out much faster and satisfy the Client.

12:26

Charlie: There are two things that shareholders should know about our software business.  One is that our system is more configurable than that offered by many of our competitors.  That is a hugely good idea on our part.  And the other thing is that we’re slower to recognize revenue when somebody hires us than most of our competitors, and that is also a good thing because if you agree to give somebody selling computer software a lot of pay for developing a system, you can spend a lot of money and get nothing back.  Buyers are very wary.  And we are playing to that by…one of the advantages of being very rich is that we can behave better than other people.  Not only are we very rich, we don’t give a damn about what we report in any given quarter, and that gives us an advantage in saying to these government agencies, “You’re not going to take a big risk with us because you’re not going to pay us until the system is working.”  And I think it’s a very good idea that we’re using conservative accounting and have that attitude towards dealing with our customers.  We want the customers to be right when they trust us.  It’s rather interesting the way it has happened.

I will confess to one thing to this group of shareholders.  I’ve fallen in love with the Justice Agency of South Australia.  We have a contract there, and I think we trust them and they trust us.  And we are going to do a hell of a good job for Australia.  And it gives me an enormous pleasure.  So I’m biased in favor of Australia.  The shareholders will just have live with it.  We may end up with pretty much all of our business in Australia.  If we do, it will because we deserve it.  That’s our system, we try and deserve the business, that’s the way we’re trying to get it. (link)

Well, that’s pretty much…It’s been a long slog to date and there’ll be a long slog ahead.  We’re taking some territory, but it’s not rapid and it it’s never going to be the kind of thing that Google gets into, or Microsoft, where the sky just rains gold.  It’s going to be a long, long slog.  But we have a big pack of money and we have a strong will, and we have a lot of good people working in the system, and I think we’ll end up slogging pretty well.

Now, in addition to our businesses, we have a great bundle of securities.  And I want to try and dispel for the hundredth time, that this is not…we do not have some minor version of Berkshire Hathaway which has a big bundle of securities in its insurance companies, plus a lot of operating business.  We have a big bundle of securities by accident when we made a lot of money out of the foreclosure boom.  And it just happened to come in about the time when the market hit bottom.  And of course we look like a genius now because we put the money into securities because we preferred them to holding cash.  But this is not a Berkshire Hathaway (version), this is a computer software company who has a stable but small print business, and we just have a lot of extra liquidity on hand, which came to us by accident.  But of course when the money came to us by accident, we invested it as shrewdly as we could.  But the chance that we will continually gain at the rate we have in the past 4 or 5 years is zero.  Now having said that, we’re going to report in the next quarter a big increase in net worth because our deferred taxes have gone down thanks to the Trump changes in the tax code.  So we’re going to look like a genius from another accident for one more quarter. (Laughter)

16:55

(Inaudible)…There’s one security in there that is very interesting because BYD has gotten to be a significant position around here.  That with Berkshire Hathaway and the Munger family money that went into it was really a venture capital type play even though it was in the public market.  And BYD has developed into a huge company.  It’s got 250,000 employees more or less. It has a huge electric car business, it has a small gasoline car business, it has a huge battery business, it has a huge new lithium mine coming into production…(Inaudible)…near Tibet, but has a lake full of toxic water that if you drank it, it would kill you.  But it’s perfect for mining lithium.  And it’s a big lake.  One of the biggest in the world.  So we have an interesting venture capital type business, and BYD has gone into a business they were never in before, which is monorails.  And they are selling monorails like you can’t believe.  Boom-diddy, boom-diddy, boom to whole cities in China.  And some even in other countries.  And they’re also selling those big electric buses, etc. etc. and so on.  It’s weird that anybody at Berkshire or in the Munger Family, or the Daily Journal would have anything to do with a little company in China that becomes a big company, but it happened.

And there’s a buried story here that’s wonderful.  The man who founded BYD was like the eighth son of a peasant, and an older brother noticed that he was a genius and then with their Confucian system, the older brother just devoted his life to making sure the genius got educated. (link 1, 2, 3, 4)  And he got to be a PhD engineer, and then he decided to go in to the business of making cell phone batteries, in competition with the Japanese who had all the patents.  And he got $300,000 from the Bank of China, he had a cousin that approved the loan…a very Confucian system.  At any rate, from that tiny start, he created this enormous company.  250,000 employees.  And of course the governments of Shenzhen and this province up in Tibet, love BYD.  It’s not some partially owned joint venture, it’s a Chinese company created by Chinese, it’s high-tech, it does wonderful things.  And it hasn’t disappointed anybody yet, in any significant way.  So it’s heartening for me to watch.  Think of how hard it would be to create a big mono-rail business that suddenly starts to gallop.  Think how few mono-rails there are in the United States.  But of course the Chinese permitting system is totally different from the United States.  If the Chinese want to do something, they just do it.  Of course I love that system.  That’s the Salzman system.  If Gerry wants to do something he just does it.  But there are some varied stories like that, and it’s a pleasure to be affiliated with people who are accomplishing a lot.  And of course it’s good that you have electric buses in place where you can’t breathe the air, which is a lot of places.  And it’s good that we have a new lithium mine up in Tibet, or near Tibet, etc. etc. and so on.  There are some weirdness around here.  I don’t think we were very weird in buying into banks when they were very depressed.

21:00

The Wells Fargo position is interesting, and I know I’ll get questions about that, so I’ll answer them again in advance. (laughter)  Of course Wells Fargo had incentive systems that were too strong in the wrong direction.  And of course they were too slow in reacting properly to bad news when it came.  Practically everybody makes those mistakes. (Note: See Question 16)  I think around here we make fewer than others, but we still make them in the same direction.  I think Wells Fargo will end up better off for having made those mistakes.  Any bank can make a lot of money by making a bunch of gamier loans at higher interest rates or abusing their customers with very aggressive treatments.  And of course banks really shouldn’t do that.  And I think as a result of all the trouble, Wells Fargo’s customers are going to be better off (for) this event, and I think it’s time for the regulators to let up on Wells Fargo.  They’ve learned.  I can’t think of anything else that deserves a lot of comment in our basic businesses.

I’m looking at a bunch of shareholder that really didn’t buy Daily Journal stock because of its prospects.  There’s one exception.  Big exception.  But most of you here for some other reason, you’re groupies. (laughter)  I know a few nerds when I see them, of all ages, and all I can say is, “takes one to know one.” (laughter)  Well I guess that’s enough of the…oh, I might go on.

One of our directors came up with a list of qualities that any investment advisor should have.  And he gave it to a future picker of professional investors, and the picker immediately fire half his picks.  And I thought that was such a peculiar outcome that I’ll let Peter Kaufman share with you his ‘five aces’ system for picking an investment manager.  Peter, go ahead.

23:58

Peter Kaufman: So I came up with this list in giving reference to a very exceptional money manager.  And I not only wanted to give what I thought was the correct reference, I wanted the person that I was giving the reference to, to in turn be able to relate this above to the real shot-caller.  So that a compelling narrative would be transferred from me directly to the ultimate shot-caller.  So I came up with what I call the “five aces”.  The five aces being the highest hand you can have in a wild card poker game.  Ace number one is total integrity.  Ace number two is actual deep deep fluency on whatever it is you say you’re going to do on behalf of the client.  Ace number three is a fee structure that is actually fair in both directions.  Ace number four is an uncrowded investment space.  Ace number five is a long run-way.  Meaning that the manager is reasonable young in age.  I further add that if you ever find a money manager who possesses all five of these characteristics, there are two things you should do.  One, you should put money with them immediately.  And number two, put as much money as you are allowed to put.  Now I know we have money managers in the room, and we have…

Charlie: Do we ever! (laughter)

Peter Kaufman: And we have people who employee money managers who are in the room.  If you employ money managers, this is an excellent formula to evaluate your money managers.

Charlie: Yeah, but it will cost you to fire half those you’ve hired..or you have hired. (laughter)

Peter Kaufman: But perhaps more importantly, if you’re a money manager, this should be your list of five aspirations.  What characteristics should I seek as a money manager to possess?  I should be completely trustworthy.  I should have actual deep fluency in what I claim that I’m going to do.  I should adopt a fee structure that’s generally fair in both directions.  I should seek an uncrowded space because as we all know, in business where there’s mystery, there’s margin.  What kind of margin are you going to have in a crowded space? (Note: See Question 21)  And number 5, many of you in here, you’re very fortunate.  You get to check that box for having a long runway.  Some of the best money managers in history only get four out of these five aces because they don’t qualify for number five.

27:23

Charlie: Those include those who you’re invested with. We do not have a long runway.  That doesn’t mean the company won’t do well, (laughter) but in terms of investment management runway, it’s rather interesting.  Berkshire Hathaway’s peculiar in that its directors are so old and its managers are so old.  The only institution that exceeds Berkshire Hathaway and the Daily Journal in terms of old directors in office is the Mormon Church. (laughter)  The Mormon church is run by a group of people and they have two wonderful qualities.  There’s no paid clergy in the Mormon church.  And the ruling powers in a group of males between about 85 and 100.  And that system is more successful than any other church.  No paid clergy and very old males.  Obviously we are copying that system at Berkshire and the Daily Journal. (laughter)  And we are so much older than the Berkshire directors who are also very old.  Warren says we’re always checking to see how the young fellows are doing at the Daily Journal versus Berkshire.  It is slightly weird.  But the world is…who would have guessed that the church with the best record for keeping people happy and so on and so on…(inaudible)…which is the Mormon church.  Who would have guessed that it had no paid clergy, run only by males who are about 85 and up?  Now that is a very odd result.  I guess I should like odd results, because I’m sure as hell living a life of a lot of odd results.  And I’m very surprised to be here.  Somebody said, an old woman whom I liked, said at her 94th birthday party, “I’m very pleased to be here”, in fact she said, “I’m very pleased to be anywhere.” (laughter)  Well that’s what it is, and it is weird.

I think the incentive structure in investment management is very interesting.  If you look at the people who have a ton of money from the past, like say the Massachusetts Investor Trust (link) or something like that, which pioneered Mutual Fund investing in the early days after Mutual Funds were allowed.  It was certainly a respectable and honorable place.  But once it gets to be $700 billion or whatever it is, and hires a lot of young men and has a big staff and so forth…and young women too…and spreads its investment over 50 securities at least, the chances that it’s going to outperform the S&P average really shrinks to about zero.  And of course they wondered what we’ll keep paying, whatever number of basis points Massachusetts Investor Trust’s management operation charges for the long-term, and they may feel under pressure and that their world is threatened.

Another place that’s threatened.  Suppose you’re charging say 1 and 20, one percent off the top and twenty percent of profits…or even worse, two percent off the top and twenty percent of profits…and you’ve got $30 billion or so under management and an army of young ambitious people, all of whom want to get unreasonably rich very fast.  What are your chances of doing better for your clients?  Well the average entity that charges those fees, the chances the clients will do well is pretty poor.  That’s the reason Warren won that bet against the hedge funds.  Where he bet on the S&P averages and they bet on carefully selected bunch of geniuses charging very high fees.  And of course the high fees will just kill you.  It’s so hard in a competitive world to get big advantages just buying securities, particularly when you’re doing it by the billion, and then you add the burden of very high fees and think that by working hard and reading a lot of sell-side research and so forth, that you’re going to do well.  It’s delusional.  It’s not good to face the world in a delusional way.  And I don’t think, when Berkshire came up, we had an easier world than you people are facing this point forward, and I don’t think you’re going to get the kind of results we got by just doing what we did.  That’s not to say what we did and the attitudes that we had are obsolete or won’t be useful, it’s just that their prospects are worse.  There’s a rule of fishing that’s a very good rule.  The first rule of fishing is “fish where the fish are”, and the second rule of fishing is “don’t forget rule number one.”  And in investing it’s the same thing.  Some places have lots of fish and you don’t have to be that good a fisherman to do pretty well.  Other places are so heavily fished that no matter how good a fisherman you are, you aren’t going to do very well.  And in the world we’re living in now, an awful lot of places are in the second category.  I don’t think that should discourage anyone.  I mean life’s a long game, and there are easy stretches and hard stretches and good opportunities and bad opportunities.  The right way to go at life is to take it as it comes and do the best you can.  And if you live to an old age, you’ll get your share of good opportunities.  It may be two to a lifetime, that may be your full share.  But if you seize one of the two, you’ll be alright.  Well with that pontification done, I’ll take questions.

34:56 Q&A Begins

Question 1: How do you define mid-western values, and how have they influence you?  How much are they embedded into the DNA of Berkshire?

Charlie: Well I think there is some Middle Western values embedded in Berkshire.  I don’t think it would be the same place if it had grown up in the middle of Manhattan island.  There’s just so much buzz and craziness in finance in a place like Manhattan that I think it was actually an advantage for Warren to be brought up in a place out of Omaha. (link 1, 2)  Certainly I have a deep ties of affection and respect for my life in Omaha and my parents and their friends.  And so I like what I think of as Middle Western culture.  And I really don’t like crazy culture.  There’s a lot of it in a lot of places.  So yeah, I…(inaudible)…Mid-Western culture.  I don’t think it’s that bad in the South or the East or the Rocky Mountains, but I have less experience with that culture.  And I go to Montana to fly-fish, and I like Montana when I’m there, but that’s too rugged for me.  I like more intellectualism in the bigger cities.  So Omaha was just right for me.

36:49

Question 2: My question relates to BYD.  Given that you’ve successfully invested in commodities in the past, how do you view investing in things such Cobalt, Lithium, and Helium as technologies of the future?

Charlie: Well I’m hardly an expert in commodity investing, but certainly cobalt is a very interesting metal.  It’s up about 100% from the bottom.  And it could get tighter, but that’s not my game. (link)  I don’t know much about…I haven’t invested in metals in my life much.  I think I bought copper once with a few thousand dollars.  I think that’s my only experience.

37:53

Questions 3: When I reflect on where I am here in my 30’s I often think about the multiple sufferings you went through when you were my age.  I have the image of you walking the streets of Pasadena, shouldering your multiple griefs, alone.  In contrast to that, would you tell us about some of the people and experiences that helped you through that period?  And my friend also has a question…

Question 4: Did you ever have aspirations to be a comedian?  Because your jokes per minute are off the charts. (laughter)

Charlie: Well, I think you understand me best.  I’m really what I call a “gentile Jew”.  You know if you look at the way the world is working and just about 2% of the people provide about 60% of the humor.  And this is weird because this is a group that’s had a lot of trouble.  And so I just like the Jews, I like the humor.  My way of coping.  And by the way, I recommend it to all of you.  There are…I might tell a story about a darling little girl, wispy blonde hair, beautiful curls, charming lisp.  She goes into the pet store, and the pet store owner says, “Oh you little darling blonde haired girl, what can we do for you?”  “Wabbits, I want Wabbits.”  “Oh we’ve got wonderful ‘Wabbits’.  Grey wabbits, white wabbits, brown wabbits.  What kind of wabbits do you want?”  And she said, “I don’t think my lovely big snake is going to give a shit.” (big laughter)  It does help to go through life with a little humor.  One thing that’s nice about the human condition is that people are always doing these utterly ridiculous things.  You don’t lack for new things to crack jokes about. (link)

40:56

Question 5: I have a question about the talk you did about the talk you did back in 1995 at Harvard on “the Standard Causes of Human Misjudgment” (link 1, 2), and I thought you ended it in a very interesting way where you said, “I don’t think it’s good teaching psychology to masses, in fact I think it’s terrible.”  Would you elaborate on that comment?

Charlie: Well it sounds as though I’m somewhat misquoted.  I do think it’s hard to teach the whole reach of psychology the way they do it in academia.  Because the way they do it in academia is they want to do experiments and they want to learn things from the experiments that they can publish.  Therefore the experiments have to be pretty simple, testing one particular triggering factor if they can.  And by doing that over a vast number of triggering factors, they accumulate a big body of experimental events and you can drag some general principles out of it.  The great utility of psychology is when you know those principles as bluntly as you know how to read or something, really fluently.  And you use those principles in synthesis with the rest of knowledge.  The interplay of psychology with the rest of knowledge is a vastly productive area for correct thinking. But the psychology professors can’t do it because they don’t know the rest of knowledge, and there’s no reward in psychology for synthesizing the rest of knowledge with psychology.  The rewards are for doing another experiment and publishing.  And so it’s mis-taught.  It’s a subject that intrinsically works best when you use it in combination with some other discipline.  But academia is not set up for people to get good at using a blend of two disciplines.  So the whole damn system is wrong.  On the other hand it gave great opportunity to me because I always figured when I was young that if my professor didn’t know it, it just didn’t matter I’d figure it out for myself.  I could tell though from the first instance that the big territory was synthesizing psychology with the rest of knowledge.  So I learned psychology so I could do it.  But psychology professors, they just try and learn it the way it’s taught.  There’s no reward if you’re a professor of psychology for synthesizing psychology with the rest of knowledge.  Now you people should follow my example.  Not the example of the psychology professors.  I guarantee you that you won’t make any money doing it their way.  Occasionally you find a group like Thaler’s group, Thaler just won the Nobel prize by the way.  And he’s trying to synthesize the process.  And I say more power to Thaler.  May his tribe increase.  (“Abou Ben Adhem” link 1, 2, 3)  And it’s a good sign that the world has given it to Thaler…the Nobel Prize.  He’s doing exactly what I’m recommending.

45:15

Question 6: Speaking of Munger’s system, if you had to teach the Munger system of mental models to primary children, would you focus on covering all the models or would you focus on teaching them how to figure it out themselves?

Charlie: I’d do both.  Of course if you get the right number of models in your head it helps, and of course you want to get fluency of using the models, there isn’t any real road to getting it done fast.  At least if there is I’ve never found it.  You can keep at it.  But that’s my system.  My whole system in life is keeping at it.  I’m a big admirer of Carlyle’s approach, which was quoted all the time by Sir William Osler, who was one of the most highly regarded physician in the world.  Carlyle says that “The task of man is not to see what lies dimly in the distance, but to do what lies clearly at hand.” (link)  I think that’s right.  I think that most of the time, you should get the work that’s before you done and just let the future fall where it will.

46:33

Question 7: My Question is concerning commercial banks, obviously Berkshire has a very large $60 billion portfolio there, and Daily Journal has a very sizable one.  My question is, as I look at that portfolio, especially the Berkshire portfolio, there are quite a few banks that appear to be at or close to the quality of what’s in that in that portfolio, some of which people like you think highly of.  My question is, I realize they’re pretty fully valued now, maybe 4 to 5 years ago when they weren’t, why aren’t there more of those high quality banks in the Berkshire portfolio?  Is it just the concentration of the portfolio?  Because $60 billion’s a lot.  Or is there some pattern among those banks to make them less attractive to you and Mr. Buffett?

Charlie: Well, banking is a very peculiar business.  The temptations that come to a banking CEO are way…the temptations to do something stupid are way greater in banking than they are in most businesses.  Therefore it’s a dangerous place to invest because there are a lot of way in banking to make the near term future look good by taking risks you really shouldn’t take for the sake of the long-term future.  And so banking is a dangerous place to invest and there are a few exceptions.  And Berkshire has tried to (pick) the exceptions as best it could.  And I haven’t had any more to say on that subject except, I’m sure I’m right.

48:26

Question 8: Your thoughts on the valuation of software companies like Apple, Facebook, Google, Amazon, Alibaba.  Are they over-valued, potentially under-valued, too early to tell?

Charlie: Well my answer is I don’t know. (laughter)  Next question. (laughter)

49:04

Question 9: This question is for Mr. Kauffman.  You mentioned about the “five aces” and aligning the interests with investors with the right fee structure to benefit both.  What have you seen as a good fee structure, both from a start-up fund with say $50 million in assets, and then the larger funds with assets over billion?

Peter Kaufman: I’ll let Charlie answer that because he can describe to you what he thinks is the most fair fee formula that ever existed and that’s the formula in Warren Buffett’s original partnership.

Charlie: Yeah, Buffett copied that from Graham.  And Mohnish Pabrai is probably here…is Mohnish here?  Stand up and wave to them Mohnish.  This man uses the Buffett formula, and always has, he just copied it.  And Mohnish has just completed 10 years…where he was making up for a high water-mark.  So he took nothing off the top at all for 10 years, he sucked his living out of his own capital for ten long years, because that’s what a good money manager should be cheerfully willing to do.  But there aren’t many Mohnish’s.  Everybody else wants to scrape it off the top in gobs.  And it’s a wrong system.  Why shouldn’t a man who has to manage your money whose 40 years of age be already rich?  Why would you want to give your money to somebody who hasn’t accumulated anything by the time he was 40.  If he has some money, why should he on the downside suffer right along with you the investor?  I’m not talking about the employees under the top manager.  But I like the Buffett formula.  Here he is, he’s had these huge successes.  Huge in Buffett’s career.  But who is copying the Buffett formula?  Well we got Mohnish and maybe there are a few others, probably in the room.  But everybody wants to scrape it off the top, because that’s what everybody really needs, is a check every month.  That’s what is comforting to human nature.  And of course half the population, that’s all they have, they’re living pay check to pay check.  The Buffett formula was that he took 25% of the profits over 6% per annum with a high water mark.  So if the investor didn’t get 6%, Buffett would get nothing.  And that’s Mohnish’s system.  And I like that system, but it’s like many things that I like and I think should spread, we get like almost no successes spreading that system.  It’s too hard.  The people who are capable of attracting money on more lenient terms, it just seems too hard.  If it were easier, I think there would be more copying of the Buffett system.  But we still got Mohnish. (laughter)

52:50

Question 10: Why have you chosen to have your friends call you Charlie Munger when you could have instead chosen to go by “Chuck” Munger?

Charlie: The only people who call me “Chuck”, call me blind on the telephone and ask me to invest in oil plays. (laughter)  No I don’t mind being called Charlie.  My Grandfather was Charlie Munger.  When he got appointed as a federal judge he thought it was undignified to be a “Charlie”, so he reversed his initials, then he was T.C. Munger instead of C.T.  But I didn’t follow my grandfather’s practice, I was quite willing to have an undignified name. (laughter)

53:46

Question 11: Two Questions.  Could you give more detail around the Berkshire, J.P. Morgan, Amazon, healthcare partnership and why in the initial press release it said that the model would be spread beyond the employees of the three companies, but then the WSJ reported that the model would only be for the employees of the three companies?  My second question is, can you give your view on ‘what is Li Lu’s talent’?

Charlie: Well those are two unrelated questions but there’s no rule against it.  But three are too much just for the record. (laughter)  On the healthcare system, the existing system runs out of control on the cost side and it causes a lot of behavior which is not only regrettable but it’s evil.  There’s a lot of totally unnecessary crapola that’s crept into the medical system so that people can make more money.  And the costs are just running completely out of control.

