Boring Portfolio Charlie Munger Speaks
Notes from the Wesco Annual Meeting

By Whitney Tilson
May 15, 2000

As an admirer of Warren Buffett and a Berkshire Hathaway (NYSE: BRK.A) shareholder, I make a point of attending the company's annual meetings so I can learn from the answers to dozens of questions from his shareholders. Sharing the stage with him is Charlie Munger, Berkshire Hathaway's Vice Chairman and Buffett's long-time partner.

The dynamic is pretty funny to watch: Buffett generally takes the first stab at answering a question, but after giving his answer turns and says, "Charlie?" Munger, immobile and expressionless throughout the day (they could easily substitute a mannequin for quite a while and no-one would notice), typically replies, "I have nothing to add."

But as you can see from my notes from this year's meeting (summarized in my previous column), Munger often does have something to add, and it is invariably sharp and insightful. In many ways, he's more entertaining than Buffett because he doesn't pull any punches (I think his "mixing raisins and turds" line will go down in Berkshire history).

Over time, I have come to realize that Munger is a genius in his own right, and has had a profound effect on Buffett's thinking (which Buffett freely acknowledges). So who is this "cranky, old fashioned" man (to use his words)? I think many of the answers will be revealed in Janet Lowe's upcoming book, Damn Right, which she tells me will be available in October. But I wanted to find out for myself, so I recently attended Wesco Financial's (AMEX: WSC) annual meeting, where Munger, the company's long-time Chairman, took questions from shareholders for two hours. (Since 1973, Berkshire Hathaway has owned 80.1% of Wesco. I am a Wesco shareholder and plan to write a future column about the company and why I believe it's attractively priced.)

As I did in my last column, I will try to distill my notes down to the most important things I heard. Note that in some cases I am paraphrasing because I couldn't write quickly enough.

Opening Statement
"This only masquerades as a shareholder's meeting. It's really a gathering to hear the thoughts of the assistant headmaster of a cult."

Comments on Berkshire Hathaway and Wesco
Making the Right Personnel Decisions
"It's amazing how few times over the decades we've have to remove a person -- far less than other companies. It's not that we're soft or foolish, it's that we're wiser and luckier. Most people would look back and say their worst mistake was not firing someone soon enough. [We don't say that.] Our record is fabulous. We're old-fashioned. For example, in the case of CORT Business Services [a furniture rental business that Wesco acquired this year], Warren said to me, 'You're going to love Paul Arnold [CORT's CEO].' And he was right. Paul's been running the business since he was in law school and loves it.

Berkshire Hathaway's Culture
"There are certain virtues that are common in all of Berkshire's subsidiaries. We don't create them -- we select companies that have them already. We just don't screw it up."

Writing More Insurance
"Both Berkshire Hathaway and Wesco write amazingly low amounts of insurance relative to our surplus. It gives us investment flexibility. We just don't find enough insurance to write -- we'd do more if we could. Writing insurance equal to 10% of surplus for Berkshire Hathaway would be hog heaven -- we don't come close to that. Wesco didn't either, but we took on one big policy this year."

Lumpy Results
"That is one of our advantages as an insurer -- we don't give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage."

Risks to Berkshire Hathaway from Large Super Cat Losses
"We don't write big super cat contracts where there's no upper limit [cat means catastrophe; for example, insuring against a large earthquake in California]. It's inconceivable that we'd lose more than 6-7% of the company's assets after tax in one event. The real risk is borne by insurers who write, for example, basic homeowner's policies against a storm or earthquake and don't lay off some of that risk. That's roughly what happened to 20th Century, where they lost 100% of their capital in the Northridge (CA) Earthquake due to writing lots of little policies concentrated in an earthquake area."

Buffett's Successors
A shareholder noted that Berkshire Hathaway's succession plan calls for two people to replace Buffett: one to make the investments and one to oversee the operating companies. Lou Simpson of GEICO has been designated (at least unofficially) for the former position, so the shareholder asked, "Could you share with us who has been designated for the latter role?" Munger's succinct reply, "I could but I won't." [In the past, Buffett has defended his decision not to reveal this person because he might change his mind and wants to avoid the media circus that would invariably occur were this to happen.]

