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

Intro

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

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

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

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

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

Start of Transcript

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

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

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

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

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

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

Becky Quick: That sounds fair enough. Steven?

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

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

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

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

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

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

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

Charlie Munger: Steve, you take that one.

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

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

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

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

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

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

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

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

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

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

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

Charlie Munger: We’ll work it out.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: The arbitrage play on Activision?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: With the odds?

Charlie Munger: Yeah, sure.

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

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

Becky Quick: Not worth the headache, I guess.

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

Becky Quick: Because you were worried?

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

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

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

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

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

Becky Quick: Do you vehemently disagree?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: To ask Berkshire to follow their guidance?

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

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

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

Becky Quick: Why?

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

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

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

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

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

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

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

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

Charlie Munger: Yeah, sure.

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

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

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

Charlie Munger: We’ve never owned Disney shares.

Becky Quick: That’s my mistake.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: How far back are we talking?

Charlie Munger: Well, 25 years.

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

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

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

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

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

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

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

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

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

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

Becky Quick: Yeah. I’ve got you.

Charlie Munger: Modern technology it really works…Sometimes.

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

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

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

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

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

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

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

Charlie Munger: That’s not the sole reason.

Becky Quick: Why else?

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: Even on things like medical?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Becky Quick: You got fired from where?

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

Becky Quick: It’s pretty rare.

Charlie Munger: Yeah.

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

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

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

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

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

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

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

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

Becky Quick: Unusual how?

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

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

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

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

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

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

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

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

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

End of Transcript

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

Sincerely,

Richard Lewis, CFA

White Stork Asset Management LLC

Partner, Investments

Links to additional Transcripts:

• Peter Kaufman on The Multidisciplinary Approach to Thinking: Transcript
• Daily Journal Annual Meetings: 2016, 2017, 2018, 2019, 2020, 2021, 2022
• 2017 Fireside Chat with Charlie Munger
• Charlie Munger: Full Transcript of Caltech Zoom Talk, Dec. 2020
• Li Lu: Value Investing in China, Full Transcript

Hello Latticework Investing Community,

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

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

Cheers,

Richard

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

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

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

I hope you all enjoy!

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

Start of Transcript

Moderator: What was Caltech like in 1944?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Charlie: Well, no. I haven’t found anything yet, except how to get by fairly well. And that’s harder than a lot of people think. Just think of how hard it is to get far ahead in life. Imagine, suppose you want to get ahead in Caltech, you like the academic life. Caltech is very good at getting people tenure. If you’re very brilliant and work 80 or 90 hours a week for 9 or 10 years, you get tenure. That is not what I call an easy life…And competing with the Homer Joe Stewarts.

Moderator: Well some of us love it, that’s all I can say, Charlie.

Charlie: Yes, of course. I know. And that’s fine. And I chose to avoid it because I knew I wouldn’t win big at it. (I would have been) a perfectly successful professor by ordinary standards, but I would not have been a star.

Moderator: So finding your own path is something you really recommend to everyone?

Charlie: Well, no. What helps everyone is to get in something that’s going up and it just carries you along without much talent or work. And so if you pick a really strong place, like say Costco and you go to work at it, and you’re really reliable and nice, you’re going to do fine in life. You got a big tailwind. But in elite education, nobody wants to go to work for Costco, from Harvard or MIT or Stanford. And of course it’s the one place where it’d be easiest to get ahead.

Moderator: So I have a few more questions that are more on the finance side, but there is one I cannot resist asking you. “I’m 16. I want to take up investing as a full-time career. What is Mr. Munger’s best advice for me?”

Charlie: Well, if you pursue any career with enough fanaticism, that’s very likely to work better than not having the fanaticism. Look at Warren Buffet. He had this fanatic interest in investments from an early age and he kept making small investments even with his paper rout savings and so forth. And he finally learned how to be pretty good at it. If you want to succeed in investments, start early and try hard and keep doing it. All success comes that way by and large.

Moderator: What are you proudest of?

Charlie: Well. I’m proudest of avoiding some things I don’t like. I don’t like irrationality and I’ve worked to try and avoid it in my life. And I haven’t succeeded of course, nobody does. But I’ve done better than I thought I would, starting out at a fairly low state. And it has been a pleasant way of going. And Caltech by and large stands for that. Caltech really tries to figure things out, and that’s the value.

And having that just right into your gene plasm really helps. I work a lot these days with a Caltech postdoc who’s now a professor of physics at UCSB, and he’s a pleasure to work for. He never said anything stupid. He’s just so talented. Lars Bildsten is his name and he heads that visiting program for the physicists of the world at UCSB. But Lars, he is trying to figure it out right. And his graduate students are trying to figure out everything a little faster and better than other graduate students. That’s Caltech. He was at Caltech for two or three years as a postdoc. And Lars Bildsten is a wonderful man. Cal Tech is full of people like that. I don’t think Caltech has a lot of improvement that they can do in their physics department. I think it’s pretty good the way it is.

Moderator: Well, we are very glad of that and very proud…

Charlie: Well, you should be. You should be. It’s harder to be that smart in the liberal arts. Partly because many liberal arts professors or so leftist. It’s hard to be very smart if you’re a crazy leftist. You’re going to have the world a lot wrong.

Moderator: What was the most memorable thing for you when you were at Caltech.

Charlie: Well, it comes back to Homer Joe Stewart. Homer Joe Stewart was just exactly the kind of a person you want representing Caltech to the students. And I came back to my fiftieth anniversary from my time at Cal Tech, and there was Homer Joe Stewart. He must have been 88 or something. He was just sharp as a tack. And he started talking to me a little about thermodynamics. And he says, “You know,” he says, “what’s interesting about thermodynamics is how little of it was derived mathematically from Newtonian physics.” And that is such a good thing to say, and if you understand both subjects, it’s so correct. It’s weird! You would think that you could just derive all of thermodynamics from what Newton…but you can’t! In other words, as long as you have people like Homer Joe Stewart, you don’t have to worry about Caltech.

Moderator: Which of your acts of philanthropy are you proudest of?

Charlie: Well, I’m not that proud of my philanthropy. I regard it as an absolute minimal duty of somebody to be reasonably successful, you ought to be reasonably generous. So, I don’t think you get big merit points for philanthropy. Because you do that, you get a lot of discredit if you didn’t. And I don’t think I’ve been any record philanthropist. I’ve given away more money to my family than I’ve given to philanthropy. I am sort of a bad example. Now I think my philanthropy has been pretty intelligent. I think a lot good with the money that I’ve given away. But I don’t think I deserve any credit for giving away money that causes me pain. I don’t want to be under false pretenses on that.

Moderator: What are you most curious about in the next 30 to 40 years?

Charlie: Well, having been an investor for so long, I’m of course, interested in these weird present conditions and these weird economic conditions where they’re printing money like crazy and so forth. And of course that’s very interesting. And I’m interested in the fact that the world has come so far in having these undeveloped countries get ahead so fast like China. Now I compare India, which has a way worse economic record, even though they got more of our political institutions. You know, they got more free speech in India, and a way worse economic achievement. I think the economic development of the modern world is very interesting. It’s a very interesting subject. And I see why so many people in economics like it, because it is just so perplexing and so interesting. And of course, the achievements have been so great. And technology is the same. Who would guess that the whole world could have colloquia on Zoom? We weren’t doing it a year and a half ago. I mean, it’s just amazing what’s happened. Who would have guessed that…A lot that’s happened should surprise everybody. And it’s very interesting.

Moderator: Charlie, thank you very much for this conversation. I particularly appreciate your enthusiasm and ongoing curiosity, which is something that we very much value at Caltech. Is that there’s always something new to think about, a question to ask again. And please accept my congratulations on the distinguished alumni award and my thanks for participating in this event.

Charlie: Well, I liked Caltech when I was there. It wasn’t on the career path I was going to choose for myself, but I loved the detour that I got by accident of having to participate in a war. It was good for me to be in Caltech for my nine months. And it’s been good for me to live in the same community all these decades since. You know, I like the whole thing.

Moderator: Fantastic. And I want to thank the two twenty-four hundred people who have joined us for this conversation. Stay safe and goodbye.

