{"id":616,"date":"2017-05-31T23:14:08","date_gmt":"2017-05-31T23:14:08","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=616"},"modified":"2017-10-24T22:51:35","modified_gmt":"2017-10-24T22:51:35","slug":"97-wesco-annual-meeting-2008-part-1-tutelage-1-6","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/05\/31\/97-wesco-annual-meeting-2008-part-1-tutelage-1-6\/","title":{"rendered":"97. Wesco Annual Meeting 2008 – Part 1 – Tutelage 1-6"},"content":{"rendered":"

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

2008 Wesco Annual Meeting –\u00a0 Notes courtesy of Peter Boodell http:\/\/valueinvestingresource.blogspot.com\/2008\/05\/2008-wesco-shareholder-meetingdetailed.html<\/p>\n

Tutelage 1. Tough investment climate. Apartment yield @ 4% yield it doesn\u2019t include replacing the carpets. Bonds of strong corporations are 4% yield, Corporate equities@ 2% pa, growing 4% per year.\u00a0 It is not at all impossible that brilliant investors get bad results in the future.<\/strong><\/p>\n

CM: Testing, can you hear in back? Mr Denham has an announcement.<\/p>\n

Denham: We ask you not to use your video recorders, thanks.<\/p>\n

CM: Welcome to the 49th annual meeting of shareholders of Wesco Corp. Please register to vote at entrance. Anyone wishing to speak, state name, wait for microphone. List of shareholders, 96% of outstanding proxies received. Election of directors? All in favor?<\/p>\n

[Aye]. Motion is carried.<\/p>\n

Six nominees are elected. There will be a long Q&A preceded by Socratic solitaire conducted by the Chairman. Meeting is adjourned.<\/p>\n

We now begin Q&A, starting with a long game of Socratic solitaire. During questions, do not ask what we are buying or selling. Any other question is fair game, but we don\u2019t agree to answer them.<\/p>\n

Because many of you have come from such a long distance, I will talk before I take your questions. I will address two topics, general investment climate [and learnings from Berkshire Hathaway]. We normally avoid [discussing the general investment climate] like the plague. Most assets are priced to a level where it is hard to get excited. It is hard to get 4% yield on a nice apartment, and it doesn\u2019t include replacing the carpets. Bonds of strong corporations are 4% yield. Corporate equities are paying 2% pa, growing 4% per year. Such a world isn\u2019t the one that made all of you able to come to the meeting. Last generation has been in hog heaven \u2013 some bumps, but it had easiest time getting ahead. In the eighteen years that preceded hog heaven, the purchasing power of Yale\u2019s endowment went down 60%. They were getting real investment return of 0%, negative. It is not at all impossible that brilliant investors like Yale get bad results in the future.<\/p>\n

People are used to laying money aside and investing in standard fashion, and become quite comfortable. It is easy to forget that this isn\u2019t guaranteed. Many have recognized this, but for those running pensions it is difficult [to adjust down assumptions] \u2014like the agony of raising taxes or not looking good as CEO of a company. Some of them wonder if they have signed up for something too hard when running a defined pension plan. That crowd doesn\u2019t want to go to a 4-5% assumption, because the pain of the money needed to correct the plan is large. Bonds pay 4%, so they go to alternative \u00a0investments with profit sharing. They solve the problem by giving \u2018reasonable return\u2019 and sell hedge funds and venture capital fund, mid-stage, late stage, private equity, etc etc etc. They do complex trading strategies, private equity in Africa. They buy timber.<\/p>\n

Evidently that machine didn\u2019t like the remark. People go into alternatives, and this has worked very well so far. A lot of university endowments have done it \u2013 and that is game we are in. If natural return is 5%, getting it to 9% is very unlikely to work well long term. It\u2019s going to be difficult for people to have high real returns from deferring consumption.<\/p>\n

Tutelage 2. If you get rich because of a fluke, note that it won\u2019t necessarily continue.\u00a0 Also, easier to get happiness by reducing expectations instead of seeking extreme results.<\/strong><\/p>\n

The reason my generation did so well was kind of a fluke, and won\u2019t necessarily continue. There will be lots of chicanery in future. Many claim alpha \u2013 but really they are just taking earthquake risk. At end of year, when there is no earthquake, they take the money. This is a dishonorable way to invest. It is always easier to get felicity by reducing expectations instead of seeking extreme results.<\/p>\n

