Curated Munger Thoughts from the 2016 Daily Journal Annual Meeting

The 2016 Daily Journal Annual meeting has come and gone. Now, a few days out from the meeting, the full set of notes and audio are available online. Here is a curated sampling of what I found interesting from the meeting.


The full audio of the meeting can be listened to from here.

A full set of notes from the meeting can be found here.

The following are excerpts from the blog of The Charlieton, a blogger who

On the future prospects of the Daily Journal:

Like many newspapers it was once a fine business. Of course the world changed a lot, as it has for other newspapers.

But some things have gone well, like our stock holdings. We made a lot of money in the foreclosure boom. We had more than 80% of the foreclosure notice business. It was huge prosperity for us and that gave us a lot of money, and we then used that money to buy securities at low prices during the panic. We were aided by that peculiar circumstances, and it offset the deterioration of our newspaper business. Of course, we’ve also entered the software business.

And what’s happened now is that we have more software properties than print properties and those businesses are doing much better. And the business is doing better because our product is way better than that of our main competitor. And there is an endless market for this stuff. District attorneys, courts; it’s hard to imagine anything more certain to flourish.

It’s agony to do business with public bodies and their bureaucracies and agencies, but it’s the agony that keeps many other software companies from coming into the market. If you’re Microsoft you’re into easy money. They did buy one of these businesses once, and it was not a success. The really big boys find it hard, and they tend to stay out. I think our prospects are thus better than our main opposition.

What you have here is a sort of venture capital approach to the software business. We’ve tacked on a software business to a newspaper. Our stock may be reasonable if you like VC investments, but it’s not right for Ben Graham groupies. I’m not saying it won’t work, but if it does, you don’t deserve it.

On Charlie’s favorite investing story:

Well, I have many investment stories from my younger days, but not many that I haven’t told before. Al Marshall and I did something in 1962, where we were bidding for some oil rights. I soon realized that under the rules of the rights the only people who would bid for these oil royalties were oil brokers and they were a bunch of bastards. I realized the oil royalties business was populated by shady characters, who could be outmaneuvered easily. The Mungers were getting a $100k a pop for a while. (Authors note: Munger gave much more details regarding this trade / arbitrage but they were not audible)

The trouble with that business, is it didn’t work for very long, and that’s true of most investment stories. The trick is to get one or two or three.

On Berkshire Hathaway’s float:

In the early days we thought we had a special advantage in any float business. Now we have enormous float but it’s not that useful. It’s not a tragedy but the float business in Berkshire is large and it’s not getting a great return.

On BYD, the electric car company in China:

That too is a venture capital like company. The founder started by borrowing $300K from the Bank of China, and was going into the small batteries business. He succeeded in grabbing a small part of that market. He’s a very remarkable man, doing an insanely ambitious thing. Last month he sold 10,000 electric cars in China, which is more than Tesla sold. Most people have never heard of BYD.

Berkshire doesn’t do this venture capital stuff, and I hope that the Daily Journal works out half as well. BYD is in a position to benefit from this electrification trend. It’s very helpful when people are dying in the streets of Beijing.

We have electric forklifts in this country. Do you really want carbon dioxide in the warehouse? It’s a very interesting venture capital investment. It was an accident that the Daily Journal is doing a venture. I only wish we came across more BYDs.

On the use of numeric formulas to calculate intrinsic value:

We don’t use numeric formulas that way. We take into account quality factors. It’s like a bridge hand, you have to think about a lot of things. There is never going to be a formula. If that worked, every mathematical person would be rich, but that’s not the way it works…

Opportunity cost is crucial, and the risk free rate is one factor…

[Question asked whether he uses the same risk free rate for different business] The answer is no, of course not, different businesses need different rates. They all are viewed in terms of value and weighed against one another. Of course we’re OK paying more for a good business. In the US you can make money out of a lousy business. But it’s a painful way to make money. Sometime we do it by accident, and in that case, it’s like hitting up a relative, and we deal with those the best we can, but we’re not looking for new ones.

On reducing errors in daily life:

There are two things Warren and I have done. One is that we spend a lot of time thinking. Our schedules are not that crowded, and we sit around and think constantly. In a way, we look more like academics than businessman. My system has always been to sit quietly for a few hours. I don’t mind if there are long period where nothing happens. Warren’s the same way. He’s sitting on top of an empire now. Sometimes he clears his schedule for a haircut. His calendar will say “Tuesday: Haircut day”.