And other people have systems that have better statistics that cost maybe a fifth as much, if you talk about Singapore, or half as much if you talk about some liberal European country.  So they’re just concerned about something that’s run out of control because the incentives are wrong and they want to study it and do something…for the three companies.  Of course that’s a very difficult thing to take on.  I don’t know how it will work out.  The man in America that thinks about these subjects in a way that I much admire is Atul Gawande whose a professor of medicine at Harvard.  He’s not only the best writer that I know of in the whole medical profession, he’s also a very honorable and very clear thinking man.  Both his parents were physicians.  This is a man that can check all the boxes.  There’s a lot wrong and these people are looking at it to see if they can do something.  They’re going to find it plenty difficult.

It wouldn’t be hard if you were a benign despot to do something pretty dramatic.  Take macular degeneration of the eye.  Old people who have it, which is a lot, need a shot on a regular (basis).  Well I can give that damn shot.  It’s not that hard to shoot a little gook into an eyeball if you know how to do it.  It draws a lot of pay.  And there are two different substances you use, and one of them costs and fortune and the other costs practically nothing and they both work about equally well.  And of course what’s really being used in a lot of America is the more expensive of the two substances.  There’s a lot wrong with that situation.  It’s just crept in.  A lot of unnecessary costs.  Medicine’s just full of that kind of stuff.

And many a man whose dying is like a carcass in the plains of Africa, in come all the vultures and jackals and hyenas and so on.  A dying old person in many American hospitals looks just like a carcass in Africa.  Where the carnivores come in to feed.  It’s not right to bleed so much money out of our dying people.  And there’s not a hospital in America that doesn’t have people lying in the dialysis ward who have no chance of waking up, who are being dialysized to death.  Easily immoral, stupid conduct.  So the extent that somebody makes some assault on some of these asininities of our present healthcare system, I’m all for it.  On the other hand, I’m glad I’m not doing it because it’s really difficult.  I’m too old for that one.  But I welcome somebody who’s trying to…It’s deeply wrong what’s happening.  It’s deeply wrong.  And some stuff is not getting done that’s very cost effect and a lot of totally unnecessary stuff is being done.  Why shouldn’t we do that?  Well I’m all for somebody trying to figure it out.  But if they asked me to serve on such a panel I’d decline.  It’s really hard going and you’re stepping on a lot of…(inaudible).

The second question was Li Lu.  What was unusual about Li Lu.  Li Lu is one of the most successful investors. (link) Imagine him, he just popped out of somebody’s womb and he just assaulted life the best he could and he ended up pretty good at it.  But he was very good at a lot.  He’s ferociously smart.  It really helps to be intelligent.  He’s very energetic.  That also helps.  And he has a good temperament.  (link)  And he’s very aggressive, and he’s willing to patiently wait and then aggressively pounce. (link)  A very desirable temperament to have.  And if the reverse comes, he takes it well. (link)  Also a good quality to have.  So it’s not very hard to figure out what works.  But there aren’t that many Li Lu’s.  In my life, I’ve given money to one outside manager, and that’s Li Lu.  No others in my whole life.  And I have no feelings that it would be easy to find a second.  It’s not that there aren’t others out there, but they’re hard to find.  It doesn’t help you if a stock is a wonderful thing to buy if you can’t figure it out. (link)

1:00:13

Question 12: My question is really about brands.  In the past, you’ve talked about buying a business with a durable competitive advantage.  You’ve talked at length about great brands with pricing power.  Currently big consumer brands are losing their cache with younger consumers, new emerging brands started online, private label brands like Kirkland Signature are getting better by the day, and in turn big consumer brands are losing sales and pricing power.  In a world where the durable advantage seems to be acquired through scale, like Amazon and Costco, has your view on big consumer brand moats changed?

Charlie: Well the big consumer brands are still very valuable.  But they had an easier time in a former era than they’re going to have in the future era.  So you’re right about that.  And of course Amazon I don’t know that much about except that it’s unbelievably aggressive.  And the man who heads it is ferociously smart.  On the other hand he’s trying to do things that are difficult.  Costco I know a lot about because I’ve been a director for about 20 years and I think Costco will continue to flourish and it’s a damn miracle the way the Kirkland brand keeps getting more and more accepted.  You’re right about that.  So you’re right that it’s going to be harder for the big brands, but they’re still quite valuable.  If you could own say, the Snicker’s Bar trademarks and so forth, it will still be a good asset 60 years from now.  Now it may not be quite as good for the owner as it was in the last 60 years.  But it doesn’t have to be.  But in fact it makes it harder for you investors.  It use to be the groupie could buy Nestle and they’d think, ‘Well, I’ll just sit on…(inaudible)’.  I don’t think it’s quite that simple anymore.  It’s harder.  You’re right.  But you know that.  It was a great question. (laughter)  I just wanted you to breathe it in.  That’s what everybody likes.  You want the answering voice to agree with us.

1:02:37

Question 13: You once said in an interview that you’d prefer that the U.S. would import oil instead of getting it from the ground.  From where I come from, which is the Middle East, Kuwait, oil represents around 85 to 90% of the government’s revenues.  What do you think is the future for oil?

Charlie: Well, I said last year that oil was very interesting in that the great companies like Exxon were producing about a third as much as they use to at the peak, and yet they’re still very prosperous because the price of oil has gone up faster than production has gone down.  But it’s a weird subject, what’s going to happen with oil.  Eventually it’s going to get very hard to have more oil and eventually the price will go very high.  As a chemical feed-stock it’s totally essential, the hydrocarbons.  So it’s never going to go out of vogue, and of course we’re going to need it for energy for a long, long time ahead.  But as an investment I think it’s a difficult subject, and I think you’ll notice that Berkshire in its whole history has had few investments in oil.  Some, but it’s not that many.  The Daily Journal doesn’t have any.  It’s a tough subject and of course as I said here last year, I think the correct policy for the United States would be not to produce our oil so fast.  I think oil is so precious and so desirable over the long pull that I’d be very happy to have more of our oil just stay in the ground and just pay up front to the Arabs to use up theirs.  I think that would be the correct policy for the United States.  Only 99.9% of the rest of the people in world are against me. (laughter)  But why would we want to use up all our oil as fast as we can?  Why would that be smart?  Would we want to use up the topsoil of Iowa as fast as we can?  I don’t think so.  So I think our current policies are totally nutty.  And if you go on, when I was young, there were about 2 billion bushels of corn in the whole production of the country.  There are about 6 times as many bushels of corn (today), and a big chunk of that corn is being turned into motor fuel.  That is an utterly insane policy that happens because of the political power of the farm states in our weird system.  But nothing could be dumber than using of our topsoil to create corn to turn into motor fuel.  It’s really dumb.  Yet it’s there and nobody has any power of changing it.  It’s weird, the whole oil subject is weird.  It’s weird that companies prosper by producing less and less of their main product in physical terms, and it’s weird that a whole nation could do something as dumb as turn a big percentage of the corn crop into motor fuel by edict of the government.  So it’s a weird subject.  But the oil’s totally essential, the hydrocarbons.  Without the hydrocarbons, our great top soil doesn’t work very well.  The miracle grains are miracles if you use a lot of hydrocarbons, plus our good soil.  The miracle grains don’t work very well without the hydrocarbons.  It’s weird.  The current population of the earth is being fed by miracle grains and their miracle is they turn oil into food.  So you raised a weird subject, you must like weird subjects.

1:07:15

Question 14: Some of the greatest advancements to humanity seem to be the result of public-private partnerships.  The railroads, electrification, the technology revolution.  Now all those require some measure of rationality and foresight among politicians and business leaders.  Do you see any opportunities today in terms of the possibility for partnering for infrastructure or basic research or that sort of thing?

Charlie: Well the answer is yes.  I think one of the obvious needs is a really big national grid.  Which takes new government legislation and a lot of other things.  I think it’ll come, we should have it all ready.  It’s the failure of the government that we don’t have a wonderful electric grid.  But it will come and I think Berkshire Hathaway will be a big part of it when it happens.  But it’s easy to over-estimate the potential…why don’t we have a big electric grid that works already?  There are a lot of things that should happen but don’t happen, or happen very slowly.  I don’t think…calling it a public-private partnership sounds wonderful.  Everybody wants what my friend Peter Kaufman calls a “robust narrative”, that’s what people specialize in in America, robust narratives.  Public-private partnerships sounds like a robust narrative.  It sounds to me like a bunch of thieving bankers who get together with a bunch of thieving consultants. (laughter)  But it’s a robust narrative.

1:09:13

Question 15: You once said, when you acquire a company, your time horizon is typically forever, that being said, what did you recognize about General Electric before you got out?

Charlie: Well, we made an investment in General Electric in the middle of a panic because it was a decent buy as a security to be passively held.  It worked out for us fine.  General Electric of course is a very complicated and interesting subject.  It is interesting that a company so well regarded for acumen, education, technology, etc. etc. etc.  Could end up so ill-regarded as a result of a long period of sub-par performance.  People didn’t expect it.  Of course people are saying what caused the failure of performance at General Electric?  My answer would be partly, life is hard and there’s some accident in the world.  That’s part of it.  And part of it I would say that the system at General Electric where you rotate executives through different assignments as though there are so many army officers building up a resume to see if they can be promoted to be generals.  I don’t think that works as well as keeping people in one business for a long time and having them identify with the business the way Berkshire does.  So I would say to some extent, what’s happened in the case that…maybe there should be a little less of this corporate management in the style of the U.S. Army.  And maybe people should do actually a little more of Berkshire style where by and large people spend their whole careers in one business.  (link 1, 2)

1:11:47

Question 16: You served for many decades on a variety of boards, including for-profit sector and also the non-profit sector.  Could you give us any lessons you learned from serving on a board and touch on the criteria you consider for hiring and when necessary removing executives.

Charlie: Well, I don’t think I could do that in one short burst of pomposity.  Each situation is different, but I would say this, that If you asked people with long experience in management what their mistakes were looking backward, the standard response is, somebody who should have been removed wasn’t for way too long.  So I think that general lesson is true practically everywhere.  And in all contexts.  But beyond that, I don’t think I can…it’s too broad a question for me.

1:13:13

Question 17: Are you concerned at all about the rising level of government debt to GDP at the same time that we’re running large deficits late in the economic cycle.

Charlie: Of course I’m concerned about the rising level of government debt.  This is new territory for us, and new territories probably has some danger in it.  On the other hand, it is possible that the world will function more or less pretty well, even with a very different pattern of government behavior than you and I would have considered responsible based on history to date.  Of course if you look at the inflation we got out of the last hundred years when the announced objective of government was to keep prices stable.  Now the announced objective is 2% inflation.  Well what the hell’s going to happen?  Well the answer is, we don’t know.  But isn’t the way to bet that it’s going to be…inflation over the long-term is way higher than 2%?  I think the answer is yes.  But I think that we have learned from what has happened in the past that macro-economics is a very peculiar subject and it doesn’t work like physics. The system is different in one decade, than the system that was present in the last decade.  Different systems have different formulas, but they don’t tell you when systems have changed, and when the formulas have to change. (link 1, 2)

So I don’t expect the world to go totally to hell because…well, look at what happened in Germany after World War I.  They had a hyper-inflation when the currency basically went to zero in value.  They really screwed up big time.  And what happened?…Well what happened was they recovered from it pretty quick.  And they did it by creating a new Reichsmark backed by the mortgages which they put back on the houses and properties of the people who had unfairly gotten rid of their mortgages at no cost.  And that new Reichsmark was working pretty well and Germany had pretty well recovered from that catastrophe and then along came the Great Depression.  And the combination of the Great Depression and the Weimar inflation really brought in Hitler.  Without the Great Depression I don’t think he would have come into power.  What happened…now you’ve got…by the late 30’s, what was the leading economic power in Europe?  It was Germany.  Cause Hitler in his crazy desire for vengeance and so on, bought a lot of munitions and  trained a lot of soldiers and so forth.  And the accidental Keyensianism of Germany under Hitler caused this vast prosperity.  So Germany was the most prosperous place in Europe in 1939.  So all that catastrophe, they recovered from.  So I don’t think you should be too discouraged by the idea that the world might have some convulsions.  Because there’s a way of recovering.  Now I’m not advocating the German system (laughter), but I do think knowing these historical examples creates what I call “mental ploys.” (link)  And you’d think that a country that destroyed (itself) in a silly war, destruction of your own currency, great depression, and by 1939 it’s the most prosperous country in Europe.  It’s encouraging.  I hope you feel better. (laughter)

1:17:24

Question 18: Since the mid-1990’s, the number of DOJ cases filed annually under the Sherman Act has collapsed from 20 to almost zero.  Over the same period, we’ve seen a dramatic increase in the ‘winner-take-all’ effect.  Where market share of the top five companies across almost all industries have surged, not just technology and media.  And the number of publicly traded companies has dropped close to 50%.  So for example, from 8,100 to 4,300.  Why do you think the DOJ has less active in enforcing anti-trust legislation over the past 20+ year and do you think the DOJ is likely to become more active and how do you think that will affect the financial markets?

Charlie: Well I don’t know whether the DOJ is going to become more active or not.  I am not terribly disturbed by the present state of the economy or the present state of concentration of economic power.  Wherever I see companies by and large are having plenty of competition.  And so I’m not…(inaudible)…on the theory that the whole world is wrong as it’s presently constituted.  There are companies now, that people were worried about them being too powerful like Kodak and they’re not even here anymore.  I think we have enough competition by and large.  I do not think the world is going to hell from lack of activity in the Justice Department.

1:19:02

Question 19: How did Ajit Jain build Berkshire reinsurance from scratch?

Charlie: Well it’s very simple.  He worked about 90 hours a week.  He was very smart.  He’s very honorable.  He’s very pleasant to deal with.  And he talked every night to Warren Buffett.  Just find somebody else like that.  But he won’t do as well because the game is harder now than it was then.  And that’s my answer to your question.

1:19:49

Question 20: Question regarding Warren Buffett.  In 2008 he wrote an op-ed article regarding the depths of the bear market, talking about how he (Buffett) had previously put his own money into treasuries, and in my mind he’s normally thought of as a buy and hold investor, but in this case, a lot of his money, almost all of it was in treasuries.  And I wanted you to speak to the value of holding money in a portfolio at the proper time.

Charlie: Well, it’s possible that there could be when a wise investor would be all in treasuries.  That is not an impossible event.  It’s virtually impossible for me.  I can imagine such a world, but I don’t think…I haven’t been in that kind of a world yet.  Generally speaking long-term treasuries are a losing (investment) over the long-pull.  And that’s my view.

1:21:05

Question 21: In 1999, Warren Buffett said that he could return 50% if he ran $1 million.  Give what you said about the investment landscape today being more difficult, what do you think that number would be today?

Charlie: Well I do think that a very smart man who’s patient and aggressive in combination, is willing to work hard, to root around in untraveled places like thinly traded stocks and other odd places.  I do think a person with a lot of shrewdness, working with a small amount of capital, can probably earn high returns on capital even today.  However that is not my personal problem at the moment.  And for me it’s hard.  And for Berkshire it’s hard.  And for the Daily Journal we don’t have any cinch either.  It’s disadvantageous to have securities in a corporate vehicle like the Daily Journal Corporation.  It’s an accident that we have them there.  We have them there because that’s where the money was.  The way it’s worked out, it’s not desirable if you’re a shareholder and you have a layer of corporate taxes between you and your securities that are indirectly owned.  And once you get public securities held in a public corporation taxable under sub-Chapter C of the internal revenue code, all kinds of factors, including income taxes affect your investment decisions.  And it’s much easier to invest in charitable endowment or your personal pension plan.  Generally speaking, I would say, if you’re shrewd enough with small sums of money, I think you can compound pretty well.  The minute you get bigger sums, I think it starts getting difficult.  It’s way more difficult for all you people sitting here than it was for me when I was in your position.  But I’m about to die and you have a lot of years ahead. (laughter)  You would not want to trade your position for mine.

1:23:40

Question 22: What would you advise me as a teacher to help my students become better thinkers and decision makers and also become happy in life?

Charlie: I did not pick that up.  You were trying to help me by hurrying up, that’s not the best system…(laughter)

Well, that’s a wonderful question.  I would say the minute you have the attitude you’ve already expressed, you’re already probably going to win at everything you want to win at.  You just keep trying to live a good life, and a constructive life, and to be rational, and to be honorable, and to meet the reasonable expectations of people who depend on you.  Of course you’re going to get ahead over time.  And of course the best way to teach is by example.  And of course the example works better when you win and if you behave right you’re more likely to win.  So I would say, you’re on the right track already.  All you have to do is keep at it.  With your attitude, you can’t fail.

1:25:32

Question 23: Good morning Mr. Buffett…Mr. Munger.

Charlie: I’m flattered to be called Mr. Buffett. (laughter)

Question 23 Continued: The most recent annual report for Berkshire, as in the past reports, the growth in book value was shown and over the past 52 years it has grown from $19 to $172,000.  Which represents a return of 19% a year.  Is a large part of that outsized percentage attributable to the leverage inherent in the insurance company, such that you can own an investment in the insurance company which returns say 14% and it becomes 20% to book value?

Charlie: Well obviously there was a little leverage buried in the Berkshire numbers.  Obviously the insurance business provided some of that.  It’s not over-whelming in its consequences.  There were years when it was helping.  There were years when Ajit made so much money that it was almost embarrassing.  And then he’d give the money to Warren and Warren would make 20% on the money.  So there were some years when some remarkable synergies between the insurance business and Berkshire Hathaway.  But basically the insurance business is not some cinch easy way to make money.  There’s a lot of danger and trouble in the insurance business and its more and more competitive all the time now as we’re sitting here.  Berkshire succeeded because there were very few big errors…there were like no big errors, really big. (link) And there were a considerable number of successes.  All of which would have been much harder to get under present conditions than they were at the time we got the results.  And there are very few companies that have compounded at 19% per annum for fifty years.  It’s (a weird) in net worth.  That is very peculiar.  I wouldn’t count on that happening again soon.  It certainly won’t happen at the Daily Journal.

1:28:07

Question 24: Question regarding margin trading for Charlie and Rick Gueren.  With the recent decline in the stock market, there were a lot of margin calls to customers.  I know back in your partnership days, there was a big bear market and a lot of big declines in your portfolio.  Would you care to comment on the productivity of margin trading?

Charlie: Well of course it’s dangerous when you have a margin account because the person whose giving you credit can wipe you out at the bottom tick just because he feels nervous.  And therefore of course, people like Berkshire just totally avoid any position where anybody else would start selling our securities because he felt nervous.  And of course there are a lot of people now that are pushing margin trading very, very hard.  And…the minute you got weird new instruments like these VIX contracts that triggered new selling because existing selling happens.  So you get a feedback effect that were a little decline becomes a big one and then a big one becomes and bigger one, and so on.  And it rapidly goes down a lot in a short time.  I’m afraid that under modern conditions the risk of what happened recently with the VIX is just part of the modern conditions.  And of course we’ll always have margin traders who want to push life hard and we’ll always have catastrophes.  Neiderhoffer (link 1, 2) was just wiped out by the VIX, and that’s the second time he’s been wiped out.  And he’s a very talented man.  Neiderhoffer was famous at Harvard.  His name became a verb.  He learned to what was called “to Neiderhoffer the curriculum”.  He was a great card player and a great squash player, and a good national champion, and he was a scholarship student.  He didn’t have much money.  So he had to get very high grades, and he didn’t want to do any work.  So he figured out how to “Neiderhoffer” the curriculum of Harvard.  He signed up for nothing but the toughest graduate courses in economics.  And the economics students in those advanced courses were doing a lot of the scut work for the professors, and so nobody ever gave them anything less than an A.  And for a while Neiderhoffer didn’t even go to class.  They thought they had a new John Maynard Keynes at Harvard.  And he was just signing up for courses where you couldn’t get a low grade.  Interesting story.  Interesting man.  Wiped out a second time.  He’s very brilliant.  He was a very talented man.  Pushing life that hard is a mistake.  It’s maybe a less of a mistake when you’re trying to get out of the mire of mediocrity and get your head a little above the crowd.  But when you’re already rich, it’s insane.  Why would you risk what you have and need in order to get what you don’t have and don’t need?  It really is stupid.

1:31:50

Question 25: Question about the U.S. high-speed rail system.  As you know the high-speed rail act was introduced back in 1965 when Berkshire had their first annual meeting.  What is your thinking, or outlook, or comments about the U.S. high speed rail system.  Including the one that’s being built here in California, as well as the possibility for a national high speed rail system.

Charlie: Well that’s a very interest question.  The high speed rail system which was aggressively create in China is a huge success and very desirable.  So it’s not like it’s intrinsically a dumb idea.  However in the…(inaudible)…we actually have in America, getting a big high speed rail system is really difficult, including having one even in California.  And I’m not at all sure that trying to have a high speed rail system in California was wise all factors considered.  But I’m not sure that it isn’t on the other hand.  Just put me down as skeptical, but not determinedly opposed.  And I know it will cost a fortune, that I’m sure of.  The trouble with it is that it’s competing with something that works pretty well called the airplane.  So, I can’t answer your question except as I have.  I know we need a big grid.  I’m not sure the United States needs a high speed rail system for passengers.  I would say that may have passed us by.

1:34:04

Question 26: Could you comment on whether you ever considered investments in Hershey’s or Tiffany’s over the long term and have offered attractive entry points?

Charlie: Well I’d be delighted to own either Hershey’s or Tiffany’s at the right price, wouldn’t you?  It’s just a question of price.  Of course they’re great companies.  But that’s not enough, you have to have great companies available at a price you’re willing to pay.  Hershey’s is a private company.  Nobody’s offering me Hershey’s.  I can buy the candy, but I can’t buy the company.

1:35:30

Question 27: I’m here with my 92 year old Grandma whose spent the past 50 years investing for our family.  As a college senior with a passion for value investing, it keeps me up at night knowing that I will eventually be entrusted with a portfolio she built for a lifetime.  Based on the successful decisions that you’ve made for your large family here today, what advice do you have in regards to seizing the few opportunities when I will have to act decisively for my family without jeopardizing her life’s work?

Charlie: Well of course I like any 92 year old person. (laughter)  Particularly if it’s a good looking woman whose also rich. (laughter)  And whose descendants admire her.  Instead of being eager to have her gone. (laughter)  I’d say you have a big winner there in your family.  Try to live your life so that you can be a big winner too.

1:36:54

Question 28: It looks like the A.I. will have a much bigger impact on society than the internet revolution, so would you mind maybe sharing some of your thoughts on how artificial intelligence will impact different industries in general and who it will impact the future of the human race?

Charlie: Well, that’s a nice question. (laughter)  The people who studied artificial intelligence don’t really know the answer to that question.  I’m not studying artificial intelligence because I wouldn’t be able to learn much about it.  I can see that artificial intelligence is working in the marketing arrangements of Facebook and Google, so I think it is working in some places very well.  But it’s a very complicated subject.  And what its exact consequences are going to be, I don’t know.  I’ve done so well in life by just using organized common sense, that I never wanted to get into these fields like artificial intelligence.  If you can walk around the shores and pick up boulders of gold, as long as the boulders keep being found and picked up, I don’t want to go to the placer mining sifting vast amounts of data for some little edge.  So you’re just talking to the wrong person.  And I’m not at all sure how great…I don’t think artificial intelligence is at all sure to create an economic revolution.  I’m sure we’ll use more of it, but what are the consequence of using artificial intelligence to become the world’s best (golden boy)?  There may be places where it works, but we’ve thought about it at Geico for years and years and years, but we’re still using the old fashion intelligence.  So I don’t know enough about it to say more than that.

