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

101. Wesco Annual Meeting 2008 – Part 5 – Tutelage 25-30

Excellent Book: Charlie Munger For All Seasons

2008 Wesco Annual Meeting –  Notes courtesy of Peter Boodell

Tutelage 25. Berkshire’s annual budgeting process: Eliminate Unnecessary Costs

Q20: CA. Why has commercial property not fallen as much as residential?

Cap rates came way down and asset values went way up. Financing transactions are getting away from euphoric conditions. A lot of the real estate fortunes have been made with extraordinary leverage. Commercial real estate is not a good business for us but ok for the entrepreneurial types. We shouldn’t be doing it.

Q21: Matt from NYC. How does Berkshire thru its subsidiaries manage an annual budgeting process?

We don’t have one. Obsessing over budgets creates bad incentives. Just eliminate unnecessary costs. Budget committees tend to do just the opposite.

Tutelage 26. Experience is what happens when you’re looking for something else.

Tutelage 27. Read Cialdini

Q22: John, shareholder. Any recent books you recommend?

I’m a bug for history and science. Yes by Cialdini is good. Most of the psychology professors can’t handle this real life material. It’s not a perfect book and not as good as Influence. As Warren says, experience is what happens when you’re looking for something else.

Q23: Peter, Yonkers NY. Which is better, insurance based float or money management float?

A: In terms of pure utilitarian perspective, you can make way more money in money management than insurance business. There are few businesses as good as money management.

Average returns in insurance property and casualty have been pretty pathetic. Once you have enough money you stop accepting compensation and just manage money — it is more manly. At least 95% of the insurance businesses in the world are worse than ours.

Tutelage 28. The more big ideas you have the easier. We exclude a whole lot of things because they are in the too tough pile. If you exclude, you do better.

Q24: Ashok from LA. Checklist?

I don’t have a simple checklist. You have to work at it a long long time. I still do dumb things after years of hard work. The more big ideas you have the easier. We exclude a whole lot of things because they are in the too tough pile. If you exclude, you do better.

Then you must have field where rationality will be rewarded. Some of political ideas – it is very hard to know how they will work out over next few centuries. We are not trying to involve ourselves. We look for things that can be done. But I have no little short list.

People who sell strong abs on TV at night might have one. I have no rule for a strong brain.

Q25: Whitney Tilson. NY. You reported earnings, but not a single shareholder asked about it. I was hoping for a comment on Berkshire earnings, and on mark to market derivative losses.

It was a very remarkable occurrence. Like the Sherlock Holmes story – about the remarkable happening with the dog’s behavior. Sherlock Holmes asks about the behavior of the dog in the night. “The dog didn’t make a sound.” “Yes, that was remarkable.” That perhaps is teaching a lesson. Those people trust us. They trust Warren, and rightly so.

You saw an interesting example of deserved trust working in real world and in Omaha. By the way, we love that position. The accountants don’t know what they are doing but I don’t criticize them.

Tutelage 29. On Oil Price: Neither question nor my answer will do much for my reputation.

Q26: LA. In 25 yrs, where would you see oil production? What year do you see the peak?

This is very flattering, but I don’t think question nor my answer will do much for my reputation. We don’t know year, and the reason Warren picked up on my answer last weekend so strongly is that it is a radically different world where oil production is down 25 yrs from now, with radical adaptations necessary. Hubbert pretty accurately predicted peak. If it hasn’t peaked, it soon will, and it will go down. At $120 / barrel, there are obvious strains in the production system.

Tutelage 30. Uplifting Education: You Can Lift From The Top Or From The Bottom: Do What You Can Or Know Best

Q27: LA. I went to private school where you donated science building. For many minorities, there are low graduation rates. What can government do to help? What can we do?

Very serious problem, anguish causing. CA had once the best public education system in USA. It is a very sad thing. The private system is very competitive. Warren has suggested that if no one was allowed to use private schools, citizens would make sure public system was good. Not sure Warren is right on this. Personally I am better at lifting top up than the bottom up. Why shouldn’t I stick to game where I’m better suited? If you want to know how to raise top higher, I think I could help you a lot. If you want to raise lowest, I don’t know how to do it.