End of Transcript

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

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Sincerely,

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Links to additional Transcripts:

• Peter Kaufman on The Multidisciplinary Approach to Thinking: Transcript
• Daily Journal Annual Meetings: 2016, 2017, 2018, 2019, 2020, 2021
• 2017 Fireside Chat with Charlie Munger
• Li Lu: Value Investing in China, Full Transcript

This month I had the great pleasure of hearing Charlie Munger speak at the Daily Journal Annual Meeting for the fifth time.  Once again, the wit and wisdom of Charlie Munger was on full display at the deceptively youthful age of 96.

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

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

I hope you all enjoy!

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

Start of Transcript

Charlie: The meetings should now come to order. I’ll give you some time to sit down.

Welcome to the Catholic Cathedral. This is the most amazing place. Some of you who have never seen it should go look at it from the inside. It looks like hell from outside, but from inside it’s a startlingly good architectural work. And it’s quite interesting. Our director, Peter Kaufman, is on the committee who runs the cathedral. And if you want to be buried in the same column of the Ashes of Gregory Peck, he’ll arrange it for $100,000. (laughter) This is a very commercial crowd. You can’t even die without paying. OK, I have a script, I’m going to go through and after we’re through this script, let’s take care of the formal business of the meeting. We’ll answer questions in the usual way…After one brief little explanation from the chairman.

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

Daily Journal “State of Affairs”

I will discuss briefly the state of affairs that’s reflected in our reports and then I will take questions.

This company, of course, started as a public notice rag, which made money by doing public notices and it morphed into a very successful legal daily newspaper which had a monopoly on publishing the opinions of all appellate courts in California and every law firm had to buy it. And did a lot of other useful things and was a small but very profitable paper occupying an ideal niche.

Many of the newspapers in America had similar niches where they just made regular substantial profits in a very easy simple business to run. Of course, what’s happened is that technological change is destroying the daily newspapers in America, including the little ones like ours. The revenue goes away and the expenses remain. They’re all dying. Berkshire Hathaway owns, what, about a hundred of them, and truth of the matter is they’re all going to die. And there’s nothing that can be done with good management to save them.

It’s a sad thing because those newspapers were an accidental part of the government. They called them the ‘Fourth Estate’. And each one had come into being sort of by an accident of capitalism without any planning by the founding fathers. And the people who ran them became very powerful people due to two great American institutions. One is nepotism and the other is monopoly. (laughter)

And all those nepotistic monopolists, many of whom drank too much, actually morphed into a function where they were more useful than our legislators. And of course, we’re losing them all. And what we get is these opinion services on TV that everybody watches, where everybody believes some ridiculous version of things that’s slanted as much as anybody could… And it’s not a good thing in America that we lose Newsweek, Time magazine and all of our daily newspapers and get back Rush Limbaugh. Or (inaudible) on the other side. But that’s what’s happened.

And it’s a sad thing. Nobody planned that we had a fourth estate, that it was really a branch of the government that worked very well for us and that took pride in being accurate and so on. And nobody planned that it would go away. It just happened.

Now The Daily Journal Corporation, strangely, is not going to disappear. If all of our business fails, we still have a lot of marketable securities. So we’re going to do better than these other newspapers. I’m not counting the ones like The Wall Street Journal and The New York Times, there are a few that will survive no matter what. But basically, they’re all going away.

And The Daily Journal is not going to go away and leave the shareholders with nothing because of our big marketable securities. We also have a second business which we’re trying to use to replace the economic strength of the newspaper that is imperiled. And that’s Journal Technologies. And that is a computer software business that helps courts and government agencies replace human error prone inefficient procedures with simpler and better procedures run by software.

That is a very difficult business. Ordinary software like the software a teacher uses to help teach a class or the software is used in accounting if you’re a dealer in Chevrolets or something. That stuff is a gold mine because it’s just standard and you crank it out and everybody uses it, it’s efficient. What we’re doing is servicing all these government departments of a lot of different kinds, and they all have special requirements, and they’re almost all quite bureaucratic, and they’re also political. And it takes forever, and they’re full of lawyers and consultants…The RFP process.

So it’s a branch of the software business that is intrinsically very, very difficult. Where everything takes forever, is very hard to do and so on. And a lot of people just totally avoid it for that reason. They just want to crank out a few bits of software, or distribute it on the cloud, whatever they do, and count the money. And of course, we’re in a business where we need armies of people to help all these courts all over the world automate probation officing work or court filings and so on. It’s all going to happen, so with all this automation and the effect of software, it’s going to happen, but it’s unbelievably difficult.

An RFP involving a government and a bunch of consultants is intrinsically very, very difficult. And you have to keep good nature. You have to have huge patience and you have to have huge talent. You have to just keep rolling with it. And then the money comes in very slowly and has more bureaucracy. It’s very, very difficult. In spite of all those difficulties and the fact that everybody at the very top of this company is very old, we’ve done fairly well. And don’t ask me why it was kind of a miracle. But a lot was done right just to make it to our present state. And it’s a big market, but it’s not going to be easy and it’s not going to be fast.

On the other hand, we all like the customers. I’ve fallen in love with the government of Australia. They’re just such nice people and I think it’s wonderful that Australia wants automated courts. And I think it’s wonderful they’re smart enough to hire us. Imagine hiring the little Daily Journal Company to run the courts of Australia. And my guess is it’s all going to work for them and for us. It’s a miracle they figured out that this little company would be a pretty safe choice. I think part of the reason we’ve been successful is so many of our competitors are so awful. So we don’t deserve as much credit as we’re claiming.

But it’s going to take a long, long time and it’s an everlasting struggle. It’s kind of fun to watch because we have the most unlikely cast of characters and a lot of them are quite successful. Gerry just made a big report to the board of directors. It’s just amazing the goodwill with which the people attack this very difficult work and just keep everlastingly at it. (And if) they have trouble so they go around, if somebody goes crazy they tell him ‘no’. You know, there are a million opportunities to do this wrong.

But I think it’s all going to happen. And I think we may end up with a big share of it, but when it’s all done you shareholders will need a lot of patience. It’s really hard. This is not the easy part of the software business. This is more like trying to create another Pricewaterhouse. That would be difficult. And this is difficult. And of course, we can’t guarantee that we will succeed. But I consider it likely. I just think it will be slow and awful. I don’t anticipate any really easy times for a long time, but I suspect it will keep growing. Gerry, why don’t you…How well do you think we’re going to do in the next two or three years?

Where’s Gerry? I’m blind in my left eye, so that…

Gerry Salzman: We certainly devoted a lot of energy and resources to Journal Technology. We have approximately 250 employees in Journal Technology and we have offices here in Los Angeles obviously.  In Corona, because we acquired a company in 2013 with an office in Corona, California. We have an office in Logan, Utah, where we acquired a company there in 2013. And we have an office in Denver because our original interests in this system of serving courts started because of our interest in providing… or seeing that the court of Los Angeles, the largest in the United States at least, has sufficient resources in a service provider. That’s how we got involved in 1999.

And we are seeing lots of changes. You take, for example, in Los Angeles. Los Angeles now uses our system to do electronic filing. Attorneys do the filing electronically. If you go down to the courts in Los Angeles where people used to have to stand in line or have a service provider stand in line on behalf of the lawyers, there’s nobody there. Also, in conjunction with L.A., we were able to enable lawyers to determine when they would come to court and see the judge. So attorneys are now setting their own schedule and that reduces some of the personnel requirements at the court.

These are some of the innovations that are taking place. If for example, you get a traffic ticket in in Riverside, you’re using our system to pay for that. So drive fast through Riverside. (Laughter) And we’ve made some good inroads into other California courts. We have one basic system and we have three, four, or five different configurations of the system. One for courts. One for public defenders. One for district attorney. And one for probation officers. So we have to only modify one system and make sure the configuration of the main system is appropriate for other agencies. This is a big advantage when we come to the point of doing installations.

And Charlie mentioned the…projects in Australia, the government of Australia, we now have four or five, six or seven people down in Australia. And we’ve worked for the state of South Australia and Victoria at the present time, which is Melbourne. So we have most of the courts, we have all the courts in in those two states. And they range from mineral courts to other types of courts that we sometimes don’t see here.

Los Angeles, in California, in East County, only has one court. If you went to other states, you’d find that there was a probate court, a civil court, a family law court, it just goes on and on and on. And in California, they’re are much more efficient than you can imagine when it comes by comparison, where they have all the administrators, four or five administrators, and separate systems, and separate I.T. departments. Very inefficient. That’s what we are confronted with all the time.

