Excellent Book: Charlie Munger For All Seasons
2008 Wesco Annual Meeting – Notes cour
tesy of Peter Boodell
http://valueinvestingresource.blogspot.com/2008/05/2008-wesco-shareholder-meetingdetailed.html
Tutelage 13. Mark Twain said that truth is stranger than fiction because fiction has to make sense.
Complicated systems – the high priests usually don’t understand it either. The system just goes out of control. Now we have government guaranteeing credit and then letting investment banks do what they want — it is a very foolish system. They ought to have behavioral standards. They feel entitled, and that is not what they should feel with privilege of Federal Reserve backing. At Berkshire, we are ridiculously conservative.
Even our reserves have reserves. We don’t have to renew our credit every Monday morning. We behave in way that we never need to renew our credit, and we still don’t need the money.
There have been comments on derivative trades we have done. If other people shouldn’t be doing it, why are we? Other people pay us money because people know we don’t have clearance risk, we are not at whim of other parties. It is a very different kind of a trade.
The only reason we can make those trades is because there aren’t many out there who others would trust to make those trades. If you ask me, would I give up all of the opportunities of derivative trading to go back to a simpler cleaner world like engineering of yore–I would do it in a heartbeat. But what we have seen in mortgage market is only an aperitif to what we would see, in a system with bad rules and incentives. Especially with the appetites of males – women wouldn’t get us into this mess. In a soccer game, if there were no rules, people would destroy the body of the person on the other side. That is what referee is for. So we need referees to tell boyish adults not to hurt others. I don’t make this stuff up. Mark Twain said that truth is stranger than fiction because fiction has to make sense.
Tutelage 14. We get calls from people who trust us, and who don’t trust anyone else. We don’t get many calls like that, but how many of you get any?
Some people call you people cultists, but most here are people who want to learn. It is a very good thing to be in this world. I think we are accidently creating something which is a learning institution, which may work that way for a long time. I don’t think Berkshire will perish when Warren dies. I had lunch with two Berkshire executives, and my heavenly days, those two guys are likely to make that business one of best in the world.
How could there be a business like that buried in a place like Berkshire? There are very good things in this place. With reputation, comes duty. We should try to earn it. And run it in a way that people who succeed us do the same thing. That is what we are trying to do. Warren will never spend any of the money. He has never given a way a dime he needed. He deserves no credit as a philanthropist. I think we are part of something quite interesting and worth following. We get calls from people who trust us, and who don’t trust anyone else. We don’t get many calls like that, but how many of you get any?
I have rambled on. Academic response to Berkshire has been pathetic. It is soft science with enviable formulas. So you had to program a computer to buy only highly volatile stocks in order to make 7% per annum more? But if true, computers would do it. I don’t know why people pay attention to those ideas. Down boy, they say, you just don’t understand modern finance. And these are grown up people. One man, to whom they gave the Nobel, he kept saying Berkshire just lucky. A six sigma event – he wasn’t going to change his theory on the facts available. Business is simple, the details are hard. You need mementoes in place to help you in daily fight.
Tutelage 15. A General in England said, ‘Get you the sons your fathers got, and God will save the Queen.’ [In other words, for managers, if given a business moat, maintain or widen it.]
The only duty of corporate executive is to widen the moat. We must make it wider. Every day is to widen the moat. We gave you a competitive advantage, and you must leave us the moat. There are times when it is too tough. But duty should be to widen the moat. I can see instance after instance where that isn’t what people do in business. One must keep their eye on ball of widening the moat, to be a steward of the competitive advantage that came to you. A General in England said, ‘Get you the sons your fathers got, and God will save the Queen.’ At Hewlett Packard, your responsibility is to train and deliver a subordinate who can succeed you. It is not all that complicated – all that mumbo jumbo.
We make bricks in Texas which use the same process as in Mesopotamia. You need just a few bits of ethos, and particularly engineering ethos. Think through the system, and get a margin of safety. Like this backup microphone.
Tutelage 16. Derivatives: Needless complexity and very perverse incentives lead to collapse and big mess.
Q1: Thank you Charlie. Financial risk transfers – 500trillion notional value. Sort of like Lilly Toms – things will get worse before they get worse. How does this all unwind?
When the Chinese A-shares went utterly crazy, you could predict this has to collapse. When mortgage excesses got crazy on slicing and dicing by scummy hucksters, it was similar. Derivatives trading books however are not similar. It has no automatic collapse surely to come. Some day it will be a mess, but I don’t know when. The mess that would have been if Bear Stearns went under would have been awesome. In CDS, assume $100mil bond issue, and they allow issuance of $100b notional contracts. You have huge incentive for company to go broke. You are not allowed to buy insurance on other people, unrelated parties. There is no reason in America to have vast bets on $100m bond issue to which no one is party. It creates needless complexity and very perverse incentives. They say “it’s a free market”. The correct adjective is insane.
Q2: Mark from Auz. Last year I was concerned about solvency in banks. I had stocks sent to me in scrip form. Is it now safe to let large corporations hold our stock or safer to keep at home?
Good question. I think risks are low in a cash account at reputable firms. Even in a margin account I think risks are low. It is inconvenient to keep them at home. They all end up in depositaries anyway. Everyone relying on electronic blips. I think fairly safe.
Q3: NY. The amount of derivatives out there today 30tril, 3x GDP. Do you think volumes will present danger in future, have you ever spoken to someone who writes derivatives?
It is complicated. They show large profits. It is peculiar thing – allowed to morph to huge size. Interest rate swaps – overstated. So imperfectly regulated it has a danger to the rest of us.
Tutelage 17. Family Duty: Generally speaking the time to buy a house is when you need one. If you make money on it, it is just a byproduct of you doing your family duty.
Q4: CA. Named our son after Warren. We are in market for a house in CA. Wanted your views on house prices.
Housing prices are going down in most places in CA. If you want house in Pasadena, if offer price 1.8m better to start bid at 1.85m. So not going down everywhere. Generally speaking the time to buy a house is when you need one. If you make money on it, it is just a byproduct of you doing your family duty.
Tutelage 18. We are trying to live in a seamless web of deserved trust. It has worked for us, and it is the ideal way to live. If your marriage partner has sixty page contract, you shouldn’t enter. You want to get a seamless web of trust.
Q4: NY. Have you ever asked quality programs at subsidiaries to improve margins?
We try to buy companies so permeated by good ethos that they don’t need checking from headquarters. We are trying to live in a seamless web of deserved trust. It has worked for us, and it is the ideal way to live. If your marriage partner has sixty page contract, you shouldn’t enter. You want to get a seamless web of trust. If life is hard, you may need a command control system. But we try to avoid it.
Q5: NJ. Railroad regulation?
CM: They are regulated. Earned so little money for years, that I expect rules will be better in future. They have increased capacity in a great way. It has been costly. I would not anticipate regulatory burdens to be high because the railroads have behaved well.