Not many people are aware that Charlie Munger, whom Warren Buffett calls his partner, is also the chairman of Daily Journal Corporation. Being Munger, he is equally witty and wise at Daily Journal's annual general meeting (AGM) as he is at Berkshire Hathaway's. Here are his most interesting and insightful words at the gathering.
Favourite investment story
Years ago, 1962, my friend Al Marshall came to me and said, "I want your help in bidding for some oil royalties." They were being put up by auction. I soon realised that under the peculiar rules of an idiot civilisation, the only people who were going to bid for these oil royalties were oil-royalty brokers who were scroungy, dishonourable, cheap bunch of bastards. I realised that none of them would ever bid a fair price. So I said, "We just need to bid high enough to get some of these royalties. You can't possibly fail in an auction where they excluded everybody but kind of shady, difficult, cheap bastards." So we bid for those oil royalties and we financed the thing with a down payment. We each put up a thousand dollars, and for many, many, years, the Mungers were getting $100,000 a year, 50 years later. More than 50 years later. Out of a thousand dollar investment. The problem with that story is that it only happened once. That's true with most good investment stories. You don't get very many. It isn't like that kind of opportunity comes along every day. The trick in life is when you get the one, or two, or three that your fair allotment for a life is that you've got to do something about it.
We take into account a whole lot of factors. It's a multi-factor thing and there's a trade-off between factors, and it's just like a bridge hand. You have to think of a lot of different things at once. There's never going to be a formula that will make you rich just by going through some numerical process. If that were true, every mathematical nerd that gets A's in algebra would be rich. That's not the way it works. You've got to be comfortable thinking about a lot of different things at once, and correctly thinking about a lot of different things at once.
How to reduce errors in investment decision making
Well, there are two things Warren and I have done... Our schedules are not that crowded. We look like academics more than we do like businessmen. So our system has been to sift life for a few opportunities and seize a few of them. And we don't mind long periods in which nothing happens. And Warren is exactly the same way. Warren's sitting on top of an empire, and you go to his schedule sometimes and there's a haircut! "Oh, there's a haircut today." That's what created one of the most successful business records in history. He has a lot of time to think.
And that brings me to the subject of multitasking. All of you people have got very good at multi-tasking, and that would be fine if you were the chief nurse in a hospital, but as an investor, I think you're on the wrong road. Multitasking will not give you the highest quality of thought that man is capable of doing. Juggling two or three balls at once where people come at you on their schedule, not yours, is not an ideal thinking environment. But I do think that the constant search for wisdom, and the constant search for the right kind of temperamental reaction towards opportunity, I think that will never be obsolete. And you can apply that to your personal life, too. Most of you are not going to get five opportunities to marry some wonderful person. Heck, most of you aren't going to get one. You're just going to have to make do with an ordinary result.
How to improve rationality
Well start working at it young and keep doing it until you're as old as I am. That's a very good idea, and it's a lot of fun. Particularly if you're good at it. I can hardly think of anything that's more fun. You don't have to be the Emperor of Japan to get fun out of rationality. If you can avoid a lot of hopeless messes and you can help other people (avoid) a lot of their messes, you can be a very constructive citizen. If you're always rational. Being rational means that you avoid certain things, it's like "I don't want to go where I'm going to die." I don't want to go where the standard result is awful. Where is the standard result awful? Try anger. Try resentment. Try jealousy. Envy. All of these things are just one way tickets to hell. And yet some people just wallow in them. And of course, it's a total disaster for them and everybody around them. Another one that is just awful is self-pity. If you're dying of cancer, don't feel sorry for yourself. Just chin up, and suck it up. Self-pity is not going to improve anything, including (cancer). Self pity is just... forget about it. Get it out of your repertoire.
The auto industry is about as brutally competitive an industry now as I have ever seen it. Everybody knows how to make good cars. Everybody. And they rely on the same suppliers. And the cars last a long time with very little service. And everybody leases them at cheap rents, and has all kind of incentives. It has all of the earmarks of a very commoditised, difficult, super-competitive market. So I don't think the auto industry is going to be a terribly easy place. And it may actually shrink one of these days. In other words, the culture of everybody having three or four cars could actually shrink. And so, I think that the auto industry is not a cinch.
View on unicorn companies like Airbnb, Uber, etc.
Well, my attitude is that I have a circle of competence. And that does not include correctly predicting which new companies in Silicon Valley, or dependent on Silicon Valley, are going to succeed. So I tend to avoid the subject entirely. I've paved my way in other passions. However I will comment on one thing: manipulated finance. As these venture capitalists, who are part of the finance industry, the constructive ones. These are the people who make their living more honourable than the rest of the people in finance because they're actually allocating capital to new businesses. So the venture capitalists are useful members of finance. But they don't escape their share of sin. What they've gotten in the habit of doing is creating these rounds of financing. And each new one is at a higher value. But they just sneak a little clause in saying that nobody who previously bought into the venture gets anything until the new guys are preferred. Well that is sort of like a Ponzi scheme. It's a disgusting, tricky, dishonourable thing to do. Particularly since it's obscured. And of course it's being deliberately obscured. So even our most reputable part of finance has dirty sleazy activities creeping in. Large amounts of easy money cause regrettable human behavior. That's Munger's rule.
Is fundamental investing losing relevance?
