Timeless Lessons From the 2017 DJCO Meeting – Part III On Integrity, Morality and How to Judge People

The most-asked question this year both during and after the Daily Journal Corp. DJCO meeting, to my recollection, was how Buffett and Munger were so good at judging people. In the post-meeting small group discussion, Munger spent quite some time teaching us the value of integrity and making money in the most righteous way. On this note, I would like to share some thoughts and observations on the aforementioned topic.

First of all, some general observations:

1. The best way to be good at judging people (especially the high caliber ones) is to embrace the admirable qualities such as integrity, generosity and honesty yourself. Once you’ve become an honorable person, you will know one when you see one. The skill of judging people comes with the lifetime long habit of self-improvement.
2. Never judge the success of a person by wealth.
3. Always own a debt of gratitude to the people who introduced to us great partners.
4. The best way to find a great partner is to become one yourself.
5. Buffett and Munger’s theory of life is win-win. He deals with people who trust him and who he trusts.
6. Munger’s favorite type of people are those who are “compulsively generous and compulsively honest.”

Now comes the original Mungerism:

Q: How have you and Mr. Buffet become such fine judges of character, not just someone’s skills and abilities?

A:Â "Well, I think part of it is we look smart because we pick such wonderful people to be our partners and associates, even our employees, and that’s going on right here. Jerry Solomon’s not normal, he looks normal, but he’s a damn freak! Jerry does things that cross two or three disciplines that are almost beyond human, and he’s always been that way.

By the way, he’s another real Midwesterner, he’s come out of a soil back there. We’ve been very lucky to have these wonderful people. I always say the best way to get a good spouse is to deserve one, and the best way to get a good partner is to be a good partner yourself. I think that Warren and I have both been good at that.

For whatever the reason, we had these marvelous partners, and they make us look a lot better than we are. You wouldn’t even be here is Jerry Solomon weren’t here. We did not have a number two choice to run the Daily Journal. By the way, that happens to me all the time. We have an executive search or something and the difference between your number one and number two is like going off a cliff. We need one, but there aren’t three ones to pick, where they’re all good, but one’s a little better."

Here is an interesting story about Li Lu that Munger told us after the meeting:

"General Electric GE was famous for always negotiating down to the wire. Just before they’re at close, they’d have one final twist. Of course it always worked. The other guy was all invested. Everybody feels robbed and cheated and mad, but they get their way. That last final twist.

Li Lu made a couple of venture capitalist investments in the field, and he made this one with this guy. The guy made us a lot of money in a previous deal and we were now going in with him again on another. Very high-grade guy and very smart and so forth. Now we come to the General Electric moment. Li Lu says, 'I have to make one change in this investment.' Sounds just like General Electric, just about to close. I could tell he did it himself. He said,'You know, this is a small amount of money to us. You’ve got your whole net worth in it. I cannot sign this thing if you won’t let me put in a clause saying if it all goes to hell we’ll give you your money back.' That was the change he wanted. You can imagine how likely we were to see the next venture capital investment. Nobody has to tell Li Lu to do that stuff."

This story during the small group discussion is even more fascinating –we are talking about billions of dollars of “could have” profits given up because of morality concerns.

Q: One of the best deals you’ve ever encountered is the one that you closed with a tobacco manufacturer? Could go into a bit more detail?

A: "That was Conwood (note: Today Conwood Sales Co. is called American Snuff Co. and is part of Reynolds American RAI). Yeah. It’s an addictive product. People are totally hooked. They’re the number two person in the market. They all believe in their product, every damn one of them chewed tobacco. The figures were just unbelievable. There was virtually no financial risk. Nothing but money. That cancer’s caused by that tobacco, it is maybe 5% of the cancer you get from cigarettes, but it’s not zero. You definitely are going to kill people with that product that have no reason to die. It’s the best deal we ever saw, we couldn’t lose money doing it and we passed. We didn’t pay up -- Jay Pritzker, who was then head of the trustees or something at the University of Chicago Medical School. Pritzkers are big in Chicago. He just snapped it up so fast, the Pritzkers made two or three billion dollars out of that.

Do we miss the two or three billion we would easily have had? Not an iota. We had a moment’s regret? Not an iota. We were way better off not making a killing out of a product we knew going in was a killing product. Why should we do that? On the other hand, if it was just a marketable security, we wouldn’t feel that the morality of it was ours, but if it’s going to be our subsidiary, we’re going to be paying the people that are advertising the tobacco, that’s just too much for us. We’re not going to do it."

Also during the small group discussion, Munger opined on Sumner Redstone:

"Sumner Redstone was a very peculiar man. Almost nobody’s ever liked him. He’s a very hard driven, tough to deal with and basically almost nobody’s ever liked him, including his wives and his children. He’s just gone through life as an old saying, 'Screw them all except six and save those for pallbearers.' That is the way Sumner Redstone went through life. I think he was into the pallbearers because he lived so long. One thing I view Sumner Redstone all my life as an example of what not to do. He started with some money, and he was very shrewd and hard driven. He saved his life by hanging while the fire was on his hands. He’s a very determined, high IQ maniac, but nobody likes him and nobody ever did. He paid for sex in his old age, cheated him. He’s had one thing after the other. It’s not a life you want to admire. I’ve used Sumner Redstone all my life as an example of what I don’t want to be, but for sheer talent, drive and shrewdness, you would hardly find anybody stronger than Sumner.

He didn’t care if people liked him. I don’t care if 95% don’t like me, but I really need the other 5%."

Q: Ben Franklin talked about morality being the best policy, but then you see the Sumner Redstones and the Carl Icahn (Trades, Portfolio)s and the Trumps doing really well by acting the opposite. How do you reconcile that and still come out with what no doubt is the great answer that it’s wiser to be moral?

A:Â "Well, of course Sumner Redstone ended up with more money than I did, so you can say he’s the success. That’s not the way I look at it. I don’t think it’s just a financial game. I think it’s better to do it the other way."

Lastly, when asked about what he did really well with family, Munger said this:

"Well I had a lot of children, educated them all. I take the results as they fall. What else can you do with a family? Have a lot of very admirable children, some of them are out there today. That’s a huge blessing. What it is that I like about them is that they’re decent, generous people. One of my daughters who was there, she had a friend who was married to a total jerk, bad circumstances, bitter divorce. My daughter just bought her a house. I think she owns the house, but this other family lives in it. I’m glad I have children like that and not like Sumner Redstone."

I will pause here. In my next articles, I will share my notes on a few other topics such as specialization and living a happy life.

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