Warren Buffett is generally acknowledged to be the greatest investor ever. But following close, if not better, is his long-time partner, Charlie Munger. While Warren gets all the attention, Charlie is himself an investment genius and, were it not for Warren, Charlie might well be acclaimed the world’s greatest investor.
In addition to his role as Vice Chairman of Berkshire Hathaway, Charlie is Chairman of Wesco Financial, which is 80.1%-owned by Berkshire. Similar to Berkshire annual meeting, Charlie answers shareholder questions for a couple of hours at its yearly meeting. The following are some of the excerpts drawn from such meetings. It is part of the wits and wisdoms of Mungerism.
BERKSHIRE’S INSURANCE OPERATIONS
“I do think we get some advantage in reinsurance because people trust our willingness and ability to pay, so it’s not a commodity. I think we have some special talents. That being said, I think it’s dangerous to rely on special talents – it’s better to own lots of monopolistic businesses with unregulated prices. But that’s not the world today. We have made money exercising our talents and will continue to do so.”
“I’m glad we have insurance, though it’s not a no-brainer – I’m warning you. We have to be smart to make this work.”
“The overall result is that we’re going to do pretty well – meaning in the top 10% - because we do different things. We’re willing to do some unpleasant things.”
“People are always saying to Berkshire, ‘Gee, why don’t you write a lot more volume in relation to capital? Everyone else is doing it. The rating agencies say that you can write twice as much in annual volume as you capital.’ And they look at our $10 billion in insurance capital and say, ‘That’s $20 billion a year. What are you doing writing only $1 billion?’ But then, somebody else comes in and asks, ‘Why did everyone get killed last year but you?’ Maybe the questions are related.”
BERKSHIRE’S FUTURE OUTLOOK
“It’s a finite and very competitive world. All large aggregations of capital eventually find it hell on earth to grow and thus find a lower rate of return.”
“Personally, I think Berkshire will be a lot bigger and stronger than it is. Whether the stock will be a good investment from today’s price is another question. The one thing we’ve always guaranteed is that the future will be a lot worse than the past.”
TYPES OF BUSINESSES BERKSHIRE BUYS
“We tend to buy things – a lot of things – where we don’t know exactly what will happen, but the outcome will be decent.”
BECOMING A GOOD INVESTOR
“If you’re going to be an investor, you’re going to make some investments where you don’t have all the experience you need. But if you keep trying to get a little better over time, you’ll start to make investments that are virtually certain to have a good outcome. The key is discipline, hard work, and patience. It’s like playing golf – you have to work on it.”
HAVING SPECTRUM OF MENTAL MODELS
“You need a different checklist and mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life.”
“If you’re going to learn to drive a car, it doesn’t do any good just to know how to use the accelerator. There’re four or five things you’ve to know before you understand the system correctly. I do think some things are way more important than others, and in the game we’re in, understanding the advantages of scale, scale of experience, efficiency in the plant, scale of experience in leasing, other advantages of scale. (Take) Adam Smith’s pin factory, I think that’s a very important basic concept, but it’s just one.”
CIRCLE OF COMPETENCE
“There’re a lot of things we pass on. We have three baskets: in, out, and too tough. We have to have a special insight, or we’ll put it in the ‘too tough’ basket. All of you have to look for a special area of competency and focus on that.”
“The game of investing is one of making better predictions about the future than other people. How are you doing to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much. You’re going to fail through the lack of specialization.”
BUYING INTO STOCK DECLINES
“Over many decades, our usual practice is that if something we like goes down, we buy more and more. Sometimes something happens, you realize you’re wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices.”
WALL STREET’S ETHICS
“The ethics of Wall Street will always average out to mediocre at best. This doesn’t mean there aren’t some wonderful, intelligent people on Wall Street – there’re, like those in this room – but everyone I know has to fight their own firm.”
CRITIQUE OF LEGAL AND ACCOUNTING FIRMS
“Too many law and accounting firms get roped into shady things. For example, tax shelters, with their contingency fees and secrecy, are a total abomination. I never have the least interest in defending miscreants and helping them misbehave. But the general view is that it’s wonderful what Johnny Cochran did.”
DERIVATIVES
“Everyone caved, adopted loose (accounting) standards, and created exotic derivatives linked to theoretical models. As a result, all kinds of earnings, blessed by accountants, are not really being earned. When you reach for the money, it melts away. It was never there.”
“It (accounting for derivatives) is just disgusting. It is a sewer, and if I’m right, there’ll be hell to pay in due course. All of you will have to prepare to deal with a blow-up of derivative books.”
