Book Release: Charlie Munger For All Seasons: http://charliemungersays.com/index.php/books/
Pearls of Wisdom 27. Berkshire model is so different from standard model that it has had only modest effect/copycats. There was a surgeon once who invented a very difficult surgery. Many saw it and said ‘I won’t do it – it’s too hard’.
Pearls of Wisdom 28. There should be no man fit to hold public office who isn’t perfectly willing to leave public office at any time.
Q34: Las Vegas. Berkshire has evolved into institution of learning. On Saturday you began to talk about how Berkshire would have effects on civilization after you both are gone. Could you elaborate? Have you or Warren documented your decision-making process?
CM: Berkshire model is so different from standard model that it has had only modest effect/copycats. There was a surgeon once who invented a very difficult surgery. Many saw it and said ‘I won’t do it – it’s too hard’. Many think we are nuts. Ben Franklin’s last recommendation to the Constitutional Convention was that government workers not be made a permanent professional class. I love that idea. There is a wise saying, ‘There should be no man fit to hold public office who isn’t perfectly willing to leave public office at any time.” We don’t pay directors anything, they all own lots of stock. They are wise. No one at Berkshire needs his director’s fee. Normal corporations pay $250k per year, and that is a lot of money to a college professor. But corporations of America would be better run if directors were unpaid. [clapping] You clap, but that idea is not spreading like wildfire. And I think Franklin was right. I think unpaid University Trustees are a good system. I think Walmart may be more important than Harvard. These are very important places. Who has the power is very important. If you stop to think about it, it is interesting to be a director, to interface with good people to solve good problems? Why should they want a lot of pay? We self-select for people who want a lot of pay, and I’m not sure that is best way to do it. If you like it, you carry the torch.
Pearls of Wisdom 29. Because you have identified the problem, doesn’t mean that is right for you. If you bought real estate for inflation, it went down.
Pearls of Wisdom 30. Sometimes salespeople love a second pair of shoes, and soon they start cheating someone to have a better life.
Q35: Is investing in a paper company that supplies central banks a good idea?
CM: Because you have identified the problem, doesn’t mean that is right for you. If you bought real estate for inflation, it went down. The nature of game is that it is hard. My son knew a man with a nice house. He had USD1m of securities. He was living in his house free and clear. But he felt he didn’t have enough. He sold puts on tech stocks in 2000. He lost his house and assets, and now works in a restaurant. Stretching to reach sacred needs is difficult. Needs should not be sacred. People who can handle credit and have discipline, they are the people I like. Sometimes salespeople love a second pair of shoes, and soon they start cheating someone to have a better life.
Pearls of Wisdom 31. We have submarkets everywhere and they are quite different. Pasadena houses are high priced. But it is run well, there are talented politicians. But I’d probably buy now in Pasadena.
Q36: De-inflationary environment?
CM: I don’t think every asset class and every region is the same. Now with interest rates at 4.5%, if I had good credit in Omaha I would buy a house in Omaha. But in other places there is more horror still to come. You have to make these judgments all the time. We have submarkets everywhere and they are quite different. Pasadena houses are high priced. But it is run well, there are talented politicians. But I’d probably buy now in Pasadena. Though I might buy at foreclosure…
Pearls of Wisdom 31. On China: I like Confucianism, I like work ethic, I like that rising leaders are engineers – that is my kind of communist. It is a great nuclear power. We’d be crazy not to get along with China, and they would be crazy not to be friendly to us.
Q37: Have you read man who loved china, by Ogilvy …. Obviously you have great interest in China. Why did China cease to being a leader in the world?
CM: Because there was a dumb self-satisfied emperor followed by a self-selecting group of Confucian bureaucrats. It got to be like French literature at Yale, it’s nutty. But now I think they get it.
Q38: It is also a huge population base with a huge pool of latent talent. Do you find something unique in China?
CM: I like Confucianism, and it pays attention to elderly males, and the love of learning, and their family mindedness. Wang Chuanfu – where will he get $300k to start his company? Well, he had a cousin. The cousin had an ethos – and out comes the $300k. I like Confucianism, I like work ethic, I like that rising leaders are engineers – that is my kind of communist. It is a great nuclear power. We’d be crazy not to get along with China, and they would be crazy not to be friendly to us. I think culture and genetics work together. There is a theory that the Chinese got talented because growing rice takes high IQs. That is not politically correct by the way. Somebody said rice growing regions smarter. I don’t know if true.
