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Charlie Munger At The 2016 Daily Journal

Corporation Meeting [FULL NOTES AND
AUDIO]

Whitney Tilson was kind enough to send us really extensive notes from Charlie Mungers talk
at the Daily Journal Conference earlier this week (we have some informal notes here). We also
managed to find an audio recording of the entire session, which is also embedded below.
Munger discusses a wide range of topics, mostly fielding Q&A from the audience on subjects
such as Bill Ackman, Bernie Sanders, Donald Trump, oil prices, becoming a better investor, the
morality of Coca-Colas Business, IBM stock, Berkshires future and more. Munger is less
inhibited than Buffett so it is a real pleasure to hear him talk with no holds barred.
Also see some notes from prior meetings from ValueWalk and other publications
Full Notes Of Charlie Mungers Speech At DJCO
Charlie Mungers Comments From 2015 DJCO Meeting
Q&A With Charlie Munger At The DJCO Meeting 2015 [Audio]
Charlie Munger Comments From DJCO Meeting 2014
Charlie Munger DJCO In-Depth Notes (24 Pages)
Charlie Munger comments on Valeant
Charlie Munger Isnt Done Bashing Valeant Bloomberg
Charlie Munger on Valeant: Its Not Enron or AmEx
Also get our free in-depth e-book on Munger here.
See the full notes below and enjoy!
Tilson says:
There were no real zingers like his spot-on critique on Valeant at last years meeting, but he
had lots of interesting things to say. This was my favorite, when he was asked about what he
said the previous year about Valeant:

Its caused me nothing but troubleit probably wasnt wise for me to inject myself into
this. I have no dog in that hunt. I have no interest in the pharmaceutical business. I have
no interest in Valeant. Its just that you people have come so far [laughter], I feel obligated
to tell you a few good stories and make comments about current affairs. Valeant was such
an extreme example of misbehavior and crazy greed and what have you that I couldnt
resist calling attention to it. And it ended up with one of Valeants largest shareholders
saying that Warren Buffett was a sinner because he owned Coca-Cola [laughter]. I drew
retaliation to Warren. By the way, thats a good place. If any of you are mad at me today,
why get mad at Warren [laughter]. He can handle it. Hes a very philosophical man.

It is true that these crazy false values and crazy excess is bad morals and is bad policy. Its
bad for the nation. Its just bad, bad, bad. And theres a lot of it. Now of course a lot of it is in
American finance. And theres no question about the fact that my judgement that American
financethe truth of the matter is thatElizabeth Warren doesnt agree with me on many
subjects and I wouldnt agree with her on many subjects, but she is basically right when she
says that American finance is out of control and has been [unintelligible] and that it isnt good
for the rest of us. Both Elizabeth Warren and Bernie Sanders are not two of my favorite people
on earth, but they are absolutely right [unintelligible]. You all see it [unintelligible] hucksters
trying to cheat other people. You all see what goes on in finance the craziness, the
promotions, the fuzzy accounting, the crazy trading cultures Its very bad for all of us that we
have this huge overdevelopment of finance. And yet its very hard to do anything about it.

Below are extensive notes by Adam Blum, below are 2016 Daily
Journal Corporation Meeting notes from Mungers opening
remarks, taken by Chris DeMuths uncle.
Notes are presented in order of questions asked. I tried to transcribe as much as possible.
Apologies in advance for errors or items I missed.
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params=auto_play=false&hide_related=false&show_comments=true&show_user=true&show
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StephenMcMahon

CharlieMungerDJCOAnnualMeeting2016

Cookie policy

This was my third DJCO meeting to attend and by far the most well-attended. -Adam DJCO
Meeting Business Gerry Salzman [Chief Executive Officer, President, Chief Financial Officer,
Chief Accounting Officer, Treasurer, Assistant Secretary and Director] has all the titles in the
world. I asked Mr. Salzman to attach affidavits to the minutes reflecting all that. Does
anyone want to vote personally who hasnt voted? [Doesnt look up and without skipping a
beat, says] Alright. I never know why people do this. I cant understand these vote totals. I
think Salzman gets more votes than I do because hes younger [77] and does more work than
I do, but hes hardly a spring chicken. 60,000 votes against retaining BDO as auditor. I dont
know why 60,000 people are mad at BDO, but its a big firm.
Munger Intro Monologue:
Someone in the crowd: Will you put the microphone closer? Munger, pulling the wireless
microphone attached to his shirt almost inside his mouth: Yeah, except its on me. Im
wearing it.
Maybe Ill talk for a minute. Whats interesting about this company is its a newspaper
historically that relied on a combination of public service notices [for lawyers] and ads which
gave it a monopoly to raise subscription fees every year. Like with others, technology changed
and classifieds went to hell and lawyers no longer needed to get the info in print. As we sit
here it makes about $1mm per year pretax. Can you hear me? This is a very low tech
company. Can we switch to a low tech mic?

