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

145. If You Have Learned Nothing in 2017, This Is Your Last Chance. Savour The Wisdom Here And 2017 Will Be Fine: Twenty Wisdom Nuggets for 2017 And Beyond. Happy New Year To All. (Charlie Munger Conversation @ Michigan Ross 2017)

Excellent Book: Charlie Munger For All Seasons

Thank you John for those very kind words and wonderful introduction. First of all I just want to welcome all of you. One of the luxuries of this job as Dean of Michigan Ross is the opportunity to travel the world and engage with our alumni, our students, our prospective students [and] our community broadly. The people make the place, and this place is really special because our people are really special and so I want to thank all of you for coming out this evening.

Tonight I’ve got the privilege and the honor of sharing the stage with Charlie who needs no introduction for all of you. He’s been a true champion and advocate for the University of Michigan for many years. If you were to study at the law school you would live and study in the Munger residences which is one of the most innovative in the country because what it does is it takes students from different disciplines and puts them together in a living learning environment, and that really amplifies the strength of the University of Michigan where you have 130 programs, 103 of which are in the top ten. That breath of excellence is not matched in the country except one school here on the west coast. So, it’s an honor to have you here this evening and for and on behalf of the entire University, I thank you very much for all that you’ve done. Yes, please.

So, Charlie, as I was on the flight over this morning I was thinking about and preparing for our conversation this evening, and as I went through my notes, I realized that we share an admiration for a historical figure in Ben Franklin. [CM: Absolutely!] And Ben wants once quoted that there are two things that you can do in life: you can write something that’s worth reading or you can do something that’s worth writing about, and you’ve done both of those. [CM: Oh, but not like Franklin.] And so a couple hours ago I went on Amazon books and I just typed in Charlie Munger in the search field and over a hundred books have been written about Charlie and my favorite title was The Tao of Charlie Munger, which was pretty interesting and so what I thought we would do this evening for our conversation is really just explore your life and many of the moments in your life that have shaped how you think and what you’ve been able to accomplish.

I’ll ask a number of questions and at some point hopefully we’ll have time to open it up and ask some of the questions that you all are interested in as well. So far was two for two in Bitcoin, so that’s that gives you a sense of what’s on people’s minds. But I’d like to go back to your early childhood in Omaha Nebraska. So you were raised in Omaha and what are some of the moments in your experience in Omaha that you really find memorable that shaped you and who you are today and how and how you think?

Q: Can you talk a little bit about growing up in Omaha?

  1. On Growing Up In Omaha: Well yes, I was I really liked Omaha. It was a size where I knew a lot of the people who mattered you know what they did. I wasn’t lost in a great metropolis and I was very fortunate in my nature of my parents my parents friends and I was fortunate in the public schools I attended were pretty remarkable by the standards of the time.

CM: Well yes, I was I really liked Omaha. It was a size where I knew a lot of the people who mattered you know what they did. I wasn’t lost in a great metropolis and I was very fortunate in my nature of my parents my parents friends and I was fortunate in the public schools I attended were pretty remarkable by the standards of the time. And of course most of my schooling was in the Great Depression, but that means I’m one of the very few people it’s still alive who deeply remembers the Great Depression and that’s been very helpful to me. It was so extreme that people like you have just no idea what the hell was like. [Laughter]

  1. On the Great Depression: It was just that nobody had any money, the rich people didn’t have any money.

It was just that nobody had any money, the rich people didn’t have any money. People would come and beg for a meal at the door, and we had a hobo jungle not very far from my grandfather’s house and I was forbidden to walk [through it but I] walked through it all the time. And I was safer in that hobo jungle the depths of the 30s when people are starving practically [than when] I am walking around my own neighborhood now in Los Angeles at night. The world has changed on that you’d think the crime would be less but it was the crime was pretty low in those days. So anyway I saw I had a very unusual bunch of experience to be, to go through civilization and various phases including the greatest recession, well I say it’s one of the greatest recessions and 600 years in the English-speaking world. It was really something, and it was very interesting to watch and also to watch it fixed, it was fixed by the accidental Keynesianism of world war II. Very interesting and Hitler had fixed the Great Depression in Germany by the deliberate Keynesianism but he wasn’t doing to stimulate the economy he wanted to get even with all the people he hated but he borrowed all this money and created all these armaments. Hitler’s Germany by 1939 was the strongest economic power in Europe, but nobody else was close.

