Charlie Munger Daily Journal 2016 Meeting, Part 2

This is Part 2 of Charlie Munger (Trades, Portfolio)'s 2016 Daily Journal shareholder meeting notes. Read Part 1 here.

Question: What has given you the greatest sense of accomplishment?

Answer: Well, my family life has been more important to me than wealth or prominence.On the other hand, I hated poverty and obscurity. (laughter) 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 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 ok to live that kind of a life if you're kind of pleased with it when you're old and look back.

Question: If you had any advice to give to a younger version of yourself, what would itbe?

Answer: Well my advice is always so trite. The good behavior, being dependable, andmorality. 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 recognized as a liar. So, I think all the old fashioned morality works. The old fashioned discipline works. The old fashioned good behavior and a little generosity.

We all know people who have people come to their funeral just to make sure they're dead. (laughter) 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.

I think Kiplings's ‘if', is a great poetry. Kiplings doesn't exist in the modern college anymore. It wasn't politically correct. So I think Kiplings's “if” is great poetry and it's great advice. “If you can keep your head when all about you are losing theirs”. What's wrong with that? And the quote, “Be a Man my son!” Why don't you want to be a man? You want to be some idiot child all your life? Some angry twit? There's so many of them already. There's so much to be gained by never being an angry twit. In fact I think anger is just…If you want to be philosophical, this political situation we all face now, of course it's disgraceful, a lot of these people. I mean, it's bad that a leading civilization has candidates for a high office many of them like those we were talking about. And they're

not all in one party. You don't want to get angry. After all, politicians have been politicians for a long, long, time. And, you want to operate constructively? Vote constructively.

Anger. There's so much anger in politics right now. So much automatic hatred. How could any of us really know whether the United States will be better 50 years from now because we vote Republican or vote Democrat in the next election? Who can tell what the exact mix is between compassion and something else?

All of those things were in the old behavior rules. By the way, the Muslim behavior rules read a lot like the Old Testament. Which of course they copied. They claim they came directly from God, but really they stole them from the Jews.

Question: What is the relationship between oil prices and economic growth?

Answer: I think it's obvious that if oil had been a little cheaper and easier, the growthwould have been greater than mankind had. In that sense, if oil gets very expensive and we still need it desperately, it will make life harder, and so there is that correlation between oil prices and economic growth.

On the other hand, some very peculiar things happen. When you take Exxon and Chevron and so forth. What's happened to make those things good investments over the long term, is the damn price of oil went up faster than their production went down. Now name me another business where you get richer and richer where your production of real units, keep going down, down, down. So, not everybody would have predictedthat in advance including most of the economists. It's a complicated subject…

And there's another trick to it. People who really have a lot of free energy, like the people of the middle east? They have very dysfunctional economies. They're (like) a bunch of rich people spending their capital and not knowing how to do anything that anybody else wants to buy. Maybe in that sense, having a tougher hand has been good for us.

My answer to your question reminds me of what my old Harvard Law professor who use to say to me, “Charlie, let me know what your problem is and I'll try and make it harder for you.” I'm afraid that's what I've done for you.

Question: How do you understand a new business or new industry that you are trying to get into where the dynamics are different? How do you get deep insights into the specific domain?

Answer: The answer is barely. I just barely have enough cognitive ability to do what I do.And that's because the world promoted me to the place where I'm stressed. And if you're lucky, that will happen to you. That's where you want to end up is stressed. You want to have your full powers called for. And believe you me, I've had that happen to me allmy life. I've just barely been able to think through the right answer time after time after time. And sometimes I've failed.

Question: Last year, you had some very pointed comments concerning Valeant, and Iwant to know, do you have…

Answer: It's caused me nothing but trouble.

Question: Do you have any update regarding Valeant? Do you have any areas whereyou have similar concerns?

Answer: It probably wasn't wise for me to inject myself, I have no dog in that hunt. I haveno interest in the pharmaceutical business. I have no interest in Valeant. It's just that you people have come so far…(laughter)…to tell you amusing stories about life and make comments about current affairs. And Valeant was such an extreme example of misbehavior.

