My trip to the Wesco Annual Meeting is sadly now at a conclusion and I need to thank my thoughtful wife for the birthday gift of a lifetime. I have literally been on intellectual and sensory overload since landing Monday morning and at the end of it all I have a satisfied exhaustion. There is simply too much to say for one post and I cannot do the experience any justice here. Before I get to the meeting itself I will briefly describe my impressions. I'm a big believer in themes � themes that succinctly capture an event in clear, concise declarations. That's where I will begin as I start at the end. Become a Complete Fool
At the end of his three-hour talk Charlie concluded with a beautiful encapsulation of what it takes to succeed. He called it a "seamless web of deserved trust" which is what is necessary to run any corporation of size. The payoff is huge. Think about it. With trust comes enormous efficiencies and second and third order positive effects. How does Berkshire run with such a small headquarters staff? They couldn't do it without trust. All networks, no matter what they are require a basic trust to function. Think about your personal web of people. Charlie mentioned the basic trust required in something as simple as the family unit. Think back through the history of man � we formed as groups and later as tribes which all have this basic requirement. Think back to the Berkshire meeting when Charlie mentioned picking the right people as being more important than picking the right business. So true. I had the luxury of being surrounded the entire week with great, first-class people from all walks of life and backgrounds. I will make special mention to Defelice for what I think was two solid days of non-stop talking walking/driving around Pasadena (probably a mutual pent up demand to extrovert all of this thought and philosophy). Let's face it; you can't do that with just anyone....
Charlie Munger obviously surrounds himself with great people � you could see it everywhere. Think of the positive second order effects that this spawns � a ripple effect of positive results. It can't help but be any other way. A seamless web of mutual trust...
This leads me naturally to the book � Poor Charlie's Almanac, which set the tone for this year I think. The book was edited by Peter Kaufman who knows Munger as well as anyone and who took the task to assemble the project with the assistance of some great, energetic talent that works in his company (note the ripple effect of Munger surrounding himself with great people � a cascading of the same in a pattern of trust and mutual respect). Kaufman used a very Munger-like multi-disciplinary approach with lots of inversion to design the entire construct � I think that Munger would have done it exactly the same way. So he essentially designed the book using Munger's own philosophy as the design methodology. He and his expert team put everything into this book and I think that the result is nothing short of breathtaking. The book provides a personal and professional context for Munger's speeches and underlying philosophy. It's far more than a simple compilation of Munger's speeches � when one has a better understanding of the man then one naturally has a better understanding of the all important question of � why. Why the philosophy and how did he derive it? How does it manifest itself in his day-to-day affairs? The design of the book was done with painstaking attention to detail in every way. All of this dense, intellectual philosophy boiled down to the essence in a readable and fun format that's hard to put down. Internalize that book and you've got the Munger philosophy. Not only that, but the physical qualities are all of the highest quality � the paper, the binding � everything. It's what you would expect of something affiliated with Munger....
And what's that Munger philosophy saying today...?
Other than the all-important webs of trust Munger had a lot to say. I was writing furiously and still missing a lot so apologies in advance if I gaffed something. Here were my main take-aways in no order whatsoever � it's what stuck with me.
- Buffett and Munger have lowered their bar. For investors I think this is eminently important. "We're not waiting for 1974 or 1984 for that matter." Why? Munger sees two possible outcomes 1) the "classic bust" or 2) Japan. My take - If we get Japan then we're looking at years of very low market returns where finding good valuations from these levels is not going to be so easy. We'll have to muddle through. "I've never seen in my career where all asset classes are simultaneously so high." The chances of finding Coke selling for what it was when Buffett bought just may not happen � yet there are worse things that you can do with your money than put it into Budweiser which is a dominant franchise selling at a good price. Munger talked a little about things not being "a lollapalooza" (I think BUD fits here).... It's just going to be damn harder for us. So accept the reality....get a grip... and come to terms with it in a rational way. Munger said, "The world is not going to give you extra return just because you want it. It is far easier to reduce your wants." My take - We just might get a financial meltdown....then again maybe not. Be wary of "inverse speculation" where you're waiting for the implosion thinking that you might get things at insanely cheap valuations - it that happens great, but we just may have to muddle and pick our shots and accept it because that's just the way it is.
- Wal Mart. Charlie Munger loves Wal Mart. Remember his comment about how romanticizing small-town America may be misplaced? He thinks Wal Mart does a LOT of good for society. He talked about the 70 yr old ladies working in Wal Mart because they WANT to be there and were happy. He talked about what good it does for society by bringing value to the customers. I think that at some price � not far from here � that Wal Mart has to be seriously considered by BRK � take a look at the market cap and the volume and form your own conclusions. Buffett and Munger love the company � it's obviously a dominant franchise that's not going to be knocked off the hill in my lifetime. I'll be mildly surprised if given the above commentary on lowering the bar and Wal Mart's societal impact (a definition of dominance in my book) if they don't make a move.