As we move forward, the financial results will depend upon the number of users in these various justice agencies. Yes, we do get implementation fees, but we can only take that into income when everything is delivered. And so we focus on trying to get to the point where everything is delivered. Then we can take it into income and reflected in the financial statements.

Charlie: This is a very important thing that everybody in this room should understand. We have no simple way of just counting up hours and sending little invoices to the government. That’s what most consultants like to do is bill hours. And we don’t get the right to collect money until the thing works. And we do that on purpose.

It reminds me of one of my favorite tales which really happened. When I was young, a lot of the earth moving was not done with bulldozers, it was done by teams of mules who were guided by contractors who ran these mule teams and their big plows. And there was a Latino contractor who had an enormous number of mules, and when the war came, the big builder called him and said, “I’ve got a cost plus contract with the government, I’m going to make you cost plus and I want your mules to start tomorrow morning on this big project.” Cost plus…Cost plus percentage of cost.  And this Latino said, “Oh, no.” He says, “I can’t do that.”  And he goes, “Why not?” He said, “Well”, he said, “I get business all these years because I’m so efficient.” And he said, “When I take it cost plus contract, even my mules seem to know it and they all go to hell.” (laughter).

And that’s the Daily Journal’s policy. We’re trying to avoid deteriorating, by taking this awful contracting (course). And we’re trying to be good like that Latino contractor. And my guess is it’s going to work. But you have to be very cheerful to take it because it’s agony. I can’t tell you how the people like Microsoft, Google, and so forth, they don’t want our branch of the software business. I kind of like it. Peter kind of likes it. Because he senses that…Peter Kaufman, raise your hand…Peter likes it difficult if he thinks he will keep it forever once he gets it. That’s our system.

But I certainly can’t guarantee it’s going to work. It’s a lot of very work. And I would like to tell you we’re just ass deep in talent. And that we have four qualified people for every job. We’re just the opposite. We’re like a bunch of well-armed paper hangers working away at this stuff, and so far it’s working.

And, of course, what’s happened in America, of course, is that software has grown enormously. If you take every big college in the engineering department, the most popular course is Computer Science. And if you go into venture capital, the most popular investment is some kind of software. And I do not find venture capital’s backing of software companies pretty because there’s just so much of it and there’s some wretched excess, and folly, and high prices and so on. It’s not a scene that attracts a normal Berkshire Hathaway type. I’m not saying it won’t work. For a great many of them it will do very well. But there’s also going to be a lot of casualties.

I don’t like it when bad stuff comes in… I don’t like it when investment bankers talk about EBITDA, which I translate as ‘bullshit earnings’. (laughter) And I don’t like all this talk about J-curves and all these private sales of software companies from one venture capital to another, and markups…it looks like a daisy chain to me. So I think there’s a lot of wretched excess in it. But it reflects an underlying sound development, which is this huge growth of software changing the technology of the world. But it’s going to have some unpleasant consequences because there’s so much wretched excess in it.

I bet (looking around) this room (that) almost everybody has somebody in software in the family. I’ve got two people in private equity in my family, and private equity is grown into the trillions. And of course it’s a very peculiar development because there’s a lot of promotion and a lot of crazy buying. It’s what I call ‘fee-driven buying’, much of it, where people are buying things to get the fees. I’m not used to that. I buy things because I think they’re going to work for me for the long pull…As the owner! I’m not thinking about scraping fees off along the way. So it’s a very different…it makes me very nervous to have all this fee driven buying. Wherever they’re successful, they just raise a fund that’s twice as big as the last one. Throw more money at more deals. And of course, with more money and more overhead, it’s an (inaudible) demand for fees. But will the world provide wonderful results for all these people? The answer is no, it won’t. It’s gonna be a lot of tragedy.

And in the past, the people who did well in venture capital were the clients of Sequoia, which is one of the best venture firms that ever existed in the history of the Earth. But there aren’t that many Sequoias and Sequoia had such a wonderful record because it kept itself small. And now everybody is trying to be enormously large and to grow enormously and hire more and more people and collect more and more fees. It’s weird and it’s not going to work perfectly. I am trying to give you the same service my old Harvard law professor gave me when he said, “Tell me what your problem is and I’ll try and make it more difficult for you.” (laughter) By the way, the guy that told me that was doing me a favor. It’s a pretty good way to proceed. I have this saying, ‘A problem thoroughly understood is half solved.’ It’s hard to understand it well.

Well, I guess that’s enough for The Daily Journal you’re in for a long, long difficult ride. And not only that, the damn leaders look like an old people’s home. (laughter) I’m 96. Rick is 90. Our CEO is 80. I mean, if you’re not decrepit you don’t belong here. I think we will gradually work things out in spite of this aged group of directors. After all we got a young man like Wilcox whose past retirement age. And of course we’ve got a new director, Mary Conlin, whose up here partly to make the rest of us look good…Or bad, rather.

All these odd results in capitalism…It is peculiar that one little newspaper is full of marketable securities, and it’s probably not dying, and a management that has succeeded in a business none of the people understood. None of the people I’ve named is a computer software engineer. It’s weird. And yet you people who come from all over the world to this place, you’re as nutty as we are. And if you ask me, I think it’s slightly more likely to work than not work. And it’s a very good thing to be doing. The world needs what we’re trying to do. And we’re trying to reward the right people. And really trying to serve the customers.

When it comes to customers…My ambition is to be as close to Costco as I can possibly be. I’ve never been associated with a company that works harder than Costco to make sure that customers are served well. I mean, I just love success that occurs that way. And I hate success where you deliberately trying to cheat people or sell them something that’s not good for them. Like gambling service in Las Vegas. By the way, I’m not trying to irritate our customers in Los Vegas. I’m doing it by accident.(laughter). Anyway…

But I do think there’s something to be said…You have the option for selling stuff that’s good for people instead of stuff that tricks them. And any rate, that’s our approach. I would choose that approach even if I made less money. In fact, I think you make more. It reminds me of Warren Buffet’s favorite saying, he says, “You always take the high road.” he says, “It’s less crowded.” And that’s the system.

I think the politics of the country are weirdly awful because of the excesses of hatred that you see everywhere. In California with a gerrymandered House of Representatives, the only danger of getting tossed out of the legislature is if you’re a leftist, somebody to the left of you may come in. Or if you’re rightist, somebody to the right of you may come into the primary.

And this…creates an awful legislature where the individuals hate each other. And there maybe will be 10 sort of sensible Republicans and 10 kinds of sensible Democrats in the California legislature. And every 10 years, these nutcases of the right and left get together and throw all the sensible people out by gerrymandering them out because they all agree that the people in their own party who are near the middle are horrible. Well that is a crazy way to be governed. And it is not pretty. And I have no solution. It’s just interesting. Warren said to me the other day, he said, “It’s so interesting now,” he says, “I would like to stay around for another 30 years if I couldn’t participate, if I could just watch.” And I said I’d sign up for that, too. It is very interesting. It’s weird.

Think about different television is when Cronkite is gone and we have all these clowns on the opinion servers lying to us in a very shrewd way. And they are really good at! You know, the ability to mislead people is greatly underestimated. Any good magician can make anybody see a lot of things happening that aren’t happening and not see a lot of things happening that are happening. And of course, we’re all dealing with various people who, through ‘practice evolution‘, have been good at misleading us. And so it is very very hard to be rational and to stay sane.

Of course, that’s part of the reason that some of the companies that I’ve been affiliated with have been successful. It’s not that we’re so smart, it’s that we stayed sane. Because a lot of what goes on is absolutely nuts. And we all see it in politics of course. It’s even sillier than it is in business. Although sometimes we businessmen try and get into our share of the stupidity.

You people come from all over the world, to this thing out of some deep hunger. I regard you as nerds because I was once one of you, and I know a nerd when I see one. (laughter) And you come here because some fellow nerd has managed to succeed despite his defects, and you need a similar result. (laughter) And you know something that’s really odd, is you’re right! If you could learn some of our tricks, you can get more success out of life than you deserve. That’s what’s happened to me.

And how did it happen? I’ll tell you how it happened, it’s obvious that I got better life outcomes than I deserve based on energy or intellect. And of course that’s an interesting process, and everybody would like more of it. Who doesn’t like to get a lot more than one deserves? I stumbled into a few metal tricks early in life, and I just use them over and over again. I mean, I take the high road because it’s less crowded. Of course that’s a smart thing to do. And then…I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself. And that notion, which was just inherited basically from my genes and my surroundings, has served me enormously well. It’s like Kipling said, “If you can keep your head when all around you are losing theirs.”, it’s a big advantage!

