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Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) co-chairman and Warren Buffett's sidekick Charlie Munger gave a fantastic two-hour speech at the University of Michigan last week. Here are a few excerpts, lightly edited for clarity.
On employment: I will be surprised if employment bounces back with the wonderful speed that it did after previous economic disappointments like the one we've been through. I just see business after business after business which has just rationalized so that it can do credibly in terms of protecting its balance sheet and its earning power while utilizing fewer people.
On dealing with the pains of recession: I think you should all just say "so what?" There are good times and there are bad times. And we know from the example of other people that if you constantly stand well by your generation, and cope with competency and grace with whatever life deals you and just keep doing it, your share of the honors and emoluments of the civilization in due time are very likely to come.
On success: The best way to get what you want in life is to deserve what you want. How can it be otherwise? It's not crazy enough so that the world is looking for a lot of undeserving people to reward.
On opportunity: Some of the people that have the best careers in my age cohort, and the age cohort just before mine, are the ones that had the worst clobbering in the '30s. Because they were there when the great boom came if you just kept plugging while the favorable tide came in due course.
On the Great Depression vs. today: It's nowhere near as bad as it was in the '30s. This is hog heaven compared to the '30s. That was unbelievable. I lived in the '30s. We didn't have this social safety net. You know what people did in the '30s? They moved into one another's houses. That's what families were for. My grandfather cut his house in half and moved one of my uncles in. My other grandfather saved his son-in-law's bank using a third of the only good assets he had on earth. It was just pain and trouble. And without the family system it was difficult. But the people who plugged well and just kept going eventually did fine.
On Wall Street: If you're in a miasma of competition -- and to use the word that is so popular, greed -- and you attract very competitive people and they're thrown into this miasma, of course there's going to be more regrettable behavior than you might find in a monastery. Or at least than we thought we'd find in monasteries before we understood them better.
Lord Acton had this law that you all taught: that power corrupts, and absolute power tends to corrupt absolutely. The Munger version of that is "easy money corrupts, and really easy money tends to corrupt absolutely." And I don't think it was good for Wall Street that they had this absolute torrent of really easy money when idiots and naives were making a fortune selling shoddy mortgages with ridiculous theories. It was very regrettable behavior. And it was the easy money that allowed it.
On accountants: The accountants utterly failed us. And by the way, there's practically no sign of any intelligent reversal of the failure of that profession. I have yet to meet many accountants who are the least bit ashamed for their contribution to our recent troubles. But it was immense. Imagine when Enron comes down to the SEC and says "we want to write a little contract with A, and a little contract with B, and take all the profit we're going to make from these complicated contracts over the next 20 years into earnings immediately, and put an asset on our balance sheet of $28 billion from signing two pieces of paper." And the SEC, led by wonderful accountants who studied at great places, [says] "Why, of course you should have that kind of accounting!" What the hell were they thinking? How can anybody have any respectable understanding of human nature without realizing that the kind of people who were going to be tempted by that accounting were not going to be able to resist the temptations? It was disgusting.
On why accountants got it so wrong: Partly the establishment accountants want to please the people who are writing the checks. And partly the academic accountants get full of people who overdosed on mathematics. They want everything to be in balance. And they don't think that that really isn't rational when creating rules for a human behavioral system. They're too mathematical and not rational enough when dealing with their fellow humans. You can't give the average Wall Street CEO really lenient standards of accounting and expect the figures to be good.
On politicians: I think all politicians tend to behave badly under the peculiar pressures of their trade. So I think they've chosen a profession where it's hard to behave well. And if it's hard to behave well and you're in a miasma of wrong incentives, then you get a lot of bad behavior. I think we're lucky the system has worked as well as it has. In my state, we have a thoroughly gerrymandered legislature, so you have to be an extreme nut on the right or an extreme nut on the left, or you're not allowed in the legislature. And there are ten sane people who creep in every decade, and at the end of the decade the right and the left agree and throw them out. How well are you going to behave in that kind of a system? You can't say you hate the other people in your chamber. You need this ever-growing tide of money. You can't really tell the truth as it is because you'll offend various people that are important to you. It's a miracle it ever worked as well as it did. I suppose it's better than absolute despotism. But sometimes it's a little close.
On communism: Two things work beautifully to ruin an aggregation of people. All the best people leave; that's a sure source of huge failure. Then you have the remainder under a total crazy bunch of people -- like say the nutcase that runs North Korea -- and of course that will ruin anybody. Do you see all those pictures of North Korea at night? It's dark! They have starvation in the Year of Our Lord 2010! They have people starving in the dark! That's what communism will do for you if you work at it hard enough.
On the need for tax reform: I'm sort of against my own party. I think my taxes are a little too low. And I don't think we needed the last round of tax cuts, nor do I think that hedge fund operators deserve to pay lower taxes than taxi drivers as a percentage of income. I think when you're that crazy, it's serious.
On what he'd do to fix the economy: If you asked what I would do if I were the benevolent despot of the United States, I would have the biggest infrastructure program you ever saw. Go to power from renewable sources. And by that I don't mean corn. That was one of the most asinine ideas in the history of the world -- to use corn for motor fuel. I mean, you can argue that the people that come up with that kind of stuff don't deserve hardly to be at the table at all. But the idea of rapidly going to the sun and creating a vast infrastructure that will do it is a thoroughly sound idea. And we now know how to do everything that we need to know how to do. And I think the country would get behind it if people had the sense to concentrate on something large and important and sensible.