- On U.S. decline. "Over the long-term the eclipse rate of great civilizations is 100%." Nice lead in. Munger is optimistic on the ability of our culture to withstand a lot of abuse � but just as you don't abuse a good spouse, it's a sin to abuse your country. He calls for a return to the old values. I took that to mean integrity, hard work, decency, honesty, etc. And of course the punch line � "If we swept away a certain class of people it would be quite desirable." Context is important here � because preceding this nice quip was a good lecture on corporate governance etc. I suggest that folks read Diamond's book "Collapse" and then discuss the prospects of China � But Munger thinks well of Asia.
- He talked a lot about the enterprising spirit and hard work of the Asian class � note that our grad schools are full of Asian descendents. The Confucian value system has enormous benefit. Samsung engineers are having staff meetings at 11 PM at night � who's going to win? Munger says, "We need them (Asians)." And another classic � "If the Munger children get displaced, that's just too damn bad for the Mungers." Obviously the man loves meritocracy. "We don't like competing against Chinese manufacturing and it's not just low tech. The amount of talent there is amazing and they've just been held down by ridiculous systems." I think of the Friedman quote, "to be one in a million in China means there are 1300 just like you." Jim Rogers of course talks a lot about the coming Chinese century.
- On Berkshire. For them to buy back shares the prices would have to be lower. Take what you will of that but I do not buy the quick conclusion that BRK is not under-valued. It's blatantly obvious to me � they just don't like the thought of share buy-backs for Berkshire because it creates a win-lose situation � I think they feel they'd be "Screwing" the shareholders whom they bought from. The competition to buy entire companies has "gotten ridiculous" but won't stay that way.
- On Buffett. Take a good hard look at his last 5 or 6 buys � the record is just like the Buffett record of old. But the size of the positions just doesn't move the needle nearly as much. Take heart � the Buffett/Munger philosophy of equity investing � of betting big on high probability events etc. is alive and well. But...."We're willing to endure our misfortune in having so much."
- On insurance. Buffett and Jain do not use the actuarial techniques as taught in the fine schools.... They're useless for what these guys do. He used the example of - if you don't have a hurricane for a long time then the normal way of doing these things is that the probability would go down and you'd lower your premiums... of course this line of thinking is insane. "It just doesn't work that way."
Reading recommendations. 1) Poor Charlie's Almanac; 2) Read the best people; 3) Fiasco; 4) He's not "reading romance novels and detective stories" (ha ha)
On Currencies. It's a zero sum game. Someone who devotes their life to it might do OK but it's not something he likes. Why do a zero-sum game when you can instead buy an enterprise, which works on your behalf?
On AIG. Talked in glowing terms of Hank Greenberg who was trying to do the right thing for AIG and who they have had good dealings with in the past. Hank has done a lot of good for insurance.
On Spitzer. Spitzer has done a lot of good. Using the media has increased both pressure and speed to get positive results � the change in corporate behavior due to the "public hangings" (I LOVE this sort of phraseology) has had an enormous and positive impact on corporate behavior in America. It's worked marvelously well in reinsurance. All of the scandals have now resulted in a lot of places cleaning up their act � the result is good. "Not everything is going to hell in a bucket in civilization." But as for hedge funds "I confidently predict more scandals."
Compensation. I liked this example. Think of your typical corporate boardroom. There's a long rectangular table with your authority figure sitting at the end. "There are enormous psychological forces at play." There is the human urge to please authority...there is social proof... there is commitment....there are all sorts of forces at play which result in ever higher pay.... Pretty fascinating when you think of it that way.... Next staff meeting I'm going to plant myself at the head of the table and start talking numbers!
Conduct Unbecoming. As a military officer I loved this example. He referred to his time in the Army Air Corps and the culture of the officer ethos. It is essentially a mortal sin to do something which is "conduct unbecoming an officer." Thinks that corporate America would do well to have something similar � pointed to IBM where the guy took liberty with his position and filled the email system with all sorts of crap that was "unbecoming." There are just some basic things that leaders should and should not do � it's simple.
Friction Costs. Munger figures that 5% of American GDP is pissed away in money friction costs of one kind or another. People getting the 5% are a very high percentage of the smart which is probably not the nation's best use � are they going to be attracted to "developing better soap at Proctor and Gamble?" asking rhetorically.....
That's going to have to sum it up for now � up at 4:30 am for flight home on another bankrupt and inefficient American airline with a pissed off labor force.... I guess they lack a basic web of trust.
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My trip to the Wesco Annual Meeting is sadly now at a conclusion and I need to thank my thoughtful wife for the birthday gift of a lifetime. I have literally been on intellectual and sensory overload since landing Monday morning and at the end of it all I have a satisfied exhaustion. There is simply too much to say for one post and I cannot do the experience any justice here. Before I get to the meeting itself I will briefly describe my impressions. I'm a big believer in themes � themes that succinctly capture an event in clear, concise declarations. That's where I will begin as I start at the end.