Not a transcript, just detailed notes. Wisdom is Munger's; errors are mine. Part One is here.
Q: What’s one thing that you are excited about in the next year, professionally and personally?
Munger: That’s spoken like a true groupie. Basically, I lead a very favored life. I’ve got wonderful associates. I’ve had problems that my abilities were able to solve. Working on a problem and lacking the ability to solve it is unpleasant. Luckily, I have selected very easy problems all my life, and I have a reasonable batting average.
I feel very thankful that I’m alive and that I’ve been so favored. It’s very easy to get discouraged by what’s wrong and forget what’s right. There are a whole lot of developments that I really don’t like.
I don’t like the vast growth of legalized gambling, including the legalized gambling run by Wall Street in the form of derivatives trading and so on. It’s bad for the country.
I think one legal drug is enough. I don’t think society is going to be better with two or three or four legal drugs. If I look back in my own life, 95% of the people have handled liquor responsibly. It may even have been a slight plus in their lives. The other 5% have created enough misery to counterbalance all the felicity of the others. As I look back, at least one person in twenty has ended in total alcoholism and half of them died young and half of them recovered. It was a lot of damage.
I also don’t like the increasing tendency of governments to pay off fraud. If I were running the world I wouldn’t pay off anything that could be easily faked. It’s so bad for people to learn to lie to get money from the government -- just to have everybody hire somebody on a contingent fee to say his back hurts or his life adjustment is bad because of a psychiatric difficulty. I find this appalling. What kind of nut cases running our government would create a fraud like this? It’s crazy – you’re teaching people to be crooks, you’re paying people to be crooks.
On the other hand, if you look back over 100 years, it’s just fabulous what’s been solved and how much better off the average person is. I was recently at Harvard for a little bash, and Harvard really thinks they’re about to create pancreatic cells from stem cells. Considering the prevalence of diabetes, that would be a considerable stunt. Some of that stuff is coming. Just take the quality of the cars we all drive. Think of what clever engineering it is, how much the safety has been improved, etc. A lot is done right.
I have this grandson who is at UCSB in computer science. I’ve had a whole bunch of the science and engineering students around my dinner table over the years. It makes you feel good about your country. Now, there are a lot of the people at the bottom of the pit around UCSB living in Isla Vista, but they weren’t invited. Basically, if you want to have an orgy, I want you to have it somewhere else.
On balance, I’m not as optimistic as Warren [Buffett]. I don’t see how anybody could be more optimistic that Warren. He has this real faith in the long term. I’m not quite so enthusiastic, but he’s right that there’s a lot good that’s happening.
If you take what China has done from what China was, there’s been no achievement on this scale in the entire history of the world. They’ve done a lot of things right at which we have failed, and we shouldn’t be looking down our noses at them. Imagine taking an economy from subsistence agriculture to what they have done at these enormous rates of growth, and doing it not by borrowing from the rich world – which is what we did in the United States – they did it by saving the money. They were poor, and they were saving 45% of their income. They financed themselves and they’re lending to us. We seem to have reasonable peace with China and are getting along. That’s very important. All the trade helps.
Mr. Picketty [Capital] is a little daft. Put me down has hoping the Pickettys don’t marry into my family. It isn’t that some of his numbers aren’t correct, but he just doesn’t interpret them correctly. Of course if a place as big as China gets really good at manufacturing it’s going to reduce some union jobs in the rest of the world in every trade. But they have a right to succeed. The rest of us can be mature enough to adjust instead of bitching about the fact that the world is occasionally a little tougher than we would have chosen. Of course there are going to be parts of the economy that do better or worse over a twenty- or forty-year period. It’s not some malevolent outcome. It’s a huge change, and in terms of world equality it’s enormously improved. To sit in a very rich country with a 36-hour week and complain about the fact that all the other people are coming up just doesn’t strike me as a very mature or noble way to behave.
