{"id":574,"date":"2017-04-22T02:56:44","date_gmt":"2017-04-22T02:56:44","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=574"},"modified":"2017-10-24T23:01:28","modified_gmt":"2017-10-24T23:01:28","slug":"86-wesco-2007-lets-learn-some-more-part-4-points-19-24","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/04\/22\/86-wesco-2007-lets-learn-some-more-part-4-points-19-24\/","title":{"rendered":"86. Wesco 2007: Let’s Learn Some More- Part 4 – Points 19-24"},"content":{"rendered":"

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

Lesson 19. Subprime Crisis \u2013 Some originators belong to lowest circle of hell<\/strong><\/p>\n

Subprime and the rating agencies<\/p>\n

The rating agencies have prospered mightily, and their most likely source of embarrassment is subprime paper. Overall, they do a good job, and you always miss things with the benefit of hindsight. I would not predict they encounter great distress. If you want to pick things to disapprove of, the rating agencies would be far down on the list.<\/p>\n

You might pick many originators of the subprime mortgages. They are some of the most disgusting people we\u2019ve been able to produce, and many of them belong in the lowest circle of hell. There will always be such people, making money by misleading people. You\u2019ll always get people like the worst commissioned salespeople in the mortgage brokerage business. This isn\u2019t the real tragedy.<\/p>\n

The real tragedy is the people higher up at the Wall Street banks who only asked if they could sell it, not if they should do it. They violated engineering principles and ethical principles. There\u2019s nothing wrong with giving a mortgage to the deserving poor. Here\u2019s a guy who\u2019s working hard, etc., and even if you give him a 90% or 100% mortgage, he\u2019ll pay it. Making such loans worked and was good for us and the nation.<\/p>\n

But if you look for the undeserving, dishonorable, addicted people with silly views on their own entitlement \u2013 if you start giving them phony mortgages so they can drink more, gamble more \u2013 it\u2019s like pouring gasoline on the floor and throwing a match. I would argue that in very high places in America, it\u2019s not enough to call it folly. It\u2019s sin-folly.<\/p>\n

It\u2019s sad that that much terrible behavior came in, due to the self-serving bias. Because they made easy money doing it, they rationalized it.<\/p>\n

Dean Kendall of the University of Michigan music school once told a story: \u201cWhen I was a little boy, I was put in charge of a little retail operation that included candy. My father saw me take a piece of candy and eat it. I said, \u201cDon\u2019t worry. I intend to replace it.\u201d My father said, \u201cThat sort of thinking will ruin your mind. It will be much better for you if you take all you want and call yourself a thief every time you do it.\u201d<\/p>\n

It\u2019s a good story and we need more Dean Kendalls in the high reaches of American business. This and envy cause so much trouble. They account for so much of what you see in the abuses of the subprime field.<\/p>\n

We knew how to do it once. The subprime for the deserving poor worked, but egalitarianism and biases led to a big mess.<\/p>\n

Lesson 20. Declining dollar did not necessarily lead to inflation<\/strong><\/p>\n

Why hasn\u2019t the declining dollar led to increased inflation?<\/p>\n

The dollar\u2019s been going down like crazy, but the prices at Costco [Munger\u2019s on the board] have shown no inflation for many, many, many years. It\u2019s a good question. A lot of economics professors would say it couldn\u2019t happen, but it did. It\u2019s very important.<\/p>\n

There\u2019s been an unusual set of circumstances. It\u2019s easy for me to tell you it matters. But how it matters \u2013 if I were able to do that, I wouldn\u2019t be qualified to sit here. The answer is, I don\u2019t know.<\/p>\n

Lesson 21. Envy is a huge motivator, though it\u2019s seldom admitted. In my whole life, I\u2019ve never had someone say, \u201cCharlie, I\u2019m doing this out of envy.\u201d<\/strong><\/p>\n

Is there a trend in the private equity business?<\/p>\n

Of course there\u2019s a trend. The LBO funds get larger and larger and buy larger and larger businesses, so it\u2019s a huge trend.<\/p>\n

It\u2019s a different lifestyle than Berkshire\u2019s. We almost never sell \u2013 we don\u2019t want to do that. We don\u2019t want to play gin rummy with our friends, dumping five businesses and getting five new ones. We aren\u2019t buying to resell.<\/p>\n

