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Berkshire Hathaway's Other Half

TMF: Did Charlie Munger become a billionaire because of Warren Buffett?

Lowe: Munger was a millionaire when he met Buffett, so he was well on his way. But there is no doubt, by working with Buffett, his financial fortunes were enhanced. Buffett would also say the reverse is true.

TMF: Having the unique opportunity to interview and write about several captains of industry, how would you compare Charlie Munger, Warren Buffett, Bill Gates, Jack Welch, Oprah Winfrey, and Ted Turner? What do they all have in common?

Lowe: Each of these people is very bright, of course, and each of them lived and prospered in the United States, a country that places high value on individualism. Each of these people built their own fortunes, using their own ideas. All this said, the single strongest characteristic these people share is that they believe in themselves. From very early ages they had enormous confidence in their own talents, ideas, and their ability to succeed.

TMF: What will Charlie Munger's legacy be?

Lowe: Munger said that he wanted to be wealthy so that he could have a large family, but also so that he could be independent, follow his own ideas, and live life the way he chooses. He hopes to follow the example of Benjamin Franklin -- to use his wealth and independence to do good works. His legacy will be that of a self-made billionaire who also is a dedicated family man, a faithful friend, and a good citizen. He may also be remembered for his passion for fishing. 

TMF: On the succession issue, has Charlie Munger had any input on this issue? Are there any differences between Munger and Buffett on this issue?

Lowe: Munger says very little on this point, except that at some point successors will be necessary. He and Buffett have discussed topics such as this over a very long period of time, and they know how one another think. Munger knows the Buffett children well and he worked closely with Lou Simpson during the Salomon Brothers crisis. Though he has not said so specifically to me, I believe he approves on the succession plan announced earlier this year. It will be interesting to see who the third member of the management triad is. I'll bet it is someone that Munger approves of. After all, Ron Olson, the most recently appointed Berkshire Hathaway board member, is from the Munger, Tolles, Olson law firm. 

TMF: The current shareholder base [for Berkshire Hathaway] is aging, and institutions are underrepresented. Are there any differences between Munger and Buffett on the issue of the shareholder base? Does Munger feel that institutional ownership should be encouraged and expanded? Does Munger feel that Berkshire should be included in the S&P 500?

Lowe: I don't think the age of the shareholder base bothers Munger at all. In most cases, the shares simply pass on to the next generation. What does bother them is a shareholder base that is too large and too scattered. Munger has joked that there should be a dance for young people during the Berkshire annual meeting weekend so that shareholder's children can meet and marry, thus allowing for consolidation of shares. It was just a joke.

Likewise, Buffett and Munger have not sought institutional investors, because this type of investor is prone to instructing management and trying to influence management decisions.

I've heard both Buffett and Munger say that Berkshire probably should be in the S&P 500 for the index to properly reflect the stock market, but it probably won't happen, because the introduction of a stock with such a high price would be too difficult to manage. All those index fund managers would have to figure a way to get Berkshire into their mix. At least temporarily, that might be a boon for Berkshire shareholders as demand drives the price up.

TMF: Given the investment experience that Munger had in the 1973-1974 bear markets, do you think he would do anything differently today with his stock market investments, if inflation, interest rates, and other conditions were similar to the 1970s? Or do you think that if the economics of the underlying business are very good, he would hold all of his stocks through thick and thin?

Lowe: It isn't like Charlie to sit around thinking about the past and imposing possible alternate scenarios on events. To know what Munger would do today, we need only to look at Wesco Financial and to Berkshire, keeping in mind that both companies sometimes sell good assets simply because they need the cash to buy a better asset.

Munger is keenly aware of tax consequences, and that is one reason Berkshire is structured the way it is. Buffett is able to manage money for investors, i.e. to reinvest earnings, without a tax distribution. The investor is completely in control of when he or she wants to sell out and pay taxes on the gain. Overall, though, Munger believes in buying good businesses and sticking with them if a downturn seems situational or temporary. Both he and Buffett point out that this is the way great family fortunes usually are built.

TMF: Perhaps the most interesting aspect of Munger is his "multi-disciplinary" approach to knowledge and how that type of understanding can assist one in understanding seemingly random or chaotic events in the world. Does Munger have any models to offer us, other than those given in his famous U.S.C. lecture?

Lowe: This is one of Munger's most interesting concepts, and he occasionally writes and speaks about it. However, he does not lay out very clear or concrete ways of how this works. Basically, he believes that all people should have a "multi-disciplinary" education. They should know the rudiments of physics, chemistry, astronomy and other sciences, plus psychology, economics, history, philosophy, political systems, etc. With this interconnected knowledge we could both make big things happen and understand events as they occur. Often, major change happens when big ideas from several disciplines converge.

For example, when Ted Turner recognized the possibilities of linking journalism, cable television, and satellite technology, he was able to create a global news network that transformed the way the world gets its news and even the way diplomacy is conducted. World leaders now watch war in progress on their televisions even as they discuss and negotiate resolutions. The rules of engagement are far different from what they were in the pre-Cable News Network days. On top of that, Turner was able to create a lollapalooza business.

I explain in Damn Right that Munger gives us an old-fashioned treasure map with an X on it. The map itself is part of the mystery, and only by figuring out what the map means and following it step by step can we find the treasure. X = multi-disciplinary approach. Treasure = better understanding and big results.

TMF: I am an avid Costco (Nasdaq: COST) shopper and fan. How do you think Munger would comment on what type of competitive "moat" he sees around this business?

Lowe: Munger also is an avid Costco shopper and fan. He believes that Costco is an innovative retailer as well as a responsible one. Costco evolved from Price Club, a company that pioneered the warehouse store concept and still sets the standard in this segment. Costco's name recognition, the trust it has built, and the loyal consumer base is the company's moat. All these things have come to pass because Costco is well-managed.

TMF: What books were on the reading list you were handed by Munger when he grudgingly agreed to cooperate on the book?

Lowe:The Selfish Gene, by Richard Dawkins; Three Scientists and Their Gods, Robert Wright (out of print); Influence: Science and Practice, Robert B. Cialdini; Guns, Germs & Steel by Jared Diamond.

TMF: In what ways did Munger surprise you?

Lowe: Munger is incredibly open in his thinking. He will listen carefully to opposing views and consider them. He sometimes disagrees, but he often comes up with a new way of thinking about the subject, or if necessary, changes his mind. This is unusual in most people, but especially people of his age, I think.

TMF: Great. Thanks for discussing Damn Right: Behind the Scenes With Berkshire Billionaire Charlie Munger with us.

Back to Part 1 »


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