“It’s a crazy idea for people who are already rich – like Berkshire – to be in this business. It’s a crazy business for big banks to be in.”
RISKS OF FINANCIAL INSTITUTIONS
“The beauty of a financial institution is that there’re a lot of ways to go to hell in a bucket. You can push credit too far, do a dumb acquisition, leverage yourself excessively – it’s not just derivatives (that can bring about your downfall).”
UNIVERSITIES
“There’s a lot wrong (with American universities). I’d remove ¾ of the faculty – everything but the hard sciences. But nobody’s going to do that, so we’ll have to live with the defects. It’s amazing how wrongheaded (the teaching is). There’s fatal disconnectedness. You’ve these squirrelly people in each department who don’t see the big picture.”
THINKING SENSIBLY
In addition to his role as Vice Chairman of Berkshire Hathaway, Charlie is Chairman of Wesco Financial, which is 80.1%-owned by Berkshire. Similar to Berkshire annual meeting, Charlie answers shareholder questions for a couple of hours at its yearly meeting. The following are some of the excerpts drawn from such meetings. It is part of the wits and wisdoms of Mungerism.
BERKSHIRE’S INSURANCE OPERATIONS
“I do think we get some advantage in reinsurance because people trust our willingness and ability to pay, so it’s not a commodity. I think we have some special talents. That being said, I think it’s dangerous to rely on special talents – it’s better to own lots of monopolistic businesses with unregulated prices. But that’s not the world today. We have made money exercising our talents and will continue to do so.”
“I’m glad we have insurance, though it’s not a no-brainer – I’m warning you. We have to be smart to make this work.”
“The overall result is that we’re going to do pretty well – meaning in the top 10% - because we do different things. We’re willing to do some unpleasant things.”
“People are always saying to Berkshire, ‘Gee, why don’t you write a lot more volume in relation to capital? Everyone else is doing it. The rating agencies say that you can write twice as much in annual volume as you capital.’ And they look at our $10 billion in insurance capital and say, ‘That’s $20 billion a year. What are you doing writing only $1 billion?’ But then, somebody else comes in and asks, ‘Why did everyone get killed last year but you?’ Maybe the questions are related.”
BERKSHIRE’S FUTURE OUTLOOK
“It’s a finite and very competitive world. All large aggregations of capital eventually find it hell on earth to grow and thus find a lower rate of return.”
“Personally, I think Berkshire will be a lot bigger and stronger than it is. Whether the stock will be a good investment from today’s price is another question. The one thing we’ve always guaranteed is that the future will be a lot worse than the past.”
TYPES OF BUSINESSES BERKSHIRE BUYS
“We tend to buy things – a lot of things – where we don’t know exactly what will happen, but the outcome will be decent.”
BECOMING A GOOD INVESTOR
“If you’re going to be an investor, you’re going to make some investments where you don’t have all the experience you need. But if you keep trying to get a little better over time, you’ll start to make investments that are virtually certain to have a good outcome. The key is discipline, hard work, and patience. It’s like playing golf – you have to work on it.”
HAVING SPECTRUM OF MENTAL MODELS
“You need a different checklist and mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life.”
“If you’re going to learn to drive a car, it doesn’t do any good just to know how to use the accelerator. There’re four or five things you’ve to know before you understand the system correctly. I do think some things are way more important than others, and in the game we’re in, understanding the advantages of scale, scale of experience, efficiency in the plant, scale of experience in leasing, other advantages of scale. (Take) Adam Smith’s pin factory, I think that’s a very important basic concept, but it’s just one.”
CIRCLE OF COMPETENCE
“There’re a lot of things we pass on. We have three baskets: in, out, and too tough. We have to have a special insight, or we’ll put it in the ‘too tough’ basket. All of you have to look for a special area of competency and focus on that.”
“The game of investing is one of making better predictions about the future than other people. How are you doing to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much. You’re going to fail through the lack of specialization.”
BUYING INTO STOCK DECLINES
“Over many decades, our usual practice is that if something we like goes down, we buy more and more. Sometimes something happens, you realize you’re wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices.”
WALL STREET’S ETHICS
“The ethics of Wall Street will always average out to mediocre at best. This doesn’t mean there aren’t some wonderful, intelligent people on Wall Street – there’re, like those in this room – but everyone I know has to fight their own firm.”
CRITIQUE OF LEGAL AND ACCOUNTING FIRMS
“Too many law and accounting firms get roped into shady things. For example, tax shelters, with their contingency fees and secrecy, are a total abomination. I never have the least interest in defending miscreants and helping them misbehave. But the general view is that it’s wonderful what Johnny Cochran did.”
