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"Most of you know exactly what I think about every subject, but you still come anyway. It's a damn cult." So began this year's annual meeting with Berkshire Hathaway's (NYSE: BRK-B ) 87-year-old vice-chairman Charlie Munger in Los Angeles. It was, sadly, the last we'll see of these gatherings -formally the Wesco Financial annual meeting, and this year, simply labeled "A Morning With Charlie." "You need a new cult hero," Munger said. "I'm doing you all a favor by not having another one of these meetings." "We'll be talking about a lot today," he told the crowd of 500. "Some of it is academic. Some philosophical. And some will be about investments because I know you're all a bunch of greedy bastards." Here's Part 1 of my notes in Munger's own words, lightly edited and condensed for clarity. On the Wall Street meltdown: It all started with an asinine bubble. The cause was a combination of megalomania, stupidity, insanity, and I would say evil on the part of bankers and mortgage brokers. And it was widespread. Alan Greenspan was a smart guy, but he totally overdosed on Ayn Rand when he was young. You can't give bankers the freedom to create gambling games. That's what it was. Wall Street was a gambling house, and the house's odds
were better than a Vegas casino. In the 1920s they called it bucket shops -. On the future of Berkshire: Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends. None of us should fall for the idea that this was constructive capitalism. It's expensive. It's amazing how fast Berkshire acts when we find opportunity. That's why half of all marriages don't work out. You can't be timid -. . and rightly so. On banks: Bernie Madoff expressed sorrow in court to get a lighter sentence. In prison he told a guy that he carried his clients for 25 years. Wall Street was like a casino with no overhead. Too many people don't act when they should. He doesn't think it's fair. Part of this is due to weather [insurance losses]. It might be your only opportunity to be happy in life. And real casino operators have to build parking lots. My grandfather taught me that opportunity is infrequent and one has to be ready when it strikes. but it was all false. part of it is Europe being welcomed into what I call adult life. On Berkshire's valuation: Berkshire's stock is at a point Buffett and I never anticipated it would go to. pay for bars and restaurants. On opportunity: Patience combined with opportunity is a great thing to have.and that applies to all of life. That's what Berkshire is.and they eventually made it illegal. You can't be timid in marriage when you find the right spouse. But it created vast damage with terrible consequences to civilization.just the name tells you it's bad -. They should do the same this time. It was hog heaven for them. and now he's serving 150 years. fly in entertainers.
you need rules to prevent stupid things. Over time we just discovered that we could raise prices 10% a year and no one cared. You have to be a lifelong learner to appreciate this stuff. Most of Berkshire's success grew from stupidity and failure that we learned from. It was really important. you need rules to prevent catastrophe. It's just megalomania. On the power of Berkshire: People make contracts with Berkshire all the time just because they trust us to do well. I bet Richard Fuld [former CEO of Lehman Brothers] doesn't have an ounce of contrition. What we want is innovation in widgets. Too many people graduate from Wharton today and think they know how to do everything. We think of it as a moral duty. It killed them. Learning that changed Berkshire.]." On lifetime learning: When we bought See's Candies. They trust us to behave because they know others won't.Many people don't. Bankrupt. but how wrong it is to use it like a tyrant. On accountants: Banks showed income and assets for things that . I hope that makes you feel better about your own life. Increasing rationality and improving as much as you can no matter your age or experience is a moral duty. etc. It's a considerable mistake. It's a wonderful position to be in. And as the saying goes. It's OK to be boring in finance. we didn't know the power of a good brand. "How nice it is to have a tyrant's strength. Clever derivatives broke dozens of companies. When it's like that. We don't need these kinds of innovation in finance. When banks are borrowing the government's credit rating [FDIC insurance.
a bank's allowance for bad debt goes to zero. Just awful. that's who. Now think about this. The result. Accountants feel no similar responsibility toward their field. Who deserves the most credit for this? That would be John Maynard Keynes and his book The Economic Consequences of the Peace. like the laws of physics. Japan tortured our soldiers to death. . Terrible things result.were neither/nor. and the accountants were totally fine with it. of course. At the top of an idiot boom. and they just did it. They thought it was a law. The Germans put people in ovens. They marched them around. And Hitler could have been more successful than he was. Japan's lost decade: There was an orthodoxy of the world that Keynesian tricks would goose an economy and solve and ameliorate recessions. They just want to get the job done. Economists were so sure it would work that GDP would grind ahead. It was chaos and hyperinflation." The result was a magnificent global economic system and a win for human rights. During World War II. And what did we do after the war? We gave them money to rebuild. It's contemptible behavior. "Let bygones be bygones. On our financial crisis vs. People figured out he was right. That's the accounting rule. You don't ever want to do anything to push an economy to collapse. On financial collapse: The world learned what happened after World War I when we demanded that Germany repay. What kind of maniac thinks this is good? A certified public accountant. They feel no embarrassment about it. We said. was the rise of Hitler. his kids or family members could still be in power today had things gone just a little differently. What kind of profession acts this way? The medical profession wants to eradicate epidemics.
