Perspicacity 37. Apart from BRK, Charlie Munger Admires Costco & the CEO.
Q29: Which is the company you love the most outside of BRK? What CEO do you admire the most?
Munger: His only other directorship position is on the board of Costco. He is on the board because it is his wish and also because many companies avoid him and wouldn’t want him on their boards. He would argue that Costco is one of the most admirable firms in the world and that CEO Jim Sinegal is one of the top executives in the world. Charlie can’t say enough about his admiration of Costco. But the world has figured it out and the stock sells at 25x earnings. The world should work that way—finding great places to invest. If you are comfortable with 25x earnings, slow advances, and working with great people, Costco at 25x earnings is one of the most admirable capitalistic institutions in the world. It is a total meritocracy. They pass on savings to their customers as if it were a moral duty. The company is losing money in the short term to make money in the long term. Everyone in the room should go through Costco’s annual report. In fact, every time Donald Trump says something and you get discouraged, just think about Costco.
Perspicacity 38. He also likes to better understand how important it is to stumble on the right gold mine.
Perspicacity 39. Similarly, he loves to admit it when he is a total horse’s ass. You take the pain out of being foolish if you take pleasure in rubbing your nose in your own mistakes. It is a wonderful thing to do. You will never lack for opportunities.
Q30: The question had to do with what books he reads and what he does if he starts a book he doesn’t like.
Munger: As he starts regretting reading a book, he starts turning the page faster. But, he is not too burdened by god awful books because he either avoids them altogether or desists after a short time. He passionately read the world’s great fiction when he was young. But, he gradually drifted out of it after he knew most of the tricks. He moved to non-fiction for the most part and rarely reads fiction now even for pleasure’s sake. When he was a kid he loved Sherlock Holmes. Then, later in life he read a paperback that included the total work of Arthur Conan Doyle. He found that some of the non-Sherlock Holmes stuff was just awful. The Sherlock Holmes genre was a gold mine. Conan Doyle wasn’t even that good— he just stumbled into the right gold mine. However, Charlie likes the idea that he can now admit that what he once admired was not that good. He also likes to better understand how important it is to stumble on the right gold mine.
Similarly, he loves to admit it when he is a total horse’s ass. Recently, his country club wanted to tear out a lot of trees at an exorbitant cost and he fought the plan. Now that the trees are gone, he sees that it was worth spending the money and that he was a horse’s ass. You take the pain out of being foolish if you take pleasure in rubbing your nose in your own mistakes. It is a wonderful thing to do. You will never lack for opportunities.
Perspicacity 40. WEB & CM Could Scale. Looking For Managers Who Could Too.
Q31: How would you approach selecting an investment manager if you could not see his or her returns?
Munger: It is very hard to do. Tons of people come to BRK who are very high grade investors but picking a manager is not like shooting fish in a barrel. You don’t want to find people who will only be really good if they stick in their niche. Charlie and Warren could scale and that was their advantage. He only knows of one person right now who can scale in that way. He doesn’t like the manager’s manager concept (funds of funds for example)—too many people and complexities. He is going to leave that selection process to Harvard—an endowment that makes a lot of asinine mistakes.
It is easy to find people to avoid but it becomes tough with admirable people. This is especially hard as the managers get bigger and hire more people. The big investment firms underperform as they get more money. But, it sure is a wonderful problem to be so rich that you need an investment manager.
Perspicacity 41. As Dickens said, it is the best of times; it is the worst of times.
Q32: Will recent and continuing disasters change the property and casualty insurance industry?
Munger: This business is continuing as it has it in the past—it has always been a mediocre business. Any business where you take in money, keep it for a while and then have to give it back much later will attract a lot of dumb people. The business has no receivables and is very attractive on paper. But, the insurance industry always goes a little crazy. Although, it is not terrible in the way finance is—where people go plum crazy. The casualty business is a very tough business and life insurance is even harder. He then said that the insurance business is currently normal, despite recent awful events.
Q33: What is your perception of how the US will become more adult?
Munger: As Dickens said, it is the best of times; it is the worst of times. For example, people have looked at the energy situation and decided to turn corn in fuel. This is an asinine idea and people are just starting to see how stupid it is. He knew it all along but couldn’t do anything to stop it. He mentioned that 20% of BRK’s Iowa utility’s power comes from wind. Before the world could think seriously about having energy without hydrocarbons, you could be glum about human’s future. But now we can be more optimistic—we are likely to have enough energy to face the depletion of certain resources. We are going to have to pay more for things like shale natural gas. But, having access to that gas is a very positive thing. We are going to take a lot of energy through the sun in the future. We are going to have a big national grid at some point. We are learning from China as China is putting in a huge grid.
