{"id":514,"date":"2017-04-03T21:51:17","date_gmt":"2017-04-03T21:51:17","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=514"},"modified":"2017-10-24T23:13:11","modified_gmt":"2017-10-24T23:13:11","slug":"71-wesco-financial-annual-meeting-2005-lessons-learned-part-4-points-19-24","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/04\/03\/71-wesco-financial-annual-meeting-2005-lessons-learned-part-4-points-19-24\/","title":{"rendered":"71. Wesco Financial Annual Meeting 2005: Lessons Learned – Part 4 – Points 19-24"},"content":{"rendered":"

\"\"<\/a>Excellent Book: Charlie Munger For All Seasons<\/a><\/a><\/strong><\/p>\n

Point 19: Some Success We Predicted. Some were fortuitous.<\/strong><\/p>\n

Did You Predict Berkshire\u2019s Success?<\/p>\n

Well, some of our success we predicted and some of it was fortuitous. [Regardless,] like most human beings, we took a bow. (Laughter)<\/p>\n

Point 20: [On Investment] Patience and aggressive opportunism is what you need.<\/strong><\/p>\n

Some eventualities came to pass. What the 15 best deals all have in common is that they all worked. There were different models \u2013 See\u2019s Candies was different from Shaw Carpets. But both are good businesses that will generate durable returns for the grandchildren of people sitting in this room. The reason I keep talking about the record without the 15 best deals is that it shows how few deals you need in a lifetime. The people who need a deal every month, by and large, they all crater. Patience and aggressive opportunism is what you need \u2013 an odd combination, but it\u2019s what works best.<\/p>\n

Point 21: Good Days Ahead For Berkshire (This was said in 2005)<\/strong><\/p>\n

Berkshire and Wesco Buying Back Stock?<\/p>\n

Buffett answered this question [at the Berkshire annual meeting]. At some price, we\u2019d buy back Berkshire, but it\u2019s quite a bit less than the price that currently exists. We\u2019re not looking for the chance to gleefully buy out shareholders at a substantial discount to its value. We like to behave so this doesn\u2019t happen.<\/p>\n

As for Wesco, because you people have created this cult, it always trades at a premium to its liquidation value.<\/p>\n

Despite my words, I\u2019m a bull on Berkshire Hathaway. There may be some considerable waiting, but I think there are some good days ahead.<\/p>\n

[I missed the rest of the sentence, but at one point Munger said: \u201c\u2026the stocks [plural] that we\u2019re buying today\u2026\u201d]<\/p>\n

Problem of Buffett Foundation Having to Eventually Sell Berkshire Stock<\/p>\n

I regard that as so easily solvable that I don\u2019t give two seconds to it. If the foundation has to sell 5% of its stock [every year to comply with the law that says all foundations must give away 5% of their assets each year], then Berkshire could pay a dividend or buy back the stock. It wouldn\u2019t bother me \u2013 we\u2019re drowning in cash. The needs of any one shareholder are easily dealt with in our current circumstances. You lead a very favored life if you worry about things like that.<\/p>\n

Advantage of Berkshire\u2019s AAA Credit Rating In Insurance<\/p>\n

There\u2019s a little price tiering \u2013 there\u2019s a difference among insurers based on their credit worthiness. But is there enough difference? The answer is no. Do I expect a cascade of business to Berkshire Hathaway? No. But there\u2019s a modest and increasing trickle.<\/p>\n

People are not as credit-leery as they should be.<\/p>\n

Pricing Super-Cat Insurance Policies<\/p>\n

We\u2019re very peculiar. We don\u2019t have a department where we trust people to do it on their own. All decisions must be approved by Ajit Jain and Warren, and neither of them uses standard actuarial tables. In other words, after a long period with no hurricanes, the actuarial tables would tell you that the hurricane risk has gone down \u2013 that\u2019s not how they think at Berkshire Hathaway. There\u2019re very rational. We don\u2019t use standard actuarial tables, just as we start with [companies\u2019] reported financials, but then go from there.<\/p>\n

You don\u2019t need dozens of people to write super-cat policies. So there\u2019s our plan: get Ajit Jain, add Warren Buffett working for free and then raise tens of billions of dollars because people trust you and there you go. (Laughter)<\/p>\n

