Excellent Book: Charlie Munger For All Seasons
https://www.facebook.com/groups/charliemungersays/
http://www.rbcpa.com/DJCO_Meeting_Detailed_Notes_2013.pdf
Pointer 13: (On Institutional Money Management Market) There’s a bunch of Pied Pipers who are always selling some new thing that everybody can try. It’s a crazy, dysfunctional system.
Shareholder: If you’re design a proxy statement and you’re trying to think about a couple simple long term metrics to incentivize management. What would you think about?
Munger: Well, if you want to talk about that subject, which is really interesting from your point of view… you have touched a real nerve. What has happened, of course, is that institutional money management has been hooked with the aid of these consultants, whom I can’t stand. So everybody wants to raise the indexes and they’ve got 50 different indexes, but everybody’s racing an index. The monthly statement shows how you performed that month in relation to the index. Your shareholders who’ll make the decision as to whether or not to buy the stock are institutional money managers and they’re worried about not losing assets and fees that are related to the assets from getting behind the other people? That is a dysfunctional, stupid system and it gets stronger and stronger with every passing day. That is a serious problem.
I don’t think little changes in governance are going to fix something so awful. These people are locked in this horrible system, all the participants, and they can’t do much about it. They have to live there. They’ve got a wife and children and a mortgage, but they have to live in the system they’re in. It’s not a pretty system. The people who are profiting from it like it the way it is. It does cause extra action in terms of brokers’ commissions, and so on and so on, and more fees and more different kinds of investment vehicles.
It’s the same thing like the apricot pits for the cancer sufferer, or the guy who acquire his way to wealth, having failed in his basic business. If it doesn’t work, there’s a new investment vehicle, a new technique. There’s a bunch of Pied Pipers who are always selling some new thing that everybody can try. It’s a crazy, dysfunctional system. In a better world, we wouldn’t have all those incentives to make money on a short-term basis. To have everybody engaged in trying to out-think everybody else about what’s going to be bought next or be fashionable next, is a very dysfunctional system.
I don’t think you are going to have great improvements in governance by tinkering with the rules about proxies, when the whole damned system is fundamentally flawed, when people have these perverse motives. I look at the votes on these. Everybody votes with ISS (all these institutions) and they’ve got formulas, and what they are is pro-takeover. If you’re a money manager, and you get four takeovers in a year out of your portfolios, that may be the difference between fired and not being fired. So, the institutions like takeovers, but I’m not sure we want everything in America taken over by Carl Icahn. Would that be a great outcome for the country? I don’t think so.
I think the whole subject of proper governance is a really important subject, but I would argue that the compensation system is crazy, the institutional money-management system is crazy, and the rewards system is quite unfair in many cases. People are voting themselves money they’re not entitled to. It’s not a good system, and I don’t think there’s any easy fix. Well, there is an easy fix, but it’s not one that would be easy to get through by vote.
Pointer 14: Crazy to think everybody is going to have wonderful results from investing.
Shareholder: Markets are making five year highs, what do you think …
Munger: Well, I’m not shocked that the market goes up after a long period after which it has gone down, particularly with long-term interest rates that are practically zero. I’m not surprised. That’s one of the reasons that they would journalize a bunch of securities and whatnot. That doesn’t mean that we’ve reached the hog-heaven condition for the investor. It just may mean that common stocks are a better bet than long-term bonds, but that doesn’t guarantee wonderful results for everybody in common stocks.
I think the idea that everybody is going to have wonderful results from investing is inherently crazy. Nobody thinks everybody is going to have wonderful results from playing poker. In the end, the wealth of the country is based on the productivity of the country, which only advances so fast. Of course, if you pay more and more people for not working, it’s hard to see how that grows the productivity of the country.
Pointer 15: Rudyard Kipling’s “If? Is great: “If you can keep your head when all about you are losing theirs,” and so on and so on, and if you do this, “You’ll be a man, my son.” But he also irritated many literature professors by saying, “A woman’s only a woman, but a good cigar is a smoke.”
Shareholder: You talked about modern institutional money management. How would you contrast that system with what you were doing in the late 1960s, your mindset and how you went about your business?
Munger: Well, there were some delusions we avoided. Other people thought that you hired very intelligent people, who’d worked very hard to learn their trade and taken tests making them certified whatevers, and then you organized them into specialties. One guy would study chemicals, one would study autos, one would study this and that. So, you had 100 different specialists in 100 different fields, all with high IQs and all working very hard, that they could invest in big common stocks using this wonderful system, and gain an advantage over other people.
There’s only one trouble with this idea. It doesn’t work. It’s just too competitive. Too many people are trying to do the same thing. We had a different idea. We always thought that a good investment idea was hard to get, usually, and that by working hard, you might get a few of them.
