An army of reporters and roughly 40,000 shareholders swarmed Omaha last Saturday for the Berkshire Hathaway
The Wesco Financial
Below are my summarized notes from the Wesco meeting and Charlie Munger's thoughts on the world, lightly edited for clarity.
On the crisis of the past two years: What we just went through was deadly serious. We were on the edge of something that could have taken civilization as we know it to the edge of ruin. If the government had not stepped in, the whole damn thing would have gone down like pins in a bowling alley.
This was very, very serious. Look what happened in Germany after economic collapse. Adolph Hitler never would have come to power if it weren't for stupid people ruining the economy. What we were up against was just awesome in its seriousness.
On why bankers were such idiots: Running a financial institution on small spreads with lots of leverage is a precarious way to make a living. Eventually, competition reduces lending standards until the point where everyone must go along with the lousy lending standards or go out of business. There's a very fast race to the bottom. Anything that gets as competitive as finance has naturally goes toward excess. The Ancient Greeks would recognize this as a tragedy.
There have been bank problems in the past. Why did we need bailouts this time? This time was far worse than any other time in modern history. It was like autocatalysis in chemistry. It just started feeding on itself like pins going down ... boom boom boom. The government's reaction was a credit to democracy and capitalism. We had wonderful leadership, and I'm quite grateful. The problem was just god-awful. It was out of control.
On who to blame: The academic elites failed us with their utterly asinine ideas of risk control. It was grounded on the idea that all risk took Gaussian distributions, which is just totally wrong. Very high IQ people can be completely useless. And many of them are.
Benjamin Graham used to say, "It's not the bad investment ideas that fail; it's the good ideas that get pushed into excess." And that's a lot of what happened here.
Some economic distortions come from the masses believing that other people are right. Others come from the need to make a living through behavior that may be less than socially desirable. I've always been skeptical of conventional wisdom. You have to be able to keep your head on when everyone else is losing theirs.
On the need for regulation: Take soccer as an example. It's a tremendously competitive sport, and often times one team tries to work mayhem on the other team's best player. The referee's job is to limit this mayhem and rein in extreme forms of competition.
Regulation is similar. Most ambitious young men will be more aggressive than they should. That's what happened with investment banking. I mean, look at Lehman Brothers. Everyone did what they damn well wanted until the whole place was pathological about its extremeness.
When Hitler was in his bunker before he shot himself, he said, "This isn't my fault. The German people just don't appreciate me enough." That's the attitude of a lot of bankers. They think their silliness is necessary. Banks will not rein themselves in voluntarily. You need adult supervision.
The smart way to regulate is to act like a referee. You have to curtail the activities that are permitted. There should be less trying to fix things and more tying to prevent bad outcomes. There's an old saying, "an ounce of prevention is worth a pound of cure." That's wrong. An ounce of prevention can be worth an entire ton of cure.
There was wretched excess in the 1920s, and we curtailed it after the Great Depression. Banks stayed mostly out of trouble for a long time -- until the excesses were handed back to them, in fact. Capitalism should not resemble a vast gambling hall. It shouldn't look like a casino. I mean, investment banks can make revenue from every which way in a legitimate manner. Why do they need every form of gambling conceivable to man? Many of these products have attributed far more damage than they have benefit.
On Goldman Sachs
Goldman was in a world where Congress legalized all types of derivatives. It's an inherently dangerous world. Given that world, I see no reason to think Goldman misbehaved in some horrible fashion. Everyone was doing it, and it's only natural to increase your moneymaking activities when you can do so legally.
On how he'd like business schools to be run: I'd start with how the Harvard Business School used to teach, which is starting with the history of businesses. Show why GM rose to power and how it failed. Teach why the railroads rose, then failed, and why they're now good investments. They don't do this because it's hard to teach history over teaching things that are summarized in formulas.
I have a friend here in Los Angeles whose father owned a little machine shop. He was accepted into the Harvard Business School, but he asked to defer his admittance for one year so he could help run his father's business. A year later, he asked if he could defer again. Harvard asked, "One year ago, how many employees did your dad's business have?" "Fifty," he said. "And how many does it have now?" they asked. "Nine hundred," he said. They told him he didn't need Harvard, and maybe he could just come back in a few years and endow the place. This type of thinking is no longer present at Harvard, which is too bad. Business school teaches from the perspective of a career in business, not as an investor in business. But there are great benefits to thinking like an investor.
On finance as a career: A big percentage of Cal-Tech grads are going into finance. I regard this as a regretfully bad outcome. They'll make a lot of money by clobbering customers who aren't as smart as them. It's a mistake. I look at this in terms of losses from the diversion of our best talent going into some money-grubbing exercise.
