Here's Part 2 of my notes from this year's meeting with Berkshire Hathaway (NYSE: BRK-B ) Vice Chairman Charlie Munger, lightly edited and condensed for clarity. Click here for Part 1.
Responding to a comment about the dollar depreciating 95% in past half-century: If you think the past half-century was bad, you will have serious problems in life.
Despite inflation, we've been a huge success. Real GDP has grown 2% per year per capita. That's fantastic. The period you describe as miserable was a tremendous time for the American economy. You've described success.
On hypocrisy of ripping on other financiers: To the extent that all I've done is pick stocks that have gone up, and sat on my ass as my family got richer, I haven't left much contribution to society. I guess it's a lot like Wall Street. The difference is, I feel ashamed of it. I try to make up for it with philanthropy and meetings like this one today. This meeting is not out of kindness. This is atonement.
On patience: Blue Chip Stamps was doomed a long time ago. But it had all this float, just like an insurance company. We had to do something intelligent with that float. Over decades, we only found three things to do with it: Buy See's Candy, the Buffalo Evening News, and Wesco. That's it -- just three ideas over the course of decades! That is very interesting, isn't it? Most think it's easy to go out and buy something. And it is. But most who do it will do so to the detriment of their shareholders. Study after study shows shareholders lose when management acquires businesses. Ours didn't. It was all because of patience.
On following his lead: Most people who try my way will end up unpopular and unsuccessful. There are certain peculiarities of my personality that I would not recommend. My irreverence. My insistence. These things will get most people into trouble. ... Basic morality works for everyone. Discipline works for everyone. Objectivity works for everyone. That's what you should focus on.
On pension funds: Public pensions are quite dishonorable. A police officer who earns $50,000 a year can work all this overtime in his last year and, because of it, collect a $100,000 pension for life. Of course, people think it's OK because he's an honorable police officer. But it's evil and overaggressive. It's wrong to have people behaving like that.
On Berkshire acquiring Wesco: I view myself as a captain of a ship. That ship's cargo -- Wesco -- is larger than anyone expected. But we're now at the port we always wanted to reach, at Berkshire. We've wanted this for so long, but the price was never right. It was never really feasible until now. I'm glad we waited. Berkshire has a history of waiting a long, long time before acting. It's a desirable outcome.
On Greek entitlement and bailouts: The Greeks describe failure as a job that consumes eight hours a day and five days a week. Of course, you're going to have problems with that mentality. Accepting Greece into the European Union was a huge mistake.
You can't let their big banks fail. But when I heard of Greece's bailout, my first thought was, "Those poor children." They'll be paying for it. At some point, you have to draw the line. We did. I think Lehman Brothers was a good place to draw the line.
Coke today vs. past: Coca-Cola (NYSE: KO ) is not as good today as it used to be. It's just so big. Like Berkshire, it's hard to make the elephant move very fast.
But it's still one of our favorites. The trouble with selling an expensive product is that it gives people the incentive to knock you off. Coke isn't like that. Branded companies that sell cheap products, and lots of them, is a fantastic business model to have.
On Berkshire paying a dividend: Some of you will live to see it. I hope I don't. It will only happen when we don't think we can get $1 of value for each $1 of retained earnings. I hope that never happens.
On an easy life: Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you've won.
Asked if his children have benefited from his wealth: Of course they have. When rich parents make their kids sell newspapers on the sidewalk, the result is always the same: It breeds hate. It's no different than if a man indulges himself while leaving his wife in a small corner in the kitchen.
That doesn't mean you can't have good, constructive children. They just won't be as motivated as ones who start out half-starving. It's a huge advantage to start from nothing [but be given an opportunity]. Of course, you simply won't find that in the Rockefeller descendants. It's too damn bad if you've grown so rich that your kids don't have that kind of motivation to succeed.
On challenge: Most dentists and doctors know what they're doing. They deal with problems they know they can fix. I don't want that. It's in my nature to move toward the really hard problems that haven't yet been solved.
On unemployment: I would be flabbergasted if jobs bounce back. Unemployment will be a considerable problem for a considerable amount of time. But it doesn't have to ruin your life. I was raised during the Depression, and people dealt with it. People with gumption today will deal with it.