We never had the idea that just by hiring smart people, we could be good at understanding 5,000 different securities or even 100 different securities. I just had the idea that maybe we could find a few, often enough so it would serve our lifetime needs, and we were patient and we waited and we occasionally made a few investment decisions.
In my personal accounts, guess how many securities transactions I had last year. Zero. We are not normal. Can you imagine trying to run an investment management operation with transactions of zero? Anyway, we do have differences, a few decent places. What do the Munger’s own?
They own Berkshire, they own Costco, and they own a bunch of Asian securities with a guy who’s like Charlie Munger born again, except he’s younger (presume he’s talking about Li Lu). Do I need more diversification. But if you went to the average school in your district and said, “Is this a suitable investment decision?, they’d say the man who made that decision is crazy. That is not the way to intelligently invest money. I guess I just give all the money back. I didn’t do it in the right way.
But it is the right way. It’s the other people who are wrong. If you want to get rich, you’ll need a few decent ideas, where you really know what you’re doing. Then you’ve got to have the courage to stick with them and take the ups and downs. Not very complicated, and it’s very old fashioned. Haven’t I described (Rudyard) Kipling’s poem, “If?” “If you can keep your head when all about you are losing theirs,” and so on and so on, and if you do this, “You’ll be a man, my son.” I think Kipling’s poem, If, is a great poem, even if it did come from a man who has somewhat irritated the English departments of the world by also saying, “A woman’s only a woman, but a good cigar is a smoke.” He’s not politically correct. He was right — So, I’m saying what still works is “if.”
Shareholder: Quick follow-up there…
Munger: It’s very old-fashioned. How could you teach it in business school? They teach that you have to have reverse rotation, sector rotation, God knows what in the hell they were teaching. I never paid any attention. Zero.
Shareholder: You talk about patience and long periods of dullness.
Munger: Yes.
Pointer 16: If You Made A Mistake, Admit, Change & Scramble To A Right One
Shareholder: What did your process look like back then at Pacific Coast Stock Exchange on a daily basis?
Munger: Oh, we had specialist but somebody else was doing that. I wasn’t making those decisions. That was just grunt work to make a little money, making a market. In those days, we were opportunistic and needed a few things. When we had a good idea, we went at it rather heavily. Sometimes we would actually trust an individual. When I went into that deal with Diversified Retail, that was one of the dumbest things that Warren and I ever did. We both went in on four department stores in Baltimore below the liquidating value of the company, Ben Graham style. We bought it half using bank loans from local people. I remember my share. I had 10 percent. It was $600,000. As the ink dried on the papers, we realized how ghastly the competition was, and how much capital to operate a department store, and that we were not that much better or different from the other stores, and that maybe department stores did not have the world’s greatest future. At least we had enough sense to quickly change our minds and managed to scrabble out of that having lost a few hundred thousand dollars out of $6 million we put up.
But in the course of doing that, other opportunities had come to us, and we borrowed the $6 million with no covenant. Now we had a huge panic. So we use all this capital, including the borrowed covenant, to buy all these ridiculously-priced securities, including some of our own. And so that failed, stupid investment, if you traced it through, it’s so many billions of dollars of Berkshire stock, you can hardly believe it.
To some extent, it requires scrambling, it requires the ability to change your mind. At least I’d chosen my associate. I thought that I had an associate that thought he could fix this department store. Warren never had one second — The minute he recognized what we were in, we both wanted out, which was the correct solution.
So all these things are lessons to you, but it’s this old-fashioned stuff that really works. Now, I don’t say it works to create a Money Minute, unless you have one like Mohnish’s (Pabrai), which is a copy of the Berkshire Hathaway system down to the last comma. By the way, he’s rich and happy. Look at him. He copied a good system. How many people do? There are not that many Mohnish’s. The system still works. You can even use it to create a money management business. You’ve got a man right in the front row who demonstrates it can be done.
Pointer 17: Don’t be too timid, when you really have a cinch. Go at life with a little courage.
Shareholder: Could you give an example of an investment decision …
Munger: Well, I don’t want to rehash the old investment decisions, but I’ll rehash a failure, because I believe in rubbing my noses in failure. Some of this is in Poor Charlie’s Almanac. This is one of the dumbest investment decisions I ever made. After I’d wound up (the Munger investing partnership), I was a well to do fellow, but I wasn’t, which I really wanted to do. I had enough so I didn’t really have to work, but I didn’t have enough so I could do any damn thing I pleased. A guy called me offering me 300 shares of Bell Rich Oil and I had the cash and I said, “Sure, I’ll take the listing.” It was selling there maybe a fifth of what the oil companies were. They owned the oil field. So I bought it. Then he called me back and said, “I’ve got 1,500 more.” I didn’t have the money on hand. I had to sell something. I think about it and I said, “Hold it for 10 minutes and I’ll call you back.” I thought about it for 10 minutes and called him back and didn’t buy it. Well, Bell Rich Oil sold about for 35 times the price I was going to pay within a year and a half.