So and you wouldn’t understand that as well as I do they hadn’t lived through it. You just could see the place gaining traction more and more and more and pretty soon it was fixed. And of course that was in those days, there were all kinds of people, most of my family for they believed in hard money based on gold, not much welfare and so on and so on. So I was raised among fairly backward people by modern standards. But they were backward in kind of a self-reliant way that I think was helpful. I’ve never regretted that I wasn’t raised in a more liberal establishment. I had a liberal aunt, my mother’s cousin. She was the first, second lady Dean at the University of Chicago and she did her thesis on emissions in the coal mines and of course she was a screaming leftist.  I would be extreme leftist. If whoever observed the way the coal miners of yesteryear were treated, you couldn’t be a human being with any decency on you without feeling that it was deeply improper to have the misery that great and have been manipulated for the benefit of the mine owners and so forth. She sent me all these left-wing band books one every Christmas and I always thought she was a little nuts. [Laughter]

  1. On Misjudgment & Misjudgment Avoidance: Which shows that if sometimes a very vivid extreme act you know as evidence can mislead you into a deeper reality. You’ve got to be a guard on that against that all your life. In fact, the whole trick in life is to get so that your own brain doesn’t mislead you and I have found that just a lifelong fun game and I can’t remember a time I wasn’t doing it.

I was not a prodigy or anything like that but I was I was a prodigy in adult interests. I was unto and what worked and what didn’t and why. I could see that very eminent people that I loved and revered we’re nuts in some ways. I would to say well I certainly like Doctor Davis but he’s a little nutty in one way and I’m not gonna be that way like that. Yeah, so, I was very judgmental and I think that helped me also help me that I kept changing my judgments as I learned more and more facts came in and that created lifelong habits that were very useful.

Another thing that really helped me protected me on my father’s side of the family. My  paternal grandfather was the only federal judge in Lincoln Nebraska capital, city of Nebraska. And he’d been there forever and he stayed there forever. After that I think when he left, he was the longest-serving federal judge in the country. And he was a brilliant man and he’d risen from nothing. He was a child of two impoverished schoolteachers. And when he was raised in a little town in Nebraska they gave him a nickel, to go buy the meat and he’d go to the butcher shop and he would buy the parts of the animal nobody else would eat and that’s what to school teachers lived on in those days.

The very indignity of it bothered him so much that he just determined to get out of poverty and never go back and he did he got a head like Abe Lincoln. Educated himself in lawyers offices and so on. He had to leave college because he couldn’t pay the tuition anymore but he educated himself. And since he was utterly brilliant it, wasn’t all that hard and he had an attitude that was pretty damned extreme, I would say. He had it that you have a moral duty to not to make yourself as unignorant and unstupid as you possibly can and that it was pretty much your highest moral duty. Maybe taking care of your family came first but [it’s up there] in the ranks of moral obligations. He was conventionally religious, so it may have been a religious duty to him.

  1. On Rationality: But he really believed that the rationality was a moral duty and he worked at it and he scorned people who’s on the other hand.

But he really believed that the rationality was a moral duty and he worked at it and he scorned people who’s on the other hand. As a judge he started with the idea why would anybody rob a train or whatever, a federal crime on those days. He was pretty hard on people who did it and I noticed as he got older and older and older he was willing to call a man a good man on easier terms then he started out with him. I think that was a correct development by the way. When he relaxed a little he was still pretty tough but he did relax a little which I thought was appropriate.  I was influenced by such people.

  1. On Grandfathers’ Wisdom: Anecdote on Pharmacy & Banking

When the thirties came, one son-in-law was a musician of course he couldn’t make a living so my grandfather didn’t have that much money sent him to pharmacy school carefully picking a profession that couldn’t fail and found him a bankrupt pharmacy to buy and loaned him the money. My uncle was becoming prosperous and remained prosperous the rest of his life. My other uncle was at a bank in Strasburg Nebraska but there were nine hundred and sixty-eight people in Strasburg and there were two national banks and the capitalization of my uncle’s bank was $25,000 and of course he was a lovely man but he was an optimist and a banker should not be an optimist. [Laughter]

And when they closed the banks in 1933, the bank examiners came in, and they said [it] can’t reopen, and it was the only business he had. Well, Judge Munger had always saved his money, and he had a lot of good first mortgages on homes occupied by teetotalling German butchers and people he’d carefully pitched. Of course, he never had a default. I was in the right neighborhood. The people were sober, hard working and so what my grandfather did is taking a third of his good mortgages which is all he had and put them into the bank and took all the lousy assets out of the bank. So he saved two out of three of his children. I thought it was a pretty good thing to do and very sure the way he did it. He actually got most of his money back ten or fifteen years later out of the assets of the bank when World War II: that was a good lesson.

My grandfather on the other side, his main business had gone broke in 1922 with all the other wholesale dry goods houses. What he did was he was broke and he cut his house in half and moved that family in. And in the other family, the guy was an honors graduate of the Harvard School of Architecture and he was very prosperous in the 20s in Omaha and had a wonderful life. The 30s came and the total building permits was  $25,000 a month and that was for furnace repairs or something. There was just no work, none, zero.