Q: What is the Daily Journal (ticker: DJCO) doing about pricing and other competitive issues?
Munger: The market is competitive and the outcome is not certain. I believe our product is better. I believe our business methods will be better. I don’t think all the customers we want will be wise enough to choose us. It’s struggle forever. There’s no easy bonanza ahead. Anybody who thinks that our use of the surplus cash -- which has caused such remarkable results -- is a permanent occurrence, that this is a mini-Berkshire Hathaway starting again headed by a Chairman who is ninety years old, is living in fantasy land. We made some very shrewd investments and we did it once every forty years. I’m ninety. That shouldn’t give you a lot of optimism. (laughter)
The opportunities were remarkable. They were the type that come along very rarely and they happened to coincide with a time when we were the only undertaker in a town with the plague. Two plus two gave us this chunk of money. If worse comes to worse, the shareholders are not going to go to zero like the shareholders of General Motors did. We may actually pull this thing off, but it isn’t a bit easy.
In the whole history of Berkshire Hathaway (ticker: BRK-A), I can only think of one new business that we started by ourselves at headquarters, and that was the reinsurance department. Now, that is a huge business, and it’s made an enormous amount of money. Berkshire Hathaway, for all its glorious achievement, started one new business. Everything else we bought. On the other hand, you don’t need a whole lot of achievements; you just need a few.
That’s one place where we’re different from everybody else. Imagine somebody who thinks he ought to be paid big sums for telling people they ought to divide their business into 200 individual pieces. There are grown-ups who think they ought to be paid for giving that advice. It’s weird. There is more dementia about finance than there is about sex. It’s a hard subject to be rational about.
Q: What do you think about tax inversions and how they should be addressed?
Munger: Take the one that we’re in headlines about at Berkshire. Tim Horton’s (ticker: THI) is bigger than Burger King (ticker: BKW). We merge it and the bigger company with the most income gets the headquarters, and it’s Canada, which is practically part of the United States. Anyone who thinks this is a great tragedy or great injustice is stark raving mad. Berkshire’s taxes go up a lot. But once the press goes off on something that’s complicated they go berserk.
Generally speaking, in a world of free trade, where corporations are mobile, you pay a big penalty for trying to have a corporate tax system where your taxes are way higher than the taxes in the rest of the world. If I were running the world I would have low corporate taxes, and get at the yearning for equality some other way, like consumption taxes. I don’t care if somebody makes a lot of money and holds it like a miser. Most people have a vast propensity to spend, helped by spouses and children.
If you take the places in the world where the citizens have done the best – Singapore, low tax rate, Hong Kong, low tax rate – you’re fighting against reality with a lot of left-wing envy. I think envy is destructive. I try to drive it out of my own system, and I’m pretty good at it, too. I wish my fellow citizens were less consumed by it, particularly the politicians. I don’t think our problems are caused by inequality, although I do think it’s a mistake to let a lot of people get rich out of legalized gambling, although they call themselves money managers and derivatives traders and so on. If I were running the world, I would whittle that class down by about 90%. It would take me a week to write the laws. It would totally change the real estate market in New York.
Another thing: if the rest of the world weren’t so stupid and bureaucratic, we wouldn’t be rich, and you [the people in the room] wouldn’t be rich either. This room is full of people whose comfort has come from the stupidity of other people. The same people, when they see the stupidity acting counter-productively, want to keep all the benefits and have the stupidity go away. You’re asking too much. The truth of the matter is, if you stay rational yourself, the stupidity of the world helps you. As long as they don’t blunder into World War or something – there are limits.
Q: How do you combat envy?
Munger: Well, you just don’t care if somebody else does better. It’s one of the deadly sins out of which you can never have any fun. It’s a total loser: bad for the country and bad for you. The Jews were right to put those things in the Old Testament: don’t envy thy neighbor’s donkey, his wife…they kept laying it on because they knew it was important even for a bunch of herdsmen. They were right. It’s a pernicious thing. I see in professional firms, where everybody is overpaid by 150%, and some guy gets $10,000 more than somebody else in one year, and the guy who doesn’t get it goes berserk. Is this rational, when you’re overpaid by 150% and somebody gets 1/3 of 1% more? But it happens.