It ended up with one of the Valeant shareholders saying that Warren Buffett (Trades, Portfolio) was a sinner because he owned Coca-Cola. I drew retaliation to Warren. By the way, that's a good place, if you're anybody that's mad at me today, why (not get) mad at Warren? He can handle it, he's a very philosophical man.

It is true that these crazy false values, and these crazy excess, is, it's bad morals and it's bad policy. It's bad for the Nation. It's just bad, bad, bad. And there's a lot of it. And of course there's a lot of it is in American Finance… The truth of the matter is that Elizabeth Warren would not agree with me on many subjects and I wouldn't agree with her on many subjects, but she is basically right when she says that American finance is out of control and has too much evil and folly. And it isn't good for the rest of us. Both Elizabeth Warren and Bernie Sanders, not two of my favorite people on earth, are absolutely right on that subject. And the extent that you all see it. You all see what all goes on in finance with the craziness…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.

What happened was, you look back to say Edwardian England, or a little before. And maybe 300 people owned half the land in England and they had nothing to do. What did they do? They went into the clubs of London and they sat around the card tables and they played (card games) for high stakes. And that's what human nature does when people have a lot of leisure and so on.

Fade in, fade out, and multiply the wealth per capita of the world by 30 or so and now we got all kinds of people who are like the Lords of England who had all that time to sit around and play cards against one another and enjoy thrills and games of gambling.

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 derivates relating to securities. Of course you can bet on athletic contests. We have a huge amount of legalized 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 I hate to agree with Elizabeth Warren on this subject, but she's right. I don't see a way of stopping it except with some big legislation changes.

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 depressionended 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. What they did is they destroyed the currency. They just issued a new currency. It's really interesting. They said, (‘oh people who got rid of their old mortgages we'll replace them with new mortgages and they'll owe us the new currency back.') 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 demoralized 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)… People like Alan Greenspan, he's an amiable man but he was an idiot! (laughter)

You do not make the head of the Federal Reserve, the governor of all banking, somebody whose hero is Ayn Rand! Who believed in no government at all! It's a very unlikely place to look for correct decision making. And it's probably not the kind of decision making that we observe. I think he's an honest and amiable man, but of course he didn't see reality the way that it was. A lot of people think that if an ax murder happens in the free market that it has to be all right because free markets are all right. A lot of those people are in my party by the way.

Question: Is the Automobile Industry meaningfully different today than it was (10) yearsago? Does GM make sense in the Berkshire portfolio?

Answer: The second one is easy. General Motors is in our Berkshire portfolio becauseone of our young men likes it. And Warren lets the young men do as they please. Warren, when he was a young man, didn't want any old man telling him what to do. So he delivers that kind of freedom to his young men.

I haven't got the faintest idea of why that young man likes GM. It is true that it's statistically cheap and it may be affected by the federal government in the end. So it may be a very good investment. But 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 commoditized, 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. If I were investing in the auto industry, I'd want some place that I thought was way the hell better competitor than the others, and that's hard to find.

Question: For most of the oil market's history there's been some entity enforcingproduction controls. But today Saudi Arabia (operates) more as a base load producer than controlling OPEC's production. Would you suspect that this will result in protracted negative impact on the economics of all those related to oil production? Or is the way to bet that some entity will eventually re-emerge for production control.

Answer: I would not have predicted that oil would be at its present price. In fact, if youforced me to bet, I would have bet that what has happened wouldn't have happened. But it did. I think that it's generally true that with these commodities you can get periods of extreme high prices, like we had in iron ore, and extreme low prices, like we now have with iron ore. So I think that commodities do strange things both up and down in terms of prices. And of course they have macroeconomic consequences. And huge consequences if you're in Australia having these commodities going way down is terrible. If you're in the tar sands area of Canada having oil prices go down to where they are now…I don't even know how economic it is to produce tar sands oil at $30 per barrel. My guess is that it's not very attractive. And it may not work at all. You're in a weird period.

But I think it's the nature of the human condition that with free markets in stuff like iron ore and oil, you're going to have weird periods high prices and weird periods of low prices.

I've never been able to predict accurately, or make money predicting accurately those swings. We've tended to get into good businesses and then take the bumps as they fall.