He moved to California and he lived for several years and finally he got the County of Los Angeles to hire this great Harvard architect for $108 a month after deductions. They they had him do drafting work but they classified him as a laundry man to save money and he could actually rent a house for $25 and feed himself and rent an old car. He could live on $108 a month. It’s amazing how poor everybody was. And what happened to that grandfather was along came the FHA and they had a competitive civil service examination. He was a very brilliant man of course. He was first in the exam and that made him a chief architect for the FHA in Los Angeles where he spent the rest of his life.

I watched all these families coping with all these difficulties. I’ll say this: it sounds awful but they weren’t all that unhappy. You can cope pretty well because you get used to it. That’s a nice thing about the human condition. I mean you get to be my age you got a lot of horrible things to get used to. [Laughter] It’s just one new indignity all the time. A friend of mine says a good day when you’re old is when you wake up in the morning and nothing new hurts. [Laughter]

  1. On Omaha Experience & Background: That’s my experience in Omaha. But that background of all these people: educated and civilized and generous and decent and a lot of them had good sense of humor. It was a pretty damn good place to grow up in and my memory is of being surrounded by a lot of very fine people and I think the whole thing was privileged. I look at my background, it’s absolutely privileged. I’m proud of being an Omaha boy. I sometimes use the old saying: they got the boy out of Omaha but they never got them all out of the boy and so all those old-fashioned values family comes first. Be in a position so you can help others when troubles come. Prudent sense of a moral duty to be reasonable is more important than anything else, more important than being rich, more important than being important – an absolute moral duty because none of my intelligent relatives suffered terribly because they didn’t advance higher.

So, anyway that’s my experience in Omaha. All these people were educated and civilized and generous and decent and a lot of them had good sense of humor. It was a pretty damn good place to grow up in. My memory is of being surrounded by a lot of very fine people and I think the whole thing was privileged. I look at my background, it’s absolutely privileged. I’m proud of being an Omaha boy. I sometimes use the old saying: they got the boy out of Omaha but they never got Omaha out of the boy. [We have ] all those old-fashioned values: family comes first, be in a position so you can help others when troubles come, prudence, sense of a moral duty to be reasonable is more important than anything else, more important than being rich, more important than being important – an absolute moral duty. Because none of my intelligent relatives suffered terribly because they didn’t advance higher.

Q: Right, yeah, one of the things I’m fascinated by is (I mean this was in the 20s and 30s) in the level of detail that you recall about their experiences and how that shaping your experience is, I’m trying to give people a flavor of something that nobody else can remember. I mean you’re a student of the people that you’re that you’re experiencing. So you grow up in Omaha Nebraska you find yourself in Ann Arbor Michigan, how does that happen?

  1. On How He Went To Michigan: Very simple I wanted to go to Stanford. [Laughter] And my father said to me, Charlie (I was the only son, two sisters) he says, I’ve got two daughters. They educated right after you, I don’t have unlimited money. He says, “I will send you to Stanford if it really means a great deal to you. But I’d rather you pick a university in the Midwest much better than mine (which was the University of Nebraska, and that was obviously gonna be Michigan.) What was I gonna say? Well, screw you, send me to Stanford. [Laughter] Well, I didn’t say that. I went to Michigan. So, I have never regretted that at all.

Very simple I wanted to go to Stanford. [Laughter] And my father said to me, Charlie (I was the only son, two sisters) he says, I’ve got two daughters. They educated right after you, I don’t have unlimited money. He says, “I will send you to Stanford if it really means a great deal to you. But I’d rather you pick a university in the Midwest much better than mine (which was the University of Nebraska, and that was obviously gonna be Michigan.) What was I gonna say? Well, screw you,  sent me to Stanford. [Laughter] Well, I didn’t say that.

I went to Michigan. So, I have never regretted that at all. At Stanford, people came to Stanford in the 30s with their string of polo ponies, and it was a very upscale fraternity-sorority culture. I used to call it the co-educational Princeton of the West And people loved it and so forth but literally, you call it a Stanford with a string of polo ponies. Just say I’m bringing this back to you, young people – the time you can’t remember. Who was it you ever know in college that came with a string of polo ponies?
Not very many people. You know they go, they’d be in the ROTC, but they had their own string of polo ponies. You could win better if you have your own string.
Q: So you come to Michigan, and you study math for a year?

Yes, but I don’t get credit for that, when I was young, I could get an A in any mathematics course without doing any work at all. And so I always took math because it meant that I could literally [not have] any problems. That’s [why] I just did the math and so I should not get credit as some budding mathematician. I was choosing what for me was the easiest way to think about what I want to do instead of what somebody else wants me to do.

Q: Come to find out [that] it ended up being a subject that has, I think paid, some dividends?

Hugely! Yeah, but this will interest you. In this world where people have all these algorithms and computer science and fancy math and so forth, neither Warrren nor I ever have ever used any fancy math for business, and neither did Ben Graham who taught Warren.

