{"id":582,"date":"2017-04-29T06:52:29","date_gmt":"2017-04-29T06:52:29","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=582"},"modified":"2017-10-24T23:00:15","modified_gmt":"2017-10-24T23:00:15","slug":"88-wesco-2007-lets-learn-some-more-part-6-points-31-36","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/04\/29\/88-wesco-2007-lets-learn-some-more-part-6-points-31-36\/","title":{"rendered":"88. Wesco 2007: Let’s Learn Some More- Part 6- Points 31-36"},"content":{"rendered":"

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

Point 31. Learn Rationality & Mistake Avoidance.<\/strong><\/p>\n

Copper stays low for decades and we finally get a shortage of it, and all of a sudden it\u2019s in the stratosphere. I\u2019ve seen housing prices collapse when the population is leaping. Once prices start galloping, people buy real estate like they buy stocks in Saudi Arabia or Kuwait \u2013 because they\u2019re doing up. A whole class of day traders became condo flippers. It really happens \u2013 thousands of them. But you always have stock markets where prices stay low for long time. This is good for people like you. This is why you can afford to fly long distances to come to Pasadena [to hear me and learn about value investing].<\/p>\n

Learn at the Temple of Rationality<\/p>\n

All you have to do is keep trying to learn at the temple of rationality and do things [when it makes sense]. I\u2019m quite prosperous even though I didn\u2019t invest in K-Mart\u2019s bankruptcy. You can miss a lot. We bought 4% of Freddie Mac [many years ago] yet none of Fannie Mae. How could the same mind have done that?! It wasn\u2019t very smart. But despite the many cognitive mistakes [we\u2019ve made], we\u2019re a lot richer now than we were then. I think you need to constantly remember the mistakes of omission. We\u2019re very good at this. Nobody remembers them \u2013 nobody thinks less of me for missing Kmart \u2013 but I think about it every day. It\u2019s a very [useful discipline to have].<\/p>\n

Chris Davis [of Davis Advisors], who\u2019s not here, has a temple of shame for mistakes. [It\u2019s a wall in his office in which he hangs stock certificates of the worst stocks he\u2019s ever invested in.] But this is inadequate. You need the temple of shame squared \u2013 great things you almost did and, had you been a little more rational, should have invested in. You\u2019ll be a lot better investor if you do this. You ought to remember boners of both kinds. Reality doesn\u2019t distinguish \u2013 either way, in 10 years, you\u2019re poorer. So why not celebrate your mistakes in both categories?<\/p>\n

Point 32. Efficient Market Theory \u2013 People Believe In Flat Earth<\/strong><\/p>\n

We didn\u2019t get any courses [on value investing] into [the curriculums of] major universities for the first 30 years [in which investing was taught], but it\u2019s shifted a bit in the past 10 years. The flat earth people [meaning the believers in the Efficient Market Theory] are only now about 75-80% [of the faculties].<\/p>\n

Point 33. Beware Of Derivatives, Beware Of\u00a0 Silver-Tongued Salesmen With Wonderful Slide Shows<\/strong><\/p>\n

RISKS IN THE FINANCIAL SYSTEM<\/p>\n

Derivatives and Accountants Selling Out<\/p>\n

This world of derivatives is another place the world has gone absolutely bonkers by the standards of the past. You take Fannie Mae \u2013 a big, clumsy, dumb bureaucracy to start with \u2013 and they\u2019re in this great privileged position where they got enough of a government halo so that their borrowing costs were lower than other people\u2019s. And they created this marvelous intermediary system where they were able to take an override on the safe mortgages of the world. They could raise earnings 20% per annum for a decade or so, but that wasn\u2019t enough. They wanted to make sure that they earned 15-20% every quarter than they earned in the previous year\u2019s quarter. And so they listen to the siren song of the professionals who invented these mad derivatives. And of course there was a lot of leverage in the bargain.<\/p>\n

When they tried to clean up Fannie Mae, the new CEO complained that spent hundreds of millions of dollars on experts just trying to understand what\u2019s already on the books. You get people investing weird things, complex things for other people to gamble in. And those silver-tongued salesmen going into leading institutions, with wonderful slide shows showing how everything\u2019s going to work way better for them \u2013 weird things get done.<\/p>\n