1:39:16

Question 29: Questions about culture.  How can an outsider really know a company’s culture?  And for that matter, how can an insider, at the top of an organization, really be certain about the culture of the company beneath him?  And how would you go about assessing the culture of giants like Wells Fargo or General Electric?  What is it that you look at that helps you understand culture?

Charlie: Well, you understand culture best where it’s really down (low) in a place like Costco.  And there the culture is a vast and constructive force.  Which will probably continue for a very, very long time.  The minute you get into General Electric, partly decentralized, partly not.  Multi-business instead of one business.  It gets very complicated.  What is the culture of General Electric when the businesses can be so radically different?  Maybe headquarters can have a certain kind of culture.  And maybe the culture will be a little wrong.  And maybe it’s wrong to shift people around from business to business as much as they do.  Which I strongly suspect.  I do think…there are very few businesses like Costco that have a very extreme culture where everybody’s bought into.  And where they stay in one basic business all the way.  I love a business like Costco because of the strong culture and how much can be achieved if the culture is right.  But the minute you get into the bigger and more complicated places…I mean you can talk about the culture of General Motors or the culture of AT&T, it’s a very difficult subject.  What big businesses have in common by and large is that they get very bureaucratic.  That’s the one norm in culture is that they get very bureaucratic.  And of course it happens to the government too.  A big governmental body.  And basically I don’t like bureaucracy, it creates a lot of error.  I don’t have a substitute for it.  I don’t have a better way of running the U.S. government than the way they’ve been doing it.  But I basically don’t personally like big bureaucratic cultures and so I don’t think very much about big bureaucratic cultures.  I don’t know how to fix bureaucracy in a big place.  I would regard it as a sentence to hell if they gave me some company with a million employees to change the culture.  I think it’s hard to change the culture in a restaurant.  A place that’s already bureaucratic, how do you make it un-bureaucratic?  It’s a very hard problem.  Berkshire has solved the problem as best it can…of bureaucracy.  You can’t have too much bureaucracy at headquarters if there’s no bodies at headquarters. (laughter)  That’s our system.  I don’t think it arose because we were geniuses or anything.  I think partly it was an accident.  But once we saw what was working, we kept it.  But I don’t have a solution for corporate culture at monstrous places.

1:43:08

Question 30: What’s your current view of climate change today?

Munger: Well, I’m deeply skeptical of the conventional wisdom of the people who call themselves climate scientists.  I strongly suspect that they’re more alarmed than the facts call for.  And that they kind of like the fact that they can prattle about something they find alarming.  I am not nearly as afraid as the typical so called climate scientist is, and I think the difficulties of what they urge as a remedy are under-estimated by these people.  And besides, just because you’re smart enough…suppose you, by knowing a lot of physics and so forth, could actively figure out that climate change was a huge problem, you were right.  That would not automatically mean that you know how to fix it.  Fixing it would be a vast complicated problem involving geo-politics, political science, all kinds of things, that just because you understood the chemistry of climate say, you wouldn’t have any expertise as…So I think there’s a hell of a lot of non-sense being prattled on the climate change things.  But no, there’s no doubt that the CO2 does cause some global warming.  But just because you accept that doesn’t mean that the world is absolutely going to hell in a hand-basket.  Or that the seas are going to rise by 200 feet any time soon and so on.  So I’m deeply skeptical of a lot of these people, and yet I don’t want to be identified with the no-nothings who really are vastly ignorant and wouldn’t even recognize that CO2 does have some influence on temperature.  Now I’ve tried to offend everybody…(laughter)

1:46:02

Question 31: In an age that’s very different than the one you grew up in, if you’re a young guy like me with a lot of runway like Peter talked about, where would you focus your attention?

Munger: Well, I’d approach life a lot like Carlyle.  I would just get up every morning and do the best I could in every way and I’d expect over time to do pretty well.  And it’s not very hard.  I’d try to marry the right person instead of the wrong person.  Everything would be quite (trite).  I would guess that practically everybody your age in this room is going to do pretty well.  You’re not that mad at the world here.  You’re trying to figure out how to cope with it a little better.  You’re going to do alright.  People like that succeed.  But if you all came in here with placards, sure you were right on every subject and wanted to shout back?  You wouldn’t have such a bright future.  Those people are pounding their idiocy in instead of (shutting it out).

1:47:46

Question 32: Which cognitive biases are particularly at scale on a national scale these days?

Charlie: Well its hard, with so many cockroaches in the kitchen it’s hard to identify each…(laughter)  I would say every bias that man is prone to is always working.  That’s the nature of the system.  It’s amazing what people have come to believe.  And it’s amazing how polarized our parties are becoming.  And now you turn on TV, and you can even turn to channel A and you’ve got your kind of idiot, or you click channel B and you got the other fellow’s kind of idiot.  What they have in common is that they’re both idiots.  They’re playing to an audience that is mentally defective. (laughter)  Of course it’s a little disquieting.  I was use to a different world.  I liked Walter Cronkite.  This choose your idiot form of news gathering, I don’t much like.  What do you do?  I flip back and forth between idiot types. I will not stay with just one type of idiot. (laughter)  So that’s my system.  But you’re right.  It’s weird.  Now the world has always had weird idiots.  Hitler was an idiot…a smart idiot, but an idiot.  We’re always going to have crazy people and crazy people who follow crazy people. Part of what I like about that situation is…it gives you more incentive to think correctly yourself.  I find life works best when you are trying to stay rational all the time.  And I must say, these idiots are giving me more incentive.  I don’t want to be like any of them.  Don’t you feel that way when you turn on the TV and here’s one idiot mouthing this way, and the other one mouthing this way, and misrepresenting the facts?  I don’t want to be like either of them!  I don’t know whether we’re going to have more of what’s developed or whether we’re going to go back to something that’s more pleasant.  But it’s kind of interesting to watch, I will say that.

1:51:11

Question 33: What do you think of the critical challenges that business models relying heavily on advertising as a source of revenue in a digital age?

Charlie: Well if I’m following that correctly, you do live in an age where people using computer science to sift out correlations that might be predictive and then to try trading on those algorithms on an instant basis, in and out.  Where large amounts of money have been made, by say, Renaissance Technologies.  And there’s way more of that and its worked for those people.  And I don’t consider it a good development.  I don’t see any big contributions to civilization, having a lot of people using computer algorithms to out-trade each other on a short-term basis.  Some people think it creates more liquidity in the markets and therefore it’s constructive.  But I could just as soon do without it.  I would rather make my money in some other way than short-term trading based off of computer algorithms, but there is more of it, you’re right about that.  And by and large, the one thing they have in common is that they can’t take infinite amounts of money.  You try and file too much money into an algorithm and it’s self-defeating.  And thank God it’s self-defeating.

 1:52:51

Question 34: I was hoping to gain some insight regarding your and Warren’s discussions into airlines.  Whether or not it was a light-bulb that went off in a certain year.  Or whether it morphed over time.  Just trying to get an idea about when you got open minded about maybe investing into airlines and how you changed your mind.

Charlie: Well, we did change our mind.  For a long time, Warren and I (painted over) the railroad because there were too many of them, and it was too competitive, and union rules were too crazy.  They were lousy investments for about 75 years.  And then they finally…the world changed and they double decked all the trains and they got down to four big rail systems in all the United States in terms of freight and all of a sudden we liked railroads.  It took about 75 years.  Warren and I never looked at railroads for about 50 years, and then we bought one. (link)

Now airlines, Warren use to joke about them.  He’d say that the investing class would have done better if the Wright Brothers would never have invented flight.  But given the conditions that were present when the stock was purchased and given the conditions of Berkshire Hathaway where it was drowning in money, we thought it was ok to buy a bunch of airline stocks.  What more can I say?  Certainly it’s ok to change your mind when the facts change.  And to some extent the facts had changed, and to some extent they haven’t.  It is harder to create the little competing airlines than it was.  And the industry has maybe learned something.  I hope it works better, but I don’t think its…I think the chances of us buying airlines and holding them for 100 years is going to work that well.  I think that’s pretty low.

1:55:19

Question 35: Question about DJCO.  The auditor’s report discussed material weakness in segregated duties.  I was curious if that was something you could speak on.  If it’s something you’re fixing.  Or not if not, whether or not it’s rational.

Charlie: Well, all auditors are now paid to find some kind of weakness and then fix it.  So there’s very few companies that don’t have some little material weakness that needs fixing.  I am not that worried about the accounting at the Daily Journal.  Basically it’s more conservative than other people in our industry.  And basically we’re not trying to mislead anybody.  And basically we’ve got a couple hundred million dollars in marketable securities and we’re not mismanaging those, they just sit there.  So I don’t think we have big accounting problems at the Daily Journal.  I think it’s typical of the modern developments in accounting that the accountants have gotten…(inaudible)…and they’ve gotten new responsibilities and they’re amorphous.  Like “weakness”.  Well everybody has weakness, you, me.  And I don’t think there’s some wonderful accounting standard where all the accountants know what’s weak and what isn’t and exactly how much and how dangerous it is.  And so I am not much worried about the accounting at the Daily Journal.  But I think this business of…everybody in America is worried about somebody hacking in and getting a lot of data, and everybody has some weakness, meaning they’re all afraid of, and they’re right to be afraid of it.  You’ve got these amorphous terms.  I’m just doing the best we can, and taking the blows as they come.  Or the benefits too.  But I’m not worried about material weaknesses in accounting.

There was a guy name B.B. Robinson when I came to Los Angeles, and he had gotten out of the pools, the stock pools of the 20’s, as a young man with 10 or so million dollars, which was a lot of money to come out here in the 30’s.  When he got here with all this money, he spent his time drinking heavily and chasing movie starlets.  And in those days the bankers were more pompous and old fashioned.  And one of them called him in and said, ‘Mr. Robinson, I’m terribly worried about your drinking all this whisky and chasing all these movie starlets.  This is not the kind of thing our sound banks likes.’  What B.B. Robinson said to the banker, he said, ‘Listen.  My Municipal Bonds don’t drink.’ (laughter)  That’s basically the answer to the material weakness problem with the Daily Journal.  Our lovely marketable securities aren’t drinking.

1:58:38

Question 36: I believe you said that, If you’re not willing to put the work into investigating specific stock investments, that you should perhaps put your money into a passive index fund.  One of my advisers is very concerned about the move of capital into index funds for three reasons.  First he says, there’s an inadvertent concentration into (few) stocks because similar investments in different indexes.  Second, he thinks long term, the concentration of capital into preferred companies that are in the index fund…that they’re able to raise money easily despite poor performance.  And third, he’s also concerned long-term that the concentration of the management of these index funds into three institutions which is detrimental to the market place.  I’d appreciate your comments.

Charlie: I think that a lot of people who are in the business of selling investment advice, hate the fact that the indexes have been outperforming them.  And of course, they can’t say, “I hate it, because it’s ruining my life.”  But they say, “I hate it because it’s too concentrated.”  Well the index contains 75% of the market capitalization.  It’s hardly so small.  Index investing will work for quite a while when it’s so broad.  I don’t think it’s ruining the world or anything like that.  It is peculiar that we lived a long time without this.  I think it’ll keep running a long time forward, and I think it’ll work pretty well for a long time.  And I suspect most money-managers just hate it.  It’s making their life hard.  But you see I don’t mind if people are having a hard life.

2:01:05

Question 37: History doesn’t repeat itself, but it certainly rhymes.  And we’re seeing this mania in Bitcoin, that is often akin to the Tulip mania, and I’d like to see your views on how you and Warren navigated through these waters in your several decades of investing.  And what it says about the human condition that we tend to keep constantly falling for these things despite what history teaches us otherwise.

Charlie: Well you’re of course right to suspect that I regard the Bitcoin craze as totally asinine.  To create some manufactured currency…A different payment system could happen like WeChat in China.  It’s a better payment system than the one we have in America.  So something like that could happen.  But Bitcoin where they’re creating an alternative to gold…and then make a big speculative vehicle?…I never considered for one second having anything to do with it.  I detested it the moment it was raised, and the more popular it got, the more I hated it.  On the other hand, I expect the world to do insane things from time to time.  Everybody wants easy money.  And of course the people who are peddling things and taking money off the top for promoting the investment, they like it too.  And so these crazies just keep coming and coming and coming.  But who would want their children buying things like Bitcoin?  I just hope to God that doesn’t happen to my family.  It’s just disgusting that people would be taken in by something like this.  It’s crazy.  I’m not saying that some different payment system might not be a good thing like WeChat.  That could come and be constructive.  But Bitcoin is noxious poison.  Partly they love it because the computer science is quite intriguing to people with mathematical brains.  It’s quite a feat what they’ve done as a matter of pure computer science.  But, you know, I’m sure you can get terribly good at torture if you spend a lot of time at it. (laughter)  It’s not a good development.  And the government of China which is stepping on it pretty hard is right and our government’s more lax approach to it is wrong.  The right answer to stuff like that is to step on it hard, and it’s the government’s job.

2:04:30

Question 38: What are the qualities you look for in a life partner?

Charlie: In a life partner?  Well I’ve been quoted on that.  I think what you really need in a life-partner, if you’re constructed the way I am, is somebody with low expectations.

2:05:23

Well I think it’s 12 o’clock and that should probably do for this group.  I know you…I’m use to the groupies, but standing up for two hours?  I wouldn’t stand up for two hours to listen to Isaac Newton if he came back.  (laughter)  So I guess our meeting is adjourned.  I certainly wish you all well, you’re my kind of people.

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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Sincerely,

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

Links to additional Transcripts:

Wall Street Recap: September 17-23, 2017

My full notes and analysis from the past week: September 17-23, 2017.  Periodicals covered in this Wall Street Recap include the WSJ, FT, NYT, and LA Times.

Investing in “Hot” Industries

“A lot of the places where the industries are doing a great job for the world, it’s very hard to make money out of it.  Because these wild enthusiasms come into it.  I don’t have a favorite industry.” – Charlie Munger

In the depths of the ocean, the glow from a small lure stands out among the darkness.  Fish from the surrounding waters swim toward the lure, tempted with the promise of a free lunch.  Little do they realize that they are swimming right into the jaws of an angler fish and their impending doom.

Likewise, “Hot” industries have historically acted like an angler fish, attracting investors who unwittingly swim into the jaws of poor investment returns.   Think back to the hot industries in history such as autos, airlines, and dotcoms.  The lure of those industries was typified by two compelling elements;

  1. A story of a world-changing product or service,
  2. Stellar growth wrapped around massive consumer demand.

Even though those industries had favorable long-term tail-winds, industry returns were abysmal and left thousands of bankrupt companies in its wake.  Why?

Two key reasons:

  1. Durable Moats are Illusive: “Hot” industries are defined by growth and rapid change.  This constantly evolving environment makes it incredibly hard to predict winners and losers.  The best product or service today may become obsolete tomorrow.  And a perceived competitive advantage today may vanish overnight.
  2. Wild Enthusiasm Attracts Too Much Capital: Wild enthusiasm attracts massive amounts of capital into hot industries.  This in turn increases competitive pressures and drives down the returns on invested capital.

Examples of “hot” industries from the last century:

Autos: “Autos had an enormous impact on America, but in the opposite direction on investors.”…”of the two thousand companies, as of a few years ago, only three car companies survived. And, at one time or the other, all three were selling for less than book value which is the amount of money that had been put into the companies and left there.” – Warren Buffett (link)

Airlines:  “Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact–though the picture would have improved since then–the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.” – Warren Buffett

Nifty-Fifty Tech Stocks: A study found that the compounded annual return of the Nifty-Fifty portfolio from the peak in 1972 to 1998 was actually quite admirable, 12.5%.  The study also found that the Technology stocks in the Nifty-Fifty were significantly over-valued at the peak, and, as a result, performed poorly over the 26 year period.  On the other hand, predictable and “boring” consumer staples stocks like Gillette, Phillip Morris, and Coca-Cola all performed well, and, in hindsight, were still undervalued at the peak of the investment craze.  (link)

Mental Model: Viscosity

Viscosity: the state of being thick, sticky, and semifluid in consistency, due to internal friction.  Liquids show a reduction in viscosity (stickiness) with increasing temperature. (link)

Hot industries are like a fluid with low viscosity.  They are fluid, in a state of change, and have little resistance to deformation by (industry) stress.  All of which make them hard to predict.

Meanwhile, industries and businesses that are highly viscous are “sticky”.  Their future can be predicted with reasonable confidence.

As a fluid increases in temperature, its viscosity decreases (i.e. becomes less sticky).  Applying that model to investing, as an industry becomes “hot”, it becomes more fluid and less predictable.

This has implications regarding the usefulness of a company’s historical financials.  As an industry’s “temperature” increases (i.e. becomes more fluid and subject to change), a company’s historical figures may no longer be an accurate representation of its future performance.  Using a company’s historical financials in this new environment invites error and potential over-valuation.  (Or under-valuation if the reverse is true; low viscosity moving to high viscosity)

Investment Lessons:

Avoid “Hot” Industries: Subject to intense competition and an ever shifting environment, it is challenging if not impossible to predict winners and losers in a hot industry.

“We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises.  We’re not smart enough to do that, and we know it.” – Warren Buffett

Invest in Sticky “Predictable” Businesses: Investing in sticky businesses follows Buffett’s prescription of not fooling yourself and not losing money.

“…we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge.” – Warren Buffett

“Hot” Industries: In the News

Netflix, Tesla, and Blue Apron are the hottest companies in hottest industries.  Each one is contending with wild enthusiasm and a flood of investment capital.  Some of the most recent developments threatening these companies are listed below.

Netflix

Facebook

“Facebook Inc. is loosening its purse strings in its drive to become a major hub for video.  The social-media giant is willing to spend as much as $1 billion to cultivate original shows for its platform,” (link)

“It also signals Facebook’s readiness to spend more than before to become what Chief Executive Mark Zuckerberg calls a ‘video-first’ platform.”

HBO, Amazon, Netflix, Facebook, and Apple are all “banking on video to capture the fleeting attention of users and seize billions of dollars in advertising that is expected to migrate from television to digital video.”

Apple

“Apple Inc. is preparing its own billion-dollar war chest for content.”

Disney

“For Netflix, Disney’s decision to hold on to rights to ‘Star Wars’ and Marvel movies will add to the pressure to create appealing original content of its own to replace some of the high-profile franchise films Netflix will lose starting in 2019.” (link)

“The big problem is not aggregate costs, but costs versus competitors. If your costs are out of line, you’re going to get killed eventually.” – Charlie Munger

Tesla

VW

” VW, the world’s biggest carmaker, says it will build 50 all-electric models by 2025 and electrify 300 models by 2030.”

The speed of the shift is remarkable…The switch is driven by policy: “European regulators were previously content to set environmental standards and let manufacturers decide how to meet them.  Since the emissions cheating scandal, they are quite reasonably inclined to be more prescriptive…This is prompting a rapid change in consumer behavior: few people will risk buying a car that may be of limited use within a decade.”

Mercedes, Smart, BMW

“Daimler boss Dieter Zetsche said the Mercedes owner’s ‘entire portfolio’ will be electrified by 2022.  The Smart brand will become fully electric by 2020, making it the first internal comustion engine marque to make the switch.”

“BMW told reporters at the show: ‘Our top priority now as a company is electric mobility.'”

Nissan-Renault-Mitsubishi alliance

“The chairman and chief executive officer of the Nissan-Renault-Mitsubishi alliance is pushing ambitious targets for the auto makers in an effort to leapfrog Silicon Valley and swipe market share, even as some of his biggest rivals look to scale back.” (link)

He is also planning 12 new electric cars, forays into robotaxi fleets and the debut of a fully autonomous car within six years.”

“With the explosion of technology that is coming, it is going to make it very difficult for smaller players to follow. Mr. Ghosn said.  “You’re going to have a premium for the large car manufacturers because we are the only one who are going to be able to invest in all the fields, all the products, all the markets, all the technology without making any shortcuts or without having any blind spot.”

Blue Apron

Albertsons

“Albertsons Cos. is buying the Plated meal-kit service, the first acquisition of a prepared-meals company by a national grocery chain as supermarkets scramble to keep shoppers coming to their stores.” (link)

Bob Miller, chief executive of Boise, Idaho-based Albertsons, said in an interview Wednesday: “We think there’s an opportunity to grow this thing tremendously,” adding that the supermarket will give Plated a “cost advantage” over other meal-kit companies by the scale of its food purchasing and network of 18 manufacturing plants.

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money.” – Warren Buffett

Psychology of Human Misjudgment

Confirmation Bias

Anti-Soros conspiracies sweep the globe (link)

“Conspiracy theorists have an explanation for everything.  So the fact that the Financial Times should publish a column defending Mr. Soros will simply be taken as further evidence of his nefarious influence.

Deprival Super-Reaction Syndrome

Along with the migrating steelhead, Oregon river pool holds life lessons (link)

“He recalls watching a man catch a wild steelhead.  The man was furious because by law, he could keep a marked hatchery fish, but had to throw back a wild fish.  He tore the fish’s mouth and bashed it against a rock.”

“‘As a species, we can be unbelievably kind on an individual basis – a person will give you the shirt off their back on the trail.  But start creating vested interests and people can be unbelievably brutal.‘”

Over-Influence by Authority

Shortcomings in Tesla’s self-driving tech cited among factors in fatal crash (link)

“Joshua Brown, a Tesla owner, was killed last year when his car ran into the side of a truck that was turning across the roadway in front of it.”

“He said Brown had put a higher level of trust in the Autopilot system than was intended and that the driverless technology had not been designed to operate on the road where the crash occurred…Brown had his hands on the steering wheel for only 25 seconds during the 37 minutes leading up to the crash.”

Say-Something Syndrome

Instragram video of weapons leads to an arrest (link)

“A Texas gang member suspected of violent robberies, home invasions and murder, was captured by the LAPD after…he posted a video of himself on Instragram displaying a gun collection,”

Forgetting what one is really trying to do

What started out as a plan to reduce the pigeon population in Lisbon, has turned into a mission to provide “dignity and quality of life” to pigeons.

Lisbon Has Too Many Pigeons, So It Built Them a Luxury Resort (link)

“Since the birdhouse opened…its mission has crept beyond mere population control.  Caretakers have equipped the facility, which costs 250 euros per month to maintain, with a pigeon first-aid station, and there’s talk of offering services such as deworming and, paradoxically, a nursery….’Pigeons deserve and need dignity and quality of life,’ she says”

“A majority of life’s errors are caused by forgetting what one is really trying to do.” – Charlie Munger

Simple Psychological Denial

Ex-Pakistan PM’s wife wins Lahore by-election (link)

The Panama Papers “revealed documents detailing (Mr. Sharif’s) offshore accounts, and show his family owned assets he could not account for…This was followed by the supreme court’s ruling that his unexplained wealth made him unfit for office.”