The leveraged equity crowd is getting bigger and bigger and bigger. What\u2019s happened is endowments and pension plans are believing in the tooth fairy. With assets being bid up, they\u2019re not getting enough return from ordinary investments from stocks and bonds.<\/p>\n

Then silver-tongued people came along and said you don\u2019t have to suffer low returns. Give us the money, we\u2019ll lever up, pay us a lot of compensation and we will give you 15% not 5%. It\u2019s worked \u2013 not as well as claimed; there\u2019s dubious use of statistics \u2013 but for good shops, it works.<\/p>\n

Then, a lot of envy sweeps the field. Yale can\u2019t stand Harvard making more. Envy is a huge motivator, though it\u2019s seldom admitted. In my whole life, I\u2019ve never had someone say, \u201cCharlie, I\u2019m doing this out of envy.\u201d<\/p>\n

In venture capital, except for a handful of firms at the top, the returns are lousy. This will eventually happen to the LBO firms as well. God has not decided that anyone who wants 15% can get it.<\/p>\n

Lesson 22. A nonprofit can be true to its word.<\/strong><\/p>\n

How do you invest the funds of the hospital you\u2019re chairman of?<\/p>\n

The nonprofit hospital of which I am the chair is really nonprofit. It loses so much money in a good year it\u2019s awkward and a bad year is something awful. Given the conditions under which we labor, we leave all money in short-term instruments. We need all our assets in a liquid reserve.<\/p>\n

I\u2019d like to have a hospital where my biggest problem is what to do with the surplus, but that has not been my lot in life.<\/p>\n

I don\u2019t think hospitals have different investment needs than other places. I don\u2019t think the investment process would be any different.<\/p>\n

Lesson 23. Investment bankers were better when I was young. They used to care about the quality of deals \u2013 they cared a lot.<\/strong><\/p>\n

Comment on UnitedHealth, its CEO and the options backdating scandal there<\/p>\n

It\u2019s hard to say anything but that that was very regrettable behavior. The man lost his job and he deserved to.<\/p>\n

View of lawyers<\/p>\n

The standard way lawyers think is to weigh both sides. There\u2019s forced objectivity and a procedural system. That\u2019s a huge plus. So if that\u2019s what you\u2019re talking about regarding law practice, that\u2019s good, but there\u2019s a lot that\u2019s not good, a lot that\u2019s drifted away. It\u2019s not at all uncommon that billing rates will exhaust the amount in dispute before you get to trial. If you\u2019re doing this as a lawyer, that\u2019s a moral minefield.<\/p>\n

The legal profession attracts a lot of smart people who can express themselves well in words and numbers. There are many good people coming out because many good people are going in. Yet much of what law schools do is a joke.<\/p>\n

View of investment bankers<\/p>\n

At Salomon we asked, \u201cWhere is the list of things you won\u2019t do because they\u2019re beneath you?\u201d We never saw it. Envy and greed lead people to doing almost anything that looks profitable and does not require use of a machine gun. Investment bankers were better when I was young. They used to care about the quality of deals \u2013 they cared a lot.<\/p>\n

Ethics attenuated a lot. This was not good. The deterioration would be an interesting subject for social science. You\u2019d have to understand psychology \u2013 it would be very difficult for somebody to do it.<\/p>\n

Why is the high road the best way in investment banking? It\u2019s not very crowded.<\/p>\n

[Laughter]<\/p>\n

Lesson 24. Mental checklist. I\u2019m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it\u2019s easy to miss something important.<\/strong><\/p>\n

The possible rise of protectionism<\/p>\n

It\u2019s hard to predict if there will be a lot of protectionism. At the current time, a flood of imports is changing the world. Some ordinary guys are having a tougher time and feel that China is oppressing them.<\/p>\n

MENTAL MODELS<\/p>\n

Using mental checklists<\/p>\n

I\u2019m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it\u2019s easy to miss something important.<\/p>\n

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

Notes from 2007 Wesco Financial Annual Meeting – By Whitney Tilson <\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Excellent Book: Charlie Munger For All Seasons Lesson 19. Subprime Crisis \u2013 Some originators belong to lowest circle of hell<\/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":[3,4],"tags":[],"class_list":["post-574","post","type-post","status-publish","format-standard","hentry","category-investment","category-wisdom"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/574","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=574"}],"version-history":[{"count":2,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/574\/revisions"}],"predecessor-version":[{"id":849,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/574\/revisions\/849"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=574"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=574"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=574"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}