Charlie Munger's 3 Categories of Investment: In, Out & Too Tough

32. DJCO Annual Meeting 2016 – Part V: Lesson 19-25

Lesson 19: Family Is More Important Than Wealth & Prominence

Question: Do you think a person who can’t make money running a New Jersey casino is qualified to be President of the United States?

Answer: Well, he did make money for quite a while.  My attitude is that anybody who makes his living running a casino is not morally qualified to be President of the United States.  I regard it as a very dirty way to make money.

Question: What has given you the greatest sense of accomplishment?

Answer: Well, my family life has been more important to me than wealth or prominence.  On the other hand, I hated poverty and obscurity. (laughter) I tried to get out of them and it has given me some satisfaction that I came a long way from where I’ve started.  I think most people who’ve come a long way from where they’ve started feel pretty good about it.  I think most the people who’ve finally sat atop of Everest, even though they’ll only stay there for 15 seconds…  And so, I think that’s good.  Cicero use to say that ‘one way to be happy in old age is to remember a lot of achievements in your past.’  Now some people say that’s too damn self-centered and you should be thinking about God or something, but I agree with Cicero.  It’s ok to live that kind of a life if you’re kind of pleased with it when you’re old and look back.

Lesson 20: Go For Old Fashion Morality: Good Behavior, Dependability, Discipline, A Little Generosity

Lesson 21: “If you can keep your head when all about you are losing theirs…”.  “Be a Man my son!” Quoting Kipling

Question: If you had any advice to give to a younger version of yourself, what would it be?

Answer: Well my advice is always so trite.  The good behavior, being dependable, and morality.  It makes your life easier.  It makes it work better.  You don’t have to remember your lies which gets complicated if you keep lying all of the time.  In fact, it gets so complicated that you’re sure to fall off and you’ll be recognized as a liar.  So, I think all the old fashioned morality works.  The old fashioned discipline works.  The old fashioned good behavior and a little generosity.

We all know people who have people come to their funeral just to make sure they’re dead.  (laughter)  You don’t want to be in that crowd.  You want to live your life so that some people will actually miss you when you’re gone.

I think Kiplings’s ‘if’, is a great poetry.  Kiplings doesn’t exist in the modern college anymore.  It wasn’t politically correct.  So I think Kiplings’s “if” is great poetry and it’s great advice.  “If you can keep your head when all about you are losing theirs”.  What’s wrong with that?  And the quote, “Be a Man my son!”  Why don’t you want to be a man?  You want to be some idiot child all your life?  Some angry twit?  There’s so many of them already.  There’s so much to be gained by never being an angry twit.  In fact I think anger is just…If you want to be philosophical, this political situation we all face now, of course it’s disgraceful, a lot of these people.  I mean, it’s bad that a leading civilization has candidates for a high office many of them like those we were talking about.  And they’re not all in one party.  You don’t want to get angry.  After all, politicians have been politicians for a long, long, time.  And, you want to operate constructively?  Vote constructively.

Anger.  There’s so much anger in politics right now.  So much automatic hatred.  How could any of us really know whether the United States will be better 50 years from now because we vote Republican or vote Democrat in the next election?  Who can tell what the exact mix is between compassion and something else?

All of those things were in the old behavior rules.  By the way, the Muslim behavior rules read a lot like the Old Testament.  Which of course they copied.  They claim they came directly from God, but really they stole them from the Jews.

Lesson 22: There’s A (sic: generally inverse) Relationship Between Oil Prices and Economic Growth. If you think this is a tough question, Charlie Munger can make it tougher.

Question: What is the relationship between oil prices and economic growth?

Answer: I think it’s obvious that if oil had been a little cheaper and easier, the growth would have been greater than mankind had.  In that sense, if oil gets very expensive and we still need it desperately, it  will make life harder, and so there is that correlation between oil prices and economic growth.

On the other hand, some very peculiar things happen.  When you take Exxon and Chevron and so forth.  What’s happened to make those things good investments over the long term, is the damn price of oil went up faster than their production went down.  Now name me another business where you get richer and richer where your production of real units, keep going down, down, down.  So, not everybody would have predicted that in advance including most of the economists.  It’s a complicated subject…

And there’s another trick to it.  People who really have a lot of free energy, like the people of the middle east?  They have very dysfunctional economies.  They’re (like) a bunch of rich people spending their capital and not knowing how to do anything that anybody else wants to buy.  Maybe in that sense, having a tougher hand has been good for us.