If I had made the different decision, the Mungers would be ahead by way of more than a billion dollars, as I sit here now. To count the opportunity cost, it was a real bonehead decision. There was no risk. I could have borrowed. There wasn’t the slightest in borrowing money to buy Bell Rich Oil. The worst that would happen was I would get out with a small profit. It was a really dumb decision. You don’t get that many great opportunities in a lifetime. When life finally gave me one, I blew it. So I tell you that story to say you’re no different from me. You’re not going to get that many really good ones — don’t blow your opportunities. They’re not that common, the ones that are clearly recognizable with virtually no downside and big upsides. Don’t be too timid, when you really have a cinch. Go at life with a little courage. There’s an old word commonly used in the south that I never hear anybody use now, except myself, and that’s gumption. I would say what you need is intelligence plus gumption.
Shareholder question on BYD
Munger: BYD, Li Lu is in the back standing up. Li Lu, come up here. This is the man who got me into the BYD.
Li Lu: What do you want me to say?
Munger: Like it is. Why did you buy BYD when you did?
Li Lu: It really is a quite unusually talented group of people who were able to manage, to solve a problem like no other group of people I’ve ever seen. Like all other talented people, they have their ups and downs. But in the first 15 years since BYD was founded, he has 15 years uninterrupted period of time of compounding at about 75 percent annually. It’s nearly doubled every year for the 15 years in a row, for the first 15 years, with very, very little capital. They originally maybe $300,000 US, and these money twice, and altogether a few hundred million by the time they reached multiple billions in revenue.
Of course, that growth was accumulated with all sorts of different problems. Some of you who follow the stock, you have seen that in the last few years. And just like they have always done, they have dealt with it just the way it is. They have put their heads in the sand and solve the problem, one-by-one, and slowly but surely, after three years, they solved most of your problem. They’re now back on their feet and strong.
And the speed of which, they really mastered the technology. It’s just unprecedented. I’ve never seen anybody like it. For example, they got into the auto business in 2003, andproduced their first car in 2005. That’s only seven years ago.
Munger: And they did this with almost no capital.
Li Lu: Little capital.
Munger: And over our objection. [laughter]
Li Lu: They competed with everybody. The Chinese auto market is about as open a market as any market in the world, better than US. Every auto maker on the whole planet is really competing there. They all have much richer capital base, longer history, well recognized brand name and superior technology. Yet this little company was able to really stand on its feet, and now they’re probably selling 500,000 cars a year. But more importantly, they have a mastery of the state of the art technology from the traditional auto while really pioneering all the technology know how’s of the new cars and electric cars.
In a few years, all of the BYD cars are likely to be either hybrid, or platinum hybrid or electric, and also equipped with the state of the art technology from the traditional combustion engine, and also promising efficiency. It is not a normal feat. I cannot find it in any other group in this field.
Munger: The Korean’s did the same thing.
Li Lu: The Korean’s did it primarily on the traditional auto, and in a term, in a way to catch up with the traditional auto, but they have not, in a sense, pioneered a new technology pointing in a new direction. They just basically matched everybody else, that surpass in a certain area, but it’s no kind of making a new path. They also have a whole bunch of other driven areas that have creditable promises. That was really the reason we’re all quite enthused about it.
Munger: These are very unusual people. This is the son of pheasant who got through engineering school, what with the aid of a brother, and got a PhD in engineering at a young age, and so is a very talented human being. Of course, they are hiring young talented Chinese engineers. They are hiring them by the thousands. How many employees does BYD have now?
Li Lu: About 180,000 people.
Munger: They are young Chinese. I don’t want to compete with 180,000 young Chinese. I’d rather bet with them. Anyway, you ask a question, I think? You’ll have it direct from the horse’s mouth.
Shareholder Question: I was wondering when the electric car might make it to the United States. Can you expand on that?
Li Lu: Well, they have basically, I think correctly, chosen to focus, and going to treat the car effort into public transportation. Transportation rather than probably the largest contribution across the emission of pollution, and also they really would utilize the data on the battery, because they are on the road all the time. As far as I can tell, their battery probably has the longest hours on the road as we are speaking. There are probably tens of millions of hours accumulated on the road. Therefore the longer they run, if their batteries are good enough to run for a long time and of course after 30 million miles on the road, they have proved that point.
