{"id":593,"date":"2017-05-10T04:52:08","date_gmt":"2017-05-10T04:52:08","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=593"},"modified":"2017-10-24T22:58:56","modified_gmt":"2017-10-24T22:58:56","slug":"90-wesco-2007-lets-learn-some-more-part-8-points-43-48","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/05\/10\/90-wesco-2007-lets-learn-some-more-part-8-points-43-48\/","title":{"rendered":"90. Wesco 2007: Let’s Learn Some More- Part 8- Points 43-48"},"content":{"rendered":"

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

Point 43. If you could flip a coin and get a 4-to-1 payoff,\u00a0 would you invest your house, your net worth, everything? I don\u2019t think so. You only get to live once.<\/strong><\/p>\n

Book Recommendation: Fortune\u2019s Formula<\/p>\n

I like that book that I recommended [a while ago] in which the guy that explained all of these weird guys at the horse races \u2013 a value investing thing with a lot of math in it. What was the name of it? Fortune\u2019s Formula. It\u2019s a very worthy book and you all ought to read it.<\/p>\n

In Hong Kong, people are crazy about horse racing and everyone bets on the races, yet somebody was actually able to develop a lot of algorithms such that, in spite of the croupier\u2019s take, he was able to make a lot of money. Some of that is going on in a lot of these hedge funds. Some guy can develop a lot of algorithms and can outwit the other guys\u2019 algorithms. But it\u2019s not for me\u2026<\/p>\n

Comments on the Kelly Formula, Which Is Detailed in Fortune\u2019s Formula<\/p>\n

[Munger had trouble hearing the question and asked the questioner to repeat it more slowly, saying, \u201cKeep in mind you\u2019re dealing with a slow-witted old man.\u201d]<\/p>\n

The first time I read that sizing system, my take is that it seemed plausible to me, but I haven\u2019t run that formula through my head \u2013 and I won\u2019t. You couldn\u2019t apply it to the investment operations I\u2019ve run [I think because of Berkshire\u2019s size], but the gist of it in terms of sizing your bet makes sense. Whoever developed that formula has an approach to life similar to mine.<\/p>\n

If you could flip a coin and get a 4-to-1 payoff [if you called it correctly], would you invest your house, your net worth, everything? I don\u2019t think so. You only get to live once.<\/p>\n

[The person who asked the question answered, \u201cMaybe\u201d [Laughter]]<\/p>\n

All I can say is that you remind me of a man who once worked for a contractor I knew. He was very bold and aggressive. The contractor said, \u201cOld Charlie is going to become a millionaire \u2013 several times.\u201d [Laughter] I think we\u2019ve identified another Old Charlie. But at least you\u2019re asking the right question and at least you said maybe. Generally speaking, I\u2019m closer to you when you said maybe, at least I was when I was your age.<\/p>\n

Point 44. Demosthenes: What a man hopes is what he believes. [Sic: Does Not Mean He\u2019s Right.]<\/strong><\/p>\n

Unrealistic Return Assumptions of Pension Funds<\/p>\n

Both Warren and I have said that to predict 9% returns from those pension funds is likely to be wrong and it is irresponsible to allow it. They do it to delay bad news. Look at Berkshire and our paper record, which is obviously much better [than the investment track records of the pension fund managers]: we use 6.5%. For example, the Washington Post has the best record [of virtually any pension fund, yet it assumes a 6.5% annual return]. Do you want to believe the predictions of the people with the best record or do you want to believe the people who are acting in the way Demosthenes predicted when he said the wages of profit are [?]. In other words, what a man hopes is what he believes.<\/p>\n

Point 45. Low Yield For Real Estate Is Not Strange<\/strong><\/p>\n

Housing Bubble<\/p>\n

The weirdest things I see are in really good coastal properties. It can\u2019t keep bubbling up like it has been. But when and how it will collapse I don\u2019t know.<\/p>\n

Housing Bubble and Likely Future Low Returns from Real Estate<\/p>\n

Recently someone paid $800 per square foot for the air rights to build a piece of property in Manhattan. This is driven by the prospect of selling condos for high prices. The condo selling game has already crested in Las Vegas and Miami. In Los Angeles, I don\u2019t think it\u2019s quite crested, but certainly you\u2019re seeing weird prices. I\u2019m not sure it\u2019s crazy. In other words, if you have an apartment building, after costs of maintaining it, assuming no rent control ever, you might earn a 4.5% annual return [if you pay today\u2019s prices for it]. I\u2019m not sure that that\u2019s crazy. It\u2019s not as good as the kind of stocks Berkshire would own, but it\u2019s not crazy. We may be in that kind of world [of low returns]. That\u2019s already happened in Europe where apartment buildings already have 3% yields. Stranger things have happened…<\/p>\n

Point 46: interest rates Is Not A Perfect Correlation to Inflation<\/strong><\/p>\n

Interest Rates and Inflation<\/p>\n

I have never believed that interest rates have a perfect correlation to inflation. I think there\u2019s some relation, but it\u2019s complex and not easily quantifiable.<\/p>\n

Class Action Litigation<\/p>\n

It doesn\u2019t affect Berkshire because we don\u2019t offer Directors & Officers coverage, though we do cover product liability. There\u2019s a lot of abusive litigation in the silicosis field. The asbestos lawyers just rewrote the same complaints. [It reminds me of the class action lawyer who, faced with a judge who wasn\u2019t friendly,] said, \u201cBy god, I\u2019m getting tired of this harassment and by god I\u2019m going to take my witnesses and go to Chicago!\u201d<\/p>\n

