"The one thing that has surprised me all my life is how many people with high IQs do massively stupid things." - Charlie Munger
Not a transcript; just detailed notes. Errors are mine; corrections welcome.
Q: This is the fiftieth year for the Berkshire Hathaway report. You and Warren each wrote a letter that neither had read before. I'd just like your comments on what you thought of Warren's.
Mr. Munger: I think Warren's letter was very, very useful. I particularly liked it where he was criticizing banks. Take the growth of the conglomerate movement which is sort of a chain letter game that people played with financial accounting. The accountants all blessed it. The accountants never should have blessed the conglomerate craze, with constantly buying low quality earnings and making the earnings go up.
It was an evil system and an evil way to make money. It was an evil way to run an accounting profession to bless the outcomes. Nobody else was talking that way. I tend to admire Warren when he gets off on important subjects like that, where he's totally right. The chances that anybody will pay a lot of attention to him in a way that changes anything is, I think, quite small.
For a few of the cognoscenti, like you people, how many of you approve of the way, say, IT&T played the conglomerate game where their accountants blessed their earnings reports? Raise your hand if you thought it was wonderful.
[no hands go up]
The answer is it wasn't wonderful. I liked what Warren did. Nobody else is doing it. What other CEOs are saying that American financiers and their accountants grossly misbehaved for a long time? Nobody. I think it's useful when somebody does that. And he's totally right. It was awful, the fact that everybody went along with it, including the investment managers. It's still happening.
However bad you think it is, somebody actually comes by and does it worse. It wasn't moral the first time and the second outcome is not better. People are enthusiastic about it. I'm holding my nose. That's the only correct response.
Q: What do you think is the least talked about or most misunderstood moat around a business ?
Mr. Munger: Everybody would really like to have a misunderstood moat. You're the greediest fellow that's spoken.
[laughter]
All you want to know is if I have a moat that you can understand that other people don't. A modest wish.
[laughter]
You're going to ask a 91-year-old man how to do it? Reminds me of one of my favorite stories. A young man comes to Mozart and says, "With your help I want to compose symphonies."
Mozart says, "You're too young to be composing symphonies."
He says, "Look, you were doing symphonies when you were 10 years of age. I'm 21."
Mozart says, "Yes, but I wasn't running around asking other people how to do it."
[applause]
Q: What are the customers' problems that Journal Technologies are trying to solve?
Mr. Munger: Every government department needs all kind of automation it doesn't have. It's complicated. The systems interact with other systems. Software is more and more important. It's very difficult.
The governments have their own way of doing businesses that are created by history, local legislation, and so forth. There's nothing simple about it. A company like Microsoft got in a business somewhat similar to ours when they bought Great Plains Software, Inc. They've succeeded with it moderately.
Even Microsoft finds it difficult to do anything but have moderate success when they buy some thoroughly proven software system -- more or less similar to what we're trying to do. There's nothing easy about it. But it's very necessary. It's a huge market. The right idea, of course, is to really serve the customer correctly. Somebody's going to win.
Q: I'm curious whether or not you see any parallels between what's happening today in television and what's happened to the newspaper industry.
Mr. Munger: The newspaper industry, of course, is easy. It had a revolutionary change in technology. The worst single thing was to take the classified ads out of the paper, because that was the total goldmine. I don't think that's fixable.
Our newspapers were impregnable local powerhouses, and very constructive parts of the political system of the country. Of course, they've gradually been enormously weakened. That was not good for the country. It happened by accident. We lost all these local powerhouses that could have total integrity, because they had impregnable financial positions.
Television is different. I've been a little surprised how well the old broadcast networks have survived the new world of the Internet and cable television. I'm not sure I understand the situation well enough to predict what's going to happen over the next 25 years.
Something happened recently, which I watched in China. When the Berkshire Hathaway Annual Report came out, it created a great buzz in China. China is interested. We look Confucian to the Chinese. They like elderly rich men.
[laughter]
We're trying to be wise. That's the Chinese system. There was a great buzz of the Berkshire report all through China. All of a sudden, the buzz stopped.
What happened? One woman in China took $150,000 of her own money and a year of her life and created a documentary film. She ran the thing over the Internet.
It was a film. She got 200 million views. What she did was a long thing about smog, how the people were dying in China, and how Los Angeles fixed its smog problem by taking sulfur out of the air when people burn coal and oil and so on. Terribly well done.
This one woman is changing the policy of China. She isn't on the newspapers. She isn't on the television stations. Nobody had ever heard of her.
One damn documentary. That is a new world. That's a new source of power. I don't know where a world like that is going to end up. I just know it's different. It's important. In this case, it was very constructive.
China has been dead wrong to allow people to die 10 years early in Beijing because the air is so lousy. Immoral and stupid: not a good combination. China's going to fix it. This woman is actually helping, with one film.
The world changes like that so rapidly. It's hard to know who's going to have the power and what's going to happen. That's the way I feel about a lot of the media. I understood it better when the people who had the printing press controlled the newspaper, and the people who had the network allocation controlled the broadcasting.