Point 22. You\u2019ve also have to have a compensation system that\u2019s satisfactory to the people running them. (Sic: Keep Them Simple.)<\/strong><\/p>\n

It isn\u2019t enough to buy the right business. You\u2019ve also have to have a compensation system that\u2019s satisfactory to the people running them. At Berkshire Hathaway, we have no [single] system; we have different systems. They\u2019re very simple and we don\u2019t tend to revisit them very often. It\u2019s amazing how well it\u2019s worked. We wrote a one-page deal with Chuck Huggins when we bought See\u2019s and it\u2019s never been touched. We have never hired a compensation consultant.<\/p>\n

Point 23: If you let people on sales commission set the credit standards for people using margin, you create a disaster. It\u2019s like mixing oxygen and hydrogen and lighting a match.<\/strong><\/p>\n

The recent historical experience of mobile homes \u2013 actually, it\u2019s \u201cmanufactured\u201d; they\u2019re not manufactured to move \u2013 is that you had a bunch of no-good nut cases and a balloon of unfortunate, commission-sales-driven activity. Any time you let people on sales commission set the credit standards for people using margin [e.g., debt to buy the home], you create a disaster. It\u2019s like mixing oxygen and hydrogen and lighting a match.<\/p>\n

The homes deteriorated… It was an absolute disaster. If it hadn\u2019t been, we wouldn\u2019t have been able to buy [Clayton Homes]. [The distress in the industry was so great that] they were losing their securitization capacity. Clayton was the best, but even they were at risk so they sold to us.<\/p>\n

What do you know about foreclosing on a house in a trailer park? And what do you do with it? We\u2019re now the largest in the country. I think it will work quite well for Berkshire and Clayton. If Clayton were an independent company, they\u2019d have trouble.<\/p>\n

The people who claim we underpaid for it are out of their minds. It\u2019s amazing how many people think they know more than the people selling it.<\/p>\n

Cort benefited from the venture-capital-financed, new-company boom. You could argue that we made a macro mistake. These companies went away for a while and Cort was affected. But you can see in the first quarter earnings that it\u2019s coming back. There\u2019s a class of people that just want to rent, not own. They are trying to be the Enterprise Rent-A-Car in the furniture rental business. It\u2019s not a gold mine, but we think it\u2019ll be successful over time.<\/p>\n

Point 24: If You Pay A Manager\u00a0 A Fortune To Invest Almost Parallel To The Index, You\u2019re A Sucker.<\/strong><\/p>\n

If you\u2019re an investment manager and they\u2019re going to fire you if you don\u2019t keep up with your benchmark, that can cause some weird things to happen in the markets as a whole.<\/p>\n

That\u2019s the world that we live in, whether you like it or not. It has some perverse consequences \u2013 for one thing, closet indexing. You\u2019re paying a manager a fortune and he has 85% of his assets invested parallel to the indexes. If you have such a system, you\u2019re being played for a sucker.<\/p>\n

You have these fads in investment management. With so many bodies and minds and computers, I see figures of risk by asset class, but I don\u2019t have the faintest idea what they mean. They don\u2019t either, but they learned a fad, a way of thinking. If you learn a formula, you can run the numbers and print it up, but it doesn\u2019t mean anything.<\/p>\n

http:\/\/www.valuewalk.com\/wp-content\/uploads\/2014\/05\/Charlie-Munger-2005-2013-minus-Harvard-Westlake.pdf<\/p>\n

Notes from 2005 Wesco Financial Annual Meeting – May 4, 2005 – By Whitney Tilson<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Excellent Book: Charlie Munger For All Seasons Point 19: Some Success We Predicted. Some were fortuitous. Did You Predict Berkshire\u2019s<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-514","post","type-post","status-publish","format-standard","hentry","category-charlie-mungers-3-categories-of-investment-in-out-too-tough"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/514","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/comments?post=514"}],"version-history":[{"count":2,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/514\/revisions"}],"predecessor-version":[{"id":864,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/514\/revisions\/864"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=514"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=514"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=514"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}