Question:

Would you please recommend some books that you've enjoyed lately?

Answer:

Question: Regarding philanthropic work, what inspired you and what results do you lookfor?

Answer: Well, I never wanted to tackle problems like world peace. I read enoughbiographies. Carnegi thought he was so smart and so rich, so he thought that he'd use his money to create world peace…I watched Carnegie try to do it and I decided that if he couldn't do it, then I'm going to leave it alone. So I don't take up those big subjects.

I like to create dormitories, science teaching facilities, stuff like that. It's a pretty modest activity, but it's interesting to me, and it's easy to do them better than most people do them. I have no feeling that I have any advantage about bringing about world peace, but I am pretty good at dormitories. So I do what I'm good at, and I suggest that all of you do the same thing.

Question:

Mr. Buffett has stated that he believes that income inequality is an issue that needs to be addressed. With Senator Sanders, he has built his campaign around this issues. And with so many from my generation starting to “feel the Bern”, how would you address this issue?

Answer:

Well, that's a very good question because it's…we've had Piketty and then Sanders. My attitude is that both Sanders and Piketty are a little nuts. People who really were passionate about egality and wanted to bring it about by government action, gave us things like the Soviet Union, with all the death and agony and the poverty they have now in spite of (having egality). And Communist China, they got egality, and think of the unnecessary deaths. North Korea?

I'm suspicious for all of this passion for egality that has such bad examples. On the other hand, if you want to look at what non-egality brings us. Let's just take Communist China. Communist China had egality, meaning that three fourths of their people were dirt poor, subsistence level poor. But they had the advantage of being equal. They were all struggling to get enough to eat. And of course when they adopted private property and more property rights, and so on, what they got was living standards that had advanced by a factor of 10 or so more quickly than anyone ever had. But of course they had a lot more inequality. You have all of these rich Chinese. I think it's been a very good bargain for the Chinese to have.

In other words, I don't think Bernie Sanders understands this at all. He doesn't want to understand it. He has a religion. He's had it for 30 years. He's a Johnny one note. It doesn't matter. As an intellectual he's a disgrace. I think that we'd all be glad to have him marry into the family, but as a thinker he's…pretty bad. Now I don't think he's any worse than some of our Republicans, but at least they're crazy in a different way.

But the egality has one effect in a democracy, which Aristotle comments on, people will cheerfully tolerate considerable differences of outcome if they seem deserved. Nobody minds the fact that Tiger Woods has a big income because he's the best golfer who's ever lived. Or you find somebody who invents something wonderful, or a surgeon who's way better than other surgeons, etc , etc. But differences in outcomes that are perceived as undeserved tend to disrupt democracy. That's why Aristotle commented on it in one of his most well known observations.

And of course who is getting the undeserved money in America now? Good question. It is not Bill Gates (Trades, Portfolio), it is not the people who create the new companies… We don't resent their success.

I think we have a lot of underserved 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 unrealized appreciation that gradually shifted to the general partner and he can take securities out when he leaves the business and not recognize 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 civilization that is improving for everybody.

Most of these guys (wealthy individuals) are not that interested in politics. People like to talk about the terrible influence of the rich on politics. But when you're rich, you realize how little influence the rich really have.

I think that these people who are raging about inequality, like Picketty and Sanders are wrong. But I think that the people who say that the undeserved wealth deserves some attention, I think they're right. I think a huge source of the undeserved wealth is coming from the old finance.

Question:

You mentioned Wells Fargo earlier and its culture and the reason that youbought it back in the 80's. Daily Journal Corporation owns U.S. Bank as well. You also own Bank of America and its culture is a little different. And I'm curious if the decision to buy Bank of America was driven by its low price or if you also see the compounding element.

Answer:

Question: I'm pretty excited about the prospect of self-driving cars over the next 10-20years. It seems like the technology is moving very quickly. As a Berkshire shareholder I'm worried about the implications about the entire auto insurance if accidents, hopefully, become a thing of the past. That's good for civilization, bad for the auto insurance business. I would love to hear your thoughts on that.