Everything I’ve ever done in business could be done with the simplest algebra and  geometry and addition multiplication etc. I never used calculus for any practical work in my whole damn life. I was a perfect whiz at it when they taught it to me and by the way since I never touched calculus not one after I was 19 years old, I’ve lost it. It’s  symbols would mystify me and but I think you’ll find that if you really know the basic stuff, its enormously useful and only a very few people are gonna need any calculus.

Question: So you study math at Michigan and then the war comes calling? Yeah, you moved to California, and you study meteorology?

Well, that was because I was too dumb to do what I should have done. With my background,  I should have gone to the naval ROTC because I hated infantry which I had done for four years in high school, rising to be the second lieutenant, which is a very low rank. [Laughter]

And of course that was about five feet-two – I got my growth late. So I was not your ideal of a manly soldier in high school.

  1. Why He Studied Law? Well my grandfather and father had been lawyers, and I knew I didn’t want to do everything else, it’s very simple. I didn’t want to be a doctor. I didn’t want all the blood and misery and so forth and the repetitive work. I knew I didn’t want to go to the bottom of a big organization and crawl my way up. I’m a natural contrarian and that was not going to work for me. I found that people could tell me when I thought they were idiots and that is not a way to rise in a big organization. And so I couldn’t do that and so now I’m left with law. I admired my father and grandfather – a good life for them. So I naturally drifted into it. I think people are still going to law school for that reason. It’s the least bad of options, considering their interests and ability. I guess now people go to business school; some of them, many of the people in this room I think are gonna go to business school: the least bad of their options. And all I can say is that that’s the way it worked for me and it’ll probably work for you. It worked out okay, you were okay.

Q: So, when you went to Harvard Law Why law?

Well my grandfather and father had been lawyers, and I knew I didn’t want to do everything else, it’s very simple. I didn’t want to be a doctor. I didn’t want all the blood and misery and so forth and the repetitive work. I knew I didn’t want to go to the bottom of a big organization and crawl my way up. I’m a natural contrarian and that was not going to work for me. I found that people could tell me when I thought they were idiots and that is not a way to rise in a big organization. And so I couldn’t do that and so now I’m left with law. I admired my father and grandfather – a good life for them. So I naturally drifted into it. I think people are still going to law school for that reason. It’s the least bad of options, considering their interests and ability. I guess now people go to business school; some of them, many of the people in this room I think are gonna go to business school: the least bad of their options. And all I can say is that that’s the way it worked for me and it’ll probably work for you. It worked out okay, you were okay.

So, I had to leave the profession. Well, it was a dumb profession for me. So, that’s actually what I want to ask. So you moved to California, you actually started a law firm and then practice law for some period of time?

  1. Zero choice is pretty powerful.

I had no alternative, and then you had an army of children almost immediately.
[Laughter] I painted myself into quite a corner.

Q: Yeah, so zero choice is pretty powerful?

CM: Yeah, for sure.

Q: Yes, yes of course. So you practice law, and then you leave law, in the firm that you helped found and moved over to investments?

CM: Well, but that sounds miraculous. [Laughter]

In fact, it was rather interesting. I probably got paid about $350,000 in my first 13 years of law in total, and I had an army of children and no capital to start with, and when I chose this alternative career I had over $300,000 in liquid instruments. So I had, and that was 10 years of living expenses, so I was not a courageous venturesome  admirable man I was a cautious little squirrel. [Laughter]

Saving up more nuts than I really needed it and not going very deep into my pile of nuts. And so that was it. It wasn’t that courageous and I kept one foot in the law firm while I tried my capitalist career, but as soon as the capitalist career succeeded I intended to lift that second foot because I recognized that the potential of law practice as I saw it then. I didn’t anticipate the boom that came to the big firms. I just saw this being more difficult I wanted more independence [than what I was] going to have her as a lawyer. I hated sending other people invoices and needing money from richer people. I thought it was undignified. I wanted my own money, not because I loved ease or social prestige. I wanted the independence.

Q: Well, and when you so you founded Wheeler Munger & Company, so that was the investment firm?

Yes and I [created five] real estate projects that I did both side by side for a few years, and in very few years I had three or four million dollars.

Q: And for a number of years you outperform the market 2x, 3x, and so why did you then leave Wheeler Munger & Company and then move to now what you’re doing?