What happens, of course, is that the same derivative trade that\u2019s put on, the accountant for Firm A says that the firm made $8 million, and the accounting firm for firm B says its client also made $8 million, and it\u2019s the same trade. I\u2019ve never met anyone in the accounting profession that\u2019s bothered by this. They go around and check to see if the retailer owes some money to a wholesaler \u2013 they want to make sure that it\u2019s the same on both sides. But on derivatives, the accounting profession has sort of given up \u2013 it gets complicated. I don\u2019t think given up is the right word: They sold out. You\u2019d think they\u2019d learn by now and put more integrity into the system. But telling people to do something unpleasant when they\u2019re making a lot of money out of it\u2026it\u2019s too hard. I likened it in some previous discussion to what doctors have to do when someone\u2019s on life support.<\/p>\n

Point 34. Tough Decisions Are Tough<\/strong><\/p>\n

The religions of the world say it\u2019s perfectly alright to withdraw the tubes \u2013 you can withdraw artificial help. But when you do it and the patient shrivels up like a prune, the guy who pulls the tube out feels like a murderer. He\u2019s not \u2013 it\u2019s the correct thing \u2013 but that\u2019s what he feels like. I think that\u2019s the way the accountants react to the situation when $8 million of profit is being booked by each side of the same trade. He can\u2019t pull this plug. He doesn\u2019t want to think about the consequences.<\/p>\n

Maybe there\u2019s some more kindly explanation. [Laughter] I\u2019ll give our accountant [who was sitting on the stage next to Munger] the opportunity if he wishes to participate in this discussion and explain why the accountants are doing what they\u2019re doing. [Short pause] He says he has nothing to add. [Laughter. (That\u2019s Munger\u2019s oft-repeated line from the Berkshire Hathaway annual meeting.)]<\/p>\n

Point 35. Some Derivatives Asset Are \u201cGood Until Reached For\u201d<\/strong><\/p>\n

More on the Risk of Derivatives<\/p>\n

I regard the counterparty risk as extreme. But no-one cares about this because the accounting statements assume it away. If you look at the trading sheets on Wall Street, there\u2019s no line for counterparty risk. The person who is supposed to think about this would be very unpopular [if he tried to add this]. Pulling away the punch bowl at the party has never been a way to prosperity and popularity.<\/p>\n

If you look at derivative markets enough, you think it was scandalous. That doesn\u2019t mean it can\u2019t go on for a long time, however. Look at Japan. Great civilizations can withstand a lot of terrible behavior. It\u2019s a good thing. Lord knows, we\u2019ll need it.<\/p>\n

Look at Berkshire\u2019s Gen Re derivative book. It was valued at $400 million on the balance sheet [but when he reached for the money, it wasn\u2019t there]. Imagine an balance sheet item labeled: \u201cAsset \u2013 good until reached for\u201d! [Laughter] [My comment: In fact, Berkshire has taken hundreds of millions of dollars in losses as it\u2019s run off this derivatives book \u2013 during a benign time in the markets, when no-one else was trying to run off their book! Can you imagine the utter chaos that would ensue if, say, JP Morgan Chase tried to run off its $40+ trillion derivatives book?!]<\/p>\n

Final Comments on Derivatives<\/p>\n

If we have a hell of a mess due to a big derivatives blowup, the country will survive it. Did we need derivatives to get to their current huge size? [Of course not.] [People argue that because] it lays off risk, it therefore it must be wonderful. That is not the Munger mindset. If you\u2019re lucky, we\u2019ll see who\u2019s right.<\/p>\n

Pointer 36. Ballooning Consumer Debt Is A Danger. (See South Korea Experience)<\/strong><\/p>\n

There\u2019s no question that huge ballooning credit practices in other places have caused crashes. For example, South Korea had a huge crash from irrationally ballooning consumer credit. But I can\u2019t predict whether the troubles I foresee will come soon or later. All I can predict is that there is considerable danger.<\/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 Point 31. Learn Rationality & Mistake Avoidance. Copper stays low for decades and<\/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-582","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\/582","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=582"}],"version-history":[{"count":4,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/582\/revisions"}],"predecessor-version":[{"id":847,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/582\/revisions\/847"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=582"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=582"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=582"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}