Some of you groupies may remember this [microphone issues] happened once at the Wesco
meeting and there again with endless money we were unable to have folks hear us. Amazing
with high tech we still get glitches.
Anyway, the newspaper was a fine business. It was foolproof. Of course the world changed.
Whether itll keep going down a little or hold flat, I dont know. Any of you holding it [DJCO
shares] hoping the newspaper comes back, change your rationale.
The boom in foreclosure was a boon for us we were the undertaker in a plague era that
allowed us to use our profits to buy securities [Wells Fargo at $8] in the panic.
A peculiar response on our part to the print industrys deterioration, the software business
has been slow and expensive, and we have written off everything we spent on it. We now have
more software revenues than print, and that business is doing better and better and better,
because the product is better than competitors [products], and theres an endless market for
software in public agencies. I can hardly imagine any better a market, but it is agony to do
business with public agencies and bureaucracies, and big companies shy away. Really big
boys find the niche to be such absolute agony, so they tend to stay out. The opposition has
more share but worse products. Microsoft bought a small competitor with a market which is
half as interesting.
The stock [DJCO] may be reasonable if you like a VC business, but for you old time Ben
Graham groupies, youre in for it. Youre in new territory with Daily Journal. I am not saying it
wont work, but if it does, you wont deserve it.

2016 Daily Journal Corporation Meeting Questions:

Gentleman begins by giving Charlie the option to answer one of two questions, and Munger
replies What would you like to talk about? No, youre asking the questions.
DJCOs technology business: What Charlie was most excited about for Journal Technologies
was winning the contract for Los Angeles courts, which is a crucial milestone, as this is one of
the biggest court systems on earth. If they can saturate California with huge success, they will
spread elsewhere. We bought this little nothing of a software company in Utah. Is it in Utah or
I dont know? Turns out theyre very good. 80-90 employees in Utah and 155 at headquarters
and about 150 in traditional newspaper business, so theyve crossed over into a new
business. It is interesting, because it is a big market, and if we can get entrenched, it will be
very sticky. This occurred to us as we suffered all this agony. At least we will be in a position
that will be hard to dislodge.
Hurdles facing Journal Technologies: The main hurdle is to be a big player in a new niche. It
is going very well, but not won.

IBM investment made by BRK seemingly not going so well: IBM is a lot like Daily Journal, with
a traditional business that was sticky, then the world changed, and up came Oracle and
Microsoft and others who were formerly not so large. They have an old business from which
cash continues to flow, but they want a new product that is a hit an automated checklist or
some sort of thing [Mungers way of describing the cloud would be my guess] this is very
good idea and particularly useful in medicine it could replace what made IBM great, but
Charlie has no opinion. I am neither a believer nor a disbeliever; it is a mystery. I would say
the jury is out. It may work in a mediocre way, it may work big, I just dont know. The old
business is sticky and will die slowly. BRK having to make big bets is a tough game, as
theyre no longer shooting fish in a barrel. The answer my friend, is blowing in the wind.
Advice to grandkids: I was not able to change my children very much. The old Clarence
Darrow story of reading the [William Ernest Henley] poem comes to mind, I am the master of
my fate, I am the captain of my soul. Hell, I cant even pull an oar with my kids, I am the
master of none, and regarding grandkids, hell, thank god theyre someone elses problem. Ive
served my time.
Investment story from younger days: In 1962, Al Marshall [his partner at Wheeler, Munger]
asked him to help bid on oil royalties, and under peculiar rules of stupid civilization, the only
bidders were cheap and shady bastards who were insiders to the space who low bid
everything, and so we bid a little high to win, and are getting thousands of dollars a year off of
a single $1,000. The trouble with that story is it only happened once. The trick in life is when
you get to one, two or three great deals, which is your fair allotment, you gotta do something
about it.
Blue Chip Stamps and Wesco were some of the most screamingly successful investments in
the history of mankind, and only five or six transactions carried all the freight - just doing a
few things over a long period of time - those nothing companies worked out fairly well out of a
few good decisions. You make your money by the waiting, not til next depression, but a fair
amount of patience is required followed by pretty aggressive discipline when the time comes.
Imagine putting all the foreclosure boom money to work in 1 day on the bottom tick of the
market (Wells Fargo stock bought at $8). Sure it was luck, but it wasnt luck that we had the
money ready to deploy and were willing to do so when others were fearful.
We were always opportunistic and wanted to buy the best thing conveniently available that
we could understand. Early on, we looked a lot at float businesses in the public markets, but
nowadays we have so much float it isnt as useful, and Europe and Japan rates are negative,
so we cant get great returns on the cash that the float gives us. We made so much money off
those float businesses it was obscene.
Software-based businesses: It has its good spots and bad spots; some are the most
profitable businesses ever, and others fail.