Frank Murphy [of Murphy Radio, founded 1929] liked it better when broadcasting was all black and white, and there were only three networks. He had a big, strong position. He did not welcome all the new competition.
I do not understand how they get so much information through space at the same time.
You and I grow up in a world where these radio stations interfered with one another. That's why you couldn't have very many channels. Now, one woman can put 200 million hits on a whole damn movie through God knows what. How do the bits not conflict with one another?
[laughter]
It's very complicated. I don't understand it. I understand peanut brittle.
[laughter]
Q: What has surprised you the most about human nature?
Mr. Munger: The one thing that has surprised me all my life is how many people with high IQs do massively stupid things. It happens everywhere. But it is surprising how extreme the stupidity is and how talented the people are who do them. I think the human mind was almost made to malfunction in a lot of different ways. It makes the world a very dangerous place.
The man whom you trust, he's your physician, your doctor, you investment manager, what have you, can go plum crazy. To give you an example:
I'm used to doctors who think a procedure that's good for them is good for you. But in Redding, California, a couple of doctors rose who gave everybody who consulted them open heart surgery. They really convinced themselves that everybody needed open heart surgery. A normal heart was a widow maker. If they replaced it with carbon, nylon, or something, they were way better off.
They did massive amounts of open heart surgery. By the way, their surgical results were wonderful. Nobody survives open heart surgery better than the guy who doesn't need it at all.
[laughter]
I expect the worst in human nature. But they thought they were doing the right thing and really helping the patients. That surprised me.
It seems impossible. How could anybody behave that way? How could it go on for year after year? Hospitals were sending their executives up there to learn how to run their hospitals this way.
[laughter]
They were making money and achieving status and demonstrating skill. But it's so extreme, you think that couldn't happen. If it did happen, you think it would be identified by other people early. It ran on for years. And their bosses were trying to get their other hospitals to have the same results. Amazing.
Q: Were they sued?
Mr. Munger: Of course.
[laughter]
They did take away the doctors' licenses, but nobody went to jail. You'd think they'd go the lowest circle of hell, but they didn't. They lost their licenses.
Q: When might you believe the software industry will catch up with the law profession in the form of reduced billable hours due to the processes and systems?
Mr. Munger: I wouldn't hold your breath.
[laughter]
I do think there is some trend to limit the idea of hiring a lot of young people and have them all go 13 hours and so on, trying to increase the billable hours. That is not just the law profession. The consultants do it. The accountants do it. Lots of people do it.
It's human nature operating. But I do think in law you're seeing the elements of rebellion. Some clients are insisting on different systems. It's gone too far.
Q: In China there are debates about if China should learn Singapore's management style, because this type of management style might work in a tiny place like Singapore, a city-state, but not in a big country like China.
Mr. Munger: What China adopted from Singapore was not its total management system. It adopted its system of an economic management business. It had private ownership of business. Before that, the Chinese government had owned practically everything.
They took part of what Lee Kuan Yew had done in Singapore. China's weird combination of authoritarianism and free enterprise has worked wonders for its economic output. Lee Kuan Yew's example had a lot to do with it. But he didn't think necessarily that was right for a small City State, was right for a whole backward country of a different nation.
Nobody thinks that it's his exact solution, but I do think the anti corruption part of China was right out of Lee Kuan Yew's book. China had a lot of corruption.
China increased its GDP at 8, 9, or 10 percent per annum for decades. They weren't perfect, but it was a lot of achievement from where they started.
What's really interesting is how much influence on this outcome one human being had. He started as a leftist labor leader. It's perfectly amazing. I wish it could happen more often.
[laughter]
Q: What methods would you use to quantify the appropriate amount of debt in an investment, whether it be real estate, private equity, or a public corporation?
Mr. Munger: The appropriate amount of debt varies with the circumstances. I don't have any general rule. Generally speaking, if you're investment is uncertain, say, as running a big complicated enterprise, there's a lot to be said for having a lot of extra wealth and liquidity.
You're a huge social safety net if you're a controller of capitalist power. Do we want them all to be leveraged to the gills so we can buy back the maximum amount of stock? They are big social enterprises that should have reserves of safety.
The idea that they should all leverage themselves to the gills to please a bunch of activists would be like taking all the safety margin out of bridges on the theory we'd save steel. That's a dumb idea.
Q: Could you speak about the growing market share of indexing and the effect that will have on the relationship of shareholders to the companies that they own.
Mr. Munger: It's likely to have a significant effect over time, because now you get a bunch of permanent owners. The people who run the index funds are now, in effect, permanent owners. They can't sell. Yes, of course, they will drift into using more of that power. Will it be used intelligently, the new power? I doubt it.
[laughter]
Q: Can you speak to the general level of market prices today? If you had all your money in a tax deferred account, would you be tempted to increase the level of cash?
Mr. Munger: You're asking me for a position I don't occupy in life.
