Oxstones Investment Club™By Jason Zweig, WSJ Blog,
Among investors and admirers of Berkshire Hathaway Inc., Charles T. Munger is famous as the laconic foil to the company’s chairman, the voluble Warren Buffett. At the annual shareholders’ meeting in Omaha each spring, Mr. Buffett speaks in long paragraphs; Mr. Munger speaks in zingers and, most often, simply says: “I have nothing to add.”
- Berkshire Vice Chairman Charles Munger
- Bloomberg News
But, without the need to play straight man to Mr. Buffett, Mr. Munger likes nothing better than to hold listeners rapt in attention. At the annual meeting in Los Angeles this Wednesday of Daily Journal Corp., the small publishing and software company that he chairs, the 90-year-old Mr. Munger spoke to investors for more than two hours over an open mike.
He rarely paused for breath and never took so much as a sip of water.
Then Mr. Munger went straight into presiding over the company’s board meeting, which lasted over three hours. After that, he still wasn’t talked out. Mr. Munger had an associate invite a waiting Wall Street Journal reporter into the boardroom, where he spoke for another hour or so.
Tall and trim with a handshake like a warm vise, Mr. Munger shows his age only in the slight quaver that has crept into his baritone voice. A reporter’s notes can only approximate the subtlety and complexity of Mr. Munger’s conversation, but here is an edited summary of what he had to say.
On how Warren Buffett influenced him:
Warren talked me into leaving the law business, and that was a very significant influence on me. I was already thinking about becoming a full-time investor, and Warren told me I was far better suited to that. He was right. I would probably have done it myself, but he pushed me to it. I have to say, it isn’t an easy thing to work very hard for many years to build up a significant career, as I had done, and then to destroy that career on purpose. [Mr. Munger left the law firm he founded, Munger, Tolles & Olson LLP, in 1965 to serve as Mr. Buffett’s right-hand man at Berkshire and to run a private investment partnership.] That would have been a lot harder to do if not for Warren’s influence on me.
It wasn’t a mistake. [Laughter.] It worked out remarkably well for both of us and for a lot of other people as well [the investors in Berkshire].
On Benjamin Graham, the great investor who was Warren Buffett’s revered mentor:
I don’t love Ben Graham and his ideas the way Warren does. You have to understand, to Warren — who discovered him at such a young age and then went to work for him — Ben Graham’s insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.
I think Ben Graham wasn’t nearly as good an investor as Warren Buffett is or even as good as I am. Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals – probably the only intellectual — in the investing business at the time.
On firms like Berkshire partner 3G Capital, which takes big companies and streamlines them:
I’m sensitive to the issue of cutting costs, which usually means a lot of people losing jobs. Rich people end up getting richer and a lot of people get fired. But ultimately, I think we don’t do the world a favor by employing more people than we need for companies to run efficiently. On the whole we advance civilization when companies run better.
On what he and Mr. Buffett call “the circle of your competence”:
Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome. Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years – and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know. He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know.
Knowing what you don’t know is more useful than being brilliant.
On how innovative Berkshire Hathaway has been:
There isn’t one novel thought in all of how Berkshire is run. It’s all about what [Mr. Munger’s friend] Peter [Kaufman] calls ‘exploiting unrecognized simplicities.’ We [Messrs. Buffett and Munger, their shareholders and the companies they have acquired] have selected one another. It’s a community of like-minded people, and that makes most decisions into no-brainers. Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.
Nobody has a zero incidence of bad news coming to them too late, but that’s really low at Berkshire. Warren likes to say, ‘Just tell us the bad news, the good news can wait.’ So people trust us in that, and that helps prevent mistakes from escalating into disasters. When you’re not managing for quarterly earnings and you’re managing only for the long pull, you don’t give a damn what the next quarter’s earnings look like.
On how he sank tens of millions of dollars into bank stocks in March 2009:
We just put the money in. It didn’t take any novel thought. It was a once-in-40-year opportunity. You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is. For most professional money managers, if you’ve got four children to put through college and you’re earning $400,000 or $1 million or whatever, the last thing in the world you would want to be worried about is having gumption. You care about survival, and the way you survive is just not doing anything that might make you stand out.
On accounting:
Accounting firms now [in the wake of regulatory requirements under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010] have had to hire so many people that they have had to go way down in the bucket to get all these new employees. The government is asking accountants to be policemen, but the number of people smart enough to be qualified for policing is too low. We shouldn’t be expecting accountants to do the policing. Firms should have the ethical gumption to police themselves: Every company ought to have a long list of things that are beneath it even though they are perfectly legal. Every time you increase the antagonism of the audit by making the auditors the policemen, you increase the tension between the accountants and the clients. More things end up getting hidden, costs go up, everyone ends up worse off.
On the decline of newspapers:
The role that newspapers played in this country has been absolutely remarkable. The Fourth Estate functioned for decades like another, almost better form of government in which many newspapers were run by people of the highest ethical standards and a genuine sense of the public interest. With newspapers dying, I worry about the future of the republic. We don’t know yet what’s going to replace them, but we do already know it’s going to be bad.
On the absurdity of much of the money-management industry:
Back in 2000, venture-capital funds raised $100 billion and put it into Internet startups — $100 billion! They would have been better off taking at least $50 billion of it, putting it into bushel baskets and lighting it on fire with an acetylene torch. That’s the kind of madness you get with fee-driven investment management. Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top. I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’ He said, ‘20%.’ I couldn’t believe it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!’ The investment-management business is insane.
On rapid trading of derivatives and stocks by institutions and individuals:
It’s like the slaughter of the innocents. It makes the people who run Las Vegas seem like good people.
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