On Journal Technologies: Nobodys offered us a high multiple for it, so we havent had the
opportunity [to sell]. It is a lot of pain now for success later. It is VC that happens to be located
in a publicly traded company. If it works, it will evolve into a pretty huge business and only a
few will succeed. Little companies we buy are not acquisitions like Berkshire makes. We are
not established and not assured of success. We made a VC assault on this part of market and
needed momentum from various services and just bought them. We dont view them as
traditional acquisitions, and if you dont like it, you can dump it [DJCO stock].
Question about optimal CEO compensation scheme: We dont follow anyone else. We do
whatever makes sense under the circumstances, and around here we just ask Gerry
[Salzman] to do everything and give him an unlimited budget - thats how we do things here.
Get the mic closer to your mouth. (to a guy whose accent he didnt understand)
BYD: BYD has 220,000 employees, so it is a big company now. That too was VC when we
went into it, but the company has done amazing things. The founder was the 8th son of
peasant and became an engineer with a PhD and borrowed $300k from Bank of China or
something and then got into the battery market dominated by big Japanese firms and won
patent litigation in Japan. He is a remarkable man doing insane things. BYD is now one of
biggest lithium battery makers in world and sold 10k cars last month, more than Tesla. We
can only hope the DJCO VC play works out half as well as we think BYD will. It is very helpful
that people are dying on streets of Beijing and cant breathe the air - and with those subsidies
and all [for clean energy] - do you really want a forklift spewing out carbon monoxide in the
middle of your warehouse? It was an accident for Berkshire to do this VC stuff just as it was
an accident for DJCO to do VC stuff in software.
Discount rate to use to value a company in circle of competence: We use both the risk-free
rate and opportunity cost. If you happen to have a rich uncle wholl sell you a business for
10% of what its worth, opportunity cost is your friend. Most people dont pay enough attention
to opportunity cost. American university faculty members and other important people hardly
know their ass from a plate of squash.
[note, I am not sure what he said, but it sounded like plate of squash] We dont use numeric
formulas and take into account many factors, like a bridge hand. There never will be a formula
that will make you rich. If that were true, every person who got As in algebra would be rich.
We dont want any lousy businesses. We used to make money buying them and wringing
money out, but it is painful, especially when youre rich. Sometimes it happens by accident,
and then it is like dealing with your relatives and you hope to get rid of them but cant really.
Mental models used to make investing easier: Theres no way to make investing easy.
Anyone who finds it easy, youre living in an illusion. This is an intelligent group of people [at
the meeting]. We collect them. It is hard for all of us. The constant quest for wisdom and a
temperamental reaction to opportunity will never be obsolete.

How to reduce errors in life: Warren and I and [DJCO director J.P.] Guerin do two things. One,
we spend a lot of time thinking. Our schedules are not crowded, and we look like academics
more than businessmen. It is a soft life waiting for a few opportunities, and we seize them and
are ok with waiting for a while and nothing happens. Warren is sitting on an empire, and all he
has on his schedule is a haircut this week. He has plenty of time to think. Luckily so many of
you groupies [attendees] are so obscure, youll have plenty of time to think. Second,
multitasking is not the highest quality thought man is capable of doing unless youre chief
nurse of hospital. If not, be satisfied with life in shallows. I didnt have #2 plan; I wasnt going
to dance lead in Bolshoi Ballet or stand on the mound in Yankee Stadium. The constant
search for wisdom or opportunity is important. It applies to the personal life too. Most of you
arent going to have five or six opportunities to marry a wonderful person. Most of you arent
going to get one. Most of you get an ordinary chance, which leads to an ordinary result.
On the Wells Fargo buys: When Berkshire bought Wells Fargo, the world was unglued in real
estate lending-driven banking panic. We knew their bank lending officers werent ordinary.
They grew up in the garment district as cynics and were careful and better [than others]. This
was an information advantage that we had that Wells Fargo had this special capacity. When
DJCO bought into Wells Fargo at $8, we knew the bankers were more rational than ordinary
bankers. No one should buy a bank without a feeling for how shrewd management is. It is
easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Dont
invest in banks without real knowledge.
On synthesis of disciplines: Saying one is in favor of synthesis is like saying one is in favor of
reality. It is easy to say we want to be good at it, but the rewards system pays for extreme
specialization. Youre usually way better off being a deep expert than someone an inch deep
in a lot of disciplines. It [Synthesis] is helpful to some but not the best career advice for most
people. The trouble is you make terrible mistakes everywhere else without it, so synthesis
should be a second attack on the world after specialization. It is defensive, and it helps one to
not be blindsided by the rest of world.
On being rational: I worked at being rational young and kept doing it. Do it til youre as old as
me, it is a good idea and it is a lot of fun if youre good at it. I can hardly think of anything
more fun. And I have a lot of cousins [like-minded folks] in the room. You dont have to be
emperor of Japan. You can be a very constructive citizen by being rational. Just avoid where
the standard result is awful. Anger, jealousy, resentment, self-pity, etc. Theyre a one-way
ticket to hell, and many people wallow in them, and its a disaster for them and everyone
around them. Self-pity wont improve anything if youre dying of cancer. Keep your chin up,
and forget about it.
Treating marriage as an investment seeking ROI: [Speechless at the question for a few
seconds shaking his head] Different folks can live in different ways. Marriage is the best
practical long term deal for most people. The science says they live longer and are happier.

