While Warren Buffett gets most of the attention, Charlie Munger, his partner in managing Berkshire Hathaway (NYSE:BRK.A), is an investment genius in his own right. In fact, I suspect that were it not for Buffett -- who Munger freely acknowledges is the superior investor --Munger might well be acclaimed the world's greatest investor. Before Munger joined forces with Buffett in the mid-1970s, his investment partnership compounded at an average rate of 24.3% annually from 1962 to 1975 (vs. only 6.4% for the Dow over the same period).
In addition to his role as vice chairman of Berkshire Hathaway, Munger is chairman of Wesco Financial (AMEX:WSC), which is 80.1%-owned by Berkshire. In an open-mike format similar to that of the Berkshire meeting, Munger answers shareholder questions for a couple of hours at the Wesco meeting. Since Buffett does most of the talking at the Berkshire meeting, I always like to attend the Wesco meeting to hear Munger's in-depth thinking. I wasn't disappointed this year.
As I did in Monday's column on Berkshire's annual meeting, I will try to distill extensive notes down to the most important things I heard. (My notes can be seen in their entirety at my website.) I've added a little commentary, but will generally let Munger speak for himself. Recording devices were not allowed in the meeting, so in many cases I am paraphrasing because I couldn't type quickly enough.
Thoughts on Buffett
While Buffett is now 71 years old, Munger raved, "It's hard to believe that he's getting better with each passing year. It won't go on forever, but Warren is actually improving. It's remarkable: Most almost-72-year-old men are not improving, but Warren is."
Berkshire without Buffett
The most common concern investors seem to have about Berkshire is, "What happens when Buffett dies?" Munger acknowledged that "if he were gone, we couldn't invest the money as well as Warren," but noted that "the place is drowning in money -- we have great business pounding out money. If the stock went down, Berkshire could buy it back. There's no reason to think it will go to hell in a bucket, and I think there's reason to believe it could go on quite well. I'd be horrified if it isn't bigger and better over time, even after Warren dies."
Berkshire's acquisition strategy
Berkshire continues to have spectacular success on the acquisition front. According to Munger, there's no secret: "We've bought business after business because we admire the founders and what they've done with their lives. In almost all cases, they've stayed on and our expectations have not been disappointed."
Berkshire and Wesco's stock prices relative to intrinsic value
Unlike so many corporate managers who seem to believe that it's their #1 duty to inflate their stock price -- often by unethical or illegal means -- Buffett and Munger "like the stocks of both Berkshire and Wesco to trade within hailing distance of what we think of as intrinsic value. When it runs up, we try to talk it down. That's not at all common in Corporate America, but that's the way we act."
As for Berkshire's current share price (it closed yesterday at $72,600 per A share), Munger said "there's been a deafening silence [on what we think of the stock price]. Berkshire is trading in a reasonable way given our environment and opportunities, which is why we've been silent. We are in no distress at all about the current value of the stock." When was the last time you heard a senior manager of a company say that?!
Munger, like Buffett, has long warned about the dangers of derivatives, and did so again this week: "It's easy to see [the dangers] when you talk about [what happened with] the energy derivatives -- they were kerflooey. When they [the companies] reached for the assets that were on their books, the money wasn't there. When it comes to financial assets, we haven't had any such denouement and the accounting hasn't changed, so the denouement is ahead of us.
"We tried to sell Gen Re's derivatives operation and couldn't, so we started liquidating it. We had to take big markdowns. I would confidently predict that most of the derivative books of [this country's] major banks cannot be liquidated for anything like what they're carried on the books at. When the denouement will happen and how severe it will be, I don't know. But I fear the consequences could be fearsome. I think there are major problems, worse than in the energy field, and look at the destruction there."
Alan Greenspan is apparently listening and singing a different tune than he was only a short while ago. Just yesterday, he expressed concern about derivatives and J.P. Morgan (NYSE: JPM ) in particular.
Attractive investment opportunities tend to be ephemeral
The dates stick in my mind: July 23rd and October 9th last year and March 11th this year -- all days in which the market bottomed amidst panicked selling, when bargains abounded. But if you weren't ready to buy, stocks snapped back quickly. Munger noted that "a lot of opportunities in life tend to last a short while, due to some temporary inefficiency... For each of us, really good investment opportunities aren't going to come along too often and won't last too long, so you've got to be ready to act and have a prepared mind."
Views on Ben Graham's ideas
While Munger largely rejects Ben Graham's cigar-butt style of investing, he embraces the core principles: "The idea of a margin of safety, a Graham precept, will never be obsolete. The idea of making the market your servant will never be obsolete. The idea of being objective and dispassionate will never be obsolete. So Graham had a lot of wonderful ideas."
Munger continues to report difficulty finding good stocks to buy: "In terms of the general climate, I think it's pretty miserable for anyone who likes easy, sure money. Common stocks may be reasonably fairly valued, but they are not overwhelming bargains."
The importance of reading
"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero... You'd be amazed at how much Warren reads -- at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out."
How to get rich
A young shareholder asked Munger how to follow in his footsteps, and Munger brought down the house by saying, "We get these questions a lot from the enterprising young. It's a very intelligent question: You look at some old guy who's rich and you ask, 'How can I become like you, except faster?'"
Munger's reply was: "Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts... Slug it out one inch at a time, day by day, at the end of the day -- if you live long enough -- most people get what they deserve."
Munger has an acerbic, dry wit and he was in rare form this week. Here were my favorites:
- "If you rise in life, you have to behave in a certain way. You can go to a strip club if you're a beer-swilling sand shoveler, but if you're the Bishop of Boston, you shouldn't go."
- "The idea of caring that someone is making money faster [than you are] is one of the deadly sins. Envy is a really stupid sin because it's the only one you could never possibly have any fun at. There's a lot of pain and no fun. Why would you want to get on that trolley?"
- "What's the best way to get a good spouse? The best single way is to deserve a good spouse because a good spouse is by definition not nuts."
- "I think liberal art faculties at major universities have views that are not very sound, at least on public policy issues -- they may know a lot of French [however]."
- Ben Franklin "was a very good ambassador and whatever was wrong with him from John Adams's point of view [I'm sure] helped him with the French."
Whitney Tilson is a longtime guest columnist for The Motley Fool. He owned shares of Berkshire Hathaway at press time, though positions may change at any time. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security. Mr. Tilson appreciates your feedback on the Fool on the Hill discussion board or at Tilson@Tilsonfunds.com. The Motley Fool is investors writing for investors.