DERIVATIVES
“Everyone caved, adopted loose (accounting) standards, and created exotic derivatives linked to theoretical models. As a result, all kinds of earnings, blessed by accountants, are not really being earned. When you reach for the money, it melts away. It was never there.”
“It (accounting for derivatives) is just disgusting. It is a sewer, and if I’m right, there’ll be hell to pay in due course. All of you will have to prepare to deal with a blow-up of derivative books.”
“It’s a crazy idea for people who are already rich – like Berkshire – to be in this business. It’s a crazy business for big banks to be in.”
RISKS OF FINANCIAL INSTITUTIONS
“The beauty of a financial institution is that there’re a lot of ways to go to hell in a bucket. You can push credit too far, do a dumb acquisition, leverage yourself excessively – it’s not just derivatives (that can bring about your downfall).”
UNIVERSITIES
“There’s a lot wrong (with American universities). I’d remove ¾ of the faculty – everything but the hard sciences. But nobody’s going to do that, so we’ll have to live with the defects. It’s amazing how wrongheaded (the teaching is). There’s fatal disconnectedness. You’ve these squirrelly people in each department who don’t see the big picture.”
THINKING SENSIBLY
“The ethos of not fooling yourself is one of the best you could possibly have. It’s powerful because it’s so rare.”
“Organized common sense – very basic knowledge – is an enormous powerful tool. There’re huge dangers with computers. People calculate too much and think too little.”
BEING HUMBLE
“In my whole life, nobody has ever accused me of being humble. Although humility is a trait I much admire, I don’t think I quite got my full share.”
RELATION OF CORPORATE GREED TO CORPORATE PERFORMANCE
“The opulence at the head office is often inversely related to the financial substance of the firm.”
LEARNING AS YOU GROW
“I don’t spend much time regretting the past, once I’ve taken my lesson from it. I don’t dwell on it. Certainly I had more sense when I was 32 than I did when I was 22. But I don’t have any feeling of terrible regret. (In a failed marriage, for example) We ended up with nice children. I think my ex-wife has been reasonably happy in a different situation.
WEALTH
“There’re a lot of things in life way more important than money. All that said, some people do get confused. I play golf with a man who says, ‘What good is health? You can’t buy money with it.’”
GIVING BACK
“The early Charlie Munger is a horrible career model for the young, because not enough was delivered to civilization in return for what was wrested from capitalism.”
“Look at Berkshire Hathaway. I call it the ultimate didactic (educational) exercise. Warren’s never going to spend any money. He’s going to give it back to society. He’s just building a platform so people will listen to his notions. Needless to say, they’re very good notions. And the platform’s not so bad either. But you could argue that Warren and I are academics in our own way.”
INVESTING IN INDEX FUND
“Does that mean you should be in an index fund? Well, that depends on whether or not you can invest money way better than average or you can find someone who almost surely will invest money way better than average. And those are the questions that make life interesting.”
BLACK SCHOLES MODEL
“Black Scholes is good for valuing short-term options, when you know nothing about the company. But on a long-term option, where you know something, it’s an insane way to value them. The model comes up with the lowest value. Companies will do everything they can to make the cost look low. It’s a Mad Hatter’s Tea Party. The only thing that’s consistent is that the whole thing is disgusting.”
ON NOT APPRECIATING A GOOD-WILLED IDEA OR BOOK
“No problem – just give it to someone more intelligent.”
IMPORTANCE OF READING
“I’ve said that in my whole life. I’ve known no wise person over a broad subject matter area who didn’t read all the time – none, zero. Now I know all kinds of shrewd people who by staying within a narrow area can do very well without reading. But investment is a broad area. So if you think you’re going to be good at it and not read all the time, you’ve a different idea than I do. You’d be amazed at how much Warren reads. You’d be amazed at how much I read.
HEDGE FUND
“You ask a heard hedge fund operator why the charge 2 and 20, and they say because I can’t get 3 and 30, he says. “[For hedge funds], it’s not about thinking what is fair and right – but merely how much can I get. It’s a ghastly culture…there will be terrible scandal in due course”
2 comments:
This is very interesting, Charlie is a funny guy, he and Buffett does make good partners. It would be my dream to go to Omaha someday to attend their shareholders' meeting. But first I have to be a shareholder! Hehe.
8percentpa
Hi 8percent,
My wish is to own a Berkshire stock too, whether it is class A or B. I think class B also qualifies to go to their meeting. At this moment, I can only afford Class B but I want to buy only at a value which I can get a better return.
Maybe and hopefully, we can organize a trip for those who really appreciate what Warren and Charlie did for their personal well-being, to show homage to them. That is what I hope to do one day.
Cheers
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