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

109. Wesco Annual Meeting 2009 – Part 6 – Pearls of Wisdom: 21-26

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Pearls of Wisdom 21. Railroads now have a competitive advantage over trucks.

Q25: St. Louis, railroad investments. Pricing power in railroads may be at risk, and coal volumes may be at risk. What would you change your view on railroads?

CM: If we stopped using coal it would be bad for railroads. I think there will be a lot of freight still. They now have a competitive advantage over trucks. But it will be more foolproof if we didn’t rush into an electric grid.

Q26: San Francisco. National electric grid planner – how long would you spend on engineering?

CM: We understand the technology. I don’t have a good feeling for timetables. The Chinese don’t fool around, but in other places it takes forever. We would need a streamlining process to do it. We had streamlining processes on natural gas pipelines, and look at how well they work. I have no feeling that it isn’t perfectly [ed: within reach].

Q27: Tilson. Newspapers portrayed you as negative this weekend, but I heard different meeting.

CM: I think our utility operation is as good as any in the country. I would imagine that if a better grid comes Berkshire will be heavily engaged in it. It would be a waste to not use the managers of our energy subsidiary. They try to deliver what they would want if they were the regulator.

We almost bought Constellation Energy — that would have been immense. It blew up, but with substantial profit to Berkshire.

Pearls of Wisdom 22. Misjudgment is like sunshine, it will always be part of the world.

Pearls of Wisdom 23. It is good to know how fate will rule your odds.

Q28: Florida. Do you have any recent fresh ideas on human misjudgment or cognitive errors?

CM: Misjudgment is like sunshine, it will always be part of the world. Many of the misjudgments will be massive. We have misjudgment too at Berkshire, but we have less than others. If you can stay high in the pack, you’ll do well. Best chapter in Outliers was about people with an IQ of 200 who failed utterly in life. If you can’t learn from that chapter, I don’t want to bet on you. I don’t know Gladwell but I was flabbergasted – it was a marvelous book. It gives you an insight into what you might call fate. It is good to know how fate will rule your odds.

Pearls of Wisdom 24. World will adapt to whatever the price of oil is, because it will have to. I don’t think it is the end of the world if prices go up.

Q29: CA. Oil production?

CM: Ultimately we will produce oil at lower levels. We are near peak oil production now. The interesting one is natural gas. We have found a lot of good natural gas, and it has surprised everyone.

Q29a: Any thoughts on upper threshold?

CM: World will adapt to whatever the price of oil is, because it will have to. I don’t think it is the end of the world if prices go up.

Pearls of Wisdom 25. Municipal bonds. They have good credit rating, but I don’t think they always will.

Q30: A few years ago I met Phil Fischer, and he said the right answer wasn’t right, that is was better to ask the right questions. What questions should we be asking?

CM: I don’t think we know how this will all play out. What are the odds of a hostile weapon being used in next 30 years? Pretty high, I’d wager. I think you have to think over all the possibilities. I don’t think it is a big deal. I was in Japan a year ago. It is civilized place with static GDP, and it is not a disaster. Mono- ethnic populations can get along better than diverse ones.

Q31: Municipal bonds?

CM: I don’t think I want Berkshire to insure an endless amount of municipal bonds. They have good credit rating, but I don’t think they always will. I think politicians, if they can throw it to bond insurer, they will.

Pearls of Wisdom 26. I am leery of anything with a commission and sold to the old.

Q32: Geico- Advertising spend of $800m, on the weekend you suggested this represented approximately 100m for maintenance capex, and 700m for growth capex – is this right?

CM: That is correct.

Q32a: Snowball, what did you think?

CM: Snowball is an interesting book covering a single life in such detail. That said, some facts will be incorrect. And she made a lot of money for herself.

Q33: CA. Reverse mortgages?

CM: They make sense in some ways, but they tend to have big commissions. With old people with problems, so I am leery of it. I don’t say they shouldn’t exist, but I am leery of anything with a commission and sold to the old.

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