Q: Given your investments in big money center banks, what do you think of the big fines the government is extracting from them?
Munger: Two parts. Part one was their terrible, abusive behavior as mortgage lenders. It was like deliberately building a bridge they knew was going to collapse and kill people. It was morality on that scale. The people who did it thought they were perfect. As Maimodides once said, “Every man is straight in his own eyes.” They did these terrible things and thought they were nobly serving capitalism and ought to be paid even more than they were. That was very, very regrettable.
I think if behavior is bad enough, as it was at [Enron's accounting firm] Arthur Anderson, even though the individual members of Arthur Anderson were very unfairly treated, I think you have to have some failure. The way it has worked out, very few individuals have been punished for ghastly behavior, and their companies have paid penalties that are very substantial. Whether that’s exactly right is a very interesting question.
Mortgage lending became a dirty way to make money. You take people that can’t handle credit and try to make very high returns by abusing and encouraging their stupidity – that’s not the way I want to make money in banking. You should try to make money by selling people things that are good for the customer. You’ll never see Berkshire buy a gambling casino. Even though it’s profitable and legal we’re just not going to go there. There ought to be a big standard in corporate America of things that are perfectly legal but we don’t do because they are beneath us. The standard that prevails is, "How low can we make our ethos and still not get in trouble? We don’t want our competitor to be making money in some way that we are left out of." That’s a huge mistake.
By the way, has it hurt Charlie Munger to have these ideas? Do I need more money gotten in some scroungy way? [DJCO Board Member] Peter Kaufman says something very smart: “If all these crooks and promoters knew how much money there was in being honest, there’d be more people who did it.”
Take Berkshire. There have been eight large portfolio reinsurance transactions of over a billion dollars in the history of the world. We’ve done all eight of them. That’s because people trust us. They think we’ll do what we say thirty years ahead. There’s money in being trusted. It’s such a simple idea, and yet everybody rushes into every scummy activity that seems to work.
Our politicians want to solve their financial problems by bringing in legalized gambling. In Cass Lake, MN, they have an Indian Casino. When I was young there was no pawn shop in Cass Lake. Now there are five. All these people on pensions, they’ve got one chair and one television set, and they go in and lose 100% every month of everything they have above heating money.
Or the advertisements on television: imagine teaching ordinary people the way to get ahead in life is to trade securities actively on a daily basis. Is that an honest product? It’s a legal product, but is it honorable? Would you want your son-in-law to do it? Well, maybe some of them are already doing it…it’s a big crowd.
Q: What about succession planning at the Daily Journal?
Munger: When I came out to California, there was this playboy and he spent all his time drinking heavily and chasing movie stars. In 1950 he had ten million dollars that he got by being part of a crooked pool of some kind in the 1920s and everybody else when to jail and he came out here and chased all these starlets and drank all this booze. His banker called him in and said that he was very nervous about his behavior. He told his banker, “Let me tell you something: my municipal bonds don’t drink.”
The Daily Journal has a lot of assets that aren’t going away just because the people leave. We’re not stupid and we’re not taking the shareholders to zero. At the present time, people like you have bid out stock up to a price where I wouldn't pay it myself. I don’t do anything about it. I don’t sell because it’s not my nature. I say to myself, well, if you have groupies, you’re going to get this crazy behavior. And – you might even be right. You won’t be right if the software business doesn't work out very well. But I don’t think there are that many Daily Journal shareholders in the whole room. This is a different crowd of people. That’s all right – I like you all because you remind me of myself. Who doesn't like his own image starring back at him? (laughter).