“But many of Mr. Sharif’s supporters believe the guiding power behind the supreme court ruling was the army,”

Tattoos: Lollapalooza Effect

Youths’ tattoos aren’t always cause for alarm, report says (link)

Consistency and Commitment:

“A 2016 Harris Poll found that most adults who have gotten a tattoo-86%-have never regretted doing so,”

“People think if they have committed to it, it has to be good. The minute they’ve picked it themselves it gets an extra validity. After all, they thought it and they acted o­n it.” – Charlie Munger

Liking Tendency

“They’re emulating people who are out there – athletes, musicians, military personnel – people they look up to,”

Incentive-Caused Bias

“People who get inked typically say they feel sexier, rebellious, attractive or strong.”

Social Proof

“As many as 38% of young people 18 to 29 report having a tattoo…’More often’, she says, ‘(tattoos are a) generational act of solidarity.'”

Mental Model: Parkinson’s Law

Parkinson’s Law. Observation that “work expands to fill the time available for its completion,” and that a sufficiently large bureaucracy will generate enough internal work to keep itself ‘busy’ and so justify its continued existence without commensurate output. (link)

Trump champions UN while urging reform (link)

“‘While the United Nations on a regular budget has increased 140 percent, and its staff has more than doubled since 2000, we are not seeing the results in line with this investment,’ said Mr. Trump”

Various Fascinating Excerpts

A test of compassion (link)

“‘For the first time in my life I was really proud of German,’ she says…But the initial enthusiasm soon wore off…(when she) quickly realized what a hard slog it would be to absorb so many immigrants from an entirely different culture.  The trigger was when an elderly Syrian man told her that ‘Hitler was a good man, because he gassed all the Jews.’

Japan Post share sales faces uncertain journey (link)

“Mr. Nagato was hauled before senior figures in the ruling party and told to ‘work for a living, rather than gambling,’.”

Youths’ tattoos aren’t always cause for alarm, report says (link)

“Human resource managers named tattoos as the third physical attribute likely to limit career potential (non-ear piercings and bad breath were the top two).”

Russian-built nuclear plant revives Chernobyl fears in eastern Europe (link)

“All the profits go to Belarus, all the risks are on the Lithuanian side” – Regarding Nuclear power plant being constructed in Belarus, near the Lithuanian boarder.

Waters Rise and Hurricanes Roar, but Florida Keeps on Building (link)

“Florida was built on the seductive delusion that a swamp is a fine place for a paradise.”

“The risks of building here are far better known today.  Yet newcomers still flock in and building still rise, with everyone seemingly content to double down on a dubious hand.”

Wall Street Recap: Part 2

Part 2 of my full notes and analysis from the past two weeks: September 3-16, 2017.  Periodicals covered in this Wall Street Recap include the WSJ, FT, NYT, and LA Times.

The “Burned Cat” Phenomenon

Investors who get burned by an asset bubble often develop a learned apprehension towards that asset class, regardless of its future economics or valuation.  In other words, they go about acting like Mark Twain’s cat who, after sitting on a hot stove lid, never sat on a hot or cold stove lid ever again. (link)

Learned apprehension can lead to depressed asset prices as well as severe under-investment in new supply.

1) Depressed asset prices

Investors may develop an irrational resistance towards an asset which has burned them before.  Making them reluctant to invest, even at very attractive prices.  Example:

Elon Musk

Elon Musk experienced this “Burned Cat” phenomenon while working for a bank early in his career.  He found Brazilian debt trading for 25 cents on the dollar, which was guaranteed by the U.S. Treasury for 50 cents on the dollar.  He presented this investment idea to the Bank’s CEO who promptly rejected it saying, “the bank had been burned on Brazilian and Argentinean debt before and didn’t want to mess with it again.” (link)  Taken aback, Elon tried to explain that you couldn’t lose unless you thought the U.S. Treasury was going to default, making it an effective “no-brainer”.  The CEO still declined.

2) Severe under investment in new supply

During an asset bubble, investors eagerly build out new supply, over-extend themselves, and set the ground for their own demise.  Following the bust, investors may become hesitant to develop new supply, even when favorable economic tailwinds present themselves.  As a result, an industry that was once defined by chronic over-supply, can shift into one defined by chronic under-supply.  Examples:

Ethiopian Famine

This feast or famine industry cycle contributed to Ethiopia’s 1983-1985  famine.  Having been burned by  a bountiful harvest and low prices the year before, “Ethiopian farmers produced less grain and more cash crops or livestock, reducing food production in the following year.” (link)

Ireland Housing

Ireland’s real estate market is experiencing the after-effects of the “Burned Cat” phenomenon.  Leading up to the financial crisis, Ireland produced one of the most severe housing bubbles in the world.  The subsequent bust resulted in years of under-investment in new housing.  The country has since developed a chronic shortage of new homes and property prices are rapidly rising.

As the Financial Times described: (link)

“With Ireland facing a chronic shortage of homes and property prices again rising rapidly,”

“Builders are struggling to meet 10 years of pent-up demand for new homes, while rents are rising and Dublin faces a growing homelessness crisis.”

“Housebuilding, which declined to a trickle after the crash, has stepped up markedly yet acute strains remain.  Although private builders are projected to complete 18,000 homes this year, industry figures estimate 30,000 units will be required for years to come.”

“Figures this week showed annual property inflation on a national basis is advancing at 12.3 per cent.” 

Misjudgment underpinning the Burned Cat Phenomenon:

“Burned Cat” investments are influenced by a lollapalooza of human misjudgment, including:

  1. Extra-Vivid Evidence: Investors who have been burned by an investment won’t soon forget.
  2. Pavlovian Association: Through negative reinforcement, investors learn to reflexively avoid an asset class.
  3. Over-Influence from Authority: News coverage of a “burned cat” investment is likely to be prominent, negative, and pessimistic.
  4. Social Proof: No one else is investing in it, so that reinforces the notion that it’s the right thing to do.
  5. Bias from the non-mathematical nature of the human brain: Investors tend to naively extrapolate past returns which contributes to extreme valuations during bubbles and busts.

Investment Lesson: Actively look for assets that have burned investors.  They may present excellent opportunities due to;

  1. The market’s unwillingness to invest in the asset, even when favorable economics and valuations exist.
  2. Severe under-investment in new supply, which sets the stage for future supply shortages.  (Pay special attention to areas where supply cannot ramp up quickly.)

Standard Causes of Human Misjudgment

Social Proof: Rationalized/Normalized Terrible Behavior

At Home Among the Giants (link)

Wllie McCovey: “I tried working as a bus boy in a whites-only restaurant, but I quit after a week.  All the things that make you cringe was normal talk then.  You took it or you walked away.”

“The five most dangerous words in business are: ‘Everybody else is doing it’.” – Warren Buffett

Social Proof: Fear of Missing out

Leveraged Loans too Popular (link)

 “Some companies that reprice loans have cut debt-to-earnings multiples. But for many, nothing has changed other than the strength of investor demand for debt.

“When demand is strong, any investor that declines the lower yield risks seeing another buyer take their place, and many are battling to keep their money invested.”

Deprival Super-Reaction Syndrome

That Airline Seat You Paid for Isn’t Yours (link)

“Political commentator Ann Coulter…erupted in a Twitter tirade earlier in July after Delta moved her from a preferred aisle seat to a window seat in the same extra-legroom row.”

 “…passengers think they can buy the rights to a specific seat…Airlines say that legally, you don’t.”

Contrast Caused Distortion

Passive Migration: Denver Wins Big as Financial Firms Relocate to Cut Costs (link)

 “If you’re talking to someone who’s been in Denver, they’ll say it’s getting unaffordable, but if you’re coming from San Francisco, the reverse sticker-shock is wonderful,” said Ms. Droller. 

“And while Denver home prices reached a record in June, they are still far below San Francisco.”

Incentive Caused Bias 

Wall Street Needs You to Borrow Against Your Stock (link)

“Morgan Stanley’s finance chief said, ‘that the bank expects more clients to take out loans in the months ahead. ‘That’s been a real key driver of our wealth business.‘”

“The Massachusetts securities watchdog last year accused Morgan Stanley of developing a sales program that encouraged brokers to pitch these loans regardless of whether clients needed them.

“Several Merrill Lynch brokers said they have asked long-standing clients to open a securities-backed line of credit to help them hit bonus hurdles,”

“The guy tells you what is good for him…So you’re getting your advice in this world from your paid advisor with this huge load of ghastly bias.” – Charlie Munger

Lesson: Watch out for rapidly growing products and services on Wall Street.  They likely are associated with massive incentive-caused bias.

Consistency & Commitment Tendency

Wall Street Needs You to Borrow Against Your Stock (link)

Merrill Lynch brokers asked long-standing client to open lines of credit “assuring that clients wouldn’t need to use it or pay any fees for opening it.”

“Brokerage executives have said the longer a client has one of these loans tied to their account, the more likely they are to use it.”

“People think if they have committed to it, it has to be good.” – Charlie Munger

Lesson: Beware of commitments, even seemingly harmless ones.

Lollapalooza Effect: Examples

“I would say the one thing that causes the most trouble is when you combine a bunch of these (causes of misjudgment) together, you get this lollapalooza effect.” – Charlie Munger

LIBOR: Incentive Caused Bias, Pavlovian Association, Social Proof, Envy/Jealousy

The LIBOR was a terribly flawed benchmark.  It was easily to manipulate and bankers were highly rewarded for doing so.  Everyone around them was doing it, and they were all getting rich.  Hence, “studies have estimated that hundreds of trillions of dollars of financial contracts around the world were created based on the benchmark.

Libor: A Eulogy for the World’s Most Important Number (link)

“It turned out that banks were skilled at getting Libor to move in favorable directions.  After all, it was their employees who were guesstimating their borrowing costs, so it was simple enough to skew those figures in helpful directions.”

“But government investigations soon showed not only that manipulation was wide-spread and easy to pull off, but also that government officials and central bankers had known for years about Libor’s vulnerabilities but failed to act.”

“If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin, because you’d be causing a lot of bad behavior, and the bad behavior would spread.” – Charlie Munger

Fire Ants in Japan: Stress-Induced Mental Changes, Social Proof, Extra-Vivid Evidence

The sudden stress from the arrival of fire ants in Japan, along with extra-vivid coverage from the media prompted faster and more extreme reactions.  Furthermore, Social-Proof amplified the power of this reaction.

Evacuate the Sandbox! Japan Is Freaking Out About Fire Ants (link)

“The mild panic here is partly due to sensationalism in the mass media, with some reports falsely depicting fire ants as murderous,” said Mr. Hashimoto.

“Better safe than sorry, said one wrestler.”

“He drew a parallel in Japan’s experience with how U.S. fire ant infestations in the 1950s were caught up in fear about communism.”

“Shares of pesticide makers have surged on the Tokyo Stock Exchange, and one manufacturer started selling ponchos made from industrial-strength material that allegedly protects the wearer from fire ants.”

“He added, ‘It is necessary for everyone in the nation to recognize correctly the characteristics of fire ants and address the matter calmly.'”

“One consequence of this tendency is that extra vivid evidence, being so memorable and thus more available in cognition, should often consciously be underweighed while less vivid evidence should be overweighed.” – Charlie Munger

Fireside Chat with Charlie Munger: Full Transcript

Following the 2017 Daily Journal meeting, Charlie Munger treated everyone who stayed to an informal fireside chat.  For over two hours, he graciously answered any questions.  I transcribed this fireside chat verbatim and as accurately as possible.

The Full Transcript is 15,508 words.  It was transcribed from this fantastic 1 hour and 48 minute recording of the talk.  Below is a sample of this transcript.

For a full copy of the transcript, simply Subscribe via Email to Latticework Investing today.   It’s free to subscribe!  You should receive the full transcript within 24 hours of signing up.  

If you do not receive a copy within 24 hours of subscribing,  please email me directly at rlewis@latticeworkinvesting.com.

Event Info

Location: 949 E 2nd St, Los Angeles, CA 90012

Event: Informal Fireside Chat following the DJCO Annual Meeting

Date: February 15, 2017

Start of Transcript

(Video 1 of 22 0:27)

Charlie: …Why do you want to strain and (feel like you) have more danger when you’re already filthy rich?  As Warren says, ‘What difference does it make to him if he has an extra zero on his tombstone?’.

Question: For return on invested capital, isn’t that already taking into account leverage?

Charlie: Well of course everybody would rather have billions with a high return on capital.

(Video 2 of 22 0:04)

(Video 3 of 22 0:28)

Question: What’s your reading habits every day?

Charlie: I read 3 or 4 newspapers when I get up in the morning, and I always have two or three books that I’m reading.  I kind of go back and forth between them.  And that’s what I do.  That’s what I’ve done all my life.

Question: What are your four newspapers?

Charlie: Wall Street Journal, New York Times, Financial Times, L.A. Times. (Questioner: No Washington Post?) No, no Washington Post.

(Video 4 of 22 1:14)

Question: (Question Regarding deferred gratification)

Charlie: What about medical school, that’s a lot of work.  You’re not living very high or this or that.  Later you’re a doctor and you have a better life.  That’s deferred gratification.

Question: So Charlie, you’re the chairman of the Good Samaritan Hospital, do you have any recommendations or any suggestions about lowering the prices…

Charlie: Well I took that because basically it was basically a losing hand and I play so many winning hands, so I thought, I should force myself to play a losing hand, and I must say it’s been very difficult.

Question: Do you believe in a single-payer health system?

Charlie: I think a single-payer health system would work a lot better, yes.  I think it will eventually come.  I think the existing system is a ridiculous (inaudible) system.  Ridiculous system.

Question: How should we help our children to avoid envy and jealousy.

Charlie: Well you can’t.

(Video 5 of 22 0:41)

Question: What’s your go to (valuation approach)?

Charlie: We don’t have one way of doing it.  We have certain things we avoid because we don’t think we have the competency to deal with it.  And we have certain things we kind of like because we’re use to them.  And so, we don’t have just one set of rules.  We don’t have any formulas that are exact or anything like that.  And some of the stuff we do, we just know it’s a little better than our alternatives.  We’re doing all kinds of stuff now that we would not have done.  We would have never bought Apple stock in the old days.

(Video 6 of 22 0:51)

Question: (Regarding Todd Combs.  How he got introduced to Charlie and Warren)

Charlie: He seemed like very straight forward.  But you see I get a million letters from people who want to come work for Berkshire.  Or want to come work…I sometimes get a check from somebody who says, “Here’s $50,000, I’ll pay this to work for you.”  I sent the $50,000 back.  I will say that it’s kind of a brash thing to do, and I kind of admire it because it was kind of a smart-ass stunt, and I was something of a smart-ass when I was young myself.  But I’m not looking for another starting helper or something.  I’m playing out the end game.  Anybody who’s playing anything else but an endgame when they’re 93 is crazy.  It’s an endgame.

(Video 7 of 22 2:35)

Question: So you bet against the jockey, not against the horse necessarily?

Charlie: Well, no…McKinsey.  Skilling came out of McKinsey.  There are a lot of manipulative types that (inaudible) McKinsey.

Question: So is it simply an observation of the people more so than the quantitative factors?  You don’t need to look at the balance sheet when you’re looking at the person.

Charlie: Well I can see the chain-letter aspects of the game.  And the huge leverage and the huge…he was just sort of building a chain-letter.  It’s intrinsically sort of a dishonorable thing to do.  Because the nature of the thing you’re…doing something that you can’t continue on its own motion.  You know, making it look like oil.  So it’s intrinsically sort of dishonorable.  So I don’t like chain-letter operators and I don’t like drunks.  I don’t like people who puff and lie and I don’t like people who raise prices on drugs that people have to have by 500% overnight just because it would work.  There’s a lot of flags we’re flying.

Question: Charlie, we’ve seen a lot of folks boycotting retailers because they sell Trump brand merchandise and vice-versa because…

Charlie: I don’t like all that.  Basically, I’m not in favor of young people agitating them and  trying to change the whole world because they think they know so much.  I think young people should learn more and shout less.  So I’m not sympathetic to anybody…young people are out in the streets agitating and I say, ‘to hell with them’.  That’s not my system.  I think if you got Hitler or something you can go out and agitate, but short of that, I think the young people ought to learn more and shout less.  They ought to act more like Chinese.

Question: Did you personally know Richard Feynman and what do you think of him?

Charlie: Yes.  I knew him slightly.  Very slightly.  Well he was a genius.  On the other hand he was a screwball.  He absolutely was nuts about screwing around with a lot of different woman, and going after the wives of his own graduate students (I think).  That’s disgusting.  So he had this blind-spot.  Now in physics, in teaching, he was one of the nobelist people we ever had.  But in his personal life he was a little nuts.

(Video 8 of 22 2:22)

Question: Charlie, I have a question about real estate.  When I look at real estate and stocks, real estate is just easier to evaluate.  You know, comps, cash flow, and replacement cost.  It just seems like an easier game than the equities market.

Charlie: The trouble with real estate is that everybody else understands it.  And the people who you are dealing with and competing with, they’ve specialized in a little twelve blocks or a little industry.  They know more about the industry than you do.  So you’ve got a lot of bull-shitters and liars and brokers.  So it’s not a bit easy.  It’s not a bit easy.  The trouble with it is, if it’s easy…all these people…a whole bunch of ethnics that love real estate…you know Asians, Hasidic Jews, Indians from India, they all love real estate.  They’re smart people.  And they know everybody and they know the tricks.  You don’t even see the good offerings in real estate.  It’s not an easy game to play from a beginner’s point of view.  Real estate.  Whereas with stocks, you’re equal with everybody.  If you’re smart.  In real estate, you don’t even see the opportunities when you’re a young person starting out.  They go to others.  The stock market’s always open.  It’s (like) venture capital.  Sequoia sees the good stuff.  You can open an office, “Joe Schmoe Venture Capitalists: Start-ups come to me!”  You’d starve to death.  You got to figure out what your competitive position is in what you’re choosing.  Real estate has a lot of difficulties.

Those Patels from India that buy all those motels?  They know more about motels than you do.  They live in the g.d. motel.  They pay no income taxes, they don’t pay much in worker’s compensation, and every dime they get, they fix up the thing and buy another motel.  You want to compete with the Patels?  Not I….Not I.

(Video 9 of 22 1:44)

Question: You and Warren throughout your business history were incredible at judging people.  Whether it’s Mrs. B. (Charlie interjects: We were pretty good, yes.)  What was it that you and he looked for.  And what were mistakes that you made that you learned from along the way in judging who would be good business partners to work with.

Charlie: Well, first there’s some very good people in Warren’s family.  One of them I worked under was Fred Buffett.  So we had people we knew well that were really noble people.  So we had basis to compare people against.  And we had basis to compare people in terms of capacity and talent and so forth.  So we had a lot of data in our heads that helped us.  And I think we had some genetic advantages.  Not IQ points, just absolute quirks of nature that made us better.

Question: Like Harry Bottle?  Tell me about Harry Bottle and what you saw in him.

Charlie: Well I worked with him in an electronics business that got into terrible difficulties and he’d help us work out of that business trouble by downsizing.  He knew how to do it.  And Warren had a business that needed downsizing and Warren did not know how to do it.  So I put those two together and of course it worked well. (link)

Question: Charlie, could you talk about the episode at Solomon Brothers and what you really learned about people…

(Video 10 of 22 8:14)

Charlie: What I learned is that all that easy money and easy leverage and so forth in investment banking creates a culture that’s full of envy, jealousy, craziness, over-reaching, over-leveraging.  It’s a very hard business to manage…investment banking.   It was out of control.  The envy was…these people went berserk.  If one jerk got $4 million some year, the other guy was furious that he only got $3 million.  And they just seethed and caused trouble.  It was a very difficult business to manage.  I think a lot of easy money that comes into finance just ruins practically everybody.

Question: Charlie, anything thoughts on Apple Corporation?

End of Sample Transcript

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Wall Street Journal Recap: February 20-26, 2017

My full notes and analysis on the Wall Street Journal from the past week: February 20-26, 2017 (Week 8).  Please Enjoy.

Donald Trump: Pre-Suasion genius?

Is Donald Trump a Pre-Suasion genius?  He is constantly criticized for being too vague about the details of his plans and chronically leaving people in a state of uncertainty.  But that might just be the key to his success.

Stock markets typically reject uncertainty as a negative force.  But in the case of President Trump, markets have embraced a sort of “positive uncertainty”.  In his book Pre-Suasion, Robert Cialdini provides a compelling insight which may explain Trump’s strong positive influence on the stock market:

“During the experiment, the men who kept popping up in the women’s minds were those whose ratings hadn’t been revealed, confirming the researchers’ view that when an important outcome is unknown to people, “they can hardly think of anything else.”  And because we know, regular attention to something makes it seem more worthy of attention, the women’s repeated refocusing on (the guys whose ratings remained unknown to the women) made them appear the most attractive.” – Robert Cialdini

Now let’s look at an excerpt from an article the other week titled “Federal Reserves Eye Aggressive Rate Increases.” (link)

“President Donald Trump’s plans for tax cuts, new spending and deregulation have buoyed market hopes of faster economic growth and higher corporate profits.  But Fed officials at the meeting underscored their uncertainty about the details and effects of the potential policy changes, according to the minutes.”

“A few policy makers also worried that investors betting on tax cuts “which might not materialize” had pushed up equity prices too much.”

Post-Mortem: Glencore and Copper (link)

Copper prices surged more than 30% in the last year and shares in Glencore have more than tripled in the past 12 months.  The two biggest drivers in copper prices over this time-period were:

1) China Stimulus: “The metal’s resurgence partially has been driven by a government economic stimulus program in China, where over 40% of the world’s copper is consumed.”

2) Labor Disputes: There have also been “snags at two of the world’s largest copper mines-labor problems at Chile’s Minera Escondida, and a permit dispute with the Indonesian government for Freeport-McMorRan Inc.’s Grasberg mine.”

So I’m curious…how many investors in Glencore identified “China Stimulus” and “Labor Disputes” as the main parts of their investment thesis?  My guess is very few.

“Histogram Management”

Charlie Munger once mused about The Kellogg Company that there’s nothing keeping cereal producers from going crazy over market share and tearing each other apart. (link)  So when investing in an industry, you have to seriously consider; What force is maintaining rational economic decision-making in this industry?

The CEO of Glencore appeared to be surprised and upset when his competitors weren’t acting rational in the wake of declining commodity prices.

“(Glencore) CEO has long criticized his competitors for ramping up supply in the face of falling prices.” (link)

Such a reaction seems to indicate a lack of understanding of human psychology and the forces that drive rational economic behavior.  After all, there are many reasons management would ramp up production in the face of declining prices.  Here are four such reasons:

1) Incentive-caused biases linked to executive compensation or job security.