Answer: Well you're right. If all the cars run around without drivers, it will be bad forGeico. And I don't think it's going to happen very quickly. In fact I think it's going to be quite slow. But in the auto industry…the first thing that people did when they got new wealth was (buy) more cars. I think that even if we don't get self-driving cars, that culture may be waning. Not so much in the third world, but in places like America.

Question: Could you publish a personal book list of the books in your library?

Answer: I don't want to be a book recommender. (laughter) It would be quite timeconsuming. So I'm afraid you'll have to (ask another question).

Question: A lot of people here have the ability to do well, but they don't have theopportunity to meet the right people. Ronald Burkle credits you with give him credibility when he was starting to acquire grocery stores at age 30. Who was your mutual acquaintance and how was Ron Burkle able to meet you in the early 1980s.

Answer: In those days, we (Berkshire Hathaway) had a lot of declining businesses andone of them was trading stamps. And our last big trading stamp customer was the company that Ron Burkle's father controlled. And that's where I met Ron Burkle. It was an attempt to preserve that customer. The last customer we had. And in due course I failed. Ron Burkle on the other hand left that occasion and did nothing but succeed. So maybe you should ask him.

Question: What's your view on the Unicorn companies like Airbnb, Uber, etc. Do youthink those companies have such high valuations can ever go public?

Answer: Well, my attitude is that I have a circle of competence. And that does not includecorrectly 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 honorable 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, dishonorable 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.

Question:

Apparently the environment that we invest in today is very different from whenyou started. With high frequency trading, momentum trading, and all of that, do you think that fundamental value investing is losing relevance?

Answer:

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 honorable people, I think they have all made contributions to the American economy like a bunch of rats do in a granary. (laughter) They're just sucking some of the resources out for themselves while contributing nothing to the civilization.

Question: Do you have a specific approach to spending quality time with your family?

Answer: Well, I don't think I want to (promote) myself as some wonderful example offamily life. I did the best I could…

Question: Do you think that Coach Nick Saben shares qualities with Sam Walton?

Answer: I don't know anything about Coaching. I'm better at Ballet.

Question: Could you name a few people in history that you admire?

Answer: Well of course there's a lot of historical people that I admire. One of theadvantages of being a reader is that you can consort with some of the best people who have ever lived. So that's what I do with a lot of my time. But I admire a lot of people, take surgeons who get way the hell better than other surgeons…or take some actor who gets to be the best actor in the world, and moves and entertains a lot of people. And there are a lot of people who are constructive, intelligence, generous and improve the world for the rest of us. And there are a lot of people who are good examples. And I spent some time, because he was on the Costco board for a long time, with Dan Evans who was Senator and Governor in the state of Washington. Generally admirable, sensible, high-grade, politician. There's so few politicians like Dan Evans.

But when you do find a Dan Evans you really admire him and like him. And I think there will always be admirable people. That's what we all want to be. We all want to be admirable. What you want to be is the kind of people, other people name in their will to raise their children if they die unexpectedly. When a lot of people are doing that,you'll know you're doing something right. People are very shrewd about guessing who will be good at raising their children.

Question:

When you were an attorney, you sold your most important client an hour aday. And I'm guessing that you spent that time reading and thinking, or did you do some other activity for an hour.

Answer:

Question: Question about fear. I was once given the advice that it's really important toconquer fear. Could you speak to your relationship with fear and whether you've conquered it.

Answer: Well generally I've avoided circumstances which automatically cause peoplefear. My son Philip is in the audience. When he was young, he had a saying, he would say, “If at first you don't succeed, well, so much for hang gliding.” (laughter) 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.

Question: Question about Coke. Sweetened beverages are on the decline. DoesBerkshire's ownership give Coke some leeway about addressing the declining nature of their business?

Answer: Well, that's an easy one. Coke for many decades, the basic product, full sugarCoke, grew every year. It was like the inevitable march of time. In recent years, full sugar coke is declining. Now fortunately the Coca-Cola company has amassed distribution infrastructure business in a lot of other products. Coca-Cola as an individual product is declining some, instead of going up the way it always did before. The rest of the businesses are on average rising. So I think Coke is still a pretty strong company and it will be a respectable investment. But it's not like it use to be when it was like shooting fish in a barrel.

I guess that does it.