Question: The major banks have trillions of dollars in derivative contracts. What do you think about this – the size and the counterparty risk?
Munger: If you intelligently trade derivatives it’s like a license to steal, so you can understand why they all want to do it. Now, it’s very hard to control yourself when life is that easy, and banks have a way of getting into terrible trouble, and I think a lot of them will get carried away by excess. What’s the big plus of having everybody gamble with everybody else? Now you can say that it’s something that will always be with us because of the psychological nature of human beings, but I lived in a world with low gambling for decades when I was younger and I liked it better. I think it was better for the country. It’s like having thousands of professional poker players. What good are they doing for anybody?
If I were running a major bank I would have less blowup risk, and I would use different methods of determining risk. I would not be in the derivative business at all because I would regard it as beneath me. I like the banks when they get to be the trusted partner of business and extend credit to people who deserve credit. That’s the most noble activity there ever was. I like it when the banks help somebody to buy a car or a washing machine or a truck and they give him an installment contract. Bank of America (ticker: BAC) pioneered all that stuff way early and it was a noble addition to the business activities of the world. But do I like this crazy borrowing on credit cards to finance vacations and so on? I know Germany seems to avoid it and they’re doing fine. I think we slept with the devil when we encouraged this ballooning readiness to consume. It’s a disease to max out every credit card. When I was young the banks didn’t encourage it. Of course, they didn’t make as much money, either.
We owned a bank at Berkshire for over ten years [Illinois National Bank & Trust AKA Rockford Bank]. Our bad debt losses were zero. Our returns on capital were higher than most banks. We never worried for one second, and for anyone who deserved credit, we were glad to accommodate them at fair prices. You don’t have to go crazy because you are in banking, but a lot of people do.
Q: What are your thoughts on BYD [Build Your Dreams, the Chinese battery & automotive company -- ticker: BYDDY -- an investment of both Berkshire and Munger's Asian fund]?
Munger: BYD is getting widely recognized as being in some kind of a sweet spot in a world that’s going to have to go to way more electric cars, buses, and taxis, particularly in China. In Beijing, where the average longevity is foreshortened by ten years by air that’s so bad that children are gasping for breath, they have to stop burning gasoline. So far they just have given contracts to big employers who make ordinary automobiles. That can’t last. China is recognizing that when you start killing people in large numbers you have to change behavior. BYD is the only Chinese company that has worked on electrical cars.
The evidence is that the iron phosphate solution BYD has to the lithium battery fire problem is a very safe one. It’s counter-intuitive, because it’s heavy. The people who tried to be light were out of their minds. Imagine Boeing [ticker: BA], to save the weight of two suitcases, going to a lithium battery that was very difficult to control. I’m not an engineer but I would have been smart enough to avoid that one. Even engineers go crazy. The customers want the last two pounds, says the sales department. But the last two pounds are the ones that finally kill you. So I think BYD is in a privileged position and I think it’s likely to be intelligent in adapting to its opportunities.
Q: What do you think of the monetary expansion?
Munger: When you’re as old as I am, you have seen a lot of inflation. I remember buying ice cream cones and hamburgers for a nickel. On the other hand, after inflation the country has done wonderfully. A lot of the people who were the Jeremiahs of that age basically have been proven wrong; the country could stand as much inflation as it got.
On the other hand, I’m not as optimistic as Paul Krugman, whom I always read because he’s the smartest leftist I’ve ever read and he uses the King’s English very well. If Germany had not debauched its currency in response to the reparations following World War I, I don’t think we would have had Hitler. We wouldn't have had the holocaust. We would have avoided a lot. Flirting around with the debauch of the currency of an advanced civilization on which the whole world depends for its reserve currency, I think we ought to be pretty conservative and not just assume we can print all we want forever, whatever amounts our politicians think is convenient. I was way more afraid than Paul Krugman, but so far he’s been proven more right than a lot of his critics.