Sure some marriages fail and are made in hell and all that, but marriage is the best chance in
world as difficult as it is. I love Asian culture. The Confucian idea of family being all you have
and family values are very important. Society goes to hell if you dont have family values.
Thanks for the belated 29th [92nd] birthday [January 1, 1924] wishes.
On DJCO buying land: We bought land in Logan, Utah because we think well be there a long
time. I havent seen it, but it has a river that flows by. We bought the land here [in L.A.] too. We
bought cheap and built cheap, and theres nothing wrong with owning some real estate. It is
not a way to get ahead, but it simplifies life.
On Trump: Well, he did make money for quite a while. My attitude is that anybody who makes
money running a casino is not morally qualified to be President. It is a very dirty way to make
money.
Greatest accomplishment: My family life is more important than wealth and prominence, but
I hated poverty and obscurity and have satisfaction in coming a long way from where I
started. People who stand atop Everest are proud they got up there even though theyre only
there for 15 seconds. Cicero says happy men in old age look back on a lot of achievements.
Some say thats damn selfish, but I like it. Ive always hated poverty and obscurity and finally
found my way out of them.
Advice to folks: My advice is to have good behavior, be dependable, live in morality. It makes
things easier, and you dont have to remember your lies. Old fashioned good behavior and a
little generosity are good. We all know people who, when they die, people come to funeral to
make sure theyre dead. Kiplings If is great poetry but doesnt exist in college now because
isnt politically correct. Be a man, my son; you dont want to be a child or an angry twit. In this
political situation, so many candidates are disgraceful on both sides. Sure, politicians have
been politicians for a long time, so we need to operate and vote constructively. Theres so
much automatic anger and hatred, and who the hell can tell whether the next fifty years will be
better based on how we vote? Muslim behavioral rules read like The Old Testament, which of
course they copied. They claim the rules are directly from God, but everyone knows they stole
them from the Jews.
Oil prices: Well thats a simple set of questions. I dont know about correlation between bond
prices and economic growth - oh you said oil - if oil had been cheaper and easier, then growth
wouldve been greater, so expensive oil will make life harder. Exxon Mobil and Chevron
became good investments, because the damn price of oil rose faster than their production
went down. This is unlike any other business. Your stock goes up when your units go down.
Asininity. But alas, the Middle East with a bunch or free energy for all these years has had
dysfunctional economies, so maybe in that sense tougher [higher priced] oil is better. It is like
my old Harvard Law professor said, Charlie, let me know your problem, and I will make it
harder for you.

