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

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

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

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

I hope you all enjoy!

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

Start of Transcript

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

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

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

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

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

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

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

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

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

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

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

Charlie Munger: Gerry, you take that one.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: How would a divorce work?

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

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

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

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

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

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

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

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

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

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

Becky Quick: Like what?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: How would you fix it?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: United States.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gerry Salzman: Yes, sir.

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

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

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

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

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

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

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

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

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

Becky Quick: We have.

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

End of Transcript

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

Sincerely,

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

Links to additional Transcripts:

Charlie Munger: Full Transcript of Daily Journal Annual Meeting 2018

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

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

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

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

I hope you all enjoy!

(Note: You will find that I frequently summarized the questions from the audience, but as for anything that Charlie, Gerry, or Peter said, I translated them verbatim and as accurately as possible.)

2018 Daily Journal Meeting Transcript

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

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

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

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

4:33 “Pontification” Begins

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

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

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

9:00

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

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

12:26

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

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

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

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

16:55

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

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

21:00

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

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

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

23:58

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

Charlie: Do we ever! (laughter)

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

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

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

27:23

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

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

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

34:56 Q&A Begins

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

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

36:49

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

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

37:53

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

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

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

40:56

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

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

45:15

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

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

46:33

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

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

48:26

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

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

49:04

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

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

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

52:50

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

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

53:46

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

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

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

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

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

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

1:00:13

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

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

1:02:37

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

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

1:07:15

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

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

1:09:13

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

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

1:11:47

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

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

1:13:13

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

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

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

1:17:24

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

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

1:19:02

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

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

1:19:49

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

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

1:21:05

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

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

1:23:40

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

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

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

1:25:32

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

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

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

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

1:28:07

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

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

1:31:50

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

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

1:34:04

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

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

1:35:30

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

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

1:36:54

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

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

1:39:16

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

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

1:43:08

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

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

1:46:02

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

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

1:47:46

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

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

1:51:11

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

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

 1:52:51

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

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

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

1:55:19

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

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

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

1:58:38

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

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

2:01:05

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

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

2:04:30

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

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

2:05:23

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

End of Transcript

Thank you for reading. I hope you all thoroughly enjoyed the transcript. If you found any errors, kindly let me know and I will fix them.

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Sincerely,

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

Links to additional Transcripts:

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.

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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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