All you people are very good at multitasking, and that’s fine if you are the chief nurse at a hospital. Otherwise, multitasking is bad. Juggling three balls at once is not ideal. Luckily, a lot of you are so obscure you’re not that busy (audience laughs).That advice worked for me, and it should work for you. If it didn’t work for me, I didn’t have a backup plan. I was not going to dance lead in the Bolshoi Ballet.

But I do think that the constant search for wisdom and the right reactions can help. Being angry will never serve you. You can apply that to your life. But it’s hard to do. The nature of ordinary results is that they’re ordinary.

On why Wells Fargo was such a good investment during the Financial Crisis:

Well I’ll take you back to when Berkshire bought Wells. The world was coming apart. Real estate was the source of the chaos. Wells Fargo had a huge exposure. But we knew that the lending officers at Wells Fargo were not normal bank lending officers. They were grownups, and they had a somewhat cynical view, and they were appropriately careful and it was the right way to run a bank.

And we knew they were better, and we knew they wouldn’t lose at much because they chose better and managed better. So we had an informational advantage. We were aware they had that special capacity, so we bought heavily.

Secondly when the Daily Journal bought Wells we again knew that bankers at Wells were more rational than normal. It’s a different kind of superiority and rationality. I don’t think anyone should buy a bank if they don’t have a feel for the bankers. Banking is a business that is a very dangerous place for an investor. Without deep insight, stay away.

On advice he would give to a younger version of himself:

My advice is always so trite: good behavior makes your life easier, makes it work better, and is less complicated than lying. And so I’m very old fashioned. Disciple works, old fashioned good behavior works, generosity works. We all know people who go to a funeral just to make sure someone’s dead. We don’t want to be in that crowd.

Kiplinger’s If is a great poem. Kiplinger’s If is great advice: “Keep your head, be a man my son”. Why don’t you want to be a man? Some people are so angry, there’s much to be gained by never being an angry twit.

This political situation we’re in is such a despicable mess. It’s bad that someone so mad is running for office. And they’re not all in one party. And we’ll be dealing it with a long time. If you want to operate constructively, anger is bad. There’s so much anger in politics, how do any of you think that the United States will be better off 50 years from now if were all this angry?

By the way the Muslim rules are a lot like the Old Testament rules for behavior.

On oil prices:

Well, basically, sometimes oil prices are high and sometimes they’re low. But some very peculiar things have happened. What’s happened to Exxon and so on, the damn price of oil went up faster than their production went down. Name me another business who’s earnings goes up when production units go down down down?

And there’s another trick. People in the Middle East have free energy, and they are like a bunch of rich people spending capital. My answer reminds me of my old Harvard Law Professor who said “Charlie your problem is you make it harder than it has to be”…

I would not have predicted that oil would reach its present price. It’s forced me to look at things. I think it’s generally true that with commodities, there will be periods of extreme prices. I think commodities can do strange things, and of course that has huge consequences. If you’re Australia, this is a disaster. I think it’s the nature of the human condition that you’re are going to have weird periods. Weird periods of high and low prices. I’ve never been able to predict accurately. I don’t make money predicating accurately. We just tend to get into good businesses and stay there.

On Valeant Pharmaceuticals:

I have no dog in that hunt, I have no interest in pharma, or Valeant. It’s just when you people have come so far….(audience laughs).  Valeant is such an extreme example of extreme behavior that I wanted to call attention to it. One of the Valeant shareholders said Warren is a sinner because he owned Coca-Cola. My comments drew heat on Warren. He can handle it though. He’s a very philosophical man (audience laughs).

It is true that crazy false values and crazy excess is bad morals, and bad for the nation, bad bad bad. A lot of that is in American finance. And there is no question that American finance has its sins. Elizabeth Warren and I don’t agree on many subjects, but she is basically right about American finance when she says it’s out of control.

Bernie Sanders and Elizabeth Warren are not two of my favorite people, but they are absolutely right on that subject. You all see what goes on. The craziness, the stock promotions, the accounting, the culture. It’s very bad for all us that we have this huge over-development of finance. And yet it’s very hard to do anything about it.

It reminds of me of the English land barons. They had all the land, and what did they do? They sat around and played cards, and they gambled for high stakes and that’s what human nature does. That continued day in and day out. Multiply the capital of the world by 30, and now we have people like the lords of England who had all that time to play cards. We have a vast gambling culture, and people have made it respectable. Instead of betting on horse, they bet on securities and derivatives.

