Investment Wisdom

89. Wesco 2007: Let’s Learn Some More- Part 7- Points 37-42

Point 37. Envy and Imitation Will Lead To Flood Of Money and Disaster

Risk of a Hedge Fund Blowup

There will be some repeat of Long Term Capital Management in some place – you can count on that. There’s a lot of real brainpower at a lot of these firms and some are making a lot of money by being very shrewd. The problem is envy and imitation. The result will be like what happened with early stage venture capital in Silicon Valley. Envy will lead to a flood of money and then a disaster.

Point 38. You do not want to have a margin account at a dubious firm. Also not 100% of assets at even the strongest financial firm.

Should One Be Worried About Having Cash in a Brokerage Account?

I think a cash account at the really strong brokerages is safe enough. You have other better things to worry about. As for margin accounts, with hedge funds using leverage, there will be troubles there. You’ll notice there’s an uproar at Refco. You do not want to have a margin account at a dubious firm. And personally, I wouldn’t want 100% of my assets in a brokerage account at even the strongest financial firm in America. Margin debt I’d be very goosy about right now.

Point 39. Rationality will save you from a lot but not from everything. Character & Rationality Is The Way To Play The Game.

How Fearful Should We Be About a Major Meltdown?

Every period is weird in its own way, but this period is extra weird. I could add the twin deficits to what I said earlier [about the things that worry me]. Yet economy is [rolling along]. I think it’s almost always a mistake to think that a great civilization can’t take some more [bad behavior]. I have friends who are building bomb shelters and the like [which is going overboard in my opinion]. I’m all for being reasonably cautious, like John Arrillaga [who Munger discussed in his opening remarks]. I haven’t had any debt for a long, long time. Neither has Warren – not any significant debt anyway; maybe a blip.

But I think the rationality you’re talking about is pretty sure to work. It won’t save you from a terrible accident or the death of a child, but character and rationality will save you from a lot. It’s all about not trying to get the extra zero on your portfolio’s total value when you die. It’s playing the game all the way through with both character and rationality. It doesn’t do any good to [have good motives?] if you’re a horse’s ass [?]. [Laughter]

Point 40. The only thing that will change corporate directors’ behavior is if they look ridiculous in the press.

COMMENTS ON BUSINESS AND ECONOMIC MATTERS

Backdating Stock Options

I think backdating stock options is embezzlement. I would argue that if it happened, it was criminal. But I would bet that the people who did it think it was god’s work. [They probably said to themselves:] “If options are great, then this must be even greater!” I’ll bet there’s no sense they did anything wrong. It’s hard to believe that the human mind can play such ghastly tricks.

How to Change Corporate Directors’ Behavior

The only thing that will change corporate directors’ behavior is if they look ridiculous in the press. Otherwise the CEO could be an ax murderer. [Laughter]

Is Home Depot’s CEO [Bob Nardelli] Being Paid Too Much in Light of the Company’s Stock Decline Since He’s Been CEO?

Generally I don’t think management should be blamed if the stock market goes crazy for a certain period of time. If it went up 35 times earning and then declined to 25 times earnings, how is that the CEO’s fault? Lou Simpson bought that stock and I don’t think he’ll want to comments on the situation at Home Depot. I’m not in a position to judge if the CEO’s compensation is reasonable or not, but I wouldn’t be surprised if it was.

Corporate Compensation

I don’t know how we’re going to fix corporate compensation. To have the CEO rewarded in a way that’s so extreme [is terrible].

Point 41. I think future generations will curse us for using hydrocarbons for our cars when they need them to grow food to eat.

Future Oil Prices

I think eventually the price will be higher than it is now, but what will happen in the meantime I don’t know. I’m not an expert on the price of oil, but I think it will get harder to extract hydrocarbons and demand for them will go up.

I think future generations will curse us for using hydrocarbons for our cars when they need them to grow food to eat.

Point 42. Some guy can develop a lot of algorithms and can outwit the other guys’ algorithms.

Views on Naked Shorting

One of the nice things about being an old man in a secure place is that I don’t have to think about many things and naked shorting is one of them. My jihad calendar is full enough. [Laughter] I’m sorry, that’s all I have to say.

http://www.valuewalk.com/wp-content/uploads/2014/05/Charlie-Munger-2005-2013-minus-Harvard-Westlake.pdf

Notes from 2007 Wesco Financial Annual Meeting – By Whitney Tilson