On new forms of energy: I think we'll end up with more of practically everything you can think of. But in the end, you have to go solar. There's not an endless supply of uranium, nor is it totally desirable to let every little crazy hamlet have its own nuclear capability. There's a lot to be said for going directly to the sun. And thank God it's as copious and as reliable as it is as a source. I mean, think of how lucky we are. People on Easter Island didn't have any sun to solve their problems. They basically perished when they used up their resources. This is one where our profligacy leaves us with a wonderful option that's never going to run out on us. This is a huge benefit, and the young people in the room ought to be rejoicing that the main technical problem of their civilization is basically solved.
Asked whether stocks should be bought at these levels: Long term, I'd rather own common stocks I pick than good government bonds at the present rates. So that's an easy question for me. What you should do with your own life depends on your own opportunity costs; how likely it is that you're going to need the money suddenly at an inconvenient time, and a lot of other subjects.
Look what happened in the last 100 years. The net increases in living standards and in human options between 1900 and 2000 were simply awesome when you take the big picture view instead of the short picture view. Think what came: widely distributed electric power; television and radio; the ability to get in your own car and move around wherever you wanted; cheap travel by jet all over the world; air conditioning in places that were unendurable in the summer; widely distributed information. It's just unbelievable what happened. In no previous 100 years did anything remotely comparable happen. Are all those forces gone? I don't think the next 100 years is going to do as much, because those are such huge achievements given human needs. But do I think there will be more improvements and more options? Yes.
On investing in gold: I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk.
On whether we could end up like Japan's lost decade: Of course we could. It's like the man said about baptism: I believe in it because I've seen it done. Japan has proved that an advanced nation can have a long period of utter stasis following a bust. Now, are we going to be like Japan? Or are we going to do better? I think we're going to do better. But I think if we have trouble, I don't think we'll handle it as well as Japan. Japan is a very courteous, submissive, amazing place. If they were going to have a long period of stasis, you could hardly find people who could handle it better if you selected over the whole earth. They have the right behavioral ethos. Here I think we'd have a lot more tension if we had a long period of no growth at all. And so I hope we aren't in for that. But if we did have it, in the big scheme of things, is that a tragedy? At the current living standards of the United States, would it be a tragedy if we held level for a considerable period? On the big-time scale of human tragedy, that is not the worst of threats.
On overhauling entitlements: I personally would not cut Social Security in terms of its present promises. I think net that's been a credit to our civilization. It's worked with low administrative costs and low fraud and it's given a lot of people their main dignity in old age. And I think as long as we're as rich as we are we should find a way to afford it. I don't think the world comes to an end if we end up supporting Social Security promises with a value added tax. Personally, I don't expect to live to see a value added tax because I'm so old. But I think it's a very desirable tax.
On philanthropy: Generally speaking, I believe Costco (Nasdaq: COST ) does more for civilization than the Rockefeller Foundation. I think it's a better place. You get a bunch of very intelligent people sitting around trying to do good, and I immediately get kind of suspicious and squirm in my seat. That may be a prejudice of mine which isn't quite fair. But I've seen so much good in the world by people who really created better systems, and I've seen so much folly and stupidity on the part of our major philanthropic groups, including the World Bank, that I really have more confidence in building up the more capitalistic ventures like Costco.
On future bubbles: I think you can count on more booms and busts over your remaining lifetime. How big and with what cyclicality, I can't tell you. I can tell you the best way of coping, which is just to put your head down and behave credibly every day.
On TARP: I think those bailouts were absolutely required to save civilization, and to give you the best chances of solving housing and student loans and other problems. I think that was absolutely required and we are lucky that both administrations were as wise and bold as they were. You shouldn't resent that. You should thank God they did it. And I think if you understand the system and the dangers it was in, you would recognize that that was your blessing.
On life without bailouts: I don't even want to think about how awful it could have been [without bailouts].
I always point out that Albert Einstein got a highly subsidized primary school education in Germany from the Catholic church ... Little Albert Einstein was subsidized by the Catholic church. That is a pretty civilized place. And then Adolf Hitler hits the economy with enough misery and enough disruption, destroyed the currency. God knows what happens. So I think when you have troubles like that you shouldn't be bitching about a little bailout. You should be thinking it should have been bigger. I mean, those people were working for you. And they were in both parties.
On why we bailed out banks but not people: There comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies. I don't know where it is. But at a certain place, you gotta say to people, "suck it in and cope buddy. Suck it in and cope."
And in the '30s with my family, these families would move into the same house, and they wore the same clothes for a while. They coped. And that was part of how the civilization got through. We do not want a civilization where every hardship we go to the government and say "give me some money. The world is not what I expected." So I think there's danger in just shoveling out money too much to people who say, "My life is a little harder than it used to be." Of course it's a little harder than it used to be! This is normal worldly life. And I think it is very dangerous to assume that what people did to save the whole banking system was wrong, and that it is clearly right to shovel out a lot of money to people who are now short of money. I think we come to a place where everybody has to suck it in and cope.
On health-care spending: In an aging affluent civilization where GDP rises at two or three percent per year per capita, I don't think it matters at all if we spent 20% of GDP on health care. I don't think it matters that much if 20% of the health care is no damn good. You know, like Botox for women for whom intervention is hopeless. I don't think it's our main problem at all. And I think it's quite natural in our particular civilization to have a fair amount spent on health care. If you live to be as old as I am, I'm surrounded by people who their joints hurt so much the pain is unendurable. They're like the Tin Woodman: one hip, one hip, one knee, one knee. Got an infection? 30 days in the hospital. This is expensive. But if that's the way the civilization wants to spend the money, I don't consider that a crazy choice.
On accumulating wealth: They'll say when I die, "How much did Charlie leave?" And the answer will be, "I believe he left it all." Piling it up is not such a big deal when you have to part with it in the end.
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