We have a huge amount of legalized gambling of and of course a public market is an ideal casino and there are whole bunch of people who want to be in a casino. Just to sit there and see it every night go higher and higher.  Other very respectable people see others getting rich and there’s way too much of that. Too much of the new wealth either owns a casino or they play in one. And I don’t think the exultation has been good for life in general, and I am, to some extent, a member of that group.

I’m always afraid that I’ll be a terrible example to the youth that want to make money. Even if you do it honestly, I don’t consider it much of a life.

It’s not a great example for other people, and it is the reason that Warren and I take care to run businesses. We’re not just buying pieces of paper. So I think we have something going in our nation that is really very serious and very bad, I hate to agree with Elizabeth Warren but I don’t see a way of stopping it.

As this cycle of gaming in securities continues what happens is the big busts hurt us more than the big booms help us, like in the Great Recession. A lot of people think that Hitler rose because of the inflation in the Weimar Republic, but Germany recovered well from the Weimar. They destroyed the old currency and issued a new one, and that worked pretty well. It worked pretty well in Argentina too.

What really enabled Hitler to rise was the Great Depression. Weimar plus the Depression was so demoralizing that the German people were snookered by a Hitler. I think this is deadly serious. These crazy booms should be watched. Alan Greenspan didn’t think so. He’s a capable man but he’s an idiot. You should not make him the father of all banking. His hero is Ayn Rank. It’s an unlikely place to look for wisdom .A lot of people think that if an ax murderer goes around killing people in a free market it’s alright because free markets are alright.

A lot of those people are in my party by the way.

On why Berkshire Hathaway owns auto companies:

The second one is easy. Berkshire is in GM because one of our young men likes it. Warren, when he was a young man, got to do whatever he wanted to do, and that’s the way it is. It is true GM may be protected by the federal government in the end, and it may be a good investment in the end, but the industry is as competitive as I’ve ever seen. Everyone can make good cars, they have the same suppliers, and cars last forever. It just has all these commoditized features. So I don’t think the auto industry is the place to be.

The culture of everyone having three or four cars is also shrinking so I think the auto industry is not great. If I were investing I’d want some way to be better than the others, and that’s hard to find.

On politics and Bernie Sanders:

A very good question. Because politics are corrupt perhaps. People like Bernie Sander’s attitude. But people who are really passionate about government action gave us the Soviet Union, and all the death and poverty there. They also gave us Communist China and North Korea. I’m suspicious about all this passion for equality.

If you want to look at what inequality gives us, look at China. Of course when they adopted private property what they got was growth more quickly than anyone had gotten before, but many Chinese fell behind. I think it’s a good bargain. I don’t think Bernie wants to understand this. He’s said it for thirty years. He’s a Johnny one note. As an intellectual, he’s a disgrace.

I think Bernie’s pretty bad. He’s not worse than some of the Republicans though. They’re crazy in a different way. But differences in outcomes are seen as undeserving.  Who is getting all the undeserved money in American now? A lot of the undeserved wealth from the financial class is counterproductive. I think it would be nice to fix the obviously undeserved wealth. If you take the ordinary investment manager, they take capital gains, and they don’t pay any income tax at all. It’s not very complicated to understand.

I think by and large inequality is a natural outcome of a natural civilization that’s good for everyone. And all of this stuff about the wealth of the 1%, what the hell does he do with it? He has to leave it somebody. He’s not really using the wealth much, and most of these guys (inaudible).

If you are rich, you realize how little influence the rich really have. Lots of rich people get practically nowhere. I think these people that are raging about it are wrong, but I think the undeserved wealth does deserve some attention. On that, I think they’re right, and a huge amount of the undeserved wealth is in finance.

On Silicon Valley, unicorns, and circle of competence:

I have a circle of competence, and it doesn’t include which companies in Silicon Valley are going to succeed, so I tend to avoid the subject entirely. And it’s the same way with others.

But I will comment on one thing. The venture capital industry is a more honorable than some other areas of finance. VC is a useful member of society. But they don’t escape sin. They sneak a clause in contracts where anyone that’s new to a company is preferred. It’s a disgusting, dishonest thing to do, and worse because it’s obscured. So even in our most reputable parts of finance, there are dirty sleazy activities sneaking in. Large amounts of money make people behave badly. That’s Munger’s rule.

On Coke and the decline of sweet beverage consumption:

Easy one: Coke for many decades has been a basic product full of sugar, and it grew every year. Full sugar coke is now declining. Fortunately, the Coca-Cola Company has a vast infrastructure. Coca-Cola is declining some, but the rest of the businesses are rising. I think Coke is a strong company, and will do very well. It’s still like shooting fish in a barrel.

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