My answer to your question reminds me of what my old Harvard Law professor who use to say to me, “Charlie, let me know what your problem is and I’ll try and make it harder for you.”  I’m afraid that’s what I’ve done for you.

Question 23: In Choosing What You Want To Do: You Want To Be In A Place Where You Are Stressed (in terms of cognitive ability etc). So, If You Are Not Good At Boxing and You Want To Box With Mike Tyson, You Are Being Stressed At The Wrong Place.

Question: How do you understand a new business or new industry that you are trying to get into where the dynamics are different?  How do you get deep insights into the specific domain?

Answer: The answer is barely.  I just barely have enough cognitive ability to do what I do.  And that’s because the world promoted me to the place where I’m stressed.  And if you’re lucky, that will happen to you.  That’s where you want to end up is stressed.  You want to have your full powers called for.  And believe you me, I’ve had that happen to me all my life.  I’ve just barely been able to think through the right answer time after time after time.  And sometimes I’ve failed.

Lesson 24: Avoid Bad Morals, Bad Policies

Question: Last year, you had some very pointed comments concerning Valeant, and I want to know, do you have…

Answer: It’s caused me nothing but trouble. (laughter)

Question: Do you have any update regarding Valeant?  Do you have any areas where you have similar concerns?

Answer: It probably wasn’t wise for me to inject myself, I have no dog in that hunt.  I have no interest in the pharmaceutical business.  I have no interest in Valeant.  It’s just that you people have come so far…(laughter)…to tell you amusing stories about life and make comments about current affairs.  And Valeant was such an extreme example of misbehavior.

It ended up with one of the Valeant shareholders saying that Warren Buffett was a sinner because he owned Coca-Cola.  I drew retaliation to Warren.  By the way, that’s a good place, if you’re anybody that’s mad at me today, why (not get) mad at Warren?  He can handle it, he’s a very philosophical man.

It is true that these crazy false values, and these crazy excess, is, it’s bad morals and it’s bad policy.  It’s bad for the Nation.   It’s just bad, bad, bad.  And there’s a lot of it.  And of course there’s a lot of it is in American Finance…   The truth of the matter is that Elizabeth Warren would not agree with me on many subjects and I wouldn’t agree with her on many subjects, but she is basically right when she says that American finance is out of control and has too much evil and folly.  And it isn’t good for the rest of us.  Both Elizabeth Warren and Bernie Sanders, not two of my favorite people on earth, are absolutely right on that subject.  And the extent that you all see it.  You all see what all goes on in finance with the craziness…It’s very bad for all of us that we have this huge overdevelopment of finance.  And yet, it’s pretty hard to do anything about it.

What happened was, you look back to say Edwardian England, or a little before.  And maybe 300 people owned half the land in England and they had nothing to do.  What did they do?  They went into the clubs of London and they sat around the card tables and they played (card games) for high stakes.  And that’s what human nature does when people have a lot of leisure and so on.

Fade in, fade out, and multiply the wealth per capita of the world by 30 or so and now we got all kinds of people who are like the Lords of England who had all that time to sit around and play cards against one another and enjoy thrills and games of gambling.

We have a vast gambling culture and people have made it respectable.  Instead of betting on horses or prize fights, they bet on the price of securities, or the price of derivates relating to securities.  Of course you can bet on athletic contests.  We have a huge amount of legalized gambling.  And of course the public market that operates every day with transactions is an ideal casino.  And there’s a whole bunch of people who want to own the casino and make a lot of money without losing money on inventories or credit risks, or any other irritating parts of business.  Just to sit there and have every night gold go higher and higher.  Who doesn’t want to be croupier at a casino?  And very respectable people get drawn into it if they see other people getting rich at it.  There’s way too much of that in America.  And too much of the new wealth has gone to people who either own the casino or they’re good at playing others in the casino.  And I don’t think the exhalation of that group has been good for (the public generally).

And I am to some extent a member of that group… and I’m always afraid that I’ll be a terrible example for the youth that I think will just want to make a lot of money with soft white hands and not do much for anybody else, I just wanted to be shrewd in buying little pieces of paper.  Even if you do that honestly, I don’t consider it very much of a life.  Just being shrewd about buying little pieces of paper, shrewder than other people, is not an adequate life.  It’s not a good example to other people.  And it’s the reason that people like Warren and me (are charitable and are) running businesses.  We’re not just buying little pieces of paper.