2) Prisoner’s dilemma and the Fear of Missing Out.  Which explains why two rational individuals might not cooperate, even when doing so is in their best interest.

3) Social Proof.  You look around and no one is cutting production, so this must be the right thing to do.

4) A genuine economic desire to survive.  i.e. They keep producing at a loss in order to cover massive fixed costs.

Expanding upon the first point of Incentive-caused bias, management may have a personal economic incentive to manage earnings based on compensation packages.  I like to think of this behavior as “Histogram Management.”

When commodity prices are declining, the easiest way for a mining company to show stable and growing profits is to rapidly increase sales in the wake of declining margins.  This strategy of channel stuffing may provide stable earnings figures in the short-term, but it will exacerbate the problem for the entire industry over the long-term.

(Image via Latticework Investing)

Investment lessons:

1) Management often won’t behave in economically rational ways.  Therefore, watch out for industries which allow for competition to intensify to the point of mutually ensured destruction.

2) Poorly designed executive compensation can make or break a company/industry.

In other words, don’t give them the rope with which to hang you.

Car Sales Eating into Macy’s Business?

Macy’s CEO said that record U.S. car sales indicate consumers have spent a bigger portion of their budget on bit-ticket items lately.

“At some point in time you’ve got to believe that everybody’s going to have a brand-new car,”…”There’s dollars that are going to be freed up for other categories of spending.” (link)

It makes sense too.  Car purchases are highly interest rate sensitive.  A majority of new cars are purchased with debt.  Today the APR on an auto-loan starts at 3.12%.  Meanwhile the APR on a Macy’s credit card is 24.5%.  It’s no wonder that sales of goods that can be bought with debt have done well, while cash-based retailers have struggled.

(Image via Interest.com)

Market Developments:

1) Home sales booming on historically low inventory (link)

January home sales reach highest level since February 2007, on the back of the lowest inventory levels on record (circa 1999).

Home sales rose in January to the highest level since February 2007, a sign that last year’s momentum extended into 2017 despite a limited supply of properties for sale and rising prices.”

“Inventory rose 2.4% at the end of January from the end of December, when supply hit the lowest level since the Realtors association began tracking all types of supply in 1999.

2) Banks Retreat from Apartment Market (link)

Apartment supplies are growing rapidly, as a result, loans are getting more expensive and harder to come by, and rent growth is slowing.

Swelling supplies of apartment units are prompting big banks to pull back from new projects, forcing developers to scramble for capital.”

I haven’t seen anything this seismically different since 2008, when credit dried up.”

fresh supply is beginning to overwhelm demand.  More than 378,000 new apartments are expected to be completed in 2017, a 30-year high,”

“Commercial mortgage brokers said they are seeing and uptick in mezzanine loans…(and) a rise in preferred equity, which also come with higher payments than bank loans…”

“Other developers are turning to smaller regional banks, such as Bank of the Ozarks, which can command higher rates,”

3) Corporate Bonds: (link)

All around the world, corporate debt has proved a popular investment class so far this year…

Asia: “Nowhere is the trend more surprising than in Asia, where money has kept flowing into even the riskiest debt.  The extra yield, or spread, investors demand for holding both investment-grade and high-yield Asian corporate debt versus risk-free U.S. Treasuries has narrowed since the U.S. election last November and is heading towards its tightest levels since 2008,”

U.S.: “U.S. corporate-bond spreads are at their tightest in two years.”

Europe: “In Europe, investors also have continued to pile into corporate credit in countries like Germany and France, despite uncertainty created by key elections…”

Areas where I see potential problems with corporate debt demand:

1) Naive Extrapolation of past default rates in Asia: “The default rate on high-yield corporate bonds was lower in Asia than in the U.S. last year at 1% versus 3.6%.”

2) “Risk on”: The voracious search for higher yields: “With interest rates globally still low by historical standards, cash-rich investors are on the lookout for higher-yielding assets.  Total household wealth is growing more rapidly in Asia than elsewhere globally, up 4.5% in 2016 to $80 trillion,”

4) China developments

Two fascinating highlights on China:

1) “Of the more than 11,000 public-private partnerships that China has announced since 2014-inwhich companies finance, build and manage commercially viable state ventures-88% remain in preliminary stages and none are complete,” (link)

2) “Since coming to power in late 2012, Mr Xi has eroded the consensus-driven, collective-leadership model of his recent predecessors, taking personal charge of the military, the economy and most other levers of power.” (link)

5) Equity Markets

Two fascinating highlights on China:

1) “The declines paused a rally that has sent the index to 19 fresh highs in 2017-its most records in a year since 1999,” (link)

2) “Companies in the S&P 500 traded at about 22 times their past 12 months of earnings as of Wednesday, above their 10-year average of 15.8,”

3) “The S&P 500 has a forward price/earnings ratio of 17.6, the highest multiple since 2004 and above the averages of the past five, 10, 15 and 20 years.“(link)

Organic Farming: The high labor cost problem

U.S. farmers are quite good at conventional farming where emphasis is placed on efficiency.  But consumer demand has been shifting towards organic food, which is less efficient to farm, and requires higher labor costs.

(Data source: UC Davis)

Naturally countries with cheap labor will have a competitive advantage on the U.S.   Consequently, U.S. farmers have been feeling the pressure from international organic farmers.

“Organic grain is flooding into the U.S., depressing prices and drawing complaints from domestic organic farmers…” (link)

Specifically, the article talks about pressure from Turkish farmers.

“Turkey vaulted ahead to become by far the biggest supplier of organic corn and soybeans to the U.S. last year…(they) shipped to the U.S. 400,000 metric tons of organic corn, nearly quadrupling its prior-year total, while soybean shipments climbed by more than eight times,”

It’s beneficial to dwell on Turkey for a moment because Turkish farming data helps highlight the competitive challenges that U.S. organic farmers face.  Firstly, Turkey’s minimum wage is $6,000/year giving them a competitive advantage in labor-intensive crop production.  Secondly, the barriers to entry into organic farming are nearly non-existent.  From 2002 to 2014 Turkey’s Organic Farming area increased at an annual growth rate of 22.56%.

And from 2005 to 2012, organic production went from 421,934 tons to 1,750,127 tons. (link)

(Data Source: USDA)

It would seem that the shift to organic farming is akin to switching from industrial production lines to hand craftsmanship.  The countries with the cheapest labor would naturally have the upper hand.

Note: Additional factors which have added to the pain for U.S. organic farmers include a strong U.S. dollar, and accusations that international organic farmers face weaker regulatory oversight.

Activist Defense Strategy?

Management can sometimes react poorly to unwanted activist investors, leading them to make poor economic/ethical decisions.  The following case got me thinking about the possibility that management may revert to unscrupulous methods to increase revenue at a poorly performing unit in order to save it from activist pressures.

ABB Hit by Fraud in South Korea (lInk): “The disclosure (of stolen funds) adds to the pressure on CEO Ulrich Spiesshofer as he tries to fend off Swedish activist shareholder Cevian Capital.  ABB  in recent weeks announced a string of large orders at its power-grid unit, including a $640 million project to deliver an electricity-transmission link in India, but Cevian has been urging ABB to sell the unit.

From the management’s perspective, it would be easier to defeat activist shareholders if the under-performing unit started “out-performing”.  Incentives of this kind may increase the likelihood of unethical revenue enhancement tactics like

  1. Channel stuffing or
  2. Signing sweetheart contracts that are overly generous to clients.

Both of these tactics would make the unit appear more successful just long enough to win over shareholder support and stave off activist shareholders.

I’m not saying that ABB is doing this, but from a standpoint of “incentive-caused bias”, it’s more apt to happen.  I’d like to see a study on this topic.

Don’t try to “out-Bezos Bezos”

“We’re not going to out-Bezos Bezos,” Buffett said, in response to a question about the effect of online retail on traditional retailers.

It feels like a lot of retailers are trying to out-Bezos Bezos these days.

Wal-Mart: “The retail behemoth is investing billions to raise U.S. store worker wages, lower prices and expand e-commerce sales to better compete with Amazon.com Inc.” (link)

Target: “Target’s CEO vowed to invest billions of dollars to lower prices and remodel hundreds of stores, an admission that the retailer’s focus on trendy merchandise wasn’t enough to attract shoppers.” (link)

Charlie Munger: Slime Pricing Theory

Great example of pricing theory under pavlovian association and information inefficiencies.

Knead Slime? These Business Girls Can Fix you Up (link)

“Just now, she is puzzling over price theory.  She asks 50 cents an ounce-a generous handful-but some friends charge more than twice that.  ‘They’re getting more sales and I’m not sure why,’ says the seventh-grader in Issaquah, Wash. ‘My slime is the same quality'”

Charlie Munger: Bias from pavlovian association

“In many cases when you raise the price of the alternative products, it’ll get a larger market share than it would when you make it lower than your competitor’s product. That’s because the bell, a Pavlovian bell — I mean ordinarily there’s a correlation between price and value — then you have an information inefficiency. And so when you raise the price, the sales go up relative to your competitor. That happens again and again and again. It’s a pure Pavlovian phenomenon.” (link)

Social Change becomes Economically Viable

Corporations are rarely agents for social change…even if they pretend like they are.  Rather they’re economic agents who weigh supply and demand issues carefully.  Demand for a socially beneficial product or service usually needs to hit critical mass (aka “The Tipping Point“) before companies “make that change“.  Here are some social changes which have reached critical mass and have become economically viable.

1) Large increases in organic farming (link)

2) Coca-Cola reducing its sugar footprint (link)

3) Tyson eliminating antibiotics (link)

Charlie Munger: The prognosticator of Brazilian graft

I read this article on Brazilian graft and I couldn’t help but be reminded of a talk Charlie Munger gave back in 2003.  The scenario he gave for bribing a purchasing agent is almost identical to the problems which were uncovered in Brazil 12 years later.

Charlie Munger:

“Now tell me several instances when, if you want the physical volume to go up, the correct answer is to increase the price?…Suppose you raise that price, and use the extra money to bribe the other guy’s purchasing agent?” (link)

Now here’s what happened in Brazil…

“As part of Operation Car Wash, Brazilian prosecutors have accused executives from Petrobras, the state-run oil company, and some of the nation’s largest construction firms of colluding for more than a decade to inflate the price of contracts, kicking back a portion of the ill-gotten gains to lawmakers and other political officials.”(link)

Caution: A.I. will be programmed to exploit your psychological biases

Watch out for a future where Artificial Intelligence is programmed to exploit your psychological biases better than any human can.  Charlie Munger warns heavily about this kind of psychology manipulation:

“Now if the human mind, on a subconscious level, can be manipulated that way and you don’t know it, I always use the phrase, “You’re like a one-legged man in an ass-kicking contest.” I mean you are really giving a lot of quarter to the external world that you can’t afford to give.” (link)

It has already started on a small scale:

“Stanford University found a male computerized voice was perceived to be a better teacher of computers, while a female one was preferred for guidance on love and relationships.” (link)

“There’s also the potential subconscious influence.  Are we more likely to buy Alexa’s Valentine’s Day gift suggestions if they’re delivered by a female voice?  Will a male voice convince us to spring for an expensive leaf blower?”

Teens Use Video Chat to Hang Out (link)

Fascinating insights into teen smartphone use:

“73% of teens have access to a smartphone…Those teens are checking their phones on average more than 80 times a day,”

“Packed schedules, helicopter parenting, and the decline of walkable neighborhoods…The net effect is that teens are spending more time indoors, and les active, than ever.”

“Young people today are sedentary for more than 10 hours a day,”

“Gracie says she’ll turn off the TV and talk to friends if they turn up on Houseparty ‘because that’s just better.’

“who wouldn’t want to be able to check in with their best friends whenever they felt like it?

Quote of the week:

“There were no negative tweets, so that’s a good sign.” – Portfolio Manager in response to Bayer’s CEO meeting with Mr. Trump. (link)

Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2017

This week I had the great pleasure of hearing Charlie Munger speak at the Daily Journal Annual Meeting for the second time.  For two hours Charlie  captivated the audience with an abundance of whit, wisdom, and stamina.  It was a fantastic performance.  He truly is 93 years young.

I transcribed the full event from my audio recording which you may find below.  At each question throughout the transcript, I provided a clickable link to the precise spot where the question begins in an excellent video recording of the event posted on YouTube.  If you’d like an audio recording of the event I recommend my recording on SoundCloud.  Furthermore, Charlie provided a handout to the attendees.  I scanned them into a PDF document which you can access here.

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 to Charlie, but as for Charlie’s and Gerry’s answers to the questions, I translated them verbatim and as accurately as possible.)

Charlie Discussing the Daily Journal Corporation:

Charlie: I usually talk a little bit before we take the questions.  And the essence of what’s going on here of course is that we have a corporation that was in a branch of the newspaper business.  And our branch of the newspaper business like most newspaper businesses has gone to hell compared to what it was in its peak years, and almost every other newspaper business is going to hell with no pardon, they’re just disappearing.  What we have is this computer software business where we’re serving the same customers to some extent except now they’re all over the country, even some of them outside the country, with this…we were selling software to all these courts and public agencies whereas before we were giving information to lawyers and other people, and publishing public notices and our software business is of a type where it’s a long tough slog.  But we’re slogging very well and we really love the people who are doing it for us, we’ve got a lot of wonderful people in our software business; the implementers, and the computer programmers, and people who deal with the public agencies, and the ethos of the place is very admirable.  Everybody is trying to get ahead here by doing the work right and serving the customers right, and having a lot of financial wherewithal where money is never a problem, and doing what we’re suppose to do.  It’s a pleasure to, people like Rick Guerin and myself, to watch all these young people doing this and of course we were very glad to be able to do it when we should be dead. (laughter)

A lot of you people came into this because Berkshire was successful and Guerin was successful and for various odd reasons of history, and most of you are accidentally in the software business, and I am too because Guerin did it when I wasn’t paying much attention.  I don’t do this kind of venture capital stuff.  And he doesn’t either, but he did it here.  So if there’s anything wrong with what happens in our software business, you’re looking at a man who caused it all over here. (laughter)  I’ll take credit for any successes.  But if there’s failure you’re looking at the man here who got us into this.

It is amazing to me, some of the things that are happening in our software business.  We just are getting a contract from South Australia.  Now if anybody told me when I was young, that the Daily Journal Company would be automating the courts of South Australia, I mean, I hardly know where it is.  Anyway, it’s amazing what’s happening and it’s a fair amount of fun to watch.  Probably because we’re doing more winning than losing.  I’ve never been able to enjoy losses the way some people do.  I would much rather win.  And I really like to work with good people instead of the opposite.  And we’ve got a lot of good employees in our software business.  We’ve got a bunch of implementer in Utah who are really good at it and we really trust.  And who our customers like, and we’ve got all these computer programmers and so forth around here, and a game of service like that when it’s complicated, what you have to do is minimize your glitches and (crawl out of them very rapidly in a way that your customers trust you.)  Our people were good at that and they get better and they’re trying to get ahead by being good at the service, not by hiring some politician as a consultant.  Some of our competitors do that kind of stuff.  But we’re trying to slog our way out by doing the work right.

When I was a lawyer, there was a saying that I’ve always used, “The best business-getter any lawyer ever has is the work that’s already on his desk.”  And that’s the basic ethos of our software business.  If we just keep doing it right, I don’t think we have to worry about the future.  Not that we won’t have down drafts and our failures, but we are actually grinding ahead slowly in that software business.  And it’s very interesting because Guerin and I know practically nothing about it.  And Gerry didn’t come up as a software engineer, so we’re basically doing something that’s quite difficult, we’re judging people because we don’t understand what the people do.  That’s what Andrew Carnegie did.  He didn’t know anything about making steel.  But he knew a lot about judging whether the people he was trusting were good at making steel.  And of course that’s what Berkshire’s done if you stop and think about it.  We have a lot of businesses at Berkshire that neither Warren our I could contribute much to, but we’ve been pretty good at judging which people are capable of running those businesses.

But this is pretty extreme here.  The little Daily Journal building going into the computer software business.  It’s a long slow kind of business.  RFPs.  The first time we contact a customer until we start making money may be 5 years.  So it’s like deciding to start prospecting for oil in Borneo or something.  And they just keep doing that over and over again, and the money goes out and the effort goes out, and it starts coming in five years from now.  I love that kind of stuff, not when I think we’re taking territory, it doesn’t look good when we write it off and we don’t report wonderful numbers or anything.  But if it makes sense in the long-term, we just don’t give a damn what it looks like over the short term.  And we know we’ve collected a bunch of shareholders that share our ideas.  After all we’re running a cult not a normal company.  And I think most of you feel that you’re willing to wait.

I lived all my life with people who were into deferred gratification.  In fact most of them will never have any fun.  They just defer gratification all the way to end, that’s what we do.  And it does cause you to get rich.  So we’re going to have a lot of rich dead people. (laughter)  We can excite a lot of envy.  A lot of you when the people walk by your grave and there will be this nice grave with this nice monument and they’ll say, “God what a great grave, I wish I were under.”  But at any rate, deferred gratification really does work if what you’re doing is growing a business that gets better and better and getting yourself so that your grave can look nice to outsiders.  Guerin and I have never taken any money out of this company in all these years.  We don’t take salaries, we don’t take directors fees.  We’re a peculiar example.  I wish our example spread more, because I think if you’re wealthy and own a big share of a company, and you get to decide what it does and whether it liquidates or whether it keeps going, that’s a nice position to be in, and maybe you shouldn’t try and grab all the money in addition.  That’s my theory of executive compensation.  And some of the old-fashioned guys like Carnegie never took any salary to speak of.  Cornelius Vanderbilt didn’t take any, of course he owned the whole place, practically, and he would have considered it beneath him, he lived on the dividends like the shareholders did.  So there’s a lot of that old fashioned ideas here in the Daily Journal Company.

Charlie Begins Q&A:

Charlie: I’ll first take a bunch of questions about the Daily Journal, and after that we’ll take question on anything you want to talk about.

Question 1: At last year’s meeting you talked about the milestone of getting the L.A. court system here at Journal Technologies and I was wondering, in the last year, as it has gone by, what good milestones have happened and what bad things have happened.

Charlie: Gerry you take that one.  I’ll answer it (shortly), it’s going fine.

Gerry: We have three case types for Los Angeles.  One case type went live last April, another case type will go live this coming July, and the third case type about 10 to 12 months later after that.  We have to work with the Los Angeles schedule, after all they have a lot of people to train.  And that becomes and very important factor.  Training is critical because if the end users aren’t trained properly, virtually everything falls apart.  And so that’s the schedule.  We discussed it this morning.  We meet with the court about 3 miles from here virtually every day.  We have a good team from the court and I think they’re very excited about what they’re doing, and that’s critical to us that the court feels good about the system.

Charlie: One good thing about what we’re doing is it’s slow and it’s agony in the delays between the first customer contact and finally getting into a decent revenue stream.  But once you succeed, it’s very sticky business.  Very sticky business.  And the fact that it’s difficult to do means it’s difficult for people to change much.  So if you go slog through all this tough territory where it’s (slogging through), there’s a reward out there somewhere, and we’re not in a small business.  It has way more potential than the original print business we had giving information about the (cases).  It’s a big market.  And the people have no option but to charge ahead.  These courts and district attorneys, public defenders, all these people were serving…they’re over-whelmed with options…better systems and more software.  So it’s a huge market.  And the fact that it’s so often to grind through.  It means that the people who want easy gratification don’t come in.  If it seems slow and painful to you, we kind of like it that way.

Questions 2: Your thoughts on Tyler Technologies.  How do you think your competitive position versus Tyler is doing.

Charlie: Well Tyler is an extremely aggressive company.  They were bigger faster and so on.  I like our ethos of operation better than I like theirs.  If I were buying software, I’d rather buy ours than theirs.  Our system is to keep fighting the game.  I wish all the customers I had in life were like Tyler.

Question 3: The rate of revenue growth is going down a little bit, while expenses are going up.  Any major milestones in the next 3 to 5 years that you think you’d like to get that you think would really help things along.

Charlie: I’ll take your first question.  It looks like we’re proceeding slowly, but we bought a bunch of contracts, in effect, for money, and we knew they were going to end, so we’re amortizing the cost of those contracts.  But really it was an anticipated decline that we got big revenues up front for taking.  So we’re getting ahead, there’s a little blip in the figures.

(Response to second question) Every contract that’s significant is a major jump.  The business is so big they’re whole states.  I mean this is a huge business and everybody is just scrambling at the first parts of something that’s going to grow bigger and bigger and last and last.  As long as we’re doing the work right, why it’s likely to work out right.

Question 4: Can you comment on Wells Fargo?

Charlie: Well of course Wells Fargo had a glitch.  The truth of the matter is that they made a business judgment that was wrong.  They got so caught up in cross-selling and so forth and having tough incentive systems that they got the incentive systems so aggressive that some people reacted badly and did things they shouldn’t.  And then they used some misjudgment in reacting to the trouble they got in.  I don’t think anything’s fundamentally wrong for the long-pull.  Wells Fargo, they made a mistake.  It was an easy mistake to make.

The smartest man I ever knew made a similar mistake.  Henry Singleton, who was the smartest single human being I knew in my whole life.  And Henry Singleton of Teledyne also had very aggressive incentive systems, like Wells Fargo.  And his customer in many of his subsidiaries was the government.  And of course it’s not that hard to cheat the government.  But his very aggressive incentive systems, 2 or 3 out of 20 subsidiaries cheated the government.  So all of a sudden he’s got three scandals at once.  It wasn’t that Henry was trying to cheat the government.  He just got a little aggressive in applying the incentives and he got blindsided.

That can happen to anybody.  I don’t regard getting the incentives a little aggressive at Wells Fargo as a mistake.  I think the mistake there was, when the bad news came, they didn’t recognize it rightly.  They made a mistake.  But what happens in a tough system like capital, you make a mistake like that and pretty soon you’re gone.

Question 5: For Gerry or Charlie.  Congratulations for inverting and not doing things wrong in regards to Daily Journal.  What’s your insight into the Alemeda court system and the problems that Tyler’s having over them.

Charlie: No, but I’m not dissatisfied with it.  I don’t think I want to criticize Tyler any more than I have.  One of our customers, you’ll be sad to know is having some problems with pleasing a customer…You can see the salt tears running down my cheeks. (laughter)

Question 6: Question on software fees in terms of your revenue lines.  What portion of that business is recurring?

Charlie: That is so complicated that I’m not even going to try to answer it.  I’m just going to answer it in substance.  There’s a lot that’s reoccurring if we stay in there.

You can’t look at our financial statements and make very good judgments about what’s going to happen.  It’s the nature of our game that’s confusing.  It confuses us a little bit.  So we’re not holding back on purpose, it’s a very complex, confusing, system.  You’ve got all these RFPs.  It’s very complicated.