  1. On Having a Fiduciary Gene

Well, I had three or four million dollars which was a lot of money to then and I also knew how to handle that three or four million dollars very well by that time and so, I knew I didn’t need to get fees and override some other investors. And I found that when you got into things like this 70, 74, 75 crunch which was the worst since the 30s. I didn’t suffer, I knew everything was going to work out but the quoted prices of these things really went down to ridiculous levels and some of my investors I knew were suffering: “you know I needed the money”, and of course I have enough of fiduciary gene that pained me greatly and so I said it’s just it’s like them my grandfather once they asked you how he felt wouldn’t my aunt divorced my uncle he said I feel just the way I did  when they [lanced] my carbuncle, and that’s the way I had a carbuncle, my fiduciary gene was giving me pain, and I lanced the carbuncle. I just lived on my own money no fees no overrides no salary just seemed more manly to do when I knew it would work.
Q: And so, at what point did you meet Warren? CM: 1959.

  1. On Success of Berkshire: The reason is it’s been successful is we try and buy things that aren’t gonna require much managerial talent at headquarters. Everybody else thinks they’ve got a lot of managerial talent at headquarters and that’s a lot of hubris. If the business is lousy enough, it gets a wonderful manager for the business, it’s the reputation of the business that’s going to remain intact. You can’t fix these really lousy businesses, you can wring the money out whatever comes in liquidation and do something else with it, but most lousy businesses can’t be fixed.

And so where did Berkshire Hathaway come from regarding this partnership that you all have now had for two decades? Well, Warren had been taught by Ben Graham to buy things for less than they were worth no matter how lousy the business was. You can’t imagine a more lousy business than New England textile mills, because, textile is a congealed electricity and the electricity rates in New England were about 60 percent higher than TVA rates. So it was absolute, inevitable certain liquidation. Now Warren should have known better than to buy into a totally doomed enterprise. It was so damn cheap, we get bad at a big discount from liquidating value. So he bought a big giant {finally] all the business but the business was gonna die. So the only way to go forward from there was to wring enough money out of this declining texile business, to have more money than the paid to get in and use it to buy something else. That’s a very indirect way to proceed and I would not recommend it to any of you just because we did some dumb thing that worked. You don’t have to repeat our path and of course we eventually learned not to buy these cigar butts when they were cheap and did these painful liquidations and stood by better businesses that’s the main secret of Bekshire, the reason that Berkshire has been successful as the big conglomerate, more successful than any other big conglomerate so far as I know, any other big conglomerate in the world.

The reason is it’s been successful is we try and buy things that aren’t gonna require much managerial talent at headquarters. Everybody else thinks they’ve got a lot of managerial talent at headquarters and that’s a lot of hubris. If the business is lousy enough, it gets a wonderful manager for the business, it’s the reputation of the business that’s going to remain intact. You can’t fix these really lousy businesses, you can wring the money out whatever comes in liquidation and do something else with it, but most lousy businesses can’t be fixed.

Q: But at the time Warren was doing what he was doing and so, yes, how did you convince him?

I helped him. He bought a windmill company in a little town in Nebraska and Warren didn’t know anything about running a windmill company. Why? Because it was cheap.  He said why can’t you fix my windmill company, who can you get to help me. I said I’ve got just the man for you and so one of my old colleagues from transformer business who was an accountant. I said he will fix your windmill company and Warren was desperate, he just hired him on the spot.

And Harry walked in the first day this little town [with] this big collection of windmills and so forth. A whistle blew and the whole plant stopped for 15 minutes. What the hell is this? Well, it’s a respect for a town funeral, we blow this whistle and stop for 15 minutes,. There he said, that’ll be the last time. He just approached everything that way, Another thing he did is he cut away all of the fat that he didn’t need. And then he found there were certain parts where we’re the sole supply, and he raised all the price of those parts. You can see what a business genius we are.

Q: So, how did you convince Warren to stop buying the bad apples and start buying the good apples?

  1. On Careerist’s Thinking Vs Owner’s

Warren, he gave me credit. He was gonna learn it any way. He just made so much money in this other stuff. He’d been taught it by Ben Graham. It was hard for him to quit when he was just cleaning money. But he saw the point and well you couldn’t scale that business and it was kind of scroungy and unpleasant when you’re firing people. Who the hell wants  to do that.

So we just run no money out and bought better businesses. We’ve been doing it ever since, coming to business not as business school graduates but as people who had owned portfolios or securities. We thought like capitalists because we were always in the shareholders mindset. A lot of people running the businesses think like careerists.

And believe me, you got to think like a careerist to some extent if you’re in a career, but it also helps to look at the business strategy problems as though you’re an owner. So my advice to you is you don’t never get to be a careerist so much you don’t see it from the owners point of view. That’s what General Motors did [when] they had a bunch of careerists, and an owner would have seen immediately that situation was hopeless .

They just romped through it with a lot of denials and pomposity and of course they went bankrupt. The mightiest company in the world went bankrupt and none of those hotshot executives thought like an owner. They would have seen that it was hopeless. It was hopeless the way they were handling it well.

Q: With Berkshire in the way that you all manage both headquarters and the businesses that you own you are putting talent in place who think like shareholders, not careerist. So, how do you when you’re buying a business, how do you or bringing talent into an existing business, how do you evaluate talent to see are they going to think more like a shareholder?