In a sense, our jobs problem is the same problem Japan has faced over the past 20 years: Huge competition from China. Part of the problem is that Asians are so damn smart. For years they were in this Malthusian trap, stuck in agriculture. Now they're unleashed, and human talent is just awesome when unleashed. They're formidable competitors.
On picking a good investment manager: We have recent experience picking investment managers, and it's quite humbling. It's really, really difficult. Lots of people come to us and they're all high-quality folks. You'd think it'd be like shooting fish in a barrel, but it's not. Most of them are good in small niches, but they can't scale. Warren and I could scale. You had to with Berkshire.
On success: You have to love what you do. My whole life I've never been good at anything that I wasn't interested in. Architecture is a terrible way to make a living, but a friend of mine who is an architect says he loves it so much that he never has to work. That's a great way to live. Everyone should try it.
On ETFs: I never look at them. In general, I approve of low-cost index funds. Most investors will do better with them -- and that goes for both individual and professional investors. But I don't touch them. I prefer to do better than average.
On valuation: When we buy businesses, we often pay liberal prices. Sometimes this comes at a great cost. Dexter Shoe, for example, which we bought with stock. We utterly failed on that one. But we rarely get cheap businesses. If you average it out, though, I like it that way, because we end up with good businesses. [You get what you pay for].
On adversity: Quitting under adversity or while being frightened just brings contempt. Living with adversity is the best chance for opportunity.
There will always be panicky people. If someone else panics and you're calm, people will remember the calm one. Think about when Bobby Kennedy was brain dead and dying. Jackie was the only person in the family who could say, "It's over. Pull the plug." She was the only calm one. And who do people remember from that family? Jackie.
On investing in banks: A friend of mine won't touch banks. His attitude is that sooner or later the bastards will go crazy. I think that's irrational. You have to be able to recognize the ones that stick out. Wells Fargo (NYSE: WFC ) and US Bancorp (NYSE: USB ) avoid stupidity better than most. And Wells admits that it had its head up its ass when it made some of its mortgage loans. They know it wasn't their finest moment. I'm comfortable with people like that.
On humility: I like people admitting they were complete stupid horses' asses. I know I'll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.
On diverse learning: Economists have long been divided by a simple problem. When you go to the movie theater, soda and popcorn costs a totally unfair price compared with other locations. This just tortures economists. At least 1 million man-hours have gone into trying to solve this problem. Economists understand that a first-class ticket on an airplane costs more than coach. They get that one. It's marginal utility. But they can't figure out the movie theater to save their lives.
Here's the Munger approach to the problem. In the auto world, a car manufacturer will sell a car for $40,000, and charge $200 for the extra gizmo. No one cares about the extra $200 when you're already spending $40,000. It's insignificant. The movie theater is basically the same thing. People are OK paying that much for a soda after they've paid so much for an admission ticket.
Now, psychologists can explain this clearly. Economists can't for the life of them. It's so simple what happens when you think beyond your trained field. It's amusing to see someone spend 1 million man-hours on something I can solve with my left hand.
On the success of Iscar: Failure isn't an option in Israel. You're surrounded by enemies and you have no hydrocarbons.
On energy: It's like they say: It's the best of times and the worst of times.
It's the worst with things like corn and ethanol. This was the most asinine idea in all of human history. People are just now starting to figure this out.
But it's the best in things like renewable energy from things like wind. It can't happen everywhere or match coal, but without it, imagining a world without hydrocarbon looks so glum. And we'll find more hydrocarbon. Shale, for example, is seriously interesting.
You can solve almost any problem with enough energy. Israel gets half its drinking water from the ocean.
A typical day in the life of Munger: Both Warren and I have amazingly open calendars. We're particularly brutal about saying no to new commitments. We just like to read and talk with people. It's an enormous advantage.
Why he likes BYD: Partly because they work hard at engineering problems, 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 most important investment was in myself. The rest of the hours I sold to clients.
On his favorite morning reads: I love the Wall Street Journal, but I've never liked its op-ed pages. The one I like the best is the Economist. I regard it as the adult publication of the modern world. But, in its field [news], The Wall Street Journal is still first.
Asked about parenting advice: Don't preach one set of values and live another. Whatever values you want to teach need to come with examples day after day.
On reading: Most books I read I don't finish the first chapter. I'm not burdened by awful books.
Still hunger for more Munger? Read Part 1 of this article.