I don't think that fundamental value investing will ever be irrelevant because of course to succeed in investing you have to buy things for less than they're worth instead of more than they're worth. You have to be smarter than the market. That will never go out of style. I mean that is like arithmetic it's always going to be with us. Now as far as high-frequency trading, that is a complicated subject. I think that high frequency traders of the world, many of whom are personally admirably and honourable people, I think they have all made contributions to the American economy like a bunch of rats do in a granary. They're just sucking some of the resources out for themselves while contributing nothing to the civilisation.
Well generally I've avoided circumstances which automatically cause people fear... And so I don't seek out fear to get thrills. I don't even seek out the appearance of fear when it's really safe. Generally I'm not a big lover of danger or even the appearance of danger. So that's not my thing. I don't think I've felt much fear for a long time. I've just lived a long time. I had fears when I was younger, but they gradually melted away.
Inequality of wealth
...I think we have a lot of undeserved wealth that causes a lot of envy. And to some extent, well, I think envy is always a bad idea. I think it's also inevitable that we're going to have a lot of it. There's a lot of undeserved wealth in the financial class. In a lot of cases for doing nothing, or being counterproductive. So I think that fixing the obviously undeserved wealth of a lot of people would be a constructive thing. If you take the ordinary investment partnership, not only do they get capital gains on what for anybody else would be ordinary income, but they don't pay any income tax at all. Because it's unrealised appreciation that gradually shifted to the general partner and he can take securities out when he leaves the business and not recognise the gain. They have enormous liquid fortunes being made on paying no taxes at all. Naturally that's resented. It would be resented even more if people understood it. But that's not very complicated to understand. And so, I think by and large, feeling unhappy with inequality...Inequality is the natural outcome of a successful civilisation that is improving for everybody.
It's very bad for all of us that we have this huge overdevelopment of finance. And yet, it's pretty hard to do anything about it... We have a vast gambling culture and people have made it respectable. Instead of betting on horses or prize fights, they bet on the price of securities, or the price of derivatives relating to securities. Of course you can bet on athletic contests. We have a huge amount of legalised gambling. And of course the public market that operates every day with transactions is an ideal casino. And there's a whole bunch of people who want to own the casino and make a lot of money without losing money on inventories or credit risks, or any other irritating parts of business. Just to sit there and have every night gold go higher and higher. Who doesn't want to be croupier at a casino? And very respectable people get drawn into it if they see other people getting rich at it. There's way too much of that in America. And too much of the new wealth has gone to people who either own the casino or they're good at playing others in the casino. And I don't think the exhalation of that group has been good for (the public generally). And I am to some extent a member of that group... and I'm always afraid that I'll be a terrible example for the youth that I think will just want to make a lot of money with soft white hands and not do much for anybody else; I just wanted to be shrewd in buying little pieces of paper. Even if you do that honestly, I don't consider it very much of a life. Just being shrewd about buying little pieces of paper, shrewder than other people, is not an adequate life. It's not a good example to other people. And it's the reason that people like Warren and me (are charitable and are) running businesses. We're not just buying little pieces of paper. So I think that we have something going in our nation that is really very serious and very bad.
...And you'll say, "What difference does it make?" Well, what happens is, as the cyclicality of the gambling with securities and other assets goes on, what happens is the big busts hurt us more than the big booms help us. And we say that when the Great Depression ended and the rise of Adolf Hitler. A lot of people think that Hitler rose because of the great Weimar inflation. But you know Germany recovered pretty well from Weimar inflation... But what really enabled Hitler to rise was the Great Depression. You put it on top of the Weimar inflation the Great Depression and the people were just so demoralised that they were subject to being snookered by a guttersnipe like Adolf Hitler. So I think this stuff is deadly serious in that these crazy booms should be [nipped in the bud]...
Morality and honesty
Well my advice is always so trite. The good behaviour, being dependable, and morality. It makes your life easier. It makes it work better. You don't have to remember your lies, which gets complicated if you keep lying all of the time. In fact, it gets so complicated that you're sure to fall off and you'll be recognised as a liar. So, I think all the old-fashioned morality works. The old-fashioned discipline works. The old-fashioned good behaviour and a little generosity. We all know people who have people come to their funeral just to make sure they're dead. You don't want to be in that crowd. You want to live your life so that some people will actually miss you when you're gone.
ROI on marriage
Well, I think different folks can live in different ways, but I think all the evidence is that marriage is the best practical alternative for most people. And the statistics show it. They live longer. When you measure happiness, physiologically and so forth. Considering how difficult the world is, it's your best chance for most people. And of course it should be valued. That's one of the things I like about the Asian cultures: the Confucian idea that the family is really important. It's a very sound idea. If we ever lost the family values, we'd have one hell of a lousy civilisation.
Source of accomplishment
Well, my family life has been more important to me than wealth or prominence. On the other hand, I hated poverty and obscurity. I tried to get out of them and it has given me some satisfaction that I came a long way from where I've started.
I think most people who've come a long way from where they've started feel pretty good about it. I think most of the people who've finally sat atop of Everest, even though they'll only stay there for 15 seconds... And so, I think that's good. Cicero use to say that 'one way to be happy in old age is to remember a lot of achievements in your past'.
Now some people say that's too damn self-centered and you should be thinking about God or something, but I agree with Cicero. It's okay to live that kind of a life if you're kind of pleased with it when you're old and look back.
This article originally appeared in July 2016.