Question 7: You purchased the building in Logan, which I believe is used exclusively in Journal Technologies, but in accounting, it’s under the traditional business, I’m wondering why?

Charlie: Gerry I give you that one.  He says, why is Logan, somehow in the traditional business?  It shouldn’t be.

Gerry: The Daily Journal purchased the building and they own the building.  And Journal Technologies pays rent to the parent company for that and the amount of rent is not, what we would consider, material from that perspective.  And because it’s owned by the Daily Journal that’s how we originally classify it.  No real significant reasons.  All the expenses on the Journal Technologies books.

Charlie: That’s some quirk of accounting.  It doesn’t really matter.

Question 8: Follow up on the question of incentives.  You were explaining at Wells Fargo you don’t have a problem with aggressive incentives.  Can you expand on that a little more?

Charlie: Well how do you know they’re aggressive until you try?  They didn’t react enough to the bad news fast enough.  And of course that a very dangerous thing to do.  I don’t think it impairs the future of Wells Fargo.  As a matter of fact, they’ll be better for it.  The one nice thing about doing something dumb is that you probably won’t do it again.

Question 9: Question in regards to someone early in their career trying to figure out which of several paths to pursue.  Two thoughts that seem helpful for this purpose are 1) figuring out which work you have the possibility to become the best at and 2) ascertaining which line of work would most help society.  Do you think these ideas are the right ones to focus on, and if so, how would you go about answering them.

Charlie: Well, in terms of picking what to do, I want to report to all of you, that in my whole life I’ve never succeeded much in something that I wasn’t interested in.  So I don’t think you’re going to succeed if what you’re doing all day doesn’t interest you.  You’ve got to find something you’re interested in because it’s just too much to expect of human nature that you’re going to be good at something that you really dislike doing.  And so that’s one big issue.  And of course you have to play in a game where you’ve got some unusual talents.  If you’re 5 foot 1, you don’t want to play basketball against some guy whose 8 feet 3.  It’s just too hard.  So you gotta’ figure out a game where you have an advantage and it has to be something that you’re deeply interested in.  Now you get into the ethical side of life, well of course you want to be ethical.  On the other hand, you can’t be just dreaming how you think the world should be run and that it’s too dirty for you to get near it.  You can get so consumed by some ideological notion particularly in a left-wing university.  It’s like you think you’re handling ethics and what you’re doing is not working.  And maybe smoking a little pot to boot.  This is not the Munger system.

My hero is Maimonides.  And all that philosophy and all that writing, he did after working 10 or 12 hours a day as a practicing physician all his life.  He believed in the engaged life.  And so I recommend the engaged life.  You spend all your life thinking about some politician who wants it this way or that way you’re sure you know what’s right, you’re on the wrong track.  You want to do something every day where you’re coping with the reality.  You want to be more like Maimonides and less like Bernie Sanders.

Question 10: Is American Express value proposition more in terms of payment or service and rewards?

Charlie: Well I’m going to give you an answer that will be very helpful to you because you’re somewhat confused about what the exact future of American Express will be…and I want to tell you, I’m confused too.  I think that if you understand exactly what’s going to happen to payment systems ten years out, you’re probably under some state of delusion, it’s very hard to know.  So if you’re confused, all I can say is “welcome to the club”.  They’re doing the best they can, they’ve got some huge advantages that they’re…it’s a reasonable bet.  But nobody knows.  I don’t know if IBM is going to sell that much of Watson.  I always say I’m agnostic on the subject.  You’re talking about payment system 10 years out, I’m agnostic on that too.  I think if you keep trying to do the right thing and you play the game hard, your chances are better.  But I don’t think those thing are knowable.  Think about how fast they changed.

Question 11: Do you think that domestic natural gas, exploration and production, is a good business despite the capital intensity?

Charlie: Well that’s a different subject, I have a different feeling about the energy business than practically anyone else in America.  I wish we weren’t producing all this naturally gas.  I would be delighted to have the condensate that’s coming out of our shale deposits just lie there untapped for decades in the future and pay a bunch of Arabs to use up their oil.  But nobody else in America seems to feel my way.  But I’m into deferred gratification.  Oil and gas is not going away and I think it’s just as important as the top soil in Iowa.  If any of you said, “oh goodie, I found a way to make money, we’ll ship all our top soil from Iowa to Greenland!”  I wouldn’t think that was a very good idea.  And so I don’t think that hastening to use up all of our oil and gas is a good idea.  But I’m practically the only one in the country that feels that way.  There’s not enough deferred gratification in it to please me.  But I don’t see any advantage…I regard our oil and gas reserves just as chemical feed stocks that are essential in civilization. (Leave aside) their energy content.  I’d be delighted to use them up more slowly.  By the way, I’m sure I’m right and the other 99% of the people are wrong.

But no, I don’t know…The oil and gas business is very peculiar.  The people who success in most other businesses are doing way more physical volume than they did in the past.  But a place like Exxon, the physical volume goes down by two thirds, it’s just that the price of oil goes up faster than the physical volume goes down.  That is a very peculiar way to make money.  And it may well continue, but it’s confusing, we’re not use to it.

Question 12: As an 18 year old interested in many disciplines, I was wondering how you can thrive as a polymath in a world that celebrates specialization.

Charlie: Well that’s a good question.  I don’t think operating over many disciplines as I do is a good idea for most people.  I think it’s fun, that’s why I’ve done it.  I’m better at it than most people would be.  And I don’t think I’m good at being the very best for handling differential equations.  So it’s in a wonderful path for me, but I think the correct path for everybody else is to specialize and get very good at something that society rewards and get very efficient at doing it.  But even if you do that, I think you should spend 10 or 20% of your time into trying to know all the big ideas in all the other disciplines.   Otherwise…I use the same phrase over and over again…otherwise you’re like a one legged man in an ass-kicking contest.  It’s just not going to work very well.  You have to know the big ideas in all the disciplines to be safe if you have a life lived outside a cave.

But no, I think you don’t want to neglect your business as a dentist to think great thoughts about Proust.

Question 13: Question about Lollapalooza effects.  What current event is causing you concern and how can you use that inter-disciplinary approach to spot them?

Charlie: Well, I coined that term the “Lollapalooza effect” because when I realized I didn’t know any psychology and that was a mistake on my part, I bought the three main text books for introductory psychology and I read through them.  And of course being Charlie Munger, I decided that the psychologists were doing it all wrong and I could do it better.  And one of the ideas that I came up with which wasn’t in any of the books was that the Lollapalooza effects came when 3 or 4 of the tendencies were operating at once in the same situation.  I could see that it wasn’t linear, you’ve got Lollapalooza effects.  But the psychology people couldn’t do experiments that were 4 or 5 things happening at once because it got too complicated for them and they couldn’t publish.  So they were ignoring the most important thing in their own profession.  And of course the other thing that was important was to synthesize psychology with all else.   And the trouble with the psychology profession is that they don’t know anything about ‘all else’.  And you can’t synthesize one thing you know with something you don’t if you don’t know the other thing.  So that’s why I came up with that Lollapalooza stuff.  And by the way, I’ve been lonely ever since. (laughter)  I’m not making any ground there.  And by the way, I’m totally right.

Question 14: My question relates to a comment you made some years ago about Warren Buffett.  I think you said that he has become a significantly better investor since he turned 65, which I found a remarkable comment.  I was wondering if you could share information about that, that maybe we haven’t heard before.  I know you’ve commented he’s a learning machine and we all know the aversion to retail that came out of the Diversified episode, and so on.  I’d just be interested if there’s something that’s changed about his risk assessment or his horizons or any color there would be fantastic to hear.  Thank you.

Charlie: Well, if you’re in a game and you’re passionate about learning more all the time and getting better and honing your own skills all the time, etc. etc.  Of course you do better over time.  And some people are better at that than others.  It’s amazing what Warren has done.  Berkshire would be a very modest company now if Warren never learned anything.  He never wouldn’t have never given anything back. I mean any territory he took he was going to hold it.  But what really happened was, we went out into the new fields of buying whole businesses and we bought into things like Iscar that Warren never would have bought when he was younger. Ben Graham would have never bought Iscar.  He paid 5 times book or something for Iscar.  It wasn’t in the Graham play.  And Warren who learned under Graham, just, he learned better over time.  And I’ve learned better.  The nice thing about the game we’re in, is that you can keep learning.  And we’re still doing it.  Imagine we’re in the press…for all of a sudden (buying) airline stocks?  What have we said about the airline business?  We thought it was a joke it was such a terrible business.  And now if you put all of those stocks together we own one minor airline.  We did the same thing in railroads, we said “railroads are no damn good, you know there’s too many of them, truck competition…”  And we were right it was a terrible business for about 80 years.  But finally they got down to four big railroads and it was a better business.  And something similar is happening in the airline business.

On the other hand, this very morning I sat down in my library with my daughter-in-law and she booked a round trip ticket to Europe including taxes, it was like 4 or 5 hundred dollars.  I was like, “we’re buying into the airline business?” (laughter)  It may work out to be a good idea for the same reason that our railroad business turned out to be a good idea, but there’s some chances it might not.  In the old days, I frequently talked to Warren about the old days, and for years and years and years, what we did was shoot fish in a barrel.  But it was so easy that we didn’t want to shoot at the fish while they were moving.  So we waited until they slowed down and then we shot at them with shotgun.  It was just that easy.  And it has gotten harder and harder and harder.  And now we get little edges…before, we had totally cinches.  It isn’t any less interesting.  We do not make the same returns we made when we could run around and pick this low hanging fruit off trees that offered a lot of it.

So now we go into things…We bought the Exxon position…You know why Warren bought Exxon?  As a cash substitute!  You would never have done that in the old days.  We had a lot of cash and we thought Exxon was better than cash over the short term.  That’s a different kind of thinking from the way Warren came up.  He’s changed.  And I think he’s changed when he buys airlines.  And he’s changed when he buys Apple.  Think of the hooting we’ve done over the years about high tech, ‘we just don’t understand it’, ‘it’s not in our central competency’, ‘the worst business in the world is airlines’.  And what do we appear in the press with?  Apple and a bunch of airlines.  I don’t think we’ve went crazy.  I think the answer is, we’re adapting reasonably to a business that’s gotten very much more difficult.  And I don’t think we have a cinch in either of those positions.  I think we have the odds a little bit in our favor.  And if that’s the best advantage we can get, we’ll just have to live on the advantage we can get.  I use to say you have marry the best person that will have you, and I’m afraid that’s a  rule of life.  You have to get by in life with the best advantage you can get.  And things have gotten so difficult in the investment world that we have to be satisfied with the type of advantage that we didn’t use to get.  On the other hand the thing that caused it to be so enormously difficult was when we got so enormously rich.  And that’s not a bad trade off.

Question 15: At last year’s meeting you said Donald Trump was not morally qualified to be President, and now that he is President, do you still agree with that, do you think he’s qualified in any capacity?

Charlie: Well I’ve gotten more mellow. (laughter)  I always try and think about the good as along with what’s not good.  And I think some of this stuff where they’re re-examining options about the whole tax system of the country, I think that’s a very constructive thing.  When Donald Trump says he wouldn’t touch Social Security when a lot of highfalutin Republicans have all kinds of schemes for (rising) Social Security, I’m with Donald Trump.  If I were running the world I would have his exact attitude about Social Security.  I wouldn’t touch it.  So he’s not wrong on everything and just because he isn’t like us…roll with it.  Accept a little danger.  What the hell, you’re not going to live forever at any how.

Question 16: What was the most meaningful thing you did with your life?

Charlie: Well, I think the family and children is the most meaningful thing most people do with their life.  And I’ve been reasonably fortunate…I don’t think I’ve been a perfect husband. I’m lucky to have had as much felicity as I got.  And I always needed a certain amount of toleration from the fair sex.  I started wrong and I never completely fixed myself.  I can tell this group…you come here as a cult to talk to a cult-leader?  I want to take you back in history, you’ll see what an inferior person you’re now trusting.

When I was a freshman in Omaha Central High, there was a friend of the family, a girl my age.  She had gone off to summer camp the year before and she met a blonde goddess.  A voluptuous 13 year old.  And I was a skinny under-developed whatever and so forth. ‘You gotta take my blonde goddess to this dance’.  And so I wanted to impress this ‘blonde goddess’ and so I pretended to smoke which I didn’t.  And she was wearing a net dress and I set her on fire!  (big laughter) But I was quick whittled and I through Coca-Cola all over her and in due time the fire was out.  And that’s the last I saw of the blonde goddess.

And then I said, ‘well I’ve gotta make more time with the girls’.  And I wanted to get a letter at Omaha Central High.  Of course I was no good at any sport.  So I went down to the rifle range and learned they gave letters in rifle shooting.  And I was so skinny that I could shoot a 100 in the sitting position by sitting cross-legged and putting one elbow on each foot.  Try it, you’ll break your neck.  But I could shoot a hundred every time.  So I was a good rifle shooter and they gave me a letter.  But I was so skinny and short and underdeveloped that it went from one arm pit to the other.  And I walked down the hallway trying to impress the girls and they wouldn’t turn their head.  What they said was, ‘how did a skinny little unattractive runt like that get a letter?’

And then I had another experience.  There was a girl I still remember, Zibby Bruington.  She was a senior and a very popular senior.  And I was a nerd sophomore.  And somehow she agreed with me to go to a party in one of the out-buildings at the Omaha Country Club.  Perhaps because she liked one of my friends who was a big strapping fellow.  So I took Zibby to this party in my 1934 Ford, and it sleeted and got rainy, and so forth.  And I managed to stick the Ford in the mud and I couldn’t get out of it.  And Zibby and I had to walk for several miles through sleet.  That was the last I ever saw of Zibby Bruington.  And then my car stayed in the mud and I neglected to put in anti-freeze and the temperature went way down suddenly and the block broke!  Because it was too expensive to fix.  I lost my car and my father wouldn’t by a new one because my father said, ‘why should I buy a new car for someone whose dumb enough not to put anti-freeze in it?’  This is the person you’re coming all this way to see!

My life is just one long litany of mistakes and failure.  And it went on and on and on.  And politics!  I ran to be the president of the DSIC in grade school, The Dundee School Improvement Association.  I had the most popular boy in school as my campaign manager.  I came in second by miles.  I was a total failure in politics.  There’s hardly anything I succeeded at.  Now, I tell you all this because I know a nerd when I see one.  And there are a lot of nerds here who can tell stories like mine. (big laughter)  And I want to feel it’s not hopeless.  Just keep trying.

Oh yeah, Guerin wants me to repeat the story of Max Plank.  According to the story, Max Plank when he won the Nobel Prize was invited to run around Germany giving lectures.  And a chauffeur drove him.  And after giving the lecture about 20 times, the chauffeur memorized it.  And he said, ‘you know Mr. Plank, it’s so boring, why don’t you sit in the audience and I the chauffeur will give your talk.’  And so the chauffeur got up and gave Max Plank’s talk on physics and some professor got up and asked some terrible question.  And the chauffeur said, ‘Well I’m surprised that in an advanced city like Munich, people are asking me elementary questions like that.  I’m going to ask my chauffeur to answer that!’ (laughter)

While I’m telling jokes I might tell one of my favorite stories about the plane that’s flying over the Mediterranean.  The pilots voice comes on and says, ‘A terrible thing just happened.  We’re losing both engines, we’re going to have to land in the Mediterranean.’  And he says, ‘The plane with stay afloat for a very short time, and we’ll be able to open the door just long enough so that everybody can get out.  We have to do this in an orderly fashion.  Everybody who can swim go to the right wing and stand there.  And everybody who can’t swim go to the left wing and just stand there.  Those of you on the right wing, you’ll find a little island in the direction of the sun.  It’s two miles off.  And as the plane goes under, just swim over to the island, you’ll be fine.  For those of you on the left wing, thank you for flying Air Italia.” (big laughter)

Question 17: With regard to the proliferation of index funds, do you think there will be an issue with liquidity any time we go through another large crisis?  Do you think that will create large discrepancies between the price of the index fund and the value of the securities underneath?

Charlie: Well, the index funds of the S&P is like 75% of the market.  So I don’t think the exact problem you’re talking about is going to be a big problem because you’re talking about the S&P index.  But.  Is there a point where index funds theoretically can’t work a course?  If everybody bought nothing but index funds, the whole world wouldn’t work as people expect.  There’s also the problem…one of the reasons you buy a big index like the S&P.  Is because if you buy a small index, and it gets popular, you have a self-defeating situation.  When the nifty-fifty were the rage, JP Morgan talked everybody into buying just 50 stocks.  And they didn’t care what the price was, they just bought those 50 stocks.  Of course in due time, their own buying forced those 50 stocks up to 60 times earnings.  Where upon it broke and everything went down by about two-thirds quite fast.  In other words, if you get too much faddishness in one sector or one narrow index, of course you can get catastrophic changes like they had with the nifty-fifty in that former era.  I don’t see that happening when the index is three-quarters of the whole market.

The problem is that the whole thing can’t work perfectly forever.  But it will work for a long time.  The indexes have caused just absolute agony among the intelligent investment professionals.  Because basically 95% of the people have almost no chance of beating it over time.  And yet all the people expect if they have some money, they can hire somebody who will let them beat the indexes.  And of course the honest sensible people know they’re selling something they can’t quite deliver.  And that has to be agony.  Most people handle that with denial.  They think if we’re better next year…they just don’t want to think about that.  I understand that, I mean I don’t want to think of my own death either.  But it’s a terrible problem beating those indexes.  And it’s a problem that investment professional get didn’t have in the past.  What’s happening of course is the prices for managing really big sums of money are going down, down, down, 20 basis points and so on.  The people who rose in investment management didn’t do it by getting paid 20 basis points.  But that’s where we’re going I think in terms of people who manage big portfolios of the American Equities in the equivalent of the S&P.  It’s a huge, huge, problem.  It makes your generation of money managers to have way more difficulties and causes a lot of worry and fretfulness.  And I think the people who are worried and fretful are absolutely right.

I would hate to manage a trillion dollars in the big stocks and try and beat the indexes.  I don’t think I could do it.  In fact if you look at Berkshire, take out a hundred decisions, which is like two a year.  The success of Berkshire came from two decisions a year over 50 years.  We may have beaten the indexes, but we didn’t do it by having big portfolios of securities and having subdivisions managing the drugs, and subdivisions…and so, the indexes are a hell of a problem for you people.  But you know, why shouldn’t life be hard?  It’s what had to happen, what’s happened now.  If you take these people doing some of those early trading by computer algorithms that worked.  Then somebody else would come in and do the same thing with the same algorithm and play the same game.  And of course the returns went down.  Well that’s what’s happening in the whole field.  The returns you’re going to get are being pushed down by the progress of the sons.

Question 18: First question: What books or experiences were most formative to you in your early career? Second question: Where and how do you tell your most ambitious grandchildren to look for business opportunities.

Charlie: Well I don’t spend any time telling my grandchildren what business opportunities to look for.  I don’t have that much hope. (laughter)  I’m going to have trouble getting my grandchildren to work at all!  Anyway, I don’t think there’s an easy way to handle a problem of doing better and better with finances.  Obviously if you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed.  It may not be as much as you want.  But you’re going to success.  And so the main thing is to just keep in there, and be glued together, and get rid of your stupidities as fast as you can.  And avoid the bad people as much as you can.  And you’ll do reasonably well.  But try teaching that to your grandchildren.  I think the only way you’ve got a chance is sort of by example.  If you want to improve your grandchildren the best way is to fix yourself.

Oh books.  You cultist send me so many books that I can scarcely walk into my own library.  So I’m reading so many now because I never throw one away, I at least scan it.

I’ve just read this new book by Thorp, the guy who beat the dealer in Las Vegas.  And then he did computer algorithm trading.  And I really liked the book.    For one thing, the guy had a really good marriage and he seemed grateful for it.  And it was touching.  For another he was a very smart man.  He was a mathematician using a high IQ, to A) beat the dealer in Las Vegas and so forth and the B) use these computer algorithms to do this massive trading.  I found it very interest and since some of you people are nerds, and maybe you might like a love story.  I recommend Thorp’s new book.

It’s an interesting thing to do to beat the dealer in Las Vegas…wearing disguises and so on.  And Peter Kaufman told me a story about somebody he knows that did the same thing as Thorp did, but he did it more extreme.  He wore disguises and so forth.  He won four million dollars I think, in the casinos.  And that was hard to do because casinos don’t like playing against people who might win.  And then he went into the stock market where he made four billion dollars!  Again, clever algorithms.  You know, these people are mathematically gifted.  It’s still going on.  And I don’t think many of you are going to do it.  There can’t be many people who are mathematically gifted enough, manipulate statistics and everything else so well that they find little algorithms that will make them four billion dollars.

But there are a few.  And so some of them started just like Thorp.  And so Thorp’s book is interesting.  So I recommend it for you.

Question 19: Question on Filial piety.  In this generation, how can we fulfill our filial duties?

Charlie: I like filial piety.  They worship old men.  Rich old men.  That is my kind of a system. (laughter) But I think the idea of caring about your ancestors and caring about your traditions, I think all that stuff is a big part of what’s desirable.  I really admire the Confucians for that notion that it’s not a game that’s played just in one life.  It’s a game where you’re handing the baton off and you’re accepting the baton from your predecessor.   So if filial piety is your game, why I think it’s a very good thing.  Think about how rootless we’d be if we had no families at all, no predecessors, no decedents, it would be a very different life.  Think what we owe to people who figure out things in the past that make our civilization work.  So I’m all for filial piety and its close cousins.

Question 20: You’ve said, “any year in which you don’t destroy one of your best loved ideas is a wasted year.” It’s well known that you helped coached Warren towards quality which was a difficult transition for him.  I was wondering if you could speak to the hardest idea that you’ve ever destroyed.

Charlie: Well I’ve done so many dumb things.  That I’m very busy destroying bad ideas because I keep having them.  So it’s hard for me to just single out from such a multitude.  But I actually like it when I destroy a bad idea because I think I’m on the…I think it’s my duty to destroy old ideas.  I know so many people whose main problem of life, is that the old ideas displace the entry of new ideas that are better.  That is the absolute standard outcome in life.  There’s an old German folk saying, “We’re too soon old and too late smart.”  That’s everybody’s problem.  And the reason we’re too late smart is that the stupid ideas we already have, we can’t get rid of!  Now it’s a good thing that we have that problem, in marriage that may be good for the stability of marriage that we stick with our old ideas.  But in most fields you want to get rid of your old ideas.  It’s a good habit and it gives you a big advantage in the competitive game of life…other people are so very bad at it.  What happens is, as you spout ideas out, what you’re doing is you’re pounding them in.  So you get these ideas and then you start agitating them and saying them and so forth.  And of course, the person you’re really convincing is you who already had the ideas.  You’re just pounding them in harder and harder.  One of the reasons I don’t spend much time telling the world what I think about how the federal reserve system should behave and so forth.  Because I know that I’m just pounding the ideas into my own head when I think I’m telling the other people how to run things.  So I think you have to have mental habits…I don’t like it when young people get violently convinced on every damn cause or something.  They think they know everything.  Some 17 year old who wants to tell the whole world what ought to be done about abortion or foreign policy in the middle east or something.  All he’s doing when he or she spouts about what he deeply believes is pounding the ideas he already has in, which is a very dumb idea when you’re just starting and have a lot to learn.