[Laughter]<\/p>\n

The behavior of the class action lawyers [who sue companies] may be quite inappropriate, but the behavior of the people in the corporations may be quite inappropriate as well.<\/p>\n

Municipalities\u2019 Bad Accounting for Future Pension and Healthcare Liabilities<\/p>\n

They\u2019ve gotten very lucky thanks to the accountants. [My comment: Unlike corporations, which have to account for such liabilities on their balance sheet and in the footnotes to their financial statements \u2013 at least in part (there\u2019s massive abuse and understatements here) \u2013 a loophole in accounting rules has allowed cities and states across the country to make promises of pension and healthcare payments to municipal employees\u2019 unions totaling hundreds of billions of dollars in present value, yet this doesn\u2019t have to be disclosed or reserved for. The accounting loophole was recently closed and I predict there will be hell to pay as municipalities have to suddenly come up with this money.] If that [continued bad accounting] doesn\u2019t work, then they\u2019ll have to go to Plan B: increase taxes. I predict that whatever disgusts you in this field will continue for a long time.<\/p>\n

Point 47. The Newspapers Industry\u2019s Future Is Worse Than The Past<\/strong><\/p>\n

Newspapers<\/p>\n

I think their future is way worse than their past.<\/p>\n

Dividend Payout Ratio of the S&P 500<\/p>\n

I don\u2019t really have a big opinion on the dividend payout ratio of the S&P. To me, it\u2019s within hailing distance with being reasonable\u2026That\u2019s all I have to say. [Laughter]<\/p>\n

Point 48. People Who Rise High In Life Have A Duty To Be Exemplar<\/strong><\/p>\n

ADVICE ON LIFE AND OTHER<\/p>\n

The Importance of Being an Exemplar<\/p>\n

I think people have a duty when they rise high in life to be exemplars. A guy who rises high in the Army or becomes a Supreme Court justice is expected to be an exemplar, so why shouldn\u2019t a guy who rises high in a big corporation act as an exemplar and not take every last penny?<\/p>\n

It\u2019s not a problem we\u2019ve had at Berkshire, but look at how far it\u2019s spread. We have about two imitators. [Laughter]<\/p>\n

The Future of American Civilization<\/p>\n

I\u2019ve said that American society is near its apex. It could be just before or just ahead of that point. Other people are more optimistic; Warren is more optimistic than I am.<\/p>\n

We\u2019ve had the most incredible generations. Do you think it can go from generation to generation, from apex to apex? The historical record would give you some caution.<\/p>\n

Whether the good behavior and values will outweigh the bad, I don\u2019t know. On my way over here, I stopped to watch the concrete being poured for a new Wesco building. The design is sound. The system for putting it together is sound. The skill of the crews is sound. The inspection process is sound \u2013 every single pour of concrete is watched by an inspector paid by the city of Pasadena, and he\u2019s a good, competent man. He watches to make sure every bar of rebar is correct. This building will outlast the pyramids. This system is a credit to our civilization. In contrast, look at the same process in Latin America or Japan, where guys take bribes.<\/p>\n

There is a lot that is right in our country. In a recent five-year period, not one passenger died on a major airline. Imagine if other engineering systems were as good. A lot of pilots are recovering alcoholics, yet the system is safe enough to get us around this.<\/p>\n

United States Fiscal and Trade Deficits<\/p>\n

Regarding currency and oil \u2013 this is a very sophisticated crowd [laughter]\u2026 Regarding currency, the United States is very peculiar running such a large trade deficit and a fairly big fiscal deficit. [I couldn\u2019t hear his remarks for a few sentences here.] The absurdity of this kind of thing\u2026I\u2019d rather not run such a big fiscal and trade deficit. If we have a war, I\u2019d rather add a blank space on tax returns, asking people to pay 10% more for a national emergency. It wouldn\u2019t be compulsory, but if you don\u2019t pay, we\u2019ll publish your name.<\/p>\n

[Laughter] I\u2019d be in favor of that kind of stuff. Maybe I\u2019d [be great?] for the United Jewish Appeal [an extremely successful fundraising organization, in part because it\u2019s very public about who makes big donations \u2013 and if you\u2019re a wealthy Jew, you\u2019re shamed if you\u2019re not on the list].<\/p>\n

But my ideas aren\u2019t winning. They\u2019re odd, of course. I\u2019m not predicting ruin, but I think it would be more conservative to behave differently.<\/p>\n

China\u2019s Growth and Future Pollution<\/p>\n

China\u2019s vast growth of GNP of 9-10% per annum is a remarkable thing. I think the government will be smart enough to let the tiger grow and then there will be a big pollution problem \u2013 and the United States will be way less important relative to other nations than it is now.<\/p>\n

Best-Loved Ideas That He\u2019s Destroyed Recently<\/p>\n

[In last year\u2019s annual meeting, Munger talked about the importance of destroying at least one of your best-loved ideas each year, so a shareholder asked which of his best-loved ideas he\u2019s destroyed in the past year.]<\/p>\n

I had more scorn for fixed income arbitrage in the past than I do now. I was also more hopeful about troubles in the Middle East than I am now. So I\u2019ve destroyed some of my optimism in favor of more realism. I don\u2019t think there\u2019s a man or woman in the room that thinks they have a better grasp of what going on in the Middle East [now than they did previously]. Doesn\u2019t matter what you think of this administration.<\/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":"

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