Tutelage 3. (In Derivatives) There is a lot of Gresham\u2019s law here, where the bad practice drives out the good.<\/strong><\/p>\n

We have plenty of scandals coming. Lots of rot has gotten into system. It has caused unpleasantness. What is next? I suggest the derivative trading books of the world are next. The accounting allowed in derivative books has been god awful. The morals and intelligence has been god awful. \u2018I\u2019ll be gone and you\u2019ll be gone\u2019 is phrase they use.<\/p>\n

What is buried in those books is dangerous, with clearance risks with optimistic assumptions that the accountants allowed. I was at Salomon when interest rate swap accounting was changed. They had a matched book. They were making $7mil, 25m over 18m. Both sides wanted to mark trades profitably. They couldn\u2019t retain derivative traders if they didn\u2019t have bad accounting. There is a lot of Gresham\u2019s law here, where the bad practice drives out the good.<\/p>\n

Tutelage 4. (Recipe For Systemic Financial Disaster) The engineering mindset that everything must withstand great stresses was thrown out for \u2018if music is playing, you gotta dance\u2019.<\/strong><\/p>\n

If you run a good bank, and testosterone bank around corner pressures you, there are tremendous pressures to conform. Everyone starts replicating. If every university puts 2% into timber, that can go on a long time. But it is self-fulfilling. When it comes to the unwind, when they all want to get out. A lot of things rely on momentum. Valuations make everyone look good for a while.<\/p>\n

We have seen consequences in this mortgage meltdown, not pretty. The amount of knavery and folly revealed in last eighteen months has been unbelievable. I will ask a question, then I will attempt to answer it. Why did this happen? Greed, envy, and terrible accounting was part of it. There was a general lack of conservatism. The engineering mindset that everything must withstand great stresses was thrown out for \u2018if music is playing, you gotta dance\u2019. I don\u2019t feel compulsion to dance, to join the crowd.<\/p>\n

Tutelage 5. Understanding Arithmetic Is Good But Understand Sheep As Well<\/strong><\/p>\n

One of my favorite stories is boy in Texas, when the teacher asked the class the following question. There are nine sheep in pen, and one jumps out, how many are left? Everyone got it right, and said eight are left. The boy said none are left. The teacher said you don\u2019t understand arithmetic, and he said \u2018no you don\u2019t understand sheep\u2019. Sam Goldwin had a saying \u2013 \u2018include me out\u2019 \u2013 it is one of my favorite expressions.<\/p>\n

Tutelage 6. Systems (& Decision Makers) have to be responsible. People who are making decisions must bear results of decisions. In Rome, the builder and designer stood under the bridge when the scaffolding was removed. In parachutes, you pack your own chute.<\/strong><\/p>\n

People were distributing stuff that they wouldn\u2019t buy themselves. It is the structure of the modern world. Favorite philosopher: Frankl. He said the systems have to be responsible. People who are making decisions must bear results of decisions. In Rome, the builder and designer stood under the bridge when the scaffolding was removed. In parachutes, you pack your own chute. Capitalism works that way too. At a restaurant, owner is bearing the consequences. If he slips, he doesn\u2019t do well. Frankl \u00a0would be pleased with restaurant business, and not pleased with investment banking. They sell, take the money, go home \u2013 it doesn\u2019t work. And people wouldn\u2019t get by if accountants didn\u2019t bless it. When I was at Salomon, I was on the audit committee. A group came and said that we want to change our accounting, and where our credit is terrible \u2013 we want to report automatic profits \u2013 ie, to buy counterparties out cheaply because they want to sell. I told them that \u2018You will have that accounting over my dead body\u2019. I won that battle, but I lost the war.<\/p>\n","protected":false},"excerpt":{"rendered":"

Excellent Book: Charlie Munger For All Seasons 2008 Wesco Annual Meeting –\u00a0 Notes courtesy of Peter Boodell http:\/\/valueinvestingresource.blogspot.com\/2008\/05\/2008-wesco-shareholder-meetingdetailed.html Tutelage 1.<\/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":[1,3,4],"tags":[],"class_list":["post-616","post","type-post","status-publish","format-standard","hentry","category-charlie-mungers-3-categories-of-investment-in-out-too-tough","category-investment","category-wisdom"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/616","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=616"}],"version-history":[{"count":2,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/616\/revisions"}],"predecessor-version":[{"id":838,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/616\/revisions\/838"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=616"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=616"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=616"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}