A private equity frequently buy a business where the founder is going to leave. Then they go out and hire a talent to run it. That is a tough way to make a buck, and I don’t like it. We generally buy with the talent in place, maybe some guy in the number two place and we put him in the number one place. But we very seldom [I can hardly think]  of any place where we bought something and put somebody in after Harry Bottle.

And no we don’t do that, and it’s amazing how long we have some of those people stay. Warren always says we can’t new dogs the old tricks.

  1. On Difficulty of Teaching New Dogs Old Tricks

Q: What’s the implication of not being able to teach the old dogs new tricks or new tricks to old dogs?

When if we look at what’s happening in business today, what we see is exactly, we can’t teach the old tricks to the young dogs. That’s what we found and so we keep the old dog in place. [Laughter]

Q: But that’s not the norm right?

I mean if we look around, like, no, it’s a norm in life. Normally it’s very hard to get where you got a wise old dog and a young dog that could match him. That’s hard, by definition, he’s survived a big culling process. I mean he’s unique and he’s got a record to prove it.

And by the way everybody thinks you can judge people by an interview. And of course you know who you like, you know you don’t like but everybody over estimates how much you can tell in prediction by meeting somebody. We all like to think that we have that capacity but it’s a vastly stupid type of overconfidence. The paper record has about three times the predictive value of your impression interview. And of course we’re buying great paper records. It’s so simple.

Q: But it’s fascinating to me if we look around business generally, the movement of people across firms and there’s always new dogs, and you’ve taken a contrarian position to that and managed Berkshire differently.

Of course, we’re still hiring young dogs. But it’s amazing how much of the record of Berkshire has come from the old dogs who are in the business when we buy them.

You can’t believe how good those people have been there’s one huge exception in the new dog department. I almost despise the business of executive search because I find that they really want to sell you the best that’s available even if there’s no damn good and I don’t like that.

But the best single experience that we ever had is when we paid an executive recruiting firm to find us Ajit Jain. He comes in a little tiny insurance operation, he didn’t have any experience of insurance at all, he was an honors graduate of the main technical institute in India. Hw was a very smart man, but he came in and created the only big business we created from scratch. And how he did the whole damn thing of course he talked with Warren every night and so it was like father and son, married this is a very Confucian company. But that was unbelievable. So we had an executive recruiter here brings us in India dad with no experience at all insurance. He talks about it to the old man every night and it’s now by far the biggest reinsurance business in the world. That’s been a gold mine. There’s at least 60 billion dollars in Berkshire of net worth that Ajit has created that we would not have created without him.

And the value is way more than 60 billion. I mean that there’s that much an extra just liquid net worth, but the value of the business is way more than 60 billion.

  1. On Bitcoins: I think it’s perfectly insane to even pause to think about them. You know it’s one thing to think that gold has some marvelous store value because man has no way of inventing a more gold or getting it very easily, so it has the advantage of rarity. Believe me, man is capable of somehow creating more Bitcoin. They tell you they’re not going to do it. But what they mean they’re not gonna do it is if they don’t want to. That’s what they mean. When they say they’re not going to do it, they say their rules and they can’t do it don’t believe them. When there’s enough incentive, bad things will happen. It’s bad people, crazy bubble, bad idea, luring people into the concept of easy wealth without much insider work. That’s the last thing on earth you should think about. If it worked it would be bad for you ‘cos you’ll try to do it again

  2. On Things To Avoid: It’s totally insane, and by the way I’ve just laid out a wonderful life lesson for you, give a whole lot of things a wide berth, they don’t exist, you know crooks, crazies, egomaniacs, people full of resentment, people full of self-pity, people who feel like victims. There’s a whole lot of things that aren’t gonna work for you. Figure out what they are and avoid them like the plague and one of them is Bitcoin.

Q: So, Charlie, I’m gonna I’m going to turn to a few questions from the audience as we as we start to wrap up probably half my questions here are about Bitcoin and cryptocurrency

I could answer those very quickly. [Laughter]

I think it’s perfectly insane to even pause to think about them. You know it’s one thing to think that gold has some marvelous store value because man has no way of inventing a more gold or getting it very easily, so it has the advantage of rarity. Believe me, man is capable of somehow creating more Bitcoin. They tell you they’re not going to do it. But what they mean they’re not gonna do it is if  they don’t want to. That’s what they mean. When they say they’re not going to do it, they say their rules and they can’t do it don’t believe them. When there’s enough incentive, bad things will happen. It’s bad people, crazy bubble, bad idea, luring people into the concept of easy wealth without much insider work. That’s the last thing on earth you should think about. If it worked it would be bad for you ‘cos you’ll try to do it again. [Laughter]

It’s totally insane, and by the way I’ve just laid out a wonderful life lesson for you, give a whole lot of things a wide berth, they don’t exist, you know crooks, crazies, egomaniacs, people full of resentment, people full of self-pity, people who feel like victims. There’s a whole lot of things that aren’t gonna work for you. Figure out what they are and avoid them like the plague and one of them is Bitcoin. [Laughter]

And the worst thing would happen if you won because then you do it again. It’s total insanity, and it’s so easy to simplify life from just all these things that’re beneath you. I People who are crowding Bitcoin, I don’t wanna know my address.