How to think of two mental models at once: Barely. I am barely able to think of two things at
once. This is true stress, this multitasking stuff. I was often barely able to think of the right
answer time after time, and sometimes I failed.
Valeant [led into a diatribe]: The Valeant comments last year gave me nothing but trouble. It
probably wasnt wise of me to inject myself, and I had no dog in that hunt or interest in that
business. It is just that you people come so far to see me, that I feel obligated to tell you
things. I drew retaliation to Warren. Valeant is an extreme example of greed and led to some
crazed person [Bill Ackman] calling Warren [Buffett] a sinner for owning Coke. If anyone is
mad today, just get mad at Warren. He can handle it. He is a philosophical man. I couldnt
resist calling attention to it. These crazy false values and this crazy excess is bad morals and
its bad policy. Its bad for the nation. Its just bad, bad, bad, and a lot of it is in American
finance. Theres no question that Elizabeth Warren is right when she says American finance is
out of control and has too much evil and folly in it. She and Bernie [Sanders], not two of my
favorite people, are right. Manipulative hucksters are out there trying to cheat people with
lousy accounting and a crazy trading culture. It is very bad for all of us, this huge
overdevelopment of finance, and it is hard to do anything about it.
We go back to Edwardian England or before. Three hundred men owned half the land and
had nothing to do, and even the butlers had butlers. So they got bored and had too much
leisure and started gambling, and then things fanned out and multiplied capital by 30x or so,
and now we have all kinds of people with all this time to sit around and gamble and not just
cards or horses. Now we bet on securities and derivatives and athletic contests. The public
market operating with transactions is a daily casino. People want to sit there but have none of
the trouble with it. Too much of the new wealth has gone to the owners of the casino or to the
gamblers. The exaltation of that group hasnt been good. I am, to some extent, a member of
that group, because I didnt make my career in surgery. I have some worries Ill be a bad
example for the youth. We dont want to just be shrewd about buying little pieces of paper. We
need to be charitable and run businesses. This is a serious and bad issue, and I hate to agree
with Elizabeth Warren, but she is right, and theres no way of stopping it without big legislative
change. As the cyclicality of this goes on, big busts hurt us more than the big booms help us.
We saw that when the [Great] Depression happened and rise of Hitler. Post-Weimar
hyperinflation didnt spawn Hitler. Hitler really rose out of Great Depression. People were so
demoralized that they were snookered. [Alan] Greenspan, he is an amiable man, but he was an
idiot. This is a man whose hero is Ayn Rand who believed in no government, we got the
decision making we deserved, and he didnt see reality the way it was. If an ax murder
happens in free markets, it is ok because it happened in free markets. Garbage, and a lot of
these people who say this are in my [political] party.
On General Motors: Thats simple. GM is in the Berkshire portfolio, because a young man
who works for Warren likes it, and Warren lets them do what they please. When he was a
young man, Warren didnt like when old men told him what he couldnt do. So he refrains from
that with our young men. I havent the faintest idea why he likes it. Maybe it is cheap and

therell be another god damn government bailout. The industry is too competitive. Everyone
relies on the same suppliers, and cars last long time with little service, and leases of cars are
all at cheap rents. This has the earmarks of a commoditized and difficult market and will
shrink one of these days. If I was investing, I would want something way the hell better than
others, and thats hard to find.
Oil prices: I wouldnt have predicted oil would fall so low, and it is generally true that we can
get periods of extreme prices in commodities as we see now with iron ore. Commodities can
do strange thingsup and downand they have macroeconomic consequences. If youre in
Australia [iron ore] or in the tar sands of Canada [oil], it is terrible now. We are in a weird
period, but thats the nature of the human condition with free markets. I have never accurately
predicted those swings. We just get into good businesses and let the cycles happen.
On books he recommends: You people send me thirty books a week, and I tend to skim them
so rapidly that youre ruining my joy. I cant resist reading the damn things, and it is too much.
I am no longer a good book source.
On charity: I never wanted to tackle world peace. I read enough biographies. Carnegie did all
this with The Hague and the like. And the ink was barely dry when the crazy European
monarchs stumbled into World War I, and that was quite demoralizing to Carnegie. If he
couldnt do it [tackle world peace], Ill leave it alone. I like to create dormitories and science
teaching facilities. It is interesting to me and modest, and it is easy to do them better than
most people. I do what I am good at and suggest you do the same.
Income inequality: My attitude is that both [Thomas] Piketty and [Bernie] Sanders are a little
nuts. People passionate about egality gave us the Soviet Union and all those murders and
Communist China and the starvation and lovely North Korea. I am suspicious of all this
passion that brings about such bad examples. China had egality and was starving but
adopted property rights, and living standards increased 10x, but that created a lot of
inequality. Sanders doesnt understand this at all and has a religion for it; he is Johnny One
Note. As an intellectual, Bernie is a disgrace. Now, I dont think hes any worse than some of
our Republicans. But at least theyre crazy in a different way. But I wouldnt have him [Bernie]
marry into my family just for his personal traits. As thinker, he is bad. Egality has one effect:
people will tolerate different outcomes, if the outcomes are deserved, according to Aristotle.
People are understanding that Tiger Woods is so rich. Who is getting undeserved money in
America now? Not Gates or creators of businesses. Financiers are among those who do
receive undeserved wealth and have caused envy. Even the man talking [referring to himself]
is guilty of this. We dont want a lot of undeserved wealth for doing nothing or acting
counterproductively. Fixing undeserved wealth would be extraordinary. Normal investment
partnerships pay no taxes on unrealized gains. Naturally, enormous liquid wealth created not
taxed is resented and would be more so if people actually understood it.