So it’s very important that habit of getting rid of the dumb ideas.  One of things I do is pat myself on the back every time I get rid of the dumb idea.  You could say, ‘could you really reinforce your own good behavior?’  Yeah, you can.  When other people won’t praise you, you can praise yourself.  I have a big system of patting myself on the back.  Every time I get rid of a much beloved idea I pat myself on the back.  Sometime several times.  And I recommend the same mental habit to all of you.  The price we pay for being able to accept a new idea is just awesomely large.  Indeed a lot of people die because they can’t get new ideas through their head.

Question 21A: My perception is that the (oil and gas) industry itself has continuously gotten more complex and technical, and as the economy expands and you have more division of labor and specialization, it seems to me that it can be very hard for investors unless there’s more specialization.  (Charlie interjects)

Charlie: Of course.

Question 21B: Do you think that capital allocators are going to need to become more specialized going forward?

Charlie: Well you petroleum people of course have to get more specialized because the oil is harder to get and you have to learn new tricks to get it.  And so you’re totally right.  Generally, specialization is just the way to go for those people.  It’s just I have an example of something different.  It’s awkward for me because…but I don’t want to encourage people to do it the way I did because I don’t think it will work for most people.  I think the basic ideas of being rational and disciplined and deferring gratification, those will work.  But if you want to get rich the way I did, by learning a little bit about a hell of a lot, I don’t recommend it to others.

Now I’ve get a story there that I tell.  A young man comes to see Mozart, and says, “I want to compose symphonies.”  And Mozart says, “You’re too young to compose symphonies.”  He’s 20 years old and the man says, “But you were composing symphonies when you were 10 years old.”  And Mozart says, “Yeah but I wasn’t running around asking other people how to do it.”

I don’t think I’m a good example to the young.  I don’t want to encourage people to follow my particular path. I like all the general precepts, but I would not…if you’re a proctologist, I do not want a proctologist who knows Schopenhauer, or astrophysics.  I want a man whose specialized.  That’s the way the market is.  And you should never forget that.  On the other hand, I don’t think you’d have much of a life if all you did was proctology. (laughter)

Question 22: Warren and you are known for saying that if you worked with a small sum of capital, $10 million, Warren publicly said that he could guarantee that he could compound that at 50%  a year.  So my question is, can you provide some examples?  And I would kindly ask that you provide as many examples as possible, and be specific as possible.

Charlie: Well, the minute I hear somebody that really wants to get rich, at a rapid rate, with specifics.  That is not what we try and do here.  We want to leave some mystery so that you yourself can amuse yourself finding your own way.  You know the good ideas that I’ve had in my life are quite few.  But the lesson I can give you is a few is all you need and don’t be disappointed.  When you find the few of course, you’ve got to act aggressively.  That’s the Munger system.  And I learned that indirectly from a man I never met.  Which was my Mother’s maternal grandfather.  He was a pioneer when he came out to Iowa and fought in the Blackhawk Wars and so on.  And eventually after enormous hardship, well he was the richest man in town and he owned the bank and so on.  As he sat there in his old age, my mother knew him because she’d go to Algona, Iowa where he lived and had the big house in the middle of town.  Iron fence, capacious lawns, big barns.  What Grandpa Ingham use to tell her is, ‘there’s just a few opportunities you get in a whole life’.  This guy took over Iowa when the black topsoil in Iowa was cheap.  But he didn’t get that many opportunities.  It was just a few that enabled him to become prosperous.  He bought a few farms every time there was a panic you know.  And leased them to thrifty Germans, you couldn’t lose money with leasing a farm to a German in Iowa.  But he only did a few things.  And I’m afraid that’s the case…you’re not going to find a million wonderful ideas.  These people with the computer algorithms do it, but they have a computer sifting the who world.  It’s like placer mining.  And of course every niche they’re in, if somebody else comes in, the niche starts leaching away.  And I don’t think it’s that honorable to make a living that way.  I’d rather make my money in some other way than outsmarting the trading system so I have a little computer algorithm that just leaches a little out of everybody’s trade.  I always say that those people have all the social utility of a bunch of rats in a granary.  It’s not that great a way to make money.  I would say if you make your money that way that you should be very charitable with it because you’ve got a lot to atone for. (laughter) I don’t think it’s an ambition we should encourage.

The rest of us who aren’t just leaching a little off the top because we’re great at computer science, and that’s what this room is full of.  And if you’re not finding it harder now, you don’t understand it.  That’s my lesson.

Question 23: What’s your favorite industry and why is it your favorite?

Charlie: Well, my favorite industry is taking care of my own affairs. (laughter) And it’s fun it’s creative, it’s the job that life has given me, and I think that you should do the job well that life gives you.  A lot of the places where the industries are doing a great job for the world, it’s very hard to make money out of it.  Because these wild enthusiasms come into it.  I don’t have a favorite industry.

Question 24: Is there any current monkey-business in corporate America that worries you?

Charlie: Well the answer is yes, but not as extreme as Valeant.  That was really something.  That was really something.  I probably should have done that. (laughter)  But you people come so far, and since you’re cult members you like being here.  And I feel an obligation to tell you something sort of interesting and I just went straight into Valeant that year.  It was really pretty disgusting.  What’s interesting is how many high-grade people that took in.  It was too good to be true.  There was a lot wrong with Valeant.  It was so aggressive.  It was drugs people needed.  It was just…take the difference between Valeant and the Daily Journal Company.  When the foreclosure boom came, we had 80% of the foreclosure business in our area.  It’s a big area, Southern California and Northern California too.  It would have been very easy for us to raise the prices and make, I don’t know, $50 million more or something like that, when all these people are losing their houses.  A lot of them are very decent people.  It didn’t ever…the idea that just right in the middle of that we’d make all the money we could?  Which some of our competitors did by the way.  We just didn’t do it.  I don’t think capitalism requires that you make all the money that you can.  I think there are times when you should be satisfied based on...just ideas of decency And at Valeant they just look at it like a game like chess.  They didn’t think about any human consequences, they didn’t think about anything but getting what they wanted which was money and glory.  And they just stepped way over the line.  And of course in the end they were cheating.

But I don’t have a new one.  I got a lot of publicity over that Valeant thing.  I’m not looking for…I don’t want this room to have twice as many people next year.  And I don’t want me not to be here either. (laughter)

Question 25: My question relates to a talk you gave to the foundation of financial officers in 1998 here in California.  And in that talk, you were critical of the complexity and the expense of many foundation portfolios and you said specifically, “An institution with almost all wealth invested long-term in just three fine domestic corporations, is securely rich.”  And you gave as your example the Wicker Foundation and Coca-Cola.  So if you had a foundation today with let’s say a billion dollars, would you be comfortable with it being invested in just three stocks?

Charlie: Well, let’s take the foundation…I’ll change your question around (in the way that I want to answer it). (laughter)  Am I comfortable with a non-diversified portfolio?  Of course…if you take the Munger’s, I care about the Munger’s.  The Munger’s have three stocks.  We have a block of Berkshire, we have a block of Costco, we have a block of Li Lu’s fund, and the rest is dribs and drabs.  So am I comfortable?  Am I securely rich?  You’re damn right I am.  Could other people be just as comfortable as I who didn’t have a vast portfolio with a lot of names in it?  Many of whom neither they or their advisors understand? Of course they’d be better off if they did what I did.  And is three stocks enough?  What are the chances that Costco’s going to fail?  What are the chances that Berkshire Hathaway’s going to fail?  What are the chances that Li Lu’s portfolio in China’s going to fail?  The chances that any one of those things happening is almost zero.  And the chances that all three of them are going to fail?

That’s one of the good ideas I had when I was young.  When I started investing my little piddly savings as a lawyer,  I tried to figure out how much diversification I would need if I had a 10% advantage every year over stocks generally.  I just worked it out.  I didn’t have any formula, I just worked it out with my high school algebra.  And I realized that if I was going to be there for thirty or forty years, I’d be about 99% sure to do just fine if I never owned more than three stocks and my average holding period is 3 or 4 years.  Once I’d done that with my little pencil, I just…I never for a moment believed this balderdash they keep…why diversification…diversification is a rule for those who don’t know anything.  Warren calls them ‘know-nothing investors’.  If you’re a ‘know-nothing investor’ of course you’re going to own the average.  But if you’re not a know-nothing investor, if you’re actually capable of figuring out something that will work better, you’re just hurting yourselves looking for fifty when three will suffice.  Hell one will suffice if you do it right.  One.  If you have one cinch, what else do you need in life.

And so the whole idea that the ‘know-something’ investor needs a lot of diversification.  To think that we’re paying these investors to teach this crap to our young.  And people think they should be paid for telling us to diversify.  Where it’s right, it’s an idiot decision.  And where it’s wrong, you shouldn’t be teaching what’s wrong.  What’s gone on in corporate finance teaching is that people are getting paid for dispensing balderdash.  And since I never believed that it was a great help to me, it helps if you’re out in the market and the other people are believing balderdash and you know what the hell’s going on.  It’s a big help.  So of course you don’t want a lot…if you’re Uncle Horace who has no children has an immense business which is immensely secured and powerful.  And he’s going to leave it all to you if you come to work in the business.  You don’t need any diversification.  You don’t need any corporate finance professors, you should go to work for Uncle Horace.  It’s a cinch.  You only need one cinch!  And sometimes the market gives you the equivalent of an Uncle Horace.  And when it does, step up to the pie-cart with a big pan.  Pie carts like that don’t come very often.  When they do you have to have the gumption and the determination to seize the opportunity shrewdly.  I was lucky.  Imagine learning that from your dead great-grandfather, at a very young age.  But you know I spent my whole life with dead people.  They’re so much better than many of the people I’m with here on earth.  All the dead people in the world, you can learn a lot from them.  And they’re very convenient to reach.  You reach out and grab a book.  None of those problems with transportation. So I really recommend making friends among the immanent dead.  Which of course I did very early.  And it’s been enormously helpful.  Some of you wouldn’t have helped me.  But Adam Smith really did.

Question 26: Question on Irish economy and Irish banking.  Berkshire Hathaway was a shareholder in Irish banks pre-2008.  Could you comment on how the Irish economy and Irish banking system proceeds with the U.K. not being part of the European Union going forward.

Charlie: Well, that of course was a mistake, and it was a mistake we shouldn’t have made because both Warren and I know that you can’t really trust the figures put out by the banking industry.  And the people who run banks are subject to enormous temptations that lead them astray because it’s easy to make a bank report more earnings.  By a thing that any idiot could do which is make it a little more gamey.  And of course that’s dangerous.  And the temptation are very great.  So we shouldn’t have made that mistake, but we did.  And that’s a good lesson too, that even if you’re really good at something you will occasionally drift into a dumb mistake.  And now that’s the question about the bank.  They went crazy in Ireland…the bankers.  And we went crazy when we trusted the damn statements.  And it was a mistake.

Now what Ireland has done was very smart…in reducing all of these taxes.  Now they have English speaking people with practically no taxes.  And there’s a fair amount of charm and so forth in Ireland.  It’s not like it’s a terrible place to be.  They just sucked in half the world into Ireland where they got these…Gates went there very early with Microsoft, and so on.  And they took a place that was really a backward place that had a sort of internal civil war for 60 or 70 years, and bad opportunities, and they really brought in a lot of prosperity.  And they did that by this competitive lowering of taxes and so on.  So it worked for Ireland.  I think Ireland deserves a lot of credit for the way they advanced their country.  And of course they were going to have a thing where all the countries keep trying to reduce their taxes to suck in the foreign…but it won’t work for everybody.  But it did work for Ireland.  I think Ireland deserves a lot of credit, and of course they recovered very well from a very major collapse.  Irish are like the Scottish.   I always think that those Gallic’s are pretty unusual people.  And I’m very glad that I had a Scottish-Irish great-grandmother.

Question 27: My question is in regards to Lee Kuan Yew.  You’ve on several occasions spoken about the economic miracle that is Singapore and how it’s been transferred on by Deng Xiaoping to China.  What are your thoughts about India that’s going through a similar change with the prime minister who also idolizes his people and wants to create a similar sort of situation.  I’d like you’re thoughts on that.  Thank you.

Charlie: Well that’s a very intelligent question, and I’m not saying all the other questions weren’t. (laughter)  I regard Lee Kuan Yew…may have been the best nation builder that ever lived.  He took over a malarial swamp with no assets.  No natural resources.  Surrounded by a bunch of Muslims who hated him.  In fact he was spat out by a Muslims country.  They didn’t want a bunch of damn Chinese in their country.  That’s how Singapore was formed as a country, the Muslims spat it out.  And so hay, here he is, no assets, no money, no nothing.  People were dying of malaria.  Lots of corruption.  And he creates in a very short time, by historical standards, modern Singapore.  It was a huge, huge, huge success.  It’s such a success that there’s no other precedent in the history of the world that is any stronger.  Now China’s more important because there are more Chinese, but you can give Lee Kuan Yew a lot of the credit for creating modern China.  Because a lot of those pragmatic communist leaders, they saw a bunch of Chinese that were rich when they were poor, and they said, ‘to hell with this!’  Remember the old communist said, ‘I don’t care whether the cat is black or white, I care whether he catches mice.’  And he wanted some of the success that Singapore got and he copied the playbook.  So I think the communist leadership that copied Lee Kuan Yew was right, I think Lee Kuan Yew was right.  And of course I have two busts of somebody else in my house.  One is Benjamin Franklin, and the other is Lee Kuan Yew.  So, that’s what I think of him.

Now you turn to India.  And I would say, I’d rather work with a bunch of Chinese than I would the Indian civilization mired down, case system, over-population, assimilated the worst stupidities of the democratic system, which by the way Lee Kuan Yew avoided, it’s hard to get anything done in India.  And the bribes are just awful.  So all I can say is, it’s not going to be easy for India to follow the example of Lee Kuan Yew.  I think that India will move ahead.  But it is so defective as a get-ahead…the Indians I know are fabulous people.  They’re just as talented as the Chinese, I’m speaking about the Indian populace.  But the system and the poverty and the corruption and the crazy democratic thing where you let anybody who screams stop all progress?  It mires India with problems that Lee Kuan Yew didn’t have.  And I don’t think those Indian problems are always easy to fix. Let me give you an example. The Korean steel company, POSCO, invented a new way of creating steel out of lousy iron ore and lousy coal.  And there’s some province in India that has lots of lousy iron ore and lot of lousy coal.  Which is there’s not much use for.  And this one process would take their lousy iron ore and the coal and make a lot of steel.  And they got a lot of cheap labor.  So POSCO and India were made for each other.  And they made a deal with the province to get together and use the POSCO know how and the India lousy iron ore and lousy coal.  And 8 or 9 or 10 years later with everybody screaming and objecting and farmers lying down in the road, or whatever’s going on, they canceled the whole thing.  In China they would have just done it.  Lee Kuan Yew would have done it in (Singapore).  India is grossly defective because they’ve taken the worst aspects of our culture, allowing a whole bunch of idiots to scream and stop everything. And they copied it!  And so they have taken the worst aspects of democracy and they forged their own chains and put them on themselves.  And so no I do not like the prospects of India compared to the prospects of…and I don’t think India’s going to do as well as Lee Kuan Yew.

Question 28: What happened 1973 and 1974 when your investment firm lost over half?

Charlie: Oh, that’s very simple.  That’s very easy.  That’s a good lesson.  That’s a good question.  What happened is the value of my partnership where I was running, went down by 50% in one year.  Now the market went down by 40% or something.  It was a once in 30 year recession.  I mean monopoly newspapers are selling at 3 or 4 times earnings.  At the bottom tick, I was down from the peak, 50%.  You’re right about that.  That has happened to me 3 times in my Berkshire stock.  so I regard it as part of manhood.  If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it.  And so my lesson to all of you is conduct your life so that you can handle the 50% decline with aplomb and grace.  Don’t try to avoid it. (applause)  It will come.  In fact I would say if it doesn’t come, you’re not being aggressive enough.

Question 29: Regarding biases of human misjudgment.  How do you evaluate, handle, and manage people, knowing they might exhibit and suffer from biases that you are not?  And how have you and Mr. Buffett become such good judges of character and not just skills and abilities?

Charlie: Well I think partly we look smart because we pick such wonderful people to be our partners and our associates, even our employees.  And that’s going on right here.  Gerry Salzman is not normal.  He looks normal, but he’s a damn freak.  Gerry does things across 2 or 3 disciplines that are almost beyond human.  And he’s always been that way.  By the way he’s just another mid-westerner.  He’s come out of the soil back there.  So we’ve been very lucky to have his wonderful people.  I wish…I’m not quite sure…I think one thing we’ve done that’s helped us to get wonderful people, I always say the best way to get a good spouse is to deserve one.  And the best way to get a good partner is to be a good partner yourself.  And I think Warren and I have both done good with that.  But whatever the reason we’ve had these marvelous partners, and they make us look a lot better than we are.  You wouldn’t even be here if Gerry Salzman weren’t here.  We did not have a number two choice to run the Daily Journal.  And by the way that happens to me all the time.  We have an executive search or something.  The difference between the number one and number two is like going off a cliff.   And we really…we need one, but there aren’t three good ones to pick, where they’re all good and one’s a little better.  Every executive search I’ve have, it seems there’s one guy whose fine and everybody else is a pigmy.  I think good people are hard to find.  And people like Warren and I have had wonderful people who we’ve worked with all our lives time after time.  That’s one of the reasons Warren says he tap dances to work…you’d tap-dance too if you interfaced with people Warren interfaced with all day.  They’re wonderful people and they win all the time instead of losing.  Who doesn’t like winning in good company?  If you can duplicate that, why you’ve got a great future.  I think we were a little lucky.  And I can’t give you any luck.

Question 30: We have a Chinese platform that focuses content on people trying to invest capital outside of China.  They haven’t been able to invest (outside China) because of capital controls.  But that day will come.  Since they’re at least a half-century behind in terms of investing.  What would be the first thing that you would tell the Chinese person who wants to invest in the U.S.?  What should they do with their money when they’re making their initial investment outside.

Charlie: Well, you’ve made an assumption I don’t follow.  If I were a Chinese person of vast intellect, talent,  discipline, all the good qualities…I would invest in China, not the United States.  I think the fruit is hanging lower there.  And some of the companies are more entrenched.  So I don’t agree with your proposition.  I think they have a tendency to think, ‘we were backwards therefore when we get rich, we should go over and invest in America.’  I think it’s always a mistake to look for a pie in the sky when you’ve got a big piece of pie right in your lap.  And so if I were…at current prices, I think an intelligent person would do better investing in China.

Question 31: You’ve said, everyone should spend 10-20% on some big ideas.  What are one or two big ideas that you are talking about. Meaning, specialize, but spend time working on some big ideas.

Charlie: Well the big ideas, I think you should be intelligent in improving yourself.  You’re way better to take on a really big important idea that comes up all the time than some little tiny idea that you might not face.  I always tried to grab the really big ideas in every discipline.  Because, why piddle around with the little ones and ignore the big ones.  Just all the big ideas in every discipline are just very, very, very useful.  Frequently, the problem in front of you is solvable if you reach outside the discipline you’re in and the idea is just over the fence.  But if you’re trained to stay within the fence you just won’t find it.  I’ve done that so much in my life it’s almost embarrassing.  And it makes me seem arrogant because I will frequently reach into the other fellows discipline and come up with an idea he misses.  And when I was young it caused me terrible problems.  People hated me.  And I probably shouldn’t have been as brash as I was.  And I probably wouldn’t be as brash as I am now.  I haven’t completed my self-improvement process.  But, it’s so much fun to get the right idea a little outside your own profession.  So if you’re capable of doing it, by all means learn to do it.  Even if you just want to learn it defensively.  I do not observe professional boundaries.  My doctor constantly writes, PSA test, prostate specific antigen, and I just cross it out. And he says, ‘What the hell are you doing?  Why are you doing this?’  And I say, ‘Well I don’t want to give you an opportunity to do something dumb.  If I’ve got an unfixable cancer that’s growing fast in my prostate I’d like to find out 3 months in the future, not right now.  And if I got one that’s growing slowly, I don’t want to encourage a doctor to do something dumb and intervene with it.  So I just cross it out.’  Most people are not crossing out their doctor’s prescriptions, but I think I know better. I don’t know better about the complex treatments and so forth.  But I know it’s unwise for me to have a PSA test.  So I just cross it out.  I’m always doing that kind of thing.  And I recommend it to you when you get my age.  Just go cross out that PSA test.  Now the women I can’t help.

Question 32A: How would you invest in a money manager you like?  Through a limited partnership, that would flow through the taxes, and the other way is through a corporation that would pay taxes on the gains and the dividends.  So basically, the corporation would serve no other function though than paying taxes.  So I think you’d be crazy to say that those two ways are equally desirable. (Charlie interjects)

Charlie: You’re certainly right about that.  It’s plumb crazy, and it’s exactly the way people who buy Berkshire are investing.  It’s plumb crazy to have a big common stock portfolio in a corporation and pay taxes compared to a partnership that doesn’t.  And that’s just the way the Berkshire shareholders have invested and they have made, whatever it is, 25% a years since we were there.  But you’re right, it’s not the logical way to do it.

Question 32B: So my question is, if you have to decide, to invest in pool A or pool B, how would you decide on what method you would use to figure out what discount would make you indifferent to whether you would invest in the corporate tax-paying structure when it flows to the… (Charlie interjects)

Charlie: I think it is totally asinine to invest in a portfolio of common stocks through a corporate taxed under the internal revenue code under sub chapter c or something.  It’s totally asinine.  At Berkshire, the public securities keep going down and down as a percentage of the total value, so it doesn’t matter, we’re getting to be sort of a normal corporation.  But I don’t think anybody’s right mind should invest through a corporation in a puddle of securities.  In fact the disadvantage is so horrible.  And so, I wouldn’t even consider it.  In other words…and I regard it as a minor miracle that we were able to get where we did.  So of course you’d invest in a partnership.

Question 33C: So when anyone who invests in Berkshire has to decide the discount to put on a pool of securities that has a future tax lien on the gains…do you have any mental model for…

Charlie: Yeah, my model is to avoid it.  We don’t want to invest in a portfolio of securities in somebody else’s corporation.  You’re totally right.  Which you already knew by the way.

Question 34: What’s your new findings of China?  Also, what’s your take on Ray Dalio’s statement that the U.S. election could unleash a new animal spirit which could lead to a better U.S. economy?  Do you buy this theory?