Q: So Charlie, what I hear you saying is you’re not going to be investing in Bitcoin, is that fair?

I think that’s fair.

Q: So let me move to a similarly maybe controversial topic. if you read the news recently, but there’s a lot of tax policy conversation going on both here in California and nationally as well. What’s your thought on where this ends up in terms of the policy?

I think we will get a tax bill.  I think they will squeak it through, and they’ll make whatever adjustments they have to get the last few votes. I don’t think it’s a bit crazy to give this extra two thousand a year to all those people who make $70,000 a year and have a lot of children. That strikes me as it’s good politics and probably good policy.

I also do not think it is crazy to reduce the corporate income tax on the C corporation. If  you look at the world, a lot of the places that it worked best, including Singapore and so forth, have that policy and may even have good macroeconomic consequences.

A lot of the people who are screaming about it and are so sure it won’t work. They may not be right, it may actually work pretty well, it causes the capital values of the companies to come up and there’s a wealth effect from the increased market value of all the companies

Everybody recognizes there’s an effect but people some people say it’s small and some people say it’s going to be large and I’ll tell you what they all have in common none of them know.

It is not totally inconceivable it might work pretty well. And with so much of the world doing well with similar tax policy and of course, the Democrats go berserk on this subject and but, I think they’re wrong. It may actually help them. So, I not sure it’ll work, it may not, but it’s not totally crazy.

Q: Well it reminds me of a piece of advice that they you’ve offered and given to me which is you know, people often have a point of view and the danger in and having that point of view is you start to assume with certainty that you’re right. CM: Absolutely! Totally Crazy.

Q: And I think what your point of view is you need to have a point.

Just a minute, Here’s a very important subject I’m thinking about all my life. You ask for my opinion. I don’t really know how well is gonna work. I don’t think anybody else does either. I think it’ll work to some extent, but how much, I don’t know.

  1. Anger comes in, reason leaves

Now is it unfair well the corporations are by and large owned by a bunch of charitable endowments and by a bunch of pension plans and the whole world is going into a world where they’re trying to have the business interests of the company support their huge pension obligations getting bigger all the time. China is trying to do exactly what the Republicans are. China wants to have the main businesses in China owned more by the pension plans and the stocks to do well. I don’t think China’s crazy to have that. I don’t think you’re Republicans are crazy either. It could work pretty well, and it’s not just some evil thing that people are cooking up. It’s a disagreement between people and both sides who have violent hatreds and contempt for the other side. They’re wrong. It’s a disagreement on policy that ought to be civilized. When I see Congress on my television set and the degree of hatred they have, utter contempt I mean really serious way more than as usual. It’s evil to hate that much. It’s a mistake to hate that much – that much hatred will turn – it’s always been true as anger comes in reason leaves, it’s a truism. So, do you want to adopt a political point of view or you’re angry all the time. If you do, welcome to the house of misery and pretty low worldly achievement to boot. So if that’s what you want, you’ll just find how to do it:  Behave like those people you see on television from both parties by the way

Q: The other thing that’s true going back to any earlier comments is the difference between a careerist mindset and a service or shareholder mindset we’re in politics we have the emergence of a careerist mindset that is shaping how people behave because they’re trying to survive.

Only that they have a groupthink just as the Moonies go crazy because they hang around together. So do our politicians. Yeah, do you want to go crazy, is that what your ambition in life is? You start with some advantage, just make yourself a violent believing politician on either side, you’ll turn your brain into cabbage. You know you’ve  got one brain. Why would you want to turn in a cabbage? [Laughter]

Q: So, Charlie, I’ve got a question here what’s the new amazing technology that you’re most excited about?

  1. On What Adam Smith Missed

CM: Well, I tend not to get very excited about it. I think that technology changes the world. That reminds me of the other thing. If I ask you what was the biggest the worst single mistake in the work of Adam Smith, you know I know I’d get oh. I don’t see everybody big eyes lighting up. The biggest mistake in the work of Adam Smith was (although he was totally right about markets and so on and the advantages of trade division of labor and so forth) what he missed was how much the steady advance of technology would advance, wealth and standards of living.