And just think of all the dumb things that are done by our politicians and our business leaders. And the wretched excess you see in the system and…I can remember one of the earlier crazy movements that caused one of our earlier recessions. All these traders would go to Las Vegas and people would hand them free stacks of chips and they had strippers…That was our securities market. It was grossly awful. And a lot goes on now that is grossly awful. Imagine politicians who never understood Adam Smith? It would be like hiring an engineer to design your airplane and he didn’t believe in gravity. (laughter) Well, I laugh too, but there are tears and my laughter. (laughter)

But this business of being determinedly rational does work, if you just keep everlastingly at it. Because it’s harder to say sane than it is (inaudible). Of course, one of the things that’s wrong with the present system is the way the heads get cabbaged up by the activity and the owners of the heads don’t know what’s happening. One of my favorite actors when I was young was Sir Cedric Hardwicke.  Was such a good British actor that was knighted by his Monarch. Sir Cedric Hardwicke got old and of course he kept acting right on and on and on, and toward the end of his life he made women with great statements in the history of acting. He said, “I have been a great actor for so long that I no longer know what I truly think on any subject.” If you stop to think about, that’s exactly what’s happened to most of our politicians, except they don’t know it! Sir Cedric Hardwicke at least new his brain had been turned to cabbage. Whereas our politicians, they like cabbage. (laughter) Anyway…

And of course the young people that want to shout out their resentment of this and that…You know, I always say what they’re doing is pounding it in. Nobody’s listening to them when they shout out, they’re just pounding a lot of nonsense in. It’s a big mistake to pretend to be practically anything because you become what you pretend to be. Now, sometimes that works. I knew a couple of no-goodniks in my youth who became leading philanthropists, and they did it just to mislead people. But after they had done it for a while, they became legitimate philanthropists. That always gave me conclusion that hypocrisy really is better than most people think. (laughter) Because It does change you to constantly pretend to be one thing or another, and of course it changes you to say something repeatedly. I always felt that Ronald Reagan was shifted from Democrat to Republican…Well, his acting career failed and he was hired by General Electric run around and give right-wing speeches. Of course, he became a Republican.

In a world where that’s the way your own mind tricks you, of course if you have some prophylactic measures where you’re more cautious about your views. Think of how we’d all love to have a bunch of children who we’re a little more cautious about their views. I’ve got some children in the audience. They’re by and large a pretty good bunch, but if I had my druthers, there’s a thing or two I would change. (laughter) Well you can laugh, but that’s the way life works. Well that’s enough of ruminations of one… Imagine coming to listen to some ninety-six-year-old man. Amazing. I’ll take questions now from anybody.

Question & Answers

Question 1: In the past, you’ve referred to value investors as a group of cod fishermen and suggested that they maybe fish in a different pond. Conversely, you’ve also discussed how over a long enough time frame an investor’s realized return would mirror the business’s return. So given that many of the highest quality businesses are in the U.S., wouldn’t some of our time be best focused on analyzing the quality of the businesses here in the U.S.? And I understand that the odds offered on the bet matters a lot. So I’d be curious to hear in your mind how you weigh the quality of the horse vs. the odds offered on the horse.

Charlie: Well, both are important, but basically all investment is value investment in the sense that you’re always trying to get better prospects than you’re paying for. But you can’t look everywhere at once, any more than you could run a marathon in 12 different states at once. And so you have to have some system of picking some place to look, which is your hunting ground. But you’re looking for value in every case.

And what is interesting to me is, you talk about the U.S., I don’t agree with you, I think the strongest companies are not in America. I think the Chinese companies are stronger than ours and they’re growing faster. And I have investments in them and you don’t. And I’m right and you’re wrong. (laughter) Well you can laugh, but I just spoke a simple truth. Li Lu is here, I saw his face in the audience. He’s the most successful investor in the whole damn room. Where does he invest? China. And boy was he smart to do that. And is he good at.

Oh, it really helps if you know witch hunting ground to look in. In fact, we all do better hunting, when we’re hunting where the hunting is easy. I have a friend who’s a fisherman and he says, “I have a simple rule for success in fishing. Fish where the fish are.” You want to fish where the bargains are. It’s that simple. If the fishing is really lousy where you are, you should probably look for another place to fish.  Somebody else?

Question 2: Over the years, you’ve shared lots of comments about India and China. I would love to hear any and all insights you have about your friendly neighbors to the north. Whether it’s our Canadian political system, banking system, housing sector, resources industry, health care system. Any and all insights, wisdom on Canada would be much appreciated.

Charlie: Well, I’m glad you gave me this opportunity. I’m very partial to Canada. And I think their socialized medicine system… I think they’re wise to have it. And I think they’re wise to pay their pharmaceutical prices instead of ours. And I think it’s wonderful that we’ve gotten along with Canada so well all these years. Oh, I think you should be quite pleased with Canada. I don’t think it helped you to have two different languages spoken. It was an unfortunate accident. But I basically like Canada and I think in some ways you do better than we do. Gerry points out that we have customers in Canada. He’s encouraging me.

Question 3: With computers and artificial intelligence rapidly getting better at investing than humans, what should analysts and portfolio managers in the investment management industry do to remain competitive?

Charlie: Well, that’s a very good question. I think what people in the investment management industry ought to do is prepare for tougher times ahead. I think this indexing thing is going to run and run and run. And I think that there are wretched excesses in a lot of well-paid hedge fund and private equity businesses that will in due time result in a lot of troubles that give pain.

So, everywhere I see the endowment managers have the same mantra. They want fewer and better investment managers. That’s not gonna be good for investment managers and the rest of the people are indexing. Now do you want any other cheery news? The cheery news is that if you think the way we nerds think and keep at it long enough, you’ll do all right. But if you go with this crowd, I think there’s pain ahead.

Question 4: In the past, you’ve recommended index funds for most people seeking wealth accumulation. And in the past, Warren Buffett has recommended using the selloff strategy for income as opposed to chasing dividends. If we synthesize those ideas, it seems like the best course of action for investing over a lifetime is to use index funds for accumulation and the selloff strategy for income in retirement. Would you agree with that? And if so, what benefits do you see in using that strategy?

Charlie: Well I think the reason it’s growing is that for most people it does work better. And on the other hand, there’s a huge proclivity to gamble. It’s very interesting to play in a game where the returns are variable, so that there’s a huge lure that comes to gambling. In China, the ordinary holding period for the individual investor is short. They love to gamble in stocks. This is really stupid. It’s hard to imagine anything dumber than the way the Chinese hold stock. And they’re so good at everything else. It shows how hard it is to be rational. But I don’t think investment management is going to…I think there are lots of troubles coming. There’s too much wretched excess.

Question 5: I had a question regarding the Stoics. Anybody who’s read your life, your testament to the idea to not be a victim, but to be a survivor. And it’s an attitude that has helped me in my short life so far. Could you perhaps expand on that idea, how it’s helped you, and how that is perhaps one of the greatest ways to live your life out regardless of what happens to you?

Charlie: Well of course, feeling like a… It’s fairly interesting…Some people are victimized by other people. And if it weren’t for the indignation that that causes, we wouldn’t have reforms that we need. But that truth is mixed with another. It’s very counterproductive for an individual to feel like a victim, even if he is. Best attitude is just to be cheerful about everything and keep plugging along. And therefore I don’t like politicians that get ahead by trying to make everybody else feel like a victim. It makes my flesh crawl. And I just don’t believe in it. Of course, who wants to be a victim instead of a survivor?

Of course, we want… But feeling like a victim… You can recognize your position as bad and try and improve it. That’s OK. But to have, a deep feeling of victimhood and it’s all somebody else’s fault is a very counterproductive way to think. People don’t even like being around it. It’s really stupid. And yet our politicians build on it and try and make their careers work by doing something that’s very bad for all the people they’re talking to. And they think they’re doing the world’s work. You know, it’s crazy. It’s absolutely crazy.

Question 6: The Daily Journal and Berkshire own a lot of the very large banks. My question is concerning some of the fintech technologies coming up. Your position on crypto is very clear. But do you see other fintech technologies as being a threat to the long-term profitability of those large banks?

