Investment Wisdom

114. Wesco Annual Meeting 2010 – Part 4 – Wisdom Pick: 19-24

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Wisdom Pick 19. Go where there’s dumb competition.

Q (James Armstrong, Berkshire shareholder, Pittsburgh) Last year you talked about a smart electrical grid. Are the BNSF rights of way useful for that? Could that add anything to Berkshire’s net worth?

A I’ve never heard anyone talk about it but can’t imagine the rights of way full of towers. “Put me down as skeptical.”

Q Is BYD too dependent on a single person?

A There’s a risk, but I’m used to it, working around our 80-year-old gallant leader. [At this point, Charlie asks Wang Chuanfu and BYD’s vice-chair to stand and wave (applause).]

Q (Alex Laga, a BRK and Wesco shareholder, Milwaukee) An engineering mentality is prone to paralysis by analysis and to a fascination with models for their own sake. How does one avoid that?

A Look at BYD: 16,000 engineers but determined to be rational. They don’t like unnecessary delays, nor analysis for the sake of analysis. By contrast, India has too much paralysis by analysis.

Q (Austin, TX) WEB credited you with giving him the concept of “durable competitive advantage.” What are the best ideas he’s given you?

A Warren knew about durable competitive advantage. He didn’t need me. The amazing thing is we did so well while being so stupid. “That’s why you’re all here: you think that there’s hope for you.” Go where there’s dumb competition. Patrick Wolff once told me I was better at what I did than Wolff was at what he did. I said no, I just played weaker competition.

Wisdom Pick 20. “I need it and I want it and so I should get it” is childish. We need to make changes, or we’ll get more trouble.

Q (Australia) How do you determine bet size when you invest? Do you use the Kelly formula?

A We don’t use any formulas. If you’re referring to “Fortune’s Formula,” it’s very intelligent if you get to make lots of bets that pay off quickly, but we get very few opportunities and our problem is to get enough of them to invest a lot of money. I suspect I may have intuitively used the formula when younger. It’s correct, but of very little use to how BRK operates.

Q Given the high price, and in stock, for BNSF, can you improve their operating margins to CN levels?

A That’s an easy one: we don’t have to do “one damn thing—just let Matt Rose do whatever he pleases.”

Q To what extent did you share ideas with WEB before you began co-investing?

A I always talked over ideas, but not with many people.

Q (San Diego) Excesses in the economy blew up in ’08. You compared it to being on drugs. Are things worked out, or is there a hangover still?

A Of course it’s not worked out. What you and I see as excesses are regarded by the people doing them the way a diver regards his air hose. “I need it and I want it and so I should get it” is childish. We need to make changes, or we’ll get more trouble.

Wisdom Pick 21. On Greece: I’m glad it’s not my problem to solve, though I believe that, with my mindset, I would have acted earlier.

Bonus Wisdom Pick 21A. 20/80 Rule Or Is It 80/20 Rule?

Q (Germany) What do you think about central banks printing money and the ECB accepting Greek “garbage” as collateral?

A Everybody knew Greece was problematic when they joined the EU. It’s amazing we didn’t get a Greece-type problem sooner. It’s very hard to fix: you don’t want to set a bad example, nor let them go under. Ireland got a big benefit from joining the EU, but Greece threatens the whole system. [Charlie paraphrases a Woody Allen line: “Today we are at a crossroad. One road leads to hopelessness and despair; the other to total extinction. Let us pray we choose wisely.”] I’m glad it’s not my problem to solve, though I believe that, with my mindset, I would have acted earlier.

Q You suggest studying people one admires and the eminent dead. You’ve mentioned Lee Kuan Yew, Ben Franklin, Paul Volcker. Who else?

A There are lots within Berkshire. An example: managers are reporting, and one says he uses the 80/20 rule, focusing on the 20% of the business that makes 80% of the profit. The next says he does the opposite, focusing on the 20%-profit businesses that you can buy cheap and improve. They’re both correct. You need multiple models.

Wisdom Pick 22. On Berkshire Hathaway: A BRK will be very successful long after we’ve gone. It has wonderful businesses and a durable culture.

Q (College student) I want to invest in Berkshire but I’m worried about succession and the future.

A BRK will be very successful long after we’ve gone. It has wonderful businesses and a durable culture.

Wisdom Pick 23. (With small amount of capital) I’d go where there are market inefficiencies and your work could lead to knowing important things that other people didn’t.

Q If you were starting out with a small amount of capital, where would you focus?

A I wouldn’t go where the big boys have to be, trying to decide whether Merck’s pipeline is better than Pfizer’s. I’d go where there are market inefficiencies and your work could lead to knowing important things that other people didn’t.

Q (Fund manager, New Delhi) I admire your “lattice work” model but in applying it find that adding to one’s toolkit takes a long time because you have to fit new things into a complicated framework. Is this inevitable or is there a way to speed up integration?

A I was born with a mind that works that way and am also curious, so learning isn’t work but play. If your nature’s different, you’ll “have to figure out your own damn answer.”

Wisdom Pick 24. England showed us that we could intervene directly in major banks, which was much better than TARP. It’s a credit to Paulson that he switched plans when he saw a better one.

Q (Student, Toronto) Why is it the government, rather than someone like Berkshire, bailing out the banks this time?

A It’s way worse this time. Nobody in his right mind wanted to see how far it would have gone if the government hadn’t acted. It’s a credit to democracy. England showed us that we could intervene directly in major banks, which was much better than TARP. It’s a credit to Paulson that he switched plans when he saw a better one.

Source: http://www.valueplays.net/wp-content/uploads/The-Best-of-Charlie-Munger-1994-2011.pdf