Pearls of Wisdom 32. If you take every leading civilization, they have all passed it on to someone else. Where is Egypt or Athens or London? It is nature of things that we do baton passing. It is state of nature that baton gets passed, to someone who tries harder and cares more.
Pearls of Wisdom 33. We don’t want to deny our children anything. We would like it more if children were more disciplined and ambitious.
Q39: David Winters. Is AIG still mispricing risk?
CM: These are sad days at AIG. They have lost some of their position. It does not help to be headlines, when you are selling insurance and people need to trust the insurance. AIG has been very unlucky. They have had difficult hand to play. That could happen to Berkshire. It happened to China – it is easy to fall backwards. It is hard to go forward. It is particularly hard when your children are raised in affluence and the Imperial Guard at headquarters gets to thinking they are the cats meow. We don’t want to deny our children anything. We would like it more if children were more disciplined and ambitious. If you take every leading civilization, they have all passed it on to someone else. Where is Egypt or Athens or London? It is nature of things that we do baton passing. It is state of nature that baton gets passed, to someone who tries harder and cares more.
Q40: Student in Amsterdam. Having CAPM arguments with professors.
CM: Future of finance? By and large I don’t think too much of finance professors. It is a field with witchcraft. I think a lot of physics and engineering professors. They try to teach it like physics, but it doesn’t yield to that. I never went to university with finance professors. Finance professors all believe in diversification, while we try to beat the average. If you buy a dob of everything, that is different than buying something you know something about. That is a different fountain than I want to drink in.
Pearls of Wisdom 34. On Gauging Trustworthiness In A Manager: There isn’t a single formula. You need to know a lot about business and human nature and the numbers. How would you read bone tumor slides? Nobody is any good who hasn’t been doing it for years. It is unreasonable to expect that there is a magic system that will do it for you.
Q41: How do you get a feeling for managers trustworthiness?
CM: There isn’t a single formula. You need to know a lot about business and human nature and the numbers. How would you read bone tumor slides? Nobody is any good who hasn’t been doing it for years. It is unreasonable to expect that there is a magic system that will do it for you.
Pearls of Wisdom 35. Firing Customers On Moral Or Business Grounds
Q42: Capetown SA. You point to crazy fees and commissions, what about expensive lawyers?
CM: Cost is too high and education is imperfect. If you go to law school, it is a good place to find a mate. Big firms have gotten too prosperous and there is too much paperwork, and not enough good sense. If I were running a law firm, I would cull one client a year on moral grounds. My partners refused, they were afraid it would be there first client. One of my early business successes was firing most of my customers. We were making transformers, and purchasing agents wouldn’t let us make any money. We shrank the business and we returned to a nice profit. There are some customers you don’t want. Peter Kauffman is here, he tries to get his suppliers to make money. That is win win. I think a huge mistake to try to rip off suppliers. Whether they are lawyers or others, it is okay for them to make money.
Pearls of Wisdom 36. You can’t just assume good will win. Sometimes evil wins, and that may happen in legislature for some time.
Q43: Newspaper companies, potential? CA taxfree bond market?
CM: The ordinary daily newspaper will perish. Maybe they will find a model a lot like public broadcasting, where they get a few people to pay a good price. But microeconomics of newspapers not a great place to invest money. CA bonds? I believe the rating is the worst in the country, slightly worse than Mississippi’s. Gerrymandered legislature with certified nuts on right and left hate each other. It is a very serious problem and big mess. You can’t just assume good will win. Sometimes evil wins, and that may happen in legislature for some time. Deliver to others the kind of service you would want yourself. It is such a simple idea.
Q44: US trade deficit. Unsustainability? Decline in USD not enough?
CM: Strange things happen that after 20 yrs of labor governments in UK that Thatcher would come along and change things around. Warren is more pessimistic than I am. China is prospering enormously taking our paper, and they are gaining market position by doing so. If it doesn’t show up in equations of economists, they aren’t using right equations. Deflation on securities is small price to pay for a civilization growing at 8%. I think China doing things amazingly well.
OK, We’ll go to the director’s meeting. [4:08pm – early!]
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