They're polite. They tried every Keynesian trick they could think of. But even someone as smart as him is too quick to jump to conclusions and a single explanation. Twenty years of stasis! And think. On not jumping to conclusions: Matt Ridley wrote the terrific Book The Rational Optimist -. If you have an area with 20 restaurants. There are other explanations. and the result was stasis. Japan's crash was caused by factors similar to ours -. this couldn't have happened to a better group of people than the Japanese. Joseph Stalin can achieve division of labor and there would be benefits. respectful. The outcome of 20 years of stasis in the United States would not be nearly as good. capable hands. They hired as many people as possible to clean it up. the remaining two are in good. Business owners are constantly being reminded of benefits and punishments. But it's more complicated than just looking at [Keynesian policies].an idiot boom that burst. I've read it several times.and that really is a good book. They're uniquely capable of handling tragedy. Yet the result was still stasis. I once noted that you cannot find a piece of garbage on a Japanese mountain. That doesn't mean it's capitalism. It was a bad outcome all around.But then came Japan. and suddenly 18 are out of business. and out of nowhere they suddenly faced huge and credible competition from China and Korea. The major success of capitalism is its ability to drench business owners in feedback and allocate talent efficiently. And I mean they tried everything. His explanation for the success of modern capitalism is Adam Smith's division of labor. Of course that will cause slower growth. Japan has an export-driven economy. But this is a totally inadequate answer. He repeats it over and over again. That's .
On envy: There is nothing more counterproductive than envy. Bill Gross of PIMCO has a very good concept called "the new normal. People who paid taxes thought it was the right thing to do.psychology explaining economics. That is to say. It could . I don't like the idea that we can't add new taxes today when faced with such problems. It's all sound bites designed to please their constituents. I don't want to sell credit to people who are going to hurt themselves with it. It's a total net loss. At the same time." Bond yields are so low. and prices will. two-thirds of war debt was repaid before the war was even over. On the investing climate: It's a very different world today. as there should be. Of all the sins. Some of you might enjoy this. of course. I don't. you're talking to a Republican who admires Elizabeth Warren. but I know I'm right. They do it because overdrafts generate big fees. It's hard to be optimistic with current politicians. There's now a class action suit against this. fall when interest rates rise. On consumer credit: Banks don't offer free checking accounts because they don't want to make money. And there's so much other trouble in the world. Some disagree with this. Banks had computer programs to rank the largest withdrawal so as to generate the greatest number of overdraft charges. You should only sell products that are good for the people who use them. Someone in the world will always be better than you. They had a sense of duty and patriotism. people are responding to real frustration. envy is easily the worst because you can't even have any fun with it. On taxes: During the Punic Wars. They just hate each other so much.
It's one of the most admirable capitalistic institutions in the world. the greatness of the past stays with us. but our best values will . On what his favorite company is outside Berkshire: That's easy. they turn it into profit. The profits are clearly coming from the rest of us -. When other companies find ways to save money. But it's hard to imagine Google (Nasdaq: GOOG ) not having a strong position in the future. For other tech companies. But in one sense. It has a frantic desire to serve customers a little better every year. of course there are very real threats. Sinegal passes it on to customers. Costco will continue making huge contributions to society. Jim Sinegal. Costco is a different kind of place. And its CEO. You can be 100% certain America will pass the baton.our college endowments and our pensions. On high-speed traders: Fancy computers are engaging in legalized front-running. On parallels between Rome and America: Of course there are parallels. What was great about the Athens of the past is still with us. Every great empire passes the baton. I don't know how you can replace Google. is one of the most admirable retailers to ever live on this planet. Why is this legal? What the hell is the government thinking? It's like letting rats into a restaurant. On tech stocks with low P/E ratios: I don't know much about them. He's sacrificing short-term profits for long-term success. It's almost a religious duty. More of you should look at Costco. The failure rate of empires is 100%. It's Costco (NYSE: COST ) .mean very modest returns for some time to come.