Charlie: Well, I don’t know much about crypto technologies except to avoid them. And by the way, I have a lot of things…I have what I call the ‘too hard pile’. And if you (fit into) my ‘too hard pile’, I throw you into ‘too hard pile’ and I don’t think about them. Now every once in a while, I take something on or drift into something really difficult. And then I continue doing it just because I’m perverse. The Daily Journal is basically a ridiculous enterprise. It’s really difficult. And I’m enormously rich and I’m ninety-six years old. And yet I care terribly how it works out. It’s a little insane. Why would you come here and talk to a nutcase like me?

But, no, I hate things like Bitcoin. I mean, I hate things that are intrinsically anti-social. Of course, we need real currencies. And one of the interesting things about the current condition is that the Americans have created the reserve…by accident…have created the reserve currency of the world. And the world needs a reserve currency. And I don’t sense any great sense of trusteeship among my fellow Americans for behaving very well in our responsibilities to the rest of the world with our own currency. Our attitude is we’ll do what pleases us. That’s not my view. I think once you get a big responsibility to other people who are depending on you, you ought to think about them too.

Question 7: We have record budget deficits, record unemployment, and record expansion of the balance sheet. Why do you think we don’t have inflation? And secondly, could you recommend some good books you’ve read the last year?

Charlie: Well, regarding inflation. You know the economists of the world thought they knew a lot more than they did. What has happened is weird, that in response to the Great Recession, all the nations of the world have printed money like crazy and have bought all kinds of investment assets. And they’ve done things that nobody in the economics profession would have recommended on this scale. Even five or so years ago, and yet the inflation has been very low. I think we all have a lot to be modest about when we talk about economics. Lyndon Johnson said that giving a talk on economics was a lot like pissing down your leg, he says, “It feels hot to you, but it doesn’t influence anybody else very much.” (laughter) And I’m afraid I can’t do much better than Lyndon Johnson could.

Charlie: Oh books. People send me books, more than I can read. And I’ve gotten so I skim a lot of them very rapidly. I’m not sure I’m the right one anymore to… Books were so important to me all my life that I find that my…I used to read fewer books and read them better than I do now. And of course, I don’t see very well. So maybe you should talk to some younger man about your books.

Question 8: My question is about your outlook for global market and economy, especially given the slowdown in the global economy, driven by Chinese economy. And also the rising geopolitical risk. So what’s your take on market and economy going forward?

Charlie: Well, I am mildly optimistic about China for a variety of reasons. Nobody has ever taken a big nation ahead as fast as China has come ahead. And I think they’ve done a lot right. So I’m a big admirer of what’s happened there. If stopped to think about it. They we’re in a Malthusian trap and they prevented 500,000 babies from being born. They did it by methods that we wouldn’t like in the United States. But I think they were doing their world a favor. And I think that what they did was admirable.

So, basically, I don’t have this hostility toward China. I really admire what the Chinese people have achieved. And I think, considering that they started as communists, their leaders are pretty good. And it’s amazing. Imagine a communist country creating this enormous period of growth and prosperity and lifting 800 million people out of poverty. I like what’s happening in China. And I think the United States ought to get along with China. And China ought to get along with the United States.

And regarding the global situation. It’s so peculiar to have negative interest rates…Oh, another thing I greatly admire is…and this will strike you as very peculiar…There’s one modern nation which has had like 25 years of stasis. How can anybody admire twenty-five years of stasis? Well I think the Japanese have handled 25 years of stasis with my magnificent skill and philosophy. Japan is not going to hell. They don’t like 25 years of stasis, but they take it like men and they aren’t bitching and wailing and they don’t act like victims. And so I really admire the way the Japanese have handled their adversity. And I don’t think the adversity came from a lot of mistakes. I think the adversity to Japan…They were an export powerhouse and up came China and Korea. Of course they had some troubles. We’d all have troubles if we had way tougher competition.

And so I think that’s my…I don’t think Japan’s stasis was Japan’s fault. I think it just happened. And I think they bear up in it magnificently well and they’re to be greatly admired. And of course, they got into this defect free manufacturing ethos in a big way and led the world in it. So I think the United States has a lot to learn from Asians. Think about how everything’s clean in Japan. You don’t see any homeless sleeping in the…defecating in the street either. Oh, I think there’s a lot to be said for Japan.

Question 9: I was hoping that you might share with us some examples of how you used disconfirming evidence to change some of your important determinedly held beliefs.

Charlie: Well of course being able to recognize when you’re wrong is a godsend. If you take…A good bit of the Munger fortune came from liquidating things that we originally purchased because we were wrong. Of course, you have to learn to change your mind when you’re wrong. And I actually work at trying to discard beliefs. And most people try and cherish whatever idiotic notion they already have because they think if it’s their notion it must be good. And I think, of course you want to be reexamining what you previously thought, particularly when disconfirming evidence comes through. And there’s hardly anything more important than being rational and objective.

Just think of all the dumb things you can do in life. Think of the brilliant people who are just utterly brilliant, who do some of the dumbest things. You won’t have any trouble thinking of examples. In fact, most of us can think about our own action in the last year or two and we can all pull up an example or two. It’s hard to be rational.

Question 10: I recently watched a documentary that introduced the economic masters, Keynes and Hayek. I would like to know your comments on both of them and which economic theory you’d prefer. And to take a step further if applied to personal goal setting, which model would you advise us to follow? Between planning and flexibility?

Charlie: Well, Keynes of course, was a very interesting man. And he probably had more influence on the economics profession than anybody, maybe excepting Adam Smith. And of course, I lived in the Great Depression. And his ideas were exactly right for fixing the Great Depression. And what happened was we got out of it finally because accidental Keynesianism came in courtesy of Adolf Hitler in World War II. So, I don’t see how you could study economics without Keynes.

Hayek is more complicated, and I don’t think I’m the world’s best understander of Hayek. I have read him. And I tend to rather admire him. But I’m not sure I totally agree with him. It’s too tough for me. Therefore, I (inaudible) to you.

Question 11: I want to ask you about Tesla. The company has a market capitalization of about $140 billion. It traded last week about $200 billion dollars in stock and traded about $500 billion in options. And the stock moved about 20 percent a day. Meanwhile, Mr. Musk seems thrilled to stoke this volatility. I wanted to know what your thoughts are on this situation and particularly what your thoughts are on Mr. Musk’s behavior.

Charlie: My thoughts are, two. I would never buy it. And I would never sell short. (laughter) I have a third comment. There’s a man known in Los Angeles for years named Howard Ahmanson, he once said something that I’ve taken to my heart. He said, “Never underestimate the man who overestimates himself.” I think Elon Musk is peculiar and he may overestimate himself, but he may not be wrong all the time.

Question 12: I have two questions. First, what do you think of the value investments in the next 50 or 100 years? And the second question is, do have any advice on the industrial research, or the industrial investments?

Charlie: Well, I don’t think I’ve got any wonderful comments to make about industrial investment. I do have the feeling that the world may change. And two changes that I think are possible are…I think they may extend life, average life duration, by fancy tricks. And I think they may reduce cancer deaths by fancy amounts. Well I think weird things may happen. (inaudible)…any of this if it happens to me.

But I think that…Think of what’s already happened in technology. Imagine the whole internet developing and whole different things. And all those old companies, all the daily newspapers dying, and total change in manufacturing processes. And there has been a lot of change and of course this caused a lot of loss to people who had owned stocks.

I do have the feeling that (what) is really important has probably already happened and it’s going to happen from this point forward. How much better can it be once you have enough to eat? (inaudible) and a few other things? What is extra money going to do for you?

So I do think that my generation had the best of all this technical change. You know, our children stop dying. Living standards have gone way up. Air conditioning came. There were a million good things that happened.  Medicine greatly improved. They could replace your achy joint when it caused agony. I don’t think we’re going to get as much improvement in the future because we’ve got it so much already.

Question 13: Earlier in the meeting you mentioned the benefits of taking the high road, treating the customers the right way, etc. There’s a sense, which may or may not be true, but there is a sense that in China there’s more moral flexibility in business, less respect for the rule of law, and less transparency than there is in the West. Do you share that concern?

Charlie: Well, I’m naturally more comfortable in my own country, with its traditions, than I am into what’s evolved out of Chinese communism. But I admire…Considering where they were, mired in this Malthusian poverty and also mired in some ignorance, and that leader who said I don’t care if the cat is black or white, I want to know if it catches mice. That was one smart leader. And I think that that smart leader of yesteryear has other leaders now who are as smart, and I think they’re going to keep improving. I even think the Chinese may get over their crazy love of gambling. I once talked to a bunch of Chinese leaders. (And I tell you, I got to Feng Shui) and I said, “Get over it.” Pure superstition.