Many technical problems are solvable if you have power. We will have global warming and man may have some impact on it. But, he doesn’t believe that it will be that bad. There are people who like to sit around and think about how bad things will be but mankind has adapted to temperature changes in the past. It has been colder and hotter during periods of time. We now even have the power of geoengineering. We can change the temperature of the earth if we are not happy about it. We can reflect more light if we want to. He also said that it might be a good idea to have a slightly warmer world. He doesn’t see many people moving to North Dakota from Southern California. Also, there is a lot of land in Canada that could be much more productive if the world warmed a bit. He likes the work of a guy named Freeman Dyson on this subject.
Perspicacity 42. Public schools are now nowhere near as good top private schools.
Q34: Jeff Ellis of UCLA Anderson and West Coast Asset Management- Questioned about the role of the Chairman when Buffett dies. Would Bill Gates be a better Chairman than Howard Buffett?
Munger: Would not comment on whether or not one of Buffett’s sons would make a good a Chairman.
Q35: Victor Liu of Causeway Capital- Does he favor public school or private school education?
Munger: Public schools are now nowhere near as good as private schools like Harvard Westlake. He wonders how much better he would have done if he would have gotten an education for Harvard Westlake instead of Omaha’s public schools. But, he thinks his public school education was good enough.
He thinks he would have forgotten calculus quickly in any case—it wouldn’t matter when he learned it. In the end you need to get a certain baseline education for a child. But, dragging a kid a few years ahead can be problematic. He was obnoxious enough as a kid as it was. He thinks it is worth it to push the best modern schools. He wants to see how good we can make our system. But, whether the students who graduate from these schools will have a major advantage is unknown. What he does know is that there are a lot of defective college students. Kids who come from great schools just run rings around them.
Perspicacity 43. No one can 100% stay away from trouble. However, companies like USB and WFC are better at avoiding the common stupidities of banking than most.
Q36: What advice does he have for judging good management?
Munger: Judging the management at a company like Iscar is easy—those people are enormously talented and wonderful. But, there aren’t many managements like that and few people with the incentive of such intensity. Failure is not an option in Israel—they have no hydrocarbons and enemies everywhere. It is easy to judge great managers.
On the other hand, he knows of a company with a great culture and a great business and he and Warren admire the guy who runs the company. But, the man just made an awful acquisition. Charlie believes that you have to be willing to be disappointed by managers. All managers are going to drift. If he and Warren could be so wrong as to buy Dexter Shoes then we should not be surprised that others make acquisition mistakes. If you are not frustrated by what you see, you don’t understand it.
Q37: US Bank (USB) and Wells Fargo (WFC) have done better than other banks but could get pulled down by bad actors in the industry. How can they avoid that?
Munger: No one can 100% stay away from trouble. However, companies like USB and WFC are better at avoiding the common stupidities of banking than most. BRK doesn’t get to have perfect managers either. There is always a compromise—like what his wife did when she married him. They have to deal with what is available. He knows people who will not own financials because they think the banks will go crazy. Charlie knows this is not an irrational statement. But, he likes that these banks acknowledge this problem. Bankers from WFC admit that they had their heads up their asses when they made a lot of 2nd mortgage loans.
Look at the troubles that Bank of America got into. Talk about a disgrace in terms of decision making. Of course there are risks with these companies. But, manufacturing companies are not perfect either. His life expectancy is not what it used to be but he is still here relatively cheerfully. Would it be better if he were on the floor sobbing about it?
Perspicacity 44. Franklin said something to the effect of: “When the citizens of the world find out that they can vote themselves into money, they end of the civilization is nigh.”
Perspicacity 45. People now act as if they need it, want it and deserve it. [Money & Power]. These are pathetic adults acting like children.
Q38: The question was about the prospects for Level 3 Communications?
Munger: He said he didn’t know much about the company. People build too much fiber optic cable just like they built too many train tracks in the past. They then got the same outcome: a huge contraction. He has never looked at Level 3. He has three folders on his desk—in, out and too tough. Level 3 fits in the too tough bin.
Q39: The question was about Ben Franklin’s role in his life.
Munger: Franklin said something to the effect of: “When the citizens of the world find out that they can vote themselves into money, they end of the civilization is nigh.” People now act as if they need it, want it and deserve it (money and power that is). These are pathetic adults acting like children. If Franklin were alive today he would highlight this issue. Our ancestors limited this by only allowing property owners to vote but we are having trouble with it because of our voting rules. He used to ask why everyone should vote. He has always opposed mandated voting because he thinks it would actually hurt the civilization if everyone voted.
Munger’s response to the applause at the end of the Q&A session: He liked the reaction he got and the great turnout as opposed to the huge turnout the dead man gets when people show up to the funeral just to make sure he is dead.
Source: The Inoculated Investor http://inoculatedinvestor.blogspot.com/