The longer you ride, the better and superior economics of the electric car has really become. At least in China, the differences of the electricity and the gasoline is about 80 percent off. That actually is here too, and in Europe, the economics are even more superior because of the surplus taxes on gasoline. Who is the 80 percent of the savings operation? The longer you’re on the road, the more savings you have. In fact, if you use for public transportation, for taxis or electric buses, just the saving itself within the several years could’ve produced multiple cars, given the expectancy of the battery life. At least the company believes that the battery would last longer than the car itself. If that were the case, they would be able to make multiple…the savings itself would pay for multiple cars within the life. So much so that the Chinese Development Bank recently have committed about 30 billion Chinese dollars in loan to finance a package that people can really pay to zero down. No down payment, to purchase cars and use only the equivalents of gas free cost to pay for the entire mortgage.They calculate, in the end, they will still make a profit, a large profit. If that becomes successful, it would really lay out a new business model for electrifying public transportation.
Given the air quality of Beijing and all the other cities in China, China has 7 of the 10 worst polluted cities on the whole planet. Public transportation contributes roughly a third of the emission. Electrifying the public transportation with BYD has proved A) doable, B) profitable, and C) actually good and providing enormous social benefit.
This is a line they’re correctly pushing in that direction, not only in the US, but not only in China, but all over Europe and all over South and North America. They have several dozen trials going on all over the major capitals of the world, as we’re speaking.
Munger: Yes, but tell them about Beijing, because this is very interesting. Beijing probably has the worst air pollution in the world. People are dying from pollution. Of course, it’s a huge metropolitan area. And the net purchases of BYD electric taxis and buses in Beijing is zero.
But we like that, because that leaves a lot to be done. Of course, what happens is the Chinese local governments have enormous autonomy. They favor the people that are providing jobs in Beijing, making standard automobiles. Yet if more and more people are dying, is that going to last forever?
Our bet would be that one way or another, China will get a lot more electric transportation and public vehicles in its heavily polluted cities. BYD is better at that than other people, and they may have quite the market. There are quite a few Chinese in some big polluted city. It’s a lot like the Daily Journal. It’s an upside that you’re really not paying for. We bought those little public notice rags, we got an upside that we weren’t paying for. That’s what we’re doing. But that’s more than you probably anticipated when you asked the question of BYD, and you had the man in America, who probably knows more about BYD than anybody else, to tell you what you want to know.
(missed a chunk here… )
That reminds me very much of a man I knew when I first came to California. The name was B. B. Robinson. In the pool operations of the late 1920s, he was a very young man. He scrambled out of the ruin of the great crash with about $10 or $11 million in cash and came out to California, where he spent his life doing heavy drinking and chasing young movie stars. Those days the banks were quite serious about the kind of clients they had. The leading banker took him out to lunch and said, “We’re terribly concerned about all this drinking and chasing movie stars and so forth.” B. B. Robinson looked this banker in the eye and he said, “If I were you, I wouldn’t worry.” He said, “My municipal bonds don’t drink.” In the sense the Daily Journal is like B. B. Robinson, we may have had a little flurry here of venture capital type investment, but we might actually succeed at it, and if we don’t, we still have a lot of municipal bonds that don’t drink.
We have assets that if this fails, we’re not alone in the world without resources. Yes?
Pointer 18: We’re just not interested in taking a substantial chance of taking a lot of very decent people back to “Go” so we can have one more zero on our net worth.
Shareholder: Charlie, you mention this idea of gumption — also have the courage to take advantage of things. Can you help us understand just a little bit more about how you balance those two, because from that example — obviously, it would to be aggressive, but there’s also the sense that Berkshire’s always been much more prudent and cautious than others.
Munger: Well, yes. That’s an interesting example. Berkshire, of course, if we behaved like Rupert Murdoch or somebody — that is, we used all the credit we could get all the way — Berkshire would now own the world. We have achieved what we’ve achieved with our hands tied behind our back. The reason for that is, of course, is that we have a fiduciary gene. We know the human faces. We trusted Warren when he was young and trusted me when I was young and so forth. In many cases, it’s their main asset in life. We’re just not interested in taking a substantial chance of taking a lot of very decent people back to “Go” so we can have one more zero on our net worth at the time, and they put us under the ground where we can’t come back anyway. We’re just not going to do it. We are not maximizes in the world of capital — aggrandizement through aggression. But what I did had no risk. There are real risks. We didn’t know the whole damn world was doomed — implode in something really serious in the last crisis. Berkshire was not buying hand over fist with its available resources. It was making sure that Berkshire remained through it no matter how awful the conditions got. Berkshire is a conservative way to face the world. If you want real aggression, why it doesn’t play its hand with that much aggression. It does in cinches. But if there’s real risk, even though the odds are in our favor, we’re not going to play too hard. And that’s just the way it is. What I’m telling you is when it’s virtually a cinch, or it’s in a gamble you can easily afford, and the odds are way in your favor and you know it for sure — I’m just saying don’t be timid. Gurin never needed that advice. He was never timid.