But inequality is the natural outcome of a successful, advancing civilization. What the hell is
the guy at the top 1% to do? Is he the main problem? When you get rich, you finally realize how
little power the rich really have - they will spend a lot and get practically nowhere. Piketty and
Sanders are wrong, but undeserved wealth needs some attention.
On BofA: BofA we bought, because it was for less than it was worth, and that was in the old
days of our investing, so culture of that versus US Bank versus Wells Fargo was irrelevant.
Self-driving cars: Sure, it is bad for GEICO, but it wont happen quickly and will be quite slow.
The first thing people did was buy more cars when they got money, but that is waning.
On making a book list: I dont want to be a book recommender for the world. Thatd be quite
time consuming. You will have to find another.
In Ron Burkle giving Munger credit for giving Ron credibility when Ron was young: The last
big trading stamp company [Blue Chip Stamps] customer was [a grocery store] controlled by
Rons dad, and I met him in what was an attempt to preserve the last customer, and in due
course I failed in all activities, and then Ron did nothing but succeed, so maybe you should
ask him about credibility coming from me.
On unicorns in Silicon Valley: My circle of competence doesnt include correctly predicting
which new companies in Silicon Valley will succeed. All this is manipulated finance. VCs are
an honorable part of finance for allocating capital to new businesses, but they dont escape
their share of sin. Each new round is at a higher value, and they sneak in a clause that no one
in the old rounds gets anything until the new guys get paid [liquidation preference], and this
deliberate obfuscation is a Ponzi scheme. Large amounts of easy money cause regrettably
despicable human behavior.
Value investing: Fundamental value investing will always be relevant . To succeed, always
buy for less than what it is worth, and be smarter than market. It will never go out of style.
High frequency traders have all the contribution to economy of a bunch of rats to a granary,
sucking out while contributing nothing to civilization.
Approach to spending time with family: I am not a wonderful example. I did the best I could.
On Nick Saban: I dont know anything about coaches. I am better about the ballet.
People he admires: This is one of the advantages of being a reader. I consort with the best
people who ever lived - people like surgeons, actors, a lot of constructive and intelligent
people who improve the world for the rest of us. Dan Evans (former US Senator and Governor
of Washington State), I met him on the Costco board. He was a sensible, admirable high grade
politician. With all these gerrymandered people who like only people who are like them damn
selves, he stood out. You want to be the kind of person others name in their wills to raise their
children if they die unexpectedly. Then you know youre doing something right. People very
shrewd about their wills.

Thinking and reading: As an attorney, the most important client was myself. Reading and
thinking. The beauty of doing it [reading and thinking], is if youre good at it, you dont have to
do much else.
Conquering fear: I avoided circumstances that automatically cause reasonable fear. Like my
son says, if at first you dont succeed, well, so much for hang-gliding. I dont seek out fear to
get thrills or even the appearance of fear. I am not a lover of danger or the appearance of
danger, so fear is not my thing. I have just lived a long time. I had fears when younger, but
gradually they melted away.
Coke on decline and does BRKs major holding in the stock provide cover for it?: For many
decades, the product was water and sugar, and it grew every year like the March of the
Inevitable, but in recent years this declined, and in recent years Cokes vast offering and
infrastructure with new products are growing. The power is really in that vast distribution
network. It is still a strong company and will be respectable, but it is not like it used to be.
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Feb 12th, 2016

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now are substantial

This new interview with Howard Marks of Oaktree Capital has been published on the website of
Finanz und Wirtschaft, Switzerlands leading business newspaper. Below are some of our
favorite excerpts (re-posted with permission) from the piece.
The full interview between Finanz und Wirtschaft Editor, Christoph Gisiger, and Oaktree Capital
Chairman, Howard Marks, can be found here -> http://www.fuw.ch/article/the-risks-today-aresubstantial/
..
There are a lot of risks lurking out there: Monetary policy divergence between the US and
Europe, a high degree of stress in the emerging markets and the specter of further terrorist
attacks. Whats the most important risk for investors?

Academics say risk equals volatility and the nice thing about volatility is that it gives them a
number they can manipulate and use in their formulas. But I dont worry about volatility and I
dont think most investors are worried about volatility. We know prices will go up and down. But
if something is going to be worth a lot more in the future than it is today were going to buy it
regardless. So people dont worry about volatility. What they worry about is the potential of
losing money.