I guess it's a lot like Wall Street. isn't it? Most think it's easy to go out and buy something. and Wesco. I feel ashamed of it. This meeting is not out of kindness. My .go with that baton. we've been a huge success. On hypocrisy of ripping on other financiers: To the extent that all I've done is pick stocks that have gone up. I try to make up for it with philanthropy and meetings like this one today. That's it -. That's fantastic. and sat on my ass as my family got richer. On following his lead: Most people who try my way will end up unpopular and unsuccessful. The most important people in Asia studied at American universities and learn from America like sponges.just three ideas over the course of decades! That is very interesting. I haven't left much contribution to society. And it is. Over decades. you will have serious problems in life. Most of what is achieved now will never die. There are certain peculiarities of my personality that I would not recommend. Responding to a comment about the dollar depreciating 95% in past half-century: If you think the past half-century was bad. You've described success. We had to do something intelligent with that float. Study after study shows shareholders lose when management acquires businesses. Despite inflation. But most who do it will do so to the detriment of their shareholders. But it had all this float. It was all because of patience. My irreverence. just like an insurance company. The period you describe as miserable was a tremendous time for the American economy. This is atonement. The difference is. Real GDP has grown 2% per year per capita. we only found three things to do with it: Buy See's Candy. the Buffalo Evening News. Ours didn't. On patience: Blue Chip Stamps was doomed a long time ago.
You can't let their big banks fail. my first thought was. But we're now at the port we always wanted to reach. "Those poor children. It was never really feasible until now.is larger than anyone expected. at Berkshire. long time before acting. It's just so big. because of it. Objectivity works for everyone. But it's still one of our favorites. you have to draw the line. That ship's cargo -. A police officer who earns $50. At some point. but the price was never right. These things will get most people into trouble. On Greek entitlement and bailouts: The Greeks describe failure as a job that consumes eight hours a day and five days a week." They'll be paying for it. it's hard to make the elephant move very fast. Of course. Discipline works for everyone. . Coke today vs. That's what you should focus on. I'm glad we waited. The trouble with selling an . We did. you're going to have problems with that mentality. It's wrong to have people behaving like that. Like Berkshire.000 pension for life. I think Lehman Brothers was a good place to draw the line. past: Coca-Cola (NYSE: KO ) is not as good today as it used to be.Wesco -.000 a year can work all this overtime in his last year and. Of course. Basic morality works for everyone. On pension funds: Public pensions are quite dishonorable.insistence. On Berkshire acquiring Wesco: I view myself as a captain of a ship. collect a $100. Berkshire has a history of waiting a long. people think it's OK because he's an honorable police officer. But when I heard of Greece's bailout.. It's a desirable outcome. We've wanted this for so long. Accepting Greece into the European Union was a huge mistake.. But it's evil and overaggressive.
expensive product is that it gives people the incentive to knock you off. I was raised during the Depression. constructive children. It's a huge advantage to start from nothing [but be given an opportunity]. Unemployment will be a considerable problem for a considerable amount of time. and lots of them. Coke isn't like that. and people dealt with it. On Berkshire paying a dividend: Some of you will live to see it. I don't want that. They just won't be as motivated as ones who start out halfstarving. It's too damn bad if you've grown so rich that your kids don't have that kind of motivation to succeed. People with . I hope that never happens. It's in my nature to move toward the really hard problems that haven't yet been solved. On an easy life: Assume life will be really tough. the result is always the same: It breeds hate. you've won. Branded companies that sell cheap products. you simply won't find that in the Rockefeller descendants. On unemployment: I would be flabbergasted if jobs bounce back. Of course. I hope I don't. They deal with problems they know they can fix. But it doesn't have to ruin your life. When rich parents make their kids sell newspapers on the sidewalk. is a fantastic business model to have. and then ask if you can handle it. It will only happen when we don't think we can get $1 of value for each $1 of retained earnings. That doesn't mean you can't have good. On challenge: Most dentists and doctors know what they're doing. Asked if his children have benefited from his wealth: Of course they have. It's no different than if a man indulges himself while leaving his wife in a small corner in the kitchen. If the answer is yes.