So I think that we have something going in our nation that is really very serious and very bad.  And I hate to agree with Elizabeth Warren on this subject, but she’s right.  I don’t see a way of stopping it except with some big legislation changes.

And you’ll say, “What difference does it make?”  Well, what happens is, as the cyclicality of the gambling with securities and other assets goes on, what happens is, the big busts hurt us more than the big booms help us.  And we say that when the great depression ended and the rise of Adolf Hitler.  A lot of people think that Hitler rose because of the great Weimar inflation.  But you know Germany recovered pretty well from Weimar inflation.  What they did is they destroyed the currency.  They just issued a new currency.  It’s really interesting.  They said, (‘oh people who got rid of their old mortgages we’ll replace them with new mortgages and they’ll owe us the new currency back.’)  But what really enabled Hitler to rise was the Great Depression.  You put it on top of the Weimar inflation the Great Depression and the people were just so demoralized that they were subject to being snookered by a guttersnipe like Adolf Hitler.  So I think this stuff is deadly serious in that these crazy booms should be (nipped in the bud)…  People like Alan Greenspan, he’s an amiable man but he was an idiot! (laughter)

You do not make the head of the Federal Reserve, the governor of all banking, somebody whose hero is Ayn Rand!  Who believed in no government at all!  It’s a very unlikely place to look for correct decision making.  And it’s probably not the kind of decision making that we observe.  I think he’s an honest and amiable man, but of course he didn’t see reality the way that it was.  A lot of people think that if an ax murder happens in the free market that it has to be all right because free markets are all right.  A lot of those people are in my party by the way.

Question: Is the Automobile Industry meaningfully different today than it was (10) years ago? Does GM make sense in the Berkshire portfolio?

Answer: The second one is easy.  General Motors is in our Berkshire portfolio because one of our young men likes it.  And Warren lets the young men do as they please.  Warren, when he was a young man, didn’t want any old man telling him what to do.  So he delivers that kind of freedom to his young men.

I haven’t got the faintest idea of why that young man likes GM.  It is true that it’s statistically cheap and it may be affected by the federal government in the end.  So it may be a very good investment.  But the auto industry is about as brutally competitive an industry now as I have ever seen it.  Everybody knows how to make good cars.  Everybody.  And they rely on the same suppliers.  And the cars last a long time with very little service.  And everybody leases them at cheap rents, and has all kind of incentives.  It has all of the earmarks of a very commoditized, difficult, super competitive market.  So I don’t think the auto industry is going to be a terribly easy place.  And it may actually shrink one of these days.  In other words, the culture of everybody having three or four cars could actually shrink.  And so, I think that the auto industry is not a cinch.  If I were investing in the auto industry, I’d want some place that I thought was way the hell better competitor than the others, and that’s hard to find.

Lesson 25: If You Did Not Predict The Recent Low Oil Prices, You Are In Good Company: Neither Did Our Teacher Charlie Munger. In Commodities, You Can Get Extreme High Prices and Extreme Low Prices

Question: For most of the oil market’s history there’s been some entity enforcing production controls.  But today Saudi Arabia (operates) more as a base load producer than controlling OPEC’s production.  Would you suspect that this will result in protracted negative impact on the economics of all those related to oil production?  Or is the way to bet that some entity will eventually re-emerge for production control.

Answer:  I would not have predicted that oil would be at its present price.  In fact, if you forced me to bet, I would have bet that what has happened wouldn’t have happened.  But it did.  I think that it’s generally true that with these commodities you can get periods of extreme high prices, like we had in iron ore, and extreme low prices, like we now have with iron ore.  So I think that commodities do strange things both up and down in terms of prices.  And of course they have macroeconomic consequences.  And huge consequences if you’re in Australia having these commodities going way down is terrible.  If you’re in the tar sands area of Canada having oil prices go down to where they are now…I don’t even know how economic it is to produce tar sands oil at $30 per barrel.  My guess is that it’s not very attractive.  And it may not work at all.  You’re in a weird period.

But I think it’s the nature of the human condition that with free markets in stuff like iron ore and oil, you’re going to have weird periods high prices and weird periods of low prices.  I’ve never been able to predict accurately, or make money predicting accurately those swings.  We’ve tended to get into good businesses and then take the bumps as they fall.