Question 14: Any secret of longevity tips? And how many hours do you work a day? How do you stay so current with all the information as a lifelong learner?

Charlie: Well, I don’t think I deserve any credit for longevity. It just happened. There’s no male in my family that ever lived any such age. And it’s weird. Well, I can’t help you. (laughter)

Question 15: You mentioned earlier that some mental tricks have been helpful to you. One was taking the high road. The other is being perfectly rational. What other mental tricks have been helpful to you during your life? And also you touched how you’re worried about some excesses, whether it’s in venture capital, private equity, political sphere, and in government debt. What other excesses do you see in the system right now?

Charlie: I don’t think the wide use of opioids has helped us either. There’s always some miserable excess. And it’s a very complicated subject. Do you remember how the Chinese emperor got rid of opioid addiction when something like 1 male in 8, or something like that, in China was an opium addict? He didn’t have to kill very many people, he just said death penalty for users, no exceptions. And away went his addiction problem. I think somebody may try some of that stuff sooner or later if things get awful enough. It may not be the worst way to handle it. On that cheery note, I’ll go to the next question.

Question 16: I’m a father of three young children under the age of 14. And my question to you is, what would you recommend to teach children to prepare than to be successful in life?

Charlie: I think the best thing any parent can do is be a good example. Preaching doesn’t work worth a damn.

Question 17: There are over 10 trillion dollars of securities around the world with a negative yield. And by the president’s Twitter feed, it seems that he wants to bring negative interest rates to the United States. Are you for negative interest rates or against them?

Charlie: Negative interest rates make me very nervous. However, I don’t think the authorities had much choice. It’s politically impossible to do big stimulus rapidly and the only weapon they had in a crisis was to print money and change interest rates. And I think it was probably the right thing to be done. Of course it makes me nervous. And I think, having worked once, people will overdo it. And that’s the nature of governments and people. And of course, that makes me nervous. I don’t know what to do about this.

Question 18: My question is about the effects of low interest rates on insurance. Lower returns on float may be causing a tighter supply of insurance. For example, there used to be three main underwriters insuring all the taxi cabs in Southern California. Now it is heading towards just one underwriter who will have a monopoly on all commercial taxi insurance in Southern California. You have access to CEOs of Geico and Wesco and a Rolodex that we can only dream of. So do you see 10 years of low interest rates posing a systemic risk to the supply of insurance?

Charlie: I am made uncomfortable with the idea of extremely low interest rates, or negative interest rates even more extreme, lasting a long time. I don’t think anybody knows how those will work. If you are a little uneasy, welcome to the club. I think it’s dangerous and peculiar, but I think we had to do what we did. In other words, I don’t have any good solution for you. I think you’re right to be worried about it.

Question 19: Do large cap technology stocks today reflect the bubble environment of the Nifty Fifty, in that everyone is investing in the same 10 or 15 stocks?  Also, Berkshire Hathaway owns 26 percent of Kraft Foods, would it make sense to buy out Kraft Foods completely and take advantage of the low price?

Charlie: Well I don’t think I can comment about what Berkshire Hathaway might do next at what price. But Nifty Fifty is an interesting question. At the height of the Nifty Fifty craziness, which was created by the Morgan Bank of all places, you had a home sewing company that was selling for 50 times earnings. Home sowing! Great god. We are not that crazy yet. So I don’t think that…I think that a lot of what’s happened is not crazy. I think these companies are very valuable…While they may be selling at too high prices. But home sowing was sure to fail. I don’t think our leading tech companies are at all sure to fail. Well, I think it’s not nearly…The current situation is not nearly as crazy as what…The Nifty Fifty was absolute dementia.

Question 20: What advice do you give to your family that is starting careers in private equity? And what advice would you give to young people as a whole, starting careers in those sectors?

Charlie: My family is not very interested in what I think about their career choices. (laughter) And I respect their disinterest. But I do think we’ve got way too much wretched excess. Any time you’re inventing new names to sort of mislead people, like adjusted EBITDA? Think of the basic intellectual dishonesty that comes when you start talking about adjusting the EBITDA. You’re almost announcing you’re a flake. And yet our respectable people talk that way and charge fees for talking that way. It’s ridiculous.

And so I don’t like the wretched excess. I don’t like all these transactions were one private equity group sells to another and the guys who really own it are just sort of raising the fees higher and higher for owning the same intellectual mix. It says a lot that’s…Finance by its nature, the temptations are too great and it goes to wretched excess. And of course, I don’t like it. I don’t think it’s good for the country.

I would argue that the wretched excess that led to the Great Depression, which led to the rise of Hitler. I think we pay a big price eventually for wretched excess and stupidity and greed and so forth. I’m all for staying in control. In other words, I’m all for behaving a lot more like Confucius.

Question 21: Mr. Munger, it is well known that you’re an avid and voracious reader. Do you ever reread books that you’ve already read before? And if so, which books do you reread?

Charlie: Yeah, I do. Let me give you an example of something I want to reread that I haven’t re-read yet. The other day I was musing over the current situation. And it popped into my head that I had read a poem about 80 years ago by George Sand. And George Sand was a female writer, but you know, female writers to get ahead in those days sometimes used men’s names. George Sand wrote a poem and it was an ode to the goddess of poverty. She said, “Hail to the goddess of poverty! A wonderful goddess of poverty. She tills the fields, she mines the mines, and so on.” If I remember right toward the end, the goddess of poverty said, “If you try and banish me, you’ll live to want me back.” I kind of agreed with this poem and I’d like to see it again.

I don’t know how a punch notes on the internet and get George Sands poem to me. So if somebody will send me her poem, I’ll very much like it. But I’m telling you this because it’s an anecdote to our politicians who want to tell us that they’re going to abolish all poverty. It’s a stupid idea. You know, it’s like saying we’ll all be…Riches in a modern civilization are a relative thing. It’s status where we want. It isn’t that we need more means. The trouble with reaching for status is that the bottom 90 percent are always going to contain exactly 90 percent of the people, no matter how hard we work or how much we succeed. And we actually need some tough incentives in a civilization to make it work. In other words, George Sand was right. The goddess of poverty is not all bad. She’s partly good.

And of course, I like thoughts that I have that are different from everybody else. I think that a billionaire who talks about the glories of goddess of poverty, is making a contribution. (laughter) But only a bunch of nerds like you will appreciate it.

Question 22: You were an early proponent of electric vehicles, specifically your investment in BYD. I wonder if from your perspective today, other technologies like hydrogen fuel cells or others that may come to mind are equally important in terms of their emerging capabilities and what sort of impact they may have.

Charlie: Well, I think electric vehicles will be more popular than hydrogen fuel cells. Getting the sun’s energy transferred into electricity, and electricity into the vehicles is basically a good idea for the long pull. And I think all the technology is going to work. And some of it’s actually improving. We may get a lithium battery that’s actually quite safe and more energetic than those we have now.  I think that’s all to the good.

In fact, here in California…When I came to California, we had a Petroleum Club. We had wildcatters. We had a big oil industry. It was a little like Texas. I don’t think we’ve found any new oil to speak of in California in decades. I think it’s dangerous to rely on hydrocarbons for energy. Of course we’ve got to take more of it directly from the sun. I think that Texas will eventually get to be like California.

Question 23: Do you think it’s necessary for America to record a positive trade balance to keep its prosperity in the next century?

Charlie: The answer is no.

Question 24: To borrow words from another blind philosopher, John Milton, Berkshire, Costco, and Daily Journal. “Pleas’d be long choosing, and beginning late.” This question is for my five children who may be watching later, how do you nudge your kids and grandkids to hold on to their shares for as long as possible?

Charlie: I don’t think I’m a good model for you. My children seem to do pretty much what they please. I find I’m happier if I just do the best I can by my children and take the results as they fall. I wouldn’t sweat too much about whether your children hold the stock or not.

Question 25: I’m 18 right now, I’m in college and sometimes I lose interest in what I do. And your ninety-six and you’re so passionate about what you do. So what keeps you going? How do you still have the motivation?

