Excellent Book – Charlie Munger For All Seasons: http://charliemungersays.com/index.php/books/
Perspicacity 7. Even if starting Microsoft was better financially than buying Wesco, he and Warren don’t care. They don’t want to fall prey to envy. Envy is stupid because you can’t have fun with envy—envy always represents a total net loss. There is always someone doing better than you.
Blue Chip Stamps
He then went on to talk about Blue Chip Stamps, a “doomed” trading stamp company. Almost all of these companies are now dead or almost dead in general. However, when this business was more profitable it produced a large float like a casualty insurance company. What was interesting about the task of investing that float was that BRK only found 3 big things to do in decades with the money: it bought Sees, Buffalo News and control of Wesco. The idea that he and Warren only made 3 moves is interesting given how investment bankers are always pushing people to buy things. It is “boring” to run a business and make sure each restaurant is clean, for example. It is much more fun to look for things to buy. However, almost any data suggests that most shareholders lose with all of these mergers— academic studies prove this. But, BRK shareholders did not lose because he and Warren only did 3 things and were patient. They were able to be patient because they had something else to do with the money. They had the option to buy marketable securities. Most companies don’t have this option and the combination of options gave them a respectable repertoire provided that they were patient. Strangely, the worst thing that could have happened was the purchase of Wesco. The other two businesses they bought were way more profitable. But, even so the Wesco stock went from $5 to $385.
Even if starting Microsoft was better financially than buying Wesco, he and Warren don’t care. They don’t want to fall prey to envy. Envy is stupid because you can’t have fun with envy—envy always represents a total net loss. There is always someone doing better than you.
Perspicacity 8. Brand Power Is Important: (See’s Candy) You raise the price 10-15% each year and nobody cared.
Perspicacity 9. Protect your own mind and make it better.
Another advantage to BRK’s process was that Warren and Charlie were learning as they went. They didn’t understand the power of a great brand until they bought See’s Candy. They found that they could raise the price 10-15% each year and nobody cared. This understanding then changed BRK and its investment pattern. We are all ignorant—no one knows enough now to cope with the future. His motto is to pay yourself first—protect your own mind and make it better. You always have to learn. Increasing rationality is a moral duty and it is very important to keep improving as much as you can. That’s how he and Warren went at it and it worked well.
They weren’t the smartest guys—they were massively ignorant. In fact, many of the major successes of BRK started off with massive failures. For example, they bought one of the 4 major department stores in Baltimore. This was really stupid! But they recognized the mistake, tried to exit, and did. They were able to sell it for what they bought it for, basically. Out of the contacts they made when they bought the department store they were able to buy a niche retailer that made them a lot of money.
Perspicacity 10. If You Graduate From University and Think You Know Everything – That Is A Big Mistake
Many people graduate from Wharton now and think they know how to do everything—that is a big mistake. What is needed is a lifelong learning process—this is both helpful and a lot of fun. He said that he has had so much fun learning. In fact, it is amusing to see economics professors spending all these man hours on silly problems that he could solve with his left hand even though he never took a class in economics.
Perspicacity 11. The bubble in America was from a combination of megalomania, insanity and evil on the part of a lot of people in banking—both mortgage and investment banking. Wise laws that protect against people doing crazy or evil things are important.
The Great Recession
The bubble in America was from a combination of megalomania, insanity and evil on the part of a lot of people in banking—both mortgage and investment banking. Greenspan was a smart man but he overdosed on Ayn Rand at a young age. You can’t have total freedom to create gambling games. Much of what crept into investment banking was a gambling game in drag—it was not capital raising. Now, the banks have developed an advantage in derivatives and do not want to give it up. A casino would never give up slots to keep roulette and blackjack. Similarly, the banks don’t want to give up their best businesses to save the rest of us from risk. It makes sense that banks don’t want to give it up.
Betting on a stock index is like betting on a bucket shop. The banks brought back bucket shops with the derivatives markets. With casinos you have to have parking, bars, restaurants and entertainers. But the banks have a casino with no overhead. The government then allows them to operate with leverage through the repo system. Conservative investment banks went to 30-50x leverage, making small returns on each transaction but making a lot of money in aggregate.
Then, the accounting profession allowed banks to show income and assets that weren’t really income and assets. Accountants didn’t think they had a responsibility to show the actual mess that could bring down the entire system. The medical system wants to prevent epidemics but the accounting profession does not want to deal with difficult and systemically risky issues—they want to charge more by making everything more complex. This is a contemptible approach. What accounting figures have expressed contrition? What major person in the US has been embarrassed by US accounting? Very few. But one such person is Jamie Dimon of JP Morgan who has written scathing criticisms of the accounting rules in his annual reports.
As an example, bad debt reserves go to zero in a boom. What kind of maniac would think that is good accounting? Only a CPA or a professor of accounting. The rest of us are grown-ups and know that is not good accounting. Paraphrase of a quote from Burke: For all of the folly in the world to prosper and become rampant, all the good and wise men have to do nothing.
Bernie Madoff has shown no contrition. In his mind, he was OK. Most people think the 150 years he got were unfair. Charlie would bet that Dick Fuld does not feel any contrition today either. He totally ruined Lehman Brothers with his megalomania. This is very serious situation because people won’t show any shame. You need to have a society with the right rules to stop people from going crazy. There ought to be rules that only allow banks to do simple things with the government’s credit. Remember what happened in the S&L business? Bankers are clearly not that wise or disciplined. They go crazy with envy. If the guy down the street is making a lot of money, it is hard not to try to do the same. Major accounting firms starting selling fraudulent tax shelters. But, when they finally got the whistle blown on them, they reluctantly threw out the partners who were involved. However, he never hears anyone saying they feel ashamed. Well Charlie feels ashamed to be in the same race as these people. Wise laws that protect against people doing crazy or evil things are important.
In the cases of Korea and Mexico, investment bankers sold them derivatives and caused those countries and decade old firms to go bankrupt. It is OK if financial companies are a little boring. Some of our best banks gave free checking to get people who couldn’t handle credit to sign up, a situation that led to overdrafts and people getting socked with huge fees. The banks also programed the computers to process the biggest check first and that led to even higher fees. The banks are paying for these actions through class auctions suits right now—and they should. Wise laws that constrain the worst activities that people somehow are able to rationalize are very valuable.
You are talking to a Republican who admires Elizabeth Warren. He then said that these comments are not quite as contemptuous as what he wrote in the piece about the people who were at fault for the
Perspicacity 12. Of course picking some stocks carefully will be profitable. However, these returns will be tempered by the fact that there are consultants, managers, traders, and analysts that cost so much and will take profits from the rest of us. Now people are doing what is basically legalized front running because of their skills in math and with computers.
Great Recession.
Current Investment Scene
The scene is very difficult. Charlie likes the “new normal” concept from Bill Gross of PIMCO and thinks the world is going to be lousy. He said we can’t love bonds because yields are so low. Further, with so much trouble, the old tricks no longer working in Japan and Europe, and those countries having an “adult” experience, the world looks lousy. Of course picking some stocks carefully will be profitable. However, these returns will be tempered by the fact that there are consultants, managers, traders, and analysts that cost so much and will take profits from the rest of us. Now people are doing what is basically legalized front running because of their skills in math and with computers. Our university endowment and pension funds are paying for this unfair advantage through lower returns. Even worse, the people with power in public pension plans are working in ways to escalate the size of the pensions. Soon-to-be retirees are manipulating pensions by working a lot of overtime during their last year to make the final year salary abnormally high. From there a police officer who has made $50,000 his entire career can retire with a $100,000 pension. This is evil and wrong.