Why Not Use Wesco to Make Smaller Investments?
A shareholder noted that Buffett and Munger have long maintained that Berkshire Hathaway's size makes finding attractive investments difficult. Why then, he asked, don't they use Wesco to make smaller investments? Munger replied, "Lou Simpson will occasionally do smaller investments. But we're not set up to do small investments. Also, Warren and I are idiosyncratic and are unlikely to change our spots."

Berkshire Hathaway Repurchasing Shares
"In the past, when Berkshire has gotten cheap, we've found other even cheaper stocks to buy. I'd always prefer this. It's no fun to have the company so lacking in repute that we can make money for some shareholders by buying out others."

Why Don't More Companies and Investors Copy Berkshire Hathaway?
"It's a good question. Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It's not difficult, but it looks difficult because it's unconventional -- it isn't the way things are normally done. We have low overhead, don't have quarterly goals and budgets or a standard personnel system, and our investing is much more concentrated than average. It's simple and common sense.

"Our investment style has been given a name -- focus investing -- which implies 10 holdings, not 100 or 400. Focus investing is growing somewhat, but what's really growing is the unlimited use of consultants to advise on asset allocation, to analyze other consultants, etc.

"I was recently speaking with Jack McDonald, who teaches a course on investing rooted in our principles at Stanford Business School. He said it's lonely -- like he's the Maytag repairman.

"I was in the ROTC for six years and saw a very limited culture [in the military] with few new ideas. It's the same elsewhere"

Future Outlook for Berkshire Hathaway
"The future will be harder for Berkshire Hathaway for two reasons:

1) We're so big. It limits our investment options to more competitive areas that are examined by very smart people like Alice Schroeder [Paine Webber's insurance analyst, who was sitting in the audience].
2) The current climate offers prospects in common stocks over the next 15-20 years that are way less than we've experienced over the past 15-20 years. Read Warren's Fortune article -- I totally agree with it.

"But this is not a tragedy. We're content. Berkshire Hathaway and Wesco will accumulate cash every year, and we have a structure that gives us enormous flexibility. While we're too big to buy the stock of a small company, we have the advantage of having entire companies offered to us. Something has always turned up for us. I'm not discouraged, but I don't think your money here is going to do anything like what you're used to."

Next: Part 2: Charlie Munger Speaks »

Boring Portfolio


11/20/00 as of ~5:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
APCCAMER POWER CONVERSION(0.44)(3.37%)12.56
BRK.BBERKSHIRE HATHAWAY'B'(19.00)(0.90%)2099.00
COSTCOSTCO WHOLESALE CORP(1.13)(3.12%)34.94
CSLCARLISLE COS(1.13)(2.62%)41.88
GTWGATEWAY INC(3.53)(8.88%)36.20

  Day Week Month Year
To Date
Since
10/1/1998
Annualized
Boring(2.42%)(2.42%)(5.30%)(15.05%)20.29%9.01%
S&P 500(1.84%)(1.84%)(6.07%)(8.62%)32.01%13.85%
S&P 500 (DA)(1.81%)(1.81%)(6.00%)(8.52%)33.72%14.54%
NASDAQ(5.01%)(5.01%)(14.66%)(29.33%)69.77%28.04%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
8/13/96200CSL26.3241.8859.07%
9/13/99220COST34.5534.941.12%
2/9/99200GTW36.2836.20(0.21%)
12/31/9812BRK.B2,278.332099.00(7.87%)
4/20/99460APCC14.4812.56(13.22%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
8/13/96200CSL5,264.998,375.003,110.01
9/13/99220COST7,601.147,686.2585.11
2/9/99200GTW7,255.507,240.00(15.50)
4/20/99460APCC6,659.255,778.75(880.50)
12/31/9812BRK.B27,340.0025,188.00(2,152.00)
 
Cash: 
Total: 
10,490.51
64,758.51
 

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.