Perspicacity 1. (Nice metaphor for finding one’s dream.) Like a captain who finally got to the port he had always dreamed of.
Conversation with Charlie Munger, July 1st, 2011, Pasadena Convention Center
Opening Remarks: The question after Wesco was bought by Berkshire Hathaway (BRK) was who was going to pay for the event today. Charlie decided to pay for it to continue the tradition.
Wesco Merger: Said he feels like a captain who finally got to the port he had always dreamed of. He believes BRK is the right port for Wesco. About one half of the Wesco shareholders became shareholders of BRK. The contract was disadvantageous for BRK because of the losses recognized in Swiss Re. BRK’s stock subsequently went to a price that was so low that Wesco shareholders got more shares than Warren and he had ever intended. He thinks there was a favorable wind at the end though.
Warren and Charlie developed a reputation for doing the right thing. It has worked well to be known for doing the right thing, even when BRK has the power and their partners or counterparties do not.
Perspicacity 2. How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.
Quote: How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.
Perspicacity 3. Beware Lollapaloozas & Psychology of Human Misjudgment
Charlie didn’t think the audience would bear listening to this at the end of the conversation so he put it in the beginning. When you have a complex system, what he calls lollapaloozas can be very impactful. These almost always come from a confluence of factors operating in the same direction, but coming from different academic disciplines—economics, finance, and psychology. He has never cared what disciplines they come from though. It is that they come together to have a large impact that is important.
With lollapaloozas in mind, he wanted to let us know how he approaches things. There is a problem that has bedeviled the economic departments of universities. When economists went to the movie theater, they noticed that Coke and popcorn were priced way too high relative to the prices of these goods elsewhere. There have been millions of man hours devoted to understanding this phenomenon. They understand why first class airplane seats sell for more than coach seats but can’t understand—using marginal utility—why candy bars sell for so much at theaters.
Similarly, it is well know that car manufacturers sell a car for $40,000 and then sell you an extra gizmo that costs $20 for $400. When you are paying $40,000 for a car, a $400 charge is so small that people barely even notice it and the seller can extract more money out of customers this way. Nothing can be simpler than what he told us but he can’t believe how many academics don’t understand this. He then suggested that if you can adopt his tricks and his approach, you can do better than most other people.
Perspicacity 4. Don’t Mistake Theories in Economics With Laws Of Physics
He then applied the same approach to something that is far more complex. It became orthodoxy from a Keynesian point of view that you can borrow and print money to ameliorate recessions. The Keynesians believed that recessions would be short and depressions less likely as a result of borrowing and printing money. People became so enamored with this idea that they thought these economics laws were like those of physics.
The Japanese got in trouble because of an idiot boom in real estate. They now have tried everything in the Keynesian book to try to fix that. They have had to deal with 20 years of stasis, which they are uniquely able to handle. They are a nice and polite people. However, Americans and people from most other countries would likely not be able to go through 20 years of stasis. If the “new” laws of economics do not work as well as the professors think they will, Americans will be in trouble.
Perspicacity 5. Keynesian and monetary tricks do not work as well when everyone knows you are playing them.
Of course Keynesian and monetary tricks do not work as well when everyone knows you are playing them. For example, things that worked in the 1930s might not work now. Back then the US had better credit and people did not use the polls to make themselves rich. Meaning, people did not get voted into power and then use their power just to become rich. This is a lollapalooza system.
Next, Charlie provided an explanation of Japan’s economic malaise that is not commonly cited. Japan is an export dependent economy. In the late 1980s and 1990s, Japan got huge and credible new competition from China and Korea. They got this because the traditional laws of economics were working well in China and Korea when they adopted something like free market capitalism. The main competitors got more competitive and this impacted Japan substantially. This is an explanation that you never hear. This is why you need to try multiple approaches to solving problems—using checklists.
Perspicacity 6. There are lots of rewards and punishment in free market capitalism that do not necessarily apply to someone who works for the Department of Agriculture (and can’t be fired) or who is a communist in Eastern Europe.
Additionally, Charlie recently re-read Matt Ridley’s The Rational Optimist again. This is a great book.
Ridley is absolutely charmed with the way that free market capitalism changed the world. Specifically, he has fallen in love with the idea that the division of labor was the main contributor to this success. He only looks at this explanation though and it is wholly inadequate. There are multiple factors that have made free market capitalism so successful. Even if Stalin were running a pin factory (made famous by Adam Smith in Wealth of Nations) he would get efficiencies out of it. The process of competition between different operations and companies causes the power to be allocated to people who are good and can perform a great service. But, if you just stop there you miss other things. For instance, what happens is that the owner of a business gets “reinforcement” very often. Each time the cash register rings he or she gets an “aha” feeling. There are lots of rewards and punishment in free market capitalism that do not necessarily apply to someone who works for the Department of Agriculture (and can’t be fired) or who is a communist in Eastern Europe.
The takeaway is that there are all kinds of problems that are better solved by going through a checklist. This works well in primary medicine too. Only a terrible internist jumps to the first conclusion and sticks to it. (Sadly, this represents about 75% of internists.)
The Inoculated Investor http://inoculatedinvestor.blogspot.com/