You wrote extensively about risk in one of your recent memos. What does risk mean to you?
Most people think that there is a positive relationship between risk and return: If you make
riskier investments you can expect a higher return. Thats total nonsense! Because if riskier
assets could be counted on for higher returns than they wouldnt be riskier. The reality is that if
you make riskier investments you have to perceive that there will be a higher return or else you
have no motivation to make that investment. But it doesnt have to happen: If you increase the
riskiness of your investments the expected return rises. But at the same time the range of
outcomes becomes greater and the bad outcomes become worse. Thats risk and thats what
people have to think about.
Where do you see potential for bad outcomes?
Investors are not doing what they want to do. Theyre doing what they have to do. They are like
handcuff volunteers. Today, if you want to make a decent return you have to take risks. And
most people have been willing to do that. And because of that money has flown into high yield
bonds and leveraged loans. For example, at one time there were ninety-five straight weeks of
inflows into leveraged loans mutual funds.
.
Some kind of wild card is the steep fall in energy prices. Has oil reached a bottom now?
There is nothing intelligent to be said about the price of oil, as I wrote in a memo at the end of
2014. Oil prices have been controlled by OPEC (editors note: Organization of Petroleum
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Exporting Countries) for the last forty years. So clearly, the past doesnt tell you anything about
the free market price of oil. There are assets we feel we can value: stocks, bonds, companies
and buildings. They all have in common that they deliver a stream of cash flows that can be
valued through a proper discounting process. But how do you value an asset like a barrel of oil
or an ounce of gold that doesnt produce cash flow? You cant!
Oil was one of the most important factors for the financial markets this year. Whats your
outlook on the eve of a new year?
Everybody would like to know whats going to happen a year from now. What the economy,
interest rates, exchange rates, earnings and all that stuff is going to. But its very, very hard to

know. My favorite quotation on this subject comes from the economist John Kenneth Galbraith:
We have two classes of forecasters: Those who dont know and those who dont know they
dont know.
.
Obviously, there seems to be a lack of good ideas.
There is an interesting book called The Outsiders by William Thorndike. He follows the
careers of eight outstanding CEOs like Henry Singleton of Teledyne, Katharine Graham of the
Washington Post, John Malone of Liberty Media and Warren Buffett of Berkshire Hathaway
(BRK.A 199876 -0.63%). They all were outsiders because they behaved differently from the
crowd. For example, when an industry would go through an acquisition wave these CEOs would

not participate. They would think: Everybody else is buying and thats driving up the price of
companies so we shouldnt buy. They were called capital allocators and they treated cash as a
valuable resource. And today, with the average stock on the expensive side, these CEOs
wouldnt be buying their stocks back.
In your recent memo you worte about inspiration taken from the world of sports. What else can
investors learn from top athletes?
If you want to be a superior player you have to have self confidence. The same is true for the
superior investor. At some point you have to act boldly. You have to say: This is my conviction
and you have to act on it. You cant have five hundred different stocks and expect to have a
great return because youll be diversified into mediocrity. Also, you have to think different from
the crowd because if you think the same you act the same and you perform the same. Thats
what I call second level thinking. A first level thinker says: Its a great company so I should buy
the stock. In contrast, the second level thinker says: Its a great company. But its not as great
as everybody thinks so the price is too high and I should sell.
In your memo you also refer to the baseball star Yogi Berra. He was famous for saying things
like Its too crowded, nobody goes there anymore. What kind of trades are too crowded in
todays markets?
Today, I dont see any glaring exceptions. Of course, I see some asset classes that are
somewhat more attractive than others. But I dont see things that are dirt cheap or crazy high,
except the possibility of social media stocks and technology IPOs. But other than that I dont
see anything glaringly wrong. I just think the whole world is priced for a better future than we
have.
So whats your strategy in this kind of market?
We are living in a low return world caused by the central banks pulling down the risk-free rate to
zero. And yet, even though the returns are low, the risks are substantial. Thats why at Oaktree
our mantra for the past four and half years has been move forward but with caution. The
outlook today is not so bad and prices are not so high that they demand complete caution and
defensiveness. But at the same time prices are not so low and the outlook is not so good that
we should be aggressive. So our strategy is not maximum defensiveness, not aggressive. Its
somewhere in between, but with a significant emphasis on caution. And that means you have
to select your investments carefully.
What would be an example for such an investment?
Real estate: There are no real estate mutual funds and there are no real estate ETFs. That
means the retail money cant make its way to real estate as readily as to other asset classes
and drive up prices as quickly. Thats why I think real estate is cheaper. Now, Im not talking
about core real estate: A class buildings in a A class city like New York. Im talking about B and
C class buildings in non-prime cities. But such investments require local and specialized
expertise. Amateurs shouldnt try it.
The full interview can be found here