On career choice: A very flawed person can do well if he seeks out dumb competition.
Munger's rule of investing: When any guy offers you a chance to earn lots of money without risk, don't listen to the rest of his sentence. Follow this and you'll save yourself a lot of misery.
On accountants: A lot of this [financial collapse] can be blamed on accountants. Accountants as a whole have been trained with too much math and not enough horse sense. If some of these insane accounting practices were never allowed, huge messes could have been avoided. Bankers have become quite good at manipulating accountants [mentions Enron convincing regulators to allow front-loaded revenue recognition.] Accountants have to learn how to say no. In fact, all people with power have to learn how to say no.
On derivatives: The world of derivatives is full of holes that very few people are really aware of. It's like hydrogen and oxygen sitting on the corner waiting for a little flame.
On JPMorgan Chase
On the success of Berkshire Hathaway: There are two main reasons Berkshire has succeeded. One is its decentralization [of subsidiaries]. We've installed decentralization almost to the point of abdication. There are only 28 people at headquarters in Omaha.
The other reason is our extreme centralization of capital deployment. [He and Warren are the only ones who make investing decisions.] Our centralization is just as extreme as our decentralization.
On why Berkshire has suddenly made high-tech investments [Iscar, BYD]: First, I'll start by saying I've avoided technology-based businesses for a long time for good reason. I was once involved with such a business when I was young, and the venture capital guys came in and fired everyone. Then the company quickly became irrelevant. I found it very unpleasant. Bill Gates has said that the standard outcome with disruptive technology is failure. That's what happens most of the time. There are good examples of this. IBM
So why has Berkshire changed? We've built enough models in our heads, and the models are so powerful, that we think we can now make predictions that we couldn't in the past.
BYD is a good example. BYD's CEO is so talented and has such a strong drive toward perfection that, before long, miracles started to happen. This is a business we would traditionally avoid, but when you watch one miracle, then two, then three, then you know you're onto something.
I wouldn't worry about Berkshire making too many of these bets. We're not recommending you do this either. The old way still works better, but there are exceptions to every rule.
Asked about managing a subsidiary as large as Burlington Northern: We don't have to do one damn thing other than let [CEO] Matt Rose do whatever the hell he pleases. We don't have to deal with problems.
On the long-term prospects of Berkshire: The culture will remain long after Buffett and I are gone. The businesses we have hold vast intrinsic value and meaning. There doesn't need to be much talent at the top of Berkshire. The momentum it has is just awesome. It's like no other business.
On Buffett needing Munger to achieve success: Warren didn't need me. He says a lot of nice things about his colleagues. But when I first met Buffett he already knew everything he needed to know about competitive advantages.
On Greece: The problems in Greece have been obvious for a while. I'm surprised this didn't happen sooner.
These are very hard problems to fix. Woody Allen once said, "There's utter chaos on one side, and misery on the other. I hope we have the wisdom to make the best decision." That sums up the problems in Greece.
On criticisms of China's social policies: We have a tendency in America to think everyone should do it just like us. I don't think that's necessarily true. What has worked for us socially might not work for China. Actually, it almost certainly won't.
On people he admires: I like people who follow the 80/20 rule -- those who know 20% of the time represents 80% of the outcome.
But there are also those at Berkshire who follow another form of the 80/20 rule --those who know the worst 20% of businesses can lead to great outcomes because there's little competition. You need both models in your head.
On managing small amounts of money: Don't go after large areas. Don't try to figure out if Merck's pipeline is better than Pfizer's. It's too hard. Go to where there are market inefficiencies. You need an edge. To succeed, you need to go where the competition is low. That's the best advice I can give to small investors.
On good books to read: I've read all the books on the Great Recession. They're all good. I find the story of John Paulson [the book The Greatest Trade Ever] to be particularly fascinating. He made a lot of money from entirely legal ways but may have created a lot of trouble for himself in the process. Now every nice young man wants to be him, and since he did it with derivatives, it's that much worse. His influence has been pernicious in an unintentional way.
On current market valuations: Low interest rates have driven stocks up. People look at the yield on two-year treasuries with great despair. This isn't a world you should salivate over. It's ordinary adult life, and it isn't easy.
On reading five newspapers a day: The Financial Times is the most intellectually impressive, in my opinion. The Wall Street Journal, too. I don't know anyone who's wise in a worldly sense that doesn't read newspapers every day. It's an obvious correlation.
On absorbing as much knowledge as he has: Learning has never been work for me. It's play. I was born innately curious. If that doesn't work for you, figure out your own damn system.
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