Charlie: Well, I’m not sure I understood that completely, but I’ll do my best.  What I like about China is that they have some companies that are very strong and still selling at low prices.  And the Chinese are formidable workers and they make wonderful employees.  There’s a lot of strength in that system.  And the Chinese government really tries to help its businesses, it is not behave like the government of India which I don’t think runs it’s country right at all.  And so, that’s what I like about China.  Or course I have to admire taking a billion and half people in a state of poverty up that fast.  That was never done in the history of the world.  And I admire the…you go to China and all the bullet trains go right to the heart of the city…what they’ve done is just an incredible achievement.  And they’ve done it not by borrowing money from Europe the way we did when we came up.  They have taken a poor nation with a lot of poverty and what they did is save half their income when they were poor and drive their nation way up with a lot of deferred gratification.  So it was unbelievably admirable and unbelievably effective.  So I admire that part of the Chinese picture.  China has one problem.  The problem with the Chinese people is they like to gamble and they actually believe in luck.  Now that is stupid.  What you don’t want to believe in is luck, you want to believe in odds.  And China there’s some reason in the culture, too many people believe in luck and gamble.  And that’s a national defect.

Question 35: If the world changes a lot in my lifetime, by the time I’m closer to your age, what do you think will not change about what makes a good successful business?

Charlie: What will not change is that it won’t be that damned easy.  There will be lots of…people will die that you love.  You’ll have close breaks where it goes against you.  There’s a lot of trouble that’s sure to come.  And at the end you’ll know that it’s all over, and that’s the game.  It’s a very funny game when you know when you start you have to lose.  See a dog doesn’t have to do that.  We know from the start we can’t win.  (Somebody) said the law of thermodynamics ought to be restated.  You can’t win, you must lose and you can’t get out of the game.  So we all face this ultimate difficultly. But once you’ve accepted the limitations, you’ve got the problem, how to get through your allot and expand reasonably well.  And I don’t think that’s that hard to figure out.  Because if you do pretty well, considering what you started with an so forth.  And you stand at the end and you’ve done credibly, you’ve helped other people who needed help because you had the capacity and intelligence to do it, and so on, and so on.  Set a reasonable example.  It’s a pretty good thing to do and it’s quite interesting.  And the difficulties make it interesting.

And something else happens that is really weird.  We were talking about, in our director’s meeting that proceeded this meeting, you always get glitches in something as complicated as a new software program going into a big new area.  And you suddenly have reverses and troubles and you’re scrambling.  And what I said is, that I’ve noticed in a long lifetime that the people who really love you, are the people where you scramble together with difficulty and you’ve jointly gotten through.  And in the end, those people will love you more than somebody whose just shared in an even prosperity through the whole thing.  So this adversity that seems so awful when you’re scrambling through, actually is the sinew of your success, your affection, every other damn thing.  And if you didn’t have the adversity you wouldn’t have the bonds which are so useful in life that are going to come from handling adversity well.  The idea that life is a series of adversities and each one is an opportunity to behave well instead of badly is a very, very, good idea.  And I certainly recommend it to everybody in the room.  And it works so well in old age because you get so many adversities you can’t fix.  So you better have some technique for welcoming those adversities.

Question 36: Do you believe that the 0,6, 25 high watermark fees structure that the Buffett Partnership popularized is the fairest structure for both limited partners and the manager themselves?  And what fee structure did you employ during your partnership.

Charlie: Well, I did copy the Buffett formula more or less, and I do think it’s fair and I think it’s still fair.  And I’m looking at Mohnish who still uses it.  I think it is fair and I wish it was more common.  I basically don’t like it where they’re just scraping it off the top.  If you’re advising other people, you ought to be pretty rich pretty soon.  Why would I take a lot of advice from somebody who couldn’t himself get pretty rich pretty soon?  And if you’re pretty rich why shouldn’t you put your money alongside your investors?  And go up and down with them.  And if there’s a bad stretch, why should you scrape money off the top when they’re going down enough?  So I like the Buffett system.  But it’s like so many things I like, it’s not spreading very much.  My net influence in the world, even Warren’s, has been pretty small.  Imagine how much copying we have in our executive compensation methods.  It’s about three examples.  Yes, I think it’s a fine system.

Question 37A: You spoke earlier about natural gas and the shipping of natural gas, and that activity…  (Charlie interjects)

Charlie: If I were running the world as a benign despot, I wouldn’t be shipping any natural gas outside of the United States.

Question 37B: So to tap into that view, you’ve been active in two states big in agriculture, Nebraska and California produce.  What are your thoughts on the agriculture industry and subsidies?

Charlie: Well the interesting thing about agriculture is what’s happened in my lifetime.  Which is the productivity of land has gone up about 300%.  And if it weren’t for that there would be a lot of starvation on earth.  The ag. system is one of the most interesting things that has happened in the last 60 or 70 years.  And we literally tripled the (productivity) of the land.  And we did it all over the world.  And there was just a few people who did it, the Rockefellers, Borlaug, and so forth.  It was one of the most remarkable things in the whole history of the earth and we need another doubling, and we’re probably going to get it.  And it’s absolutely incredible how well we’ve done.  And it’s amazing how efficient our farmers are.  We don’t have much socialization in farming.  We’ve got a bunch of people who own the farms and manage them themselves.  There’s not much waste and stupidity in farming.  Now people complain that we’re using up the top-soil, which I think we are, and I think that’s more of a mistake.  I would fix that if I were a benign despot.  Leaving aside using up the topsoil too fast, I think farming is one of the glories of civilization.  So I think it’s been wonderful what’s happened in farming.

Now in terms of subsidies.  It matters to the farmers where they get their subsidies.  And there’s no question about the fact that we’ve protected our farmers with subsidies and the farmers we’re protecting are getting richer and richer because the farms are owned by fewer and fewer people.  Own more and more acres per person.  So it’s very peculiar that we’re subsidizing people who are already filthy rich, to use up our topsoil a little faster.  And create stuff which we turn into ethanol.  Which is one of the stupidest ideas the world ever…you know I’m a specialist in stupid ideas (links: 1,2), but I would say turning corn into gasoline is about stupid an idea.  I would almost rather jump out of a 20 story building and think I could fly than turn corn into motor fuel.  It’s really stupid.  And yet that’s what our politics does.  I’ve got no cure for the stupidity of politics.  If I (did) the world it would be quite different.  I think that’s pretty minor whether we have subsidies or not.  The main thing that’s happening that has enabled the present population of the world to stay alive is this agricultural revolution and this very good managing of our farmlands.  And the improving agricultural standards in the rest of the world.  It’s gone on quietly that we’ve hardly noticed it.  How many of you are just deeply aware of the fact that grain per acre has gone up by 3 or 4 hundred percent.  That’s a huge stunt.  And by the way, if you take those miracle seeds and don’t use hydrocarbons, the yields are lousy.  We’re feeding ourselves because we know how to turn oil into food.  That’s one of the reasons I want to hold onto the oil.  Something that can be turned into food is quite basic.  And so I don’t mind conserving the oil instead of producing every last drop as fast as one can.  It’s odd that my idea hasn’t spread to more of people.  I may have three or four other people who agree with me in this room.  But you’re a bunch of admirers, and in the rest of the world, I’m all alone. (laughter)

Question 38: You’ve talked on emotions, discipline, and facing adversity.  Can you flesh out more about the spiritual side of this.  How you deal with the struggles and life.

Charlie: Well, just because you don’t have a specific theology, and I don’t…you know when I was a little kid and my grandfather sent me to Bible school and they told me there was a talking snake in the Garden of Eden?  I was very young but I didn’t believe them.  And I haven’t changed.  It doesn’t mean I am not spiritual, it’s just, I don’t need a talking snake to make me behave well.  And I would say that the idea that came down to me, partly through my family, was that rationality is a moral duty.  If you’re capable of being reasonable, it’s a moral failure to be unreasonable when you have the capacity to be reasonable.  I think that’s a hair-shirt that we should all take on, even if we’re pretty stupid.  Because it’s good to be less stupid.  So I think rationality is a moral duty.  And we all have a duty to get better.  And of course we also have to adjust to the other people who are going through our journey with.  I think it would be crazy not to have a social safety net when you’re as rich and successful as we are.  Now I don’t think it has to be as dumb as the one we have, but of course we need a solid social safety-net.  And it’s a moral idea.  So I’m all for morality…without the talking snakes.

Question 39: What are your thoughts on the MLP structure?  And do you have any preliminary thoughts on the border adjustment tax?

Charlie: Let me take the last question first.  We do not know what the boarder adjustment tax is.  I don’t think the people proposing it know what it is.  And I don’t think Trump and the Republicans in Congress have agreed on anything.  So I think we’re just talking about…But do I think some deep revision of the tax system might be a really good idea?  The answer is ‘yes’.  Do I think we should rely on consumption tax more?  The answer is ‘yes’.  Do I really care if somebody piles up a lot of money and leaves it to some foundation.  That’s not my idea of a big evil.  If they do want to live high on their private airplanes and their three hundred dollar dinner checks, I’m all for taxing the people who are living high.  So I like the idea of bigger consumption taxes.  And I think there’s a lot to be said for a different kind of a tax structure.

Question 40: You highlighted this idea of ‘deferred gratification’ a lot today.  In what areas of life is it most valuable?  And where should you enjoy things now vs. grind away and invest in the future?

Charlie: Well, I don’t think you should use up your body by being stupid in handling it.  And I don’t think you should be stupid in handling your money either.  And I think there are a lot of things where the only way to win is to work a long time towards a goal that doesn’t come easily.  Imagine becoming a doctor.  That is a long grind.  All those night shifts in the hospital and so and so on.  It’s deferred gratification.  But it’s a very honorable activity being a doctor.  By and large our doctors are very nice people and they’ve been through a lot.  I tend to admire the life of a doctor more than I admire the life of a derivatives trader.  And I hope all of you do.  And I think deferred gratification in the way our doctors behave is a very good thing for all the rest of us.

Question 41: Question about the circle of competence.  How do you know its limits.  And does it get redrawn from time to time.  Does it always expand, or does it contract?

Charlie: Well of course you know some things that aren’t so, and of course if you’re dealing with a complex system, the rules of thumb that worked in the complex system in year 1 may not work in year 40.  So in both cases it’s hard.  The laws of physics you can count on, but the rules of thumb in a complex civilization changes as the civilization changes.  And so you have to live with both kinds of uncertainty and you have to work longer.  It’s not a bad thing.  It’s interesting.  We’re all the same here…who would want to live in a state of sameness, you might as well be dead.

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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Sincerely,

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

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Investment Lessons from a Master Sushi Chef

The best investment book I read this year didn’t come from a Wall Street whiz or hot shot finance professor, rather it came from Jiro Ono, a Master Sushi Chef. Yes, “the Jiro”, the one from the acclaimed documentary “Jiro Dreams of Sushi.”

While in Japan this past September I picked up his book titled “Jiro Philophosy” and was quite surprised. Unlike most investment books, Jiro doesn’t talk about investing at all. In fact, it isn’t even an investment book. Rather Jiro Philosophy simply describes Jiro’s personal work-ethic.

2016-12-17-19-25-01As I read this book, I quickly came to realize just how closely Jiro’s philosophy mirrors that of Warren Buffett, Charlie Munger, and Ben Graham. It was quite surprising to see that the same principles which lead to mastery in Sushi can also lead to mastery in investing.

As a result, I have distilled the book “Jiro Philosophy” down to its 12 core principles and relate each one to the investment philosophy of Buffett, Munger, and Graham.

1. Stick to the fundamentals. Stay grounded.

Jiro

If you stray from the fundamentals – say, trying to set yourself apart from other chefs – you will completely stray off track.  I believe that by adhering to the fundamentals and continuously striving to create delicious flavors, you will be able to be innovative.”

“If you continue to do things the right way, it’s a given that your sushi will turn out delicious.” 

Investing

stick-to-the-fundamentalsMarket manias and bubbles all have two things in common;  an abandonment of fundamental investment principles and an endless series of rationalizations.

Ben Graham understood the immense rationalization power of markets very well.  He experienced it first hand during the lead up to the great depression.  It was his understanding that as markets move higher, investors don’t become more reserved, but rather they invent knew valuation metrics to justify paying any price whatsoever.  As been Graham observed, “We can find no evidence that…investors as a class have sold their holdings because PE ratios were too high.”

Consequently, Ben Graham developed an immutable investment philosophy based on strict fundamental analysis to keep investors from “completely straying off track”.  And much like Jiro Ono, investors who have stuck to Ben Graham’s fundamentals of investing have delivered “delicious” results.

With this, I’m reminded of Lou Manheim ‘s advice to Bud Fox in the movie Wall Street, “Stick to the fundamentals…good things, sometimes take time.”

2. Gain Mastery.

Jiro

“You’ve got to master some skills to reach the next stage.”

“You won’t advance to the next level all on your own.  You need to train properly up to a certain point.  In the case of Jiro, after a decade of training, a craftsman will have mastered everything from preparation to making sushi.  He will be ready to strike out on his own.”

Investing

Warren Buffett pursued and achieved mastery over Ben Graham’s investment philosophy before advancing to the next level.  Warren’s path to mastery took on the following steps:

  • Discovered Ben Graham’s book “The Intelligent Investor” at the age of 19.
  • Read Graham’s 700+ page book, Securities Analysis, at least 12 times.  
  • Attended Columbia so that he could study under Ben Graham.
  • Worked for Ben Graham at his investment fund.
  • Invested using Ben Graham’s investment principles at the Buffett Partnership.

3. Put Knowledge into Practice.

Jiro

“People will teach you new things and ideas, but if you don’t try them out you will not change.”

“No matter how good the teaching, unless you actually put it into practice, you won’t be able to progress.  You will only have the knowledge.  People passionate about their work are always trying to improve upon what they’ve made.  It’s enjoyable and rewarding.”

“Because of this, we can keep trying new things every day.”

Investing

Throughout his life, Warren Buffett has shown an amazing willingness and ability to put knowledge into practice.   This includes applying the teachings of Ben Graham as well as the four hour educational interview he had with GEICO executive Lorimar Davidson in 1950.

Much of Warren’s success simply boils down to seeking out the best knowledge and putting it into practice.  Warren recommends you do the same thing:

“You need to fill your mind with various competing thoughts and decide which make sense. Then you have to jump in the water – take a small amount of money and do it yourself. Investing on paper is like reading a romance novel vs. doing something else. You’ll soon find out whether you like it. The earlier you start, the better.”

4. Improve upon what you’re taught.  Otherwise you will always be an apprentice.

Jiro

“Just doing as you’re taught is the same as being an apprentice.  I tell my young apprentices that they should think about how to achieve good flavor on their own, improve it and then experiment.  I always tell them if they don’t, they will be apprentices for life.”

Investing

Although Warren Buffett began his career as Ben Graham’s apprentice, he did not simply stick to his teaching.  Rather he modified and improved upon Graham’s teachings over time.  As Charlie Munger describes it:

“If we’d stayed with the classic Graham, the way Ben Graham did it, we would never have had the record we have. And that’s because Graham wasn’t trying to do what we did.”

5. Practice Beginner’s Mind. (Shoshin)

Shoshin (初心) is a concept in Zen Buddhism meaning “beginner’s mind“. It refers to having an attitude of openness, eagerness, and lack of preconceptions when studying a subject, even when studying at an advanced level, just as a beginner in that subject would. (Wikipedia)

Jiro

screen-shot-12-17-16-at-07-37-pm“That said, once they’ve become independent they should still pursue improvement just like an apprentice.

“Feeling you can still evolve is important.”

Investing

Both Warren Buffett and Charlie Munger are enthusiastic learners who enjoy the process.  In fact, Charlie has said that he and Buffett are “dissatisfied with what they know.”  As a result, they are always seeking to learn, adapt, and evolve.

Charlie further explains the importance of this mindset,

“Warren Buffett has become one hell of a lot better investor since the day I met him, and so have I. If we had been frozen at any given stage, with the knowledge we had, the record would have been much worse than it is. So the game is to keep learning, and I don’t think people are going to keep learning who don’t like the learning process.”

6. The way you do the small things reflects how you do the big things.

Jiro

Through Jiro’s Philosophy, he stresses the importance of the small things.  From cleanliness, to hot towels, to the preparation process, rice, etc.  All the smallest details are given the greatest care.  The way you do the small things reflects how you do the big things.

Investing

Likewise, Buffett has a keen eye for detail as displayed by the following two stories:

Story 1:

Buffett also liked Cathy’s attention to detail.  “When I asked her on the phone how many employees she had, she replied ‘504.’  I love this,” said Buffett.  “Not ‘about 500.’ I think she has 505 now and is doing considerably more business.  She won’t be happy until she has 100 percent market share.”  (From the book “The Women of Berkshire Hathaway: Lessons from Warren Buffett’s Female CEOs”)

Story 2:

The following is an excerpt from the Q&A session at the 2016 Berkshire Hathaway Annual Meeting:

Warren Buffett: Yes, sloppy thinking in one area probably indicates there may well be sloppy thinking elsewhere. I have been a director of 19 public corporations. I’ve seen some very sloppy operations and I’ve seen a few really outstanding business operators, and there’s a huge difference. If you have a wonderful business, you can get away with being sloppy. We could be wasting a billion Dollars a year, at Berkshire, you know $640m after tax, that would be four percent of earnings, and maybe you wouldn’t notice it….

Charlie Munger: I would.

Warren Buffett: Charlie would notice it… It’s the really prosperous companies that well….the classic case were the tobacco companies many years ago. They went off into this thing and that thing, and it was practically play money because it was so easy to make. It didn’t require good management, and they took advantage of that fact. You can read about some of that in ‘Barbarians of the Gate’.

7. Listen to good advice.

Jiro

“I take customers’ advice when it makes sense.”

“Even when you think you are right often that’s not the case.  No matter what kind of business you are in, if you only work in an inflexible way, you won’t find success.”

“If (a customer’s advice) makes sense, I will adopt it, otherwise I will never evolve.”

Investing

Warren Buffett and Charlie Munger have exhibited an open mind and willingness to listen to good advice throughout their careers.  In fact, if it weren’t for some timely advice they might not have bought See’s Candies.  As Charlie Munger recounts,

“[Munger’s friend] Ira Marshall said you guys are crazy — there are some things you should pay up for, like quality businesses and people. You are underestimating quality. We listened to the criticism and changed our mind. This is a good lesson for anyone: the ability to take criticism constructively and learn from it. If you take the indirect lessons we learned from See’s, you could say Berkshire was built on constructive criticism.

8. Preserve your main asset…You.

Jiro

screen-shot-12-17-16-at-07-50-pmIn his 40’s, Jiro recognized that his most critical asset as a Sushi Chef was the sensitivity in his finger tips.  As a result, he began wearing gloves in order to preserve the long-term integrity of his hands.  

This might seem like a mildly trivial matter, but for anybody looking to achieve and maintain success in their profession, follow Jiro’s example: Identify the physical or mental attribute that is necessary for success in your field and take measures to preserve it.

Investing

Warren Buffett identifies the most important trait of an investor as “emotional stability”.  As Warren explains,

“To be a successful investor, you don’t need to understand higher math or law. It’s simple, but not easy. You do have to have an emotional stability that will take you through almost anything. If you have 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius. What’s most important is inner peace; you have to be able to think for yourself. It’s not a complicated game.”

Similar to Jiro’s practice of wearing gloves to protect his hands, here are some routines and strategies which Buffett uses to maintain emotional stability, inner peace, and independent thought.

  • An alert and fresh mind: 
    • Warren gets good sleep and takes naps when necessary
    • He plays bridge many hours every week.
  • A temperament uncorrupted by outside influences:
    • He Lives in Omaha
    • Maintains a Clear Schedule
    • Keeps a quiet office where he can think.
  • Health:
    • “My diet, though far from standard, is somewhat better than usually portrayed. I have a wonderful doctor who nudges me in your direction every time I see him. All in all, I’ve enjoyed remarkably good health — largely because of genes, of course — but also, I think, because I enjoy life so much every day.”

Furthermore, Warren explains the importance of preserving and enhancing yourself through life:

“Imagine that you had a car and that was the only car you’d have for your entire lifetime. Of course, you’d care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body. Prepare them for life, care for them. You can enhance your mind over time. A person’s main asset is themselves, so preserve and enhance yourself.”

9. Be a craftsman. Pursue work to satisfaction.

Jiro

“Pursuing work to satisfaction is the pride of a craftsman.  No matter how time consuming, I will leave no task to others.  I will do them all myself until satisfied.  Even as I get older, I still do all the work, even if it’s bothersome.  I feel very pleased when I develop and create something from a new idea of my own.”

Investing

Likewise, Buffett takes pleasure in doing all the investment analysis himself.  He does not have a team of analysts working for him.

10. Be passionate about what you do.

Jiro

“People who love their work passionately want to continue working.  I’m no exception.  Although I’m 90 years old, I’d like to keep on going.  That’s why I don’t find investing time in my work troublesome.”

Investing

At 86 years old, Buffett still tap-dances to work.  He derives great enjoyment from researching different companies.  He compares it to researching different species of animals.

11. Adapt to changing circumstances.

Jiro

screen-shot-12-17-16-at-07-41-pm“Since all sushi toppings are changing, sushi craftsman must now factor this in when working out flavors.”

“The oceans are quickly changing.  For example, the season for katsuo (skipjack tuna) now starts six months later.  But we have to serve the best of what’s in season.  Fish and shellfish were tastier in the past and it is difficult to find their intense flavors.  The next generation of sushi chefs will face challenges in trying to find ways to bring out and enhance fish flavors.”

Investing

Likewise, in investing you cannot wish for something which doesn’t exist.  You must play the hand that you’re dealt.

When Warren Buffett started investing, he could find net-net investments everywhere.  But the investment ocean quickly changed and he had to adapt to the circumstances.  Over the years, Buffett has invested in a broad range of investment classes including, bonds, common equity, preferred stock, warrants, options, commodities, and special situations.  He doesn’t wish for something that doesn’t exist, rather he adapts himself to whatever asset is on sale below his intrinsic value.

At the same time, Warren will never abandon his core principles and rationalize new investments.  During the “Nifty 50” stock market, he declared that he couldn’t find any cheap stocks and refused to invest.  Later Buffett refused to invest in tech stocks during the tech boom of the 90’s.  In each case Warren has been rewarded for his patience and sticking to the fundamentals.

This leads to a crucial point.  Although you must adapt to changing environments, you must also remember to stay true to the fundamentals.  As it says in rule number 1, “If you stray from the fundamentals…you will completely stray off track.”

So remember: Adapt, but do not abandon.

12. It’s never too early to prepare

Jiro

“It’s never too early to prepare.  You can start preparation way in advance.”

Jiro began working at a local restaurant from the age of seven.

Investing

Likewise, Warren Buffett recalls his youthful experience: “By the age of 10, I’d read every book in the Omaha public library about investing, some twice.”

Furthermore, Buffett said he read the 10Ks of IBM for fifty years before ultimately making an investment in the company.  That’s fifty years of “preparation.”

Jiro Philosophy: Distilled

jiro-philosophy