Notes for Wesco Financial Annual Meeting

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May 10, 2007
Charlie Munger presided over the annual meeting of Wesco Financial (WSC), 80% owned by Berkshire Hathaway (BRK-A). Wesco has a property and casualty business, reinsures banks, has a furniture rental business, and a steel business. In addition, it has an investment portfolio that includes Procter & Gamble (PG), Coca-Cola (KO), American Express (AXP), fixed-income, and cash.

Mr. Munger began the meeting by saying that he didn't set out in life to become the assistant leader of a cult. There were approximately seven hundred people in attendance. After the formalities of running the meeting, he began his talk, followed by questions and answers. He spoke on why Warren Buffett was so unusually successful. His first reason was mental aptitude. Buffett is smart. He has been interested in investing since he was ten years old. Munger called Buffett a learning machine. He said that the work was concentrated in one mind and that investment committees usually do not come up with great ideas because there are too many people involved. Another reason was that psychologically speaking, investing is positive reinforcement. The more good outcomes, the more one wants to excel at a subject.

Munger also spoke of bright people with streaks of "nuttiness". He gave Mozart as an example. Mozart was a brilliant composer but did nutty things like spend all of his money. He said it is fun to be rational and fun to be rightly trusted by others. Berkshire Hathaway was run with trust. They did not need layers of bureaucracy and oversight.

When speaking of the Middle East, he remembered an old saying. He said that people in the Middle East had Irish Alzheimer's. That is when a person forgets everything but their grudges.

Then came the Q & A. The first question came from Whitney Tilson. Tilson asked Munger to elaborate on the three things that he said he came into new and beat the locals. Munger replied that real estate development was one, investing the other, and would not divulge the third. The second question was from Patrick Wolf, the World Chess Champion. Mr. Wolf comes to Berkshire Hathaway annual meetings and plays six games of chess at once, blind-folded!

Another person asked why they had invested in the Korean steel company, Posco, when commodities were the antithesis of what Berkshire invested in. He replied that Posco is probably the best steel maker in the world and that China was buying its goods. He said that any commodities company is attractive at a price.

Another question about a portfolio company was about a bad decision USG had made. Mr. Munger made a long pause and said that he was trying to decide whether to dodge the question or tell the truth. He decided to tell the truth and say that management's decision was a foolish thing to do but someone apparently had gone to business school.

The hot topic of global warming was raised. Mr. Munger thinks it's not as big a deal as everyone says it is. He says that it is very difficult to change the path that we are on and we have no influence over emerging countries. He went on to say that global warming changes take place over a very long period of time and used as an example one hundred years. He said that we can adjust over long periods of time. If Florida is flooded because it is a low elevation, people will have time to move.

The question of Berkshire paying a cash dividend was asked. Munger said that it is not going to happen. He said that the "cult" members would not allow that. He did say that it could happen with Wesco. Wesco is sitting on $1.2 billion in cash and has not made any acquisitions in awhile. He said that there is no comparison between Berkshire and Wesco and that Berkshire was definitely the more superior company.

The last interesting question asked was why they had bought a railroad when they had eschewed investments of that nature. Munger replied that they used to not like them because they needed large amounts of capital, had tough unions, and stiff competition from the trucking business. He said that their paradigm had shifted and that they were two years too late in making this investment. He used an old quote and said that man is too old too soon and too smart too late. Now the railroad industry has a competitive advantage by double-stacking freight. With all of the imports from China, the U.S. has a huge amount of freight being sent across the county. Munger said that Bill Gates made an investment in a Canadian rail company and that it turned out to be quite profitable. He joked that maybe Bill Gates should be managing Berkshire.

Munger was quite patient with the questions from the audience and tried to answer most of them. There were many people from as far away as India and China who asked questions. Sometimes it did degenerate into college kids asking for career advice and people asking the most asinine questions.

This is my third Wesco meeting. Munger is definitely different than Buffett. Munger's philanthropic goals are very different. He has given much more to charity over the years as a percentage of his net worth. He also has spent more over time. I am told that he has an enormous yacht in Los Angeles. Buffett would probably never make such an ostentatious investment. Munger is also very conservative and has said that he is a Republican. Though they are quite different, the ying and yang of the relationship has turned out two great publicly traded companies.