Charlie: Well, maybe I’ve been lucky. I like what I do. I have wonderful partners and friends. I have a nice family. My problems are interesting to me. I have been a very fortunate man. And I don’t know how to make everybody else lucky. Well, I could have had a different hand and been some miserable alcoholic throwing up in the gutter. I don’t think I deserve any great credit for having stumbled into a reasonable amount of felicity. I do think that trying to be rational helped. That’s the only thing you’ve got if you’re fellow nerd. There’s no point in your...If you’re not going to be a sex object, you may have to rely on your rationality. (laughter)

Question 26: There’s a lot of talk these days about the climate and the environment and funds divesting fossil fuels and in countries trying to figure out how to generate electricity without polluting the environment. Could you give us your thoughts on nuclear power? I know Bill Gates has been a pretty vocal supporter of it. And I read that Warren used to invest in uranium back in the 50’s. And he more recently helped to fund a uranium bank in Central Asia. So if you had any comments on that as well.

Charlie: Well, I admire Bill Gates, who feels a duty to throw money at stuff that’s unpopular elsewhere, and that might possibly work. Oh, I think it’s an admirable charitable effort by Bill Gates and one for which he’s very well suited. I don’t know whether we’re going to get safe little atom plants or something. But I think it’s certainly worth thinking about. Problem with it of courts is that, how much additional (nuclear) material do you want a bunch of crazy humans to have? I don’t know the answer to that question.

And regarding energy, of course we’re going to have to get more directly from the sun and so forth. And I think it’s all to the good that everybody’s going into that in a big way. By the way, I would be in favor…if there were no global warming problem…I’d be in favor of substituting… getting power directly from the sun for fossil fuels starting today, even if we didn’t have a global warming problem. I think it’s a good idea to conserve the hydrocarbons and use more solar energy. That is, by the way, not the normal attitude of other people. But I’m right and they’re all wrong. (laughter)

Question 27: My question is on a universal basic income. So it is a government’s whole public program for a periodic payment delivered to everyone without any work requirement. So I’m just curious about your opinion plan like this.

Charlie: Well, if you did enough of it, you’d totally ruin everything. A little of it, we can afford. What the exact mix is? We’ll be determining through the political process forever.

Question 28: You talk frequently about having the moral imperative to be rational. And yet as humans, we’re constantly carrying this evolutionary baggage which gets in the way of us thinking rationally. Are there any tools or behaviors you embrace to facilitate your rational thinking?

Charlie: The answer is, of course. I hardly do anything else. One of my favorite tricks is the inversion process. I’ll give you an example. When I was a meteorologist in World War II. They told me how to draw weather maps and predict the weather. But what I was actually doing is clearing pilots to take flights.

I just reverse the problem. I inverted. I said, “Suppose I wanted to kill a lot of pilots, what would be the easy way to do it?” And I soon concluded that the only easy way to do it, would be to get the planes into icing the planes couldn’t handle. Or to get the pilot to a place where he’d run out of fuel before he could safely land. So I made up my mind that I was going to stay miles away from killing pilots. By either icing or getting him into (inaudible) conditions when they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.

And if somebody hired me to fix India, I would immediately say, “What could I do if I really want to hurt India?” And I’d figure out all the things that could most easily hurt India and then I’d figure out how to avoid them. Now you’d say it’s the same thing, it’s just in reverse. But it works better to frequently invert the problem. If you’re a meteorologist, it really helps if you really know how to avoid something which is the only thing that’s going to kill your pilot. And you can help India best, if you understand what will really hurt India the easiest and worst.

Algebra works the same way. Every great algebraist inverts all the time because the problems are solved easier. Human beings should do the same thing in the ordinary walks of life. Just constantly invert. You don’t think of what you want. You think what you want to avoid. Or when you’re thinking what you want to avoid, you also think about what you want. And you just go back and forth all the time.

Peter Kaufman, who is here today, he likes the idea that you want to know how the world looks from the top looking down and you want to know what it looks like from the bottom looking up. And if you don’t have both points of view, your reality recognition is lousy. Peter’s right. And an inversion is the same thing. Just such a simple trick to think, “How does this look from the people above me? How does it look from the people beneath me? How can I hurt these people I’m trying to help?” All these things help you think it through. And they’re such simple tricks. Like the lever, they really help. And yet our great educational systems that give out advanced degrees, they don’t teach people these simple tricks. They’re wrong. They’re just plain wrong.

Question 29: If you were researching a new company that you’ve never heard of, how would you approach the research process? How much time would you spend if you performed an intrinsic value estimate and the company was expensive, would you still continue following the company closely and researching it? Or do you kind of try to get to a valuation pretty quickly, and if it’s if it’s not cheap kind of move on? How do you balance the time you spend on companies?

Charlie: Well, of course if it’s complicated technologically I tend to leave it to others. I may make an occasional variation on that, but basically, I just don’t do it. I want to think about things where I have an advantage over other people. I don’t want to play a game where the other people have an advantage over me.

So if you have a pharmaceutical company and you’re trying to guess what new drug is going to be invented, I’ve got no advantage. Other people are better at that than I am. So I don’t play in a game where the other people are wise and I’m stupid. I look for a place where I’m wise and they’re stupid. And believe me, it works better.

God bless our stupid competitors, they make us rich. You know, that’s my philosophy. And I think you have to know the edge of your own competency. You have to kind of know, ‘This is too tough for me. I’ll never figure this out.’ I’m very good at knowing when I can’t handle something.

Question 30: My question is about electric vehicles and BYD. Why are electric vehicles sales at BYD down 50 to 70 percent while Tesla is growing 50 percent? And what’s the future hold for BYD?

Charlie: Well, I’m not sure I’m the world’s greatest expert on the future of electric vehicles, except I think they’re coming generally and somebody’s going to make them. BYD’s vehicle sales went down because the Chinese reduce the incentives they were giving to the buyers of electric cars. And Telsa’s sales went up because Elon has convinced people that he can cure cancer. (laughter)

Question 31: One of the more surprising opinions I’ve heard this year is that we never really had journalistic ethics, that the news has always been colored yellow with the voice of their proprietors. With nine decades of observation under your belt, does that ring true? Or does the recent business models shift from subscriptions towards…

Charlie: No, I think those old proprietors, the people that owned the networked news and Time magazine, and Newsweek, and the Monopoly newspapers, I think those people were pretty good and this current bunch are deliberately lying because it sells better. Oh, I like the old products of nepotism and monopoly. They were better for us than these new guys.

These guys are so good at marshaling hatreds. You know, politics was once called by some famous English politician ‘the art of marshaling hatreds’. We now have news outlets that we all follow and they’re good at marshaling hatreds. Now some hatred may have some constructive use, but they’re overdoing it. The hatred is too intense, it’s cabbaging up the minds. Pretty cabbaged up the minds of the broadcasters, and now it’s cabbaging up the people who watch.

Question 32: There’s this common sentiment that technology is both accelerating the pace of change and its impact is broadening across most industries, usurping traditional moats. So given your long career, I’m wondering, do you think the traditionally ‘moaty’ industries are being undermined at a pace that’s different from what’s been happening in the past?

Charlie: Yeah, I think the moats of have been breached time after time after time. Imagine the Eastman Chemical Company going broke. Imagine all these great department stores being on the edge of extinction. Imagine all those monopoly newspapers going down. Look at the strength of the American auto industry now compared to what it was, say in 1950. Oh, I think the moats are disappearing rapidly. I mean, the old classical moats. I think that’s probably a natural part of the modern economic system is that old moats stopped working. Let me know what your problem is and I’ll try and make it more difficult for you.

Question 33: I’m a current undergraduate student. What would you say is the best possible way for someone to expose themselves and expand their understanding of working in the business world, without actually currently being involved in it? And how can I maximize my potential value to a corporation in the future by what I do right now?

Charlie: Well, that’s a good question. There’s so many of you now who want to be rich by going into finance. And of course, that multitude is not going to all get rich. And of course, 99 percent will be in the bottom 99 percent. That’s just the way it’s going to work.

I look at the people in my generation who were the nerds who were patient and rational, eventually did well, who lived within their income and worked at being sensible and when they saw an opportunity, grabbed it pretty fiercely and so forth. And I think that’ll work for the new nerds of the world. The people who get ahead because they’re star salesmen or charismatic personalities, I’m not one of those, so I don’t know how to do that. So if you’re not a nerd, I can’t help you. And I think that the odds are that most people who try and do finance are not going to succeed.