for example. because we end up with good businesses. That's a great way to live. though. But I don't touch them. I like it that way.gumption today will deal with it. We utterly failed on that one. On picking a good investment manager: We have recent experience picking investment managers. Now they're unleashed. You had to with Berkshire. and it's quite humbling. I approve of low-cost index funds. My whole life I've never been good at anything that I wasn't interested in. For years they were in this Malthusian trap. but it's not. Part of the problem is that Asians are so damn smart. On success: You have to love what you do. . I prefer to do better than average. Dexter Shoe. Most investors will do better with them -. It's really. On valuation: When we buy businesses.and that goes for both individual and professional investors. You'd think it'd be like shooting fish in a barrel. But we rarely get cheap businesses. [You get what you pay for]. we often pay liberal prices. but a friend of mine who is an architect says he loves it so much that he never has to work. Most of them are good in small niches. but they can't scale. which we bought with stock. and human talent is just awesome when unleashed. Architecture is a terrible way to make a living. our jobs problem is the same problem Japan has faced over the past 20 years: Huge competition from China. They're formidable competitors. Everyone should try it. Sometimes this comes at a great cost. In a sense. On ETFs: I never look at them. If you average it out. Warren and I could scale. really difficult. Lots of people come to us and they're all high-quality folks. stuck in agriculture. In general.
"It's over. On diverse learning: Economists have long been divided by a simple problem. It's marginal utility. They know it wasn't their finest moment. I think that's irrational. In the auto world. You have to be able to recognize the ones that stick out. But they can't figure out the movie theater to save their lives. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn. On investing in banks: A friend of mine won't touch banks. And who do people remember from that family? Jackie. Economists understand that a first-class ticket on an airplane costs more than coach. Wells Fargo (NYSE: WFC ) and US Bancorp (NYSE: USB ) avoid stupidity better than most. Here's the Munger approach to the problem. They get that one." She was the only calm one. This just tortures economists. Think about when Bobby Kennedy was brain dead and dying. If someone else panics and you're calm. a . On humility: I like people admitting they were complete stupid horses' asses. Pull the plug. His attitude is that sooner or later the bastards will go crazy. At least 1 million man-hours have gone into trying to solve this problem. soda and popcorn costs a totally unfair price compared with other locations.On adversity: Quitting under adversity or while being frightened just brings contempt. I'm comfortable with people like that. When you go to the movie theater. There will always be panicky people. And Wells admits that it had its head up its ass when it made some of its mortgage loans. Jackie was the only person in the family who could say. people will remember the calm one. Living with adversity is the best chance for opportunity.
Why he likes BYD: Partly because they work hard at engineering . Israel gets half its drinking water from the ocean. and charge $200 for the extra gizmo. It's insignificant. People are OK paying that much for a soda after they've paid so much for an admission ticket. It's so simple what happens when you think beyond your trained field. On the success of Iscar: Failure isn't an option in Israel.000. A typical day in the life of Munger: Both Warren and I have amazingly open calendars. The movie theater is basically the same thing. but without it. No one cares about the extra $200 when you're already spending $40.car manufacturer will sell a car for $40. And we'll find more hydrocarbon. This was the most asinine idea in all of human history. You can solve almost any problem with enough energy. It's an enormous advantage. But it's the best in things like renewable energy from things like wind. We just like to read and talk with people. psychologists can explain this clearly. Economists can't for the life of them.000. for example. It's amusing to see someone spend 1 million man-hours on something I can solve with my left hand. It can't happen everywhere or match coal. On energy: It's like they say: It's the best of times and the worst of times. is seriously interesting. imagining a world without hydrocarbon looks so glum. Shale. Now. You're surrounded by enemies and you have no hydrocarbons. It's the worst with things like corn and ethanol. People are just now starting to figure this out. We're particularly brutal about saying no to new commitments.
Asked about parenting advice: Don't preach one set of values and live another. The rest of the hours I sold to clients. The Wall Street Journal is still first. But. Whatever values you want to teach need to come with examples day after day. and partly because when they fail they put their heads down and admit it. On improvement: When I was young I would sell the best hour of the day to myself. The one I like the best is the Economist.problems. On reading: Most books I read I don't finish the first chapter. . but I've never liked its op-ed pages. The most important investment was in myself. I'm not burdened by awful books. On his favorite morning reads: I love the Wall Street Journal. in its field [news]. I regard it as the adult publication of the modern world.
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