Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2021

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

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

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

I hope you all enjoy!

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

Start of Transcript

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

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

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

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

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

Go ahead. Next question.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gerry: I think so Charlie.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gerry: [since] Early 70s.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gerry: One stop center.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

End of Transcript

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

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

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

Sincerely,

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

Links to additional Transcripts:

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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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

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Sincerely,

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

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