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

118. Wesco Annual Meeting 2011 – Part 3 – Perspicacity: 13-18

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Perspicacity 13. In any case, extreme divisiveness is not good.

Charlie said that one of his favorite incidents from history occurred in the days of the Punic Wars. Rome couldn’t afford to lose wars because when that happened, people became slaves. But, in this unusual case, Rome paid back 2/3rds of the war debt (in hard money) before the war was over. The emperors kept debasing the currency during the period but the right lesson for us to take away was from the guys who had the discipline to pay back the debt. He doesn’t like the message that we can’t have tax increases in the US under any circumstance (the current stance of Republicans). But, the other idea that the rich should pay all the tax is equally crazy (the current stance of the Democrats). The rich should pay the majority of the taxes but everyone should pay moderate taxes.

In any case, extreme divisiveness is not good. He remembers real nobility among the American political class in the past. After World War 1 the Allies decided to make the Germans really pay for their transgressions and that decision led to the rise of Hitler. If he had been a little wiser, Hitler’s ancestors might still be in charge of the world. Charlie claimed that the Allies won the war because of luck and Hitler’s blunders. Fortunately, we learned after World War 1 that we don’t want to do things that cause desperation and thus decided not to be vindictive after World War 2. The Germans had put Jews in ovens and the Japanese marched people to death. But, what did we decide to do? We decided to give them money and let bygones be bygones. It was a great decision, especially the Marshall Plan.

Keynes wrote The Economic Consequences of Peace (in 1919—in which he argued for a more generous peace) and people later realized he was right. Consequently, Americans behaved really well at the end of World War 2. It is hard to imagine the same will be true now. The politicians hate one another and he hates to watch it. He is mildly hopeful it could change. But, the current system is dysfunctional and we need change.

Perspicacity 14. You have to be ready to take advantage of opportunities to succeed. Be ready. You do not want to be timid when great opportunities arise. You may have only one chance to marry the right person.

The combination of patience and opportunism is important. Charlie had a great grandfather who had a great influence on his life. This man was one of Charlie’s only ancestors who became rich. He told Charlie that you have to be ready to take advantage of opportunities to succeed. This is what they do at BRK. They are always ready. You do not want to be timid when great opportunities arise. It is kind of like how most marriages don’t work and you may have only one chance to marry the right person.

Perspicacity 15. Copy His Self-Improvement But Not His Chutzpah

Question and Answer Session:

Q1: At this point in your life, what are the 3 most important components of your legacy?

Munger: Charlie hesitated to answer this question because he believes that he is not a good example. Most people who follow his example would turn out to be quite unloved. He is really into self-improvement but certain peculiarities of his personality should not be imitated. For example, copying his insistence on improving his own mind and his irreverence will get you in trouble. Rationality and objectivity work. But, the qualities that bring so many people to hear him speak may not work for others.

Perspicacity 16. Charlie Munger Reads The Economist

Q2: The first question had to do with the Wall Street Journal’s deterioration since Rupert Murdoch took over. The second question had to do with whether or not California should become a single chamber state.

Munger: Regarding, the first part, he loves the Wall Street Journal (WSJ), although he has never liked the editorial page. However, the publication he likes best is The Economist. He believes it is the adult intellectual publication of the world. The WSJ is not as good but is good in its field. Regarding the second question, California should not have a unicameral legislature. He is agnostic on the subject, trending towards suspicious.

Perspicacity 17. Low Cost Mutual Funds Are Good For Some People

Q3: What are your thoughts on Exchange Traded Funds (ETFs) and mutual funds?

Munger: Said he didn’t know because he never looks at them. In general, he likes low cost mutual funds and thinks people do better with them than by hiring fancy managers. He doesn’t know which funds are better than others because he is not investing in them. He prefers to try to do considerably better by investing in specific companies.

Perspicacity 18. BRK’s culture has made a contribution to the world.

Q4: Question had to do with why Munger has chosen to fight a commercial real estate battle in Brentwood.

Munger: Partly because he is crazy. To the extent that he is not crazy, he has done some things in his life that he knew would be very hard. He has occasionally taken on stuff that would make his life difficult.

He felt a duty to do the right thing, regardless of whether or not it would work out for the Mungers. There is a limit to this masochistic ethos however. His life has been so favored and he is so un-humbled by disposition that maybe he needs some masochism.

Q5: Question had to do with whether or not BRK’s stock is undervalued now.

Munger: It is tough to buy stocks and operating businesses. He and Warren are better investors in stocks because they own the businesses and they are better business operators because they own stocks.

When they buy companies they pay quite liberal prices—like they did for Dexter Shoes. But, in the case of Dexter, they utterly failed at an easy problem. When they do buy businesses they do not buy them cheaply—however some like See’s Candy worked out really well. When all of the deals are averaged out he likes what has happened because BRK owns a ton of good businesses. The future can’t be like the past because the weight of BRK’s net worth and assets will limit returns. Having said that, he believes that someone who owns BRK stock and does nothing but hold it will do really well.

He likes to think that the culture of BRK has made a contribution to the world. Although, he has waited for a cascade of high ranking executive followers to take only a $100,000 salary (like he does) but it hasn’t come. Only the Rockefellers and Carnegies were willing to do that. Additionally, few corporations are as critical as BRK is of other business. As a result, deep down some people really don’t like him. For instance, he doesn’t make great friends on Wall Street when he says people there are stupid and evil. This is not the way to get ahead in corporate America.

The Inoculated Investor http://inoculatedinvestor.blogspot.com/