And there’s a lot of wretched excess in it because easy money will always attract wretched excess. It’s just the nature. It’s like a bunch of animals feeding on a carcass in Africa. By the way that’s (inaudible) I chose on purpose. But so, I don’t think it’s so pretty. And I don’t think that modern finance is so wonderful. And in my day a lot of the finance were more like engineers. They were so chastened by the Great Depression and all the wretched failure that they really tried to make everything super safe. It was a very different plodding place. The people weren’t trying to get rich they were trying to be safe. This modern world is radically different. I’m not sure if I were starting out in your world how well I would do. It would be a lot harder than it was to get ahead in the world the way it was when I came up.

If I were you my best (advice), I think you’ll be happier if you reduce your expectations than if you try and satisfy them. And by the way, I think that’s generally a very good idea. It sounds silly, but it’s so obvious. You think of how many of us are fairly content with pretty moderate success. That is worth knowing because that’s what most of us are going to get.

Question 34: What are your thoughts on the errors in engineering and business generally at Boeing? And how you’ve been thinking about that as that’s unfolded recently?

Charlie: Well, I don’t like to jump on Boeing.  Boeing is a great company that had one of the great success rates…great safety records of the world. They lost their way. They made some dumb mistakes. And I think that’s almost the nature of things too when you try and do something very complicated with hundreds of thousands of people. That occasionally there may well be a slip up.

In most places, if you actually look at them, they have some near misses. Boeing had a near miss a few years ago when the rudder stuff failed and they had a few crashes. I was on the safety committee at U.S. Air when that happened and nobody could figure it out for months. Something in the rudder was not working and it caused three crashes. It took them six months or so to figure it out. And they must put an army on it. Well they survived that one and they’ll no doubt survive this one. But, it’s really expensive to make a big safety mistake. And of course, they should be avoided.

Question 35: I have two questions.  The first is, it’s been a while since you’ve had the psychology of human misjudgment as a talk. And I was wondering if there are any additions you would have, that you’ve seen more recently? And the second part is, you’ve mentioned how important being rational is throughout your life. Can you walk us through what steps we can take to become more rational?

Charlie: Well, it’s a long process. I don’t think anybody just flashes into it. It’s not like somebody who tells you all you’ve got to do is run down to the front of the revival meeting and shout out and you get a wonderful here after. Rationality is something you get slowly and it has a variable result. But it’s better than not having it. No, I just think that…you can just see how awful it is when people get into these furies of resentment and anger, and sure they’re right about everything. It’s hard to know exactly how human civilization ought to be organized.

In my own life, I’ve often reflected about how well the system has worked. What I concluded was that the social safety net is…it’s just come up enormously as the world has gotten more prosperous. That was a very desirable thing. And that the Republicans who always opposed it were wrong. And I’ve also…the Democrats that always wanted to push the safety net too far ahead, as they did for a while with the welfare program, that was also wrong. And that, by and large, what we have is about right. We wouldn’t have got it from either party alone. If either party had been totally in control in a one-party government, we wouldn’t have had the result that we had, which is close to right.

I think power does corrupt. I think too much power…Part of the genius of the American system is, is no one person gets too much power. If either party had all the power, I don’t think American civilization would’ve work as well as it has with this ebb and flow. And I don’t know what the exact right safety net is. I don’t think it matters that much. I think the United States would be about as happy if it had five percent more, or five percent less safety net.

Question 36: One of my favorite lines from your book is, ‘It’s better to be roughly right than precisely wrong.’…

Charlie: That comes from Keynes.

Question 36 continued: Could you elaborate a little bit on the Project Haven? What are you doing to improve health care, lower the cost, improve quality and access?

Charlie: Well, that’s a very interesting subject. If you take American health care, in many ways it’s the best in the whole world. We have more brains in our medical schools and our pharmaceutical companies than the rest of the world has per capita. In fact, we may have as much brains as all the rest of the world together.

On the other hand, if you actually went into American medicine, hospitals, doctor’s offices, or… You would find a huge amount of totally counterproductive, unnecessary activity that costs a lot and does no good or actually does harm. And you’d find that some people are not doing that. Or they don’t have the incentives to make money by doing it. You don’t get a lot of counterproductive medical care. Kaiser here in California does not do a lot of unnecessary stupid medical care, or prolonged death to make more money and do all the evil things that other people do. Other people, as hospitals and doctors get under pressure, introduce a lot of waste and folly. And some of the pharmaceutical companies, behavior is totally outrageous. They have some basic diabetes drugs and it’s trying to charge some woman ten thousand a month or something, it’s ridiculous. And I even go further. I think it’s evil.

And I think that the system should be changed. And I think it will be changed. I think there’s too much wretched excess in the medical system, and the really sad part of it is, the people who are doing it have no conscious malevolence. They’re not people who decide to do murders and maimings to make money. They think it’s good for the patients, what they’re doing. And of course, you go to do an unnecessary back operation on somebody, it’s a major evil. But the guy that’s doing it really thinks it’s good for the patient. In other words, he’s turned his brain into cabbage. And that’s not a good thing.

I think you have to change the incentives. I think there are places in America that are very admirable that don’t do a lot of unnecessary stuff and other places that do. And I think we’re going to have to change the system. If you take the medical system of Singapore, it costs 20 percent of what ours costs and it has better statistics. And it’s not opaque, it’s open. We have a whole industry that tries to make the payment things opaque so they can take advantage of people. And they think it’s free enterprise. I think it’s stealing.

Question 37: I’ve been working in the financial services industry for the past five years, and one of the things that has surprised me is how many of my peers in the industry have sat out the market over the last five years. Holding cash in anticipation of a market downturn. And, you know, I would think, given that we’re in our late 20s and we’ve accumulated savings and have what’s hopefully a multi-decade runway ahead of us, the right thing to do would be to start investing now. And my question is, first, do you agree with this assessment? And if so, how would you convince your friends to start investing?

Charlie: Well, it’s obvious that deferred gratifiers do better over the long pull than these impulsive children that have to spend money on Rolex watches and other folly. And not that I’m picking Rolex is any worse than Patek Philippe or something. But I think everybody should…save and not be stupid at spending money and defer gratification to get more later. All those good things that we were taught, you know, by Benjamin Franklin, thrift and so forth.

And the odd thing about it is that people were kind of born deferred gratifiers or not. They’ve done recent psychological work on that subject. Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. (laughter) But if you have a slight tendency to defer gratification, and you can feed that tendency, you’re on the way to prosperity and happiness. It’s that demand for immediate gratification, that’s the way to ruin. It may also give you a syphilis. (laughter)

They have a saying in vaudeville, ‘Give him the hook.’ My (friend) Guerin is just giving me the hook. You know, I’m an accidental guru. We didn’t set out to have an audience of people coming in and asking me questions about every damn subject in the world. It just kind of happened by accident and I went along with it because I think it did more good than harm and I kind of enjoy it as long as I don’t have to do it too often. But I feel sorry for people who have adulating multitudes. And I also wouldn’t like a normal multitude, I love these nerds.

Question 38: I wanted to go back to Singapore and ask you a question involving Lee Kuan Yew, particularly his housing policies. I’m curious how you think California should address the insane costs of construction, new development right now, and how you would try to create housing in California that would be affordable across all socio economic areas to avoid kind of the social evils that Lee Kuan Yew has managed to avoid back in Singapore.

Charlie: Well, that’s like asking some ordinary klutz, who’s drunk, if he can’t come up with something like Albert Einstein. It’s just too much. Lee Kuan Yew is the best nation builder that probably ever existed. And what he accomplished in Singapore considering what he started with, it was a miracle. And of course, I don’t know how to create that everywhere. I’m not sure Lee Kuan Yew could have done it if he didn’t have a bunch of fellow Chinese there. I’m not sure that any other ethnic group would have done it.

I think he had a very…it looked like a terrible hand. And by the way, there’s an interesting story there. He needed an army when he first took over and nobody would help him. And only one nation in the whole world would help him and that was Israel. And he said, “How can I accept? I’m surrounded by Muslims who hate me. How can I accept military advice from Israel?” And he finally figured it out. He accepted the help and he told everybody they were Mexicans. (laughter)

Well with that little joke we’ll end the meeting.

End of Transcript

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Links to additional Transcripts:

• Peter Kaufman on The Multidisciplinary Approach to Thinking: Transcript
• Daily Journal Annual Meetings: 2016, 2017, 2018, 2019, 2020, 2021
• 2017 Fireside Chat with Charlie Munger
• Charlie Munger: Full Transcript of Caltech Zoom Talk, Dec. 2020
• Li Lu: Value Investing in China, Full Transcript

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