Q. What do you think of Fannie Mae and Freddie Mac?
Munger: I have a peculiar attitude for a Republican. I think Fannie Mae and Freddie Mac, when they don’t go crazy making lousy loans in response to the demands of politicians, are serving the country pretty well, the way the system is now configured. The fact that we came into it by accident doesn’t mean that it isn’t a pretty good solution. Considering the crisis we had and the risks we faced, everybody behaved pretty well and the result is not awful.
Last time we loosened standards because everybody else was. The politicians hated them, and they couldn’t stand that everybody else was making money on the subprime loans. This was envy and it was stupid. There is nothing wrong with keeping your head when all about you are losing theirs -- Kipling was right. Why couldn’t Fannie Mae say, we extend credit to people who deserve credit? Well, it’s not egalitarian enough – we want to shovel money at the people who were deprived. The trouble with that is the whole system blows up. What looks like hard-headedness is really soft-headedness. The whole world is better when you don’t reduce engineering standards in finance. We skipped a total disaster by a hair’s breadth. Partly because both Democrats and Republican administrations, both Congress and the President, made decisions that were pretty much exactly right and did it under terms of terrible pressure. I’m a big fan of the people who took us through the crisis. I’m not a big fan of the people who caused the crisis. Some of them deserve to be in the lowest circle of Hell – not that I have any power to put them there.
Q: But what about when the government stripped away the profits of these enterprises?
Munger: They were private corporations with a little bit of government image and they were insolvent at the time. I don’t think it was unjust. They had behaved terribly. If somebody asks you to do something that’s bad enough, you can give up your damn job rather than do it. Fannie Mae did not have to cave. It was run by people who were cavers by nature. They were just looking for a place to sell out for personal advantage. That’s what they did in life.
We want more people who say, “You’re my boss, and if that’s what you want to do, you’ll have to get a different errand boy. I’m not going to do it.” There ought to be way more of that. Elihu Root, probably the greatest cabinet officer we ever had, said one of my favorite comments: No man is fit to hold public office who isn’t perfectly willing to leave it at any time. Of course, he was the most famous lawyer in the world so he could immediately leave to success, whereas the other politicians, if they left, were nothing. The country would be better off if we had more people like Elihu Root making the decisions.
Q: What are you going to do with the technology companies at Daily Journal? Is there some thought to integrate the three brands?
Munger: We’re going to integrate them as fast as reasonably practical. We’ve already started. Exactly what the timetable will be I can’t tell you. One of them, ISD, was a very low risk transaction because they had contracts in place that would give us back most of our money. The other [New Dawn Technologies] was a real gamble: we basically paid $15MM-$16MM for a company with a net worth of about zero. We did that on a venture capital basis. I feel better about it now than when we did it. I've had an uneasy moment or two between then and now but now I really like the way it’s working out. I like the people, I like the ethos, I like the people who are gone (I mean I like them being gone), and I’m glad we did it. I think I know more about it than our accountants do.
Q. How much investment risk did you take personally once you had made enough money to live well?
Munger: Most of the Munger money – I don’t count the Daily Journal, it’s just a little asterisk (laughter) -- is in Berkshire Hathaway, Costco (ticker: COST), and an Asian fund. Now, you could go to the rest of finance, they think they know how to handle money, and they’d say it’s totally unthinkable, Munger doesn’t know what the hell he’s doing. Doesn’t fit our models. But I’m right and they’re wrong.
If you’re shrewd enough to choose well, three holdings – any one of which would support your family in perpetuity -- is enough security. What difference does it make if somebody else in some year goes up 10% and you go down 5%, when you’ve got 1000 times more than you need anyway? The people who make these crazy decisions don’t actually have envy: what they have is clients who will fire them if they don’t get the same results as everybody else. That is a crazy system. Everybody gets on the same merry-go-round. I never had any interest. As I sit here, all my securities are making new highs every day. Am I doing it wrong?