[laughter]
If you said, "Charlie, how would you practice dentistry if you've been a dentist?" I may not be able to give you as good an answer as I could about something I thought about a lot. I'm content owning virtually 100 percent stocks, but I really think that I own stocks that are better than other people's on average.
Therefore, my decision is easier. What I would have to do if I had to own average stocks like everybody else, I'm not so sure. I've carefully avoided that fate.
[laughter]
I've been able to do it for a lot of decades. Now, the margins are not what they used to be, but an old man is lucky to have any advantage at all.
[laughter]
Q: Do you think companies like Google and Apple have long lasting moats, considering that they are right at the center of technology?
Mr. Munger: I am not an expert on the moats of technology companies. The reason, by and large, I don't own them is because I do not understand whether or not there are moats that will last or not. I do think Google is a very remarkable company. If you put a gun to my head, said, "Charlie, you've got to buy a big technology company," I might choose Google.
They certainly hire brains. They're getting the best brains, I think, of anybody. They're certainly fanatic. They certainly have an entrenched position. Do I understand the value of their moat compared to the value of everybody else's? The answer is no. You're asking the wrong person.
By the way, anybody who does give you the answer is probably full of you know what.
[laughter]
Q: Denmark was recently declared the most happy country in the world. Any thoughts on that?
Mr. Munger: It may be true!
[laughter]
You've got a Nordic nation without a lot of tropical diseases. You've got a big social safety net. It's monoethnic, so they don't have the tensions of different groups making the place hard to govern. They're situated and surrounded by advanced civilizations, so they can live pretty well, whether they invent anything new themselves or not.
It's very favorably located. If you are in a small group with which you closely identify, you don't mind supporting one another more. It's just the way the human mind works. It may well be that if you measure happiness physiologically by time spent smiling, and so forth, then Denmark may well be happier than almost any place else. I suspect it's true. That does not make me want to live in Denmark.
[laughter]
I'll take the world the way it is, where I live. I prefer it.
Q: I’m an engineer. How do we keep engineering undergraduates from running off into finance?
Mr. Munger: The answer to that is, "I don't know." I don't think it's good having all the brains go into finance. Just like it's not good to have so many gambling casinos in disguise in the financial markets. I don't think that the current development is good. If I were running the world as an omnipotent emperor, I would change the laws, so the outcome changed.
I would change the incentives. The chances of anybody paying attention to my ideas about the laws are zero.
Q: At the Westco meeting about twenty years ago, you were asked the question, "What do you consider the most important invention of the twentieth century?" You said, “Air conditioning." You then talked about huge swathes of the United States that really were tropics before air conditioning. What would you say today has been the most significant invention of the last hundred years?
Mr. Munger: It's hard not to say the Internet. We had the good transportation, the airplanes, the trains, the air conditioning, the good pharmaceuticals and so on. Having the Internet, the instant cellphone, the little portable computers, the iPads and so on, that's what made this one woman in China who didn't have any power before change a whole governmental outcome. It's having other dramatic changes, including destructive changes on investments. I would say the Internet is very important. Don't you think everybody feels that way?
Q: Berkshire has put a lot of money behind MidAmerican Energy. How do you see that playing out?
Mr. Munger: Very well.
[laughter]
I think it will work out very well. Again, we're trying to do the right thing by the regulators, the customers, the engineering, the safety, you name it. I think it'll work very well for Berkshire. I think it will work very well for the customers of MidAmerican Energy.
I wish I was that optimistic about everything, as I am about that one. I regard that as almost a no-brainer.
Q: What separated Teledyne’s Henry Singleton from the other people who developed conglomerates, and why did you and Warren respect him?
Mr. Munger: We respect Henry Singleton for a very simple reason: He was a genius. Henry Singleton never took an aptitude test where he didn't score an 800 and leave early.
[laughter]
He was a major mathematical genius, a Putman Fellow. Even when he was an old man, he could play chess blindfolded, at just below the Grand Master level. He had an awesome intellect, well into the top 1/1,000 of one percent.
This was an extreme analytic. Of course, he did create a conglomerate because it was legally allowed at the time. He did it the way everybody else was doing it, he did it better, and he made a lot of money. When they ran out of favor, the stock went way down, he bought it all back for less than it was worth.
Of course, he died a very wealthy man. He was a totally rational human being in things like finance. What I found interesting about Henry Singleton, which has interesting educational implications, is that in watching both Henry and Warren invest and operate at the same time, we had two great windows of opportunity to examine human nature.
Henry was very rational. He was quite similar to Berkshire in some ways. Henry never issued a stock option. He had certain commonalities with Warren that were just logical outcomes.
What was interesting to me was how much smarter Warren was at investing money than Henry. Henry was born a lot smarter, but Warren had thought about investments a lot longer. Warren just ran rings around Henry as an investor even though Henry was a genius, and Warren was a mere almost-genius.
[laughter]
That is my last question because we reached the time when the directors meet, and besides, even for a group of addicts, you've probably had all you can take.
[applause]