He in the 1700s, was living not too much differently than the way they lived in the Roman Empire and he just missed it but, and there in fact had been huge improvements in technology but he just missed that he wasn’t very technically minded and it was really stupid, and now I ask you a harder question what was the worst mistake David Ricardo made? I’ll bet the Dean can’t answer this question I’m not going to ask you to try. [Laughter]

  1. On What Ricardo Missed

I’ll tell you the answer, David Ricardo missed: he got the first-order consequences of trade perfectly right and it was not an obvious insight and it was a great achievement which it is. But he didn’t think about the second-order consequences, he wasn’t mathematical enough to see and he wasn’t mathematical to think what would happen in one country which had way higher living standards than in another.

Like Adam Smith he missed in the main issue in a place like the United States. If you have an advanced nation and some other nation which is numerous but the people on average better than yours in terms of their innate quality which I think is roughly true of China and they’re in poverty living in caves and they’re caught in a Malthusian trap. And you got an advanced economy and you suddenly go into free trade. What is going to happen is [according to] Ricardo program both sides are going to live better right?

  1. On The World Being Big Enough

But the people here that are assimilating all great economies of the world say they’re going to go away faster. So you go up two percent a year and they go up twelve and pretty soon the other dominant nation in the world and you aren’t.

Well, are you really better off well the answer is no and we’re can’t don’t ever figure out any of that stuff. I’m so I’m telling you that so that you can fix your inadequate knowledge of Ricardo. But one of the interesting problems of that is you can’t understand Ricardo properly and thinking about the United States free trade with China, without thinking about the tragedy of the Commons. Because if we are the only nation in the world except for China, we could say won’t trade with them. We’ll just leave them in their damned agricultural poverty and we’ll just you know and we could probably have done that. Well the whole rest of the will trade or they’re gonna rise anyway, so, we have any power to hold back the rise of China by not trading with them? So we had to do what we did and once you do that, now there’s going to be a greater power than we are. And the two of us are gonna be big enough so we can accomplish pretty gently anything we both want to do. So we have to be friendly with China. So, you can imagine how I like Donald Trump complaining about these Chinese. It’s really stupid. It’s a compulsory friendship.

You must be out of your mind to do anything else. Why wouldn’t you want to have an intimate, friendly relationship with the biggest other power in the whole damn world? Particularly when they got what’s atom bombs. It’s just nutty we have no alternative but to do this.  And when that happens you’re gonna get a certain amount of misery at the people who are competing with the Chinese as a race out of poverty with trade and so forth that was inevitable.

It’s not the fault of the once evil Republicans who don’t love the poor. That is just total balderdash. It just happened, and we didn’t have all these choices.

Q: So Charlie, in wrapping up we’ve got I don’t know roughly 250 300 people in the room tonight and many of them looking at their futures, their careers with many decades ahead of them.

I wish I had many decades I’d trade some large numbers if I could just buy some more life expectancy. [Laughter]

Q: What, as you look back on your life experience, is the most important piece of advice that you would offer everyone in the room tonight as they look forward and into their futures?

CM: Well, a few obvious ones, they’re all ancient, Ben Franklin. Marriage is just like the most important decision you will have, not your business career. It’ll do more for you good or bad than anything else. Ben Franklin had the best advice ever given on marriage: he said keep your eyes wide open before marriage and half shut thereafter.
[Laughter]

It’s amazing how if you just get up every morning and keep plugging and have some discipline and keep learning. It’s incredible how it works out okay, and I don’t think it’s wise to have the ambition to be president of the United States or a billionaire or something like that because the odds are too much against you. Much better to aim low.

I did not intend to get rich I wanted to get independent, I just overshot. [Laughter]

20. On Not Discounting An Element Luck Even If You Have All The Right Attributes

And by the way, while you’re clapping, some of the overshooting was accidental. You can be very deserving and very intelligent, very disciplined but there’s also a factor of luck that comes into this thing. The people will get the good outcomes that seem extraordinary [came] through the people who have discipline and intelligence and good virtue plus a hell of a lot of luck. Why wouldn’t the world work like that so you shouldn’t give credit for the unusual.

A lot of the people [including] a my friend of mine said about a colleague of his in his fraternity: he says “old George was a duck sitting on a pond and they raised the level of a pond.” There are a lot of people would just walk into the right place and rise and then and there are a lot of very eminent people who have many advantages, and they’ve got one little flaw or one bit of bad luck and they’re mired in misery all their lives but, that makes it interesting to have all this variation.

Well, Charlie, on behalf of everyone here thank you for your wisdom. I often say as an educational institution we not only can provide people with knowledge but the most important thing we can do is give them wisdom and judgment. Your comments, I know for me and I expect for everyone in this room tonight, have added to our wisdom and our judgment and [are] also inspiring at the same time. Thank you very much.

P/S: The transcription is done over several cups of tea and may not be 100% accurate. For verbatim absorption of wisdom, please watch the video instead.

 

 

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