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7 notes

The biggest investing mistakes Warren

Buffett has made and what we can learn
from them

Here is a brief list of mistakes by Warren Buffett

1. 1965 bought control in of Berkshire Hathaway a textile manufacturing business that he

knew to be unpromising. Enticed because of cheap price. Doing this had worked in the
past. But realizing by this time strategy was not ideal. Cigar butt approach only ideal if
youre a liquidator as time is the enemy of mediocre businesses.
2. Few years later made cigar butt mistake again. Soon after BRK purchase, bought
Hochschild Kohn, a department store, bought at significant discount to book value. Good
management and hidden value/optionality in real estate and LIFO. Sold business three
years later for same price paid. Fair price for wonderful company better than wonderful
price for fair company Charlie Munger knew this, Buffett had to learn.Every once in a
while a marvelous business meets a one-time huge but solvable problem as was the case
with AmEx and GEICO. But overall, done better when avoiding dragons than slaying them.
Also, made mistakes because of not recognizing institutional imperatives of
businesses. Made some expensive mistakes because ignored the power of this. These
imperatives lead to 4 common/irrational behaviors of businesses. So BRK tries to look for
companies that are aware of this. Also, made mistakes with regards to not associating
with companies managed by people with decent economic characteristics.
3. 1981 If stock positions in publicly traded companies do not provide full value for BRK
shareholders in terms of undistributed earnings, then there has been a mistake made
with with regards to 1) management, 2) the future economics of the business or 3) the
price paid. The second is the most common error and made it this year: made prediction
on rosy future of aluminum business and got burned. Having a publicly traded position to
trade out of can be a plus.
4. 1988 Missed some huge opportunities, errors of omission rather than commission. Not
missing companies dependent on esoteric or high technology (Xerox, Apple) or brilliant
merchandising (Wal-Mart). Dont have the competence to spot these guys early. But
missed out on Fannie Mae, which was well understood. Decided to buy 30mm shares,
$350-$450mm investment. But stopped buying after 7mm shares as price climbed. Blew
out of position b/c of distaste for small positions. By 1991, had that position been taken,
would of resulted in a $1.4bn gain.
5. 1990 Made $358mm convertible preferred in USAir Group. Made unforced error. Right
when industry and post-merger issues caused problems. Should have known as most
airline mergers followed by ops difficulties. Even with latter resolved, industry economics
and pricing tactics in a commodity-type product makes it tougher to be smarter than
dumbest competitor.
6. 1991 Had owned preferreds of Salomon Inc but had to get involved in Salomon Inc
personally. Said in 1990 that USAir investment should be okay unless industry is
decimated in next few years. Industry was decimated in 1991 with 3 airlines going
bankrupt. Another 2 filed Chapter 11 couple months into 1992. Domino effect because
Chapter 11 allows the airliners to operate at below industry costs (lower capital costs and
funding losses via 363 asset sales). Solvent competitors hit with knockout blows
because of ongoing fare-reductions maintained by those operating in Chapter 11.
7. 1993 Sold 10mm shares of Cap Cities at $63/share. Year-end 1994 was at

$85.25/share, a difference of $222.5mm. This was a repeat mistake bought in 1986 at

$17.25/share after having sold it in 1978-1980 at $4.30/share.
8. 1994 $358mm preferred stock in USAir had dividend suspended. Competition protected
from regulation. When deregulation occurred, disaster not immediate. But as lower cost
carriers expanded, other legacy carriers started to cut fares. In unregulated commodity
business, costs must competitive or death. Strength of high union salaries in bankruptcy
court not understood. Wrote investment down to 25 cents on the dollar to $89.5mm. May
have been tempted by seniority of security but still dumb.
9. 1995 Salomon preferreds option to convert into common shares has not resulted in
any value. $700mm security when bought in 1987, even then BRK had no insights with
regards to the future profitability of investment banking. DJI has doubled since 1987.
9% yearly coupon has made this unattractive. Unless converted, 20% matures each year
from 1995-1999. Did not elect to convert 1st 20% and got $140mm put back. But 4 more
chances to convert. Aside from Gillette, the preferreds have given no better after-tax
returns than what would have been gotten in medium-term fixed income securities.
10. 1996 Early in the year tried to sell USAir preferreds for $335mm but no takers. But was
lucky because it actually worked out due to accruing penalty dividends on arrearages that
were eventually paid out in second half of year. By year-end worth $358mm and collected
on amounts owed in second half.
11. 1998 Decision to sell McDonalds was a big mistake. Portfolio actions taken during the
year decreased the gain for the year. Should not have done anything during market hours
during the year.
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connect with us on Linkedin
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#$FNMA
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