Charlie Munger (Trades, Portfolio) is an extremely interesting guy. Not just because of his track record at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), but also because of his incisive opinions on a wide variety of subjects. In a 2009 interview with the BBC, Munger took some time to talk about what he sees as the problem with Wall Street: short-termism, ideological blindness and an overly-competitive "locker room" culture.
At the time the interview was conducted (in the depths of the Great Recession), shares of Berkshire had lost around 50% of their value compared to their September 2008 peak just a few weeks prior. This, however, did not phase Munger:
This is the third time that Warren and I have seen our holdings of Berkshire go down, top tick to bottom tick, by 50%. I think its in the nature of long-term shareholding, of the normal vicissitudes in worldly outcomes and markets that the long-term holder has his quoted value of his stock go down by say 50%. In fact you could argue that if you are not willing to react with equanimity to a market price decline of 50% 2-3 times a century, you are not fit to be a common shareholder and you deserve the mediocre result that you are going to get, compared to the people who do have the temperament who can be more philosophical about these market fluctuations.
Ironically, the existence of such fluctuations has contributed mightily to Berkshires market capitalization over the last half-century. So perhaps Munger would prefer it if the public did not follow his advice too closely.
On ideological blindness
It is impossible to tame all of the irrational exuberance and excessive despondency that comes as part of a capitalist economy, but you can tame it. Munger believes in the existence of "wise restraints" that should be imposed on finance in order for the economy to function better. He saw the root of the crisis in the failure of these restraints:
What happened in America is that the people who were making money out of a lack of wise restraints just got more and more power by doing more and more lobbying and making larger and larger political contributions. And being aided by a certain ideological nuttiness that assumed that because free markets worked so well compared to, say, communism, if automatically followed that if there were no laws at all restraining financial conduct the economy would work better and thats not so.
What is often lost on proponents of deregulation is that no market is completely free. The existence of institutions like the stock market and securities law, by definition, imposes certain restrictions upon buyers and sellers. The important thing, as Munger said, is to strike a balance with the correct amount of regulation that satisfies both buyers and sellers, as well as other stakeholders in the market.
On excessive competitiveness
Munger believes Wall Street attracts and rewards people who subscribe to a "locker room" culture. These are:
People who just have to win. And theyre just so competitive that whatever A is doing, they have to do the same or better than A. And of course Warren and I have no such compulsions. They do enormous damage to the rest of us.
The industry-wide drive to obtain results at all costs obviously has negative externalities and creates a tendency to cut legal and regulatory corners. But it also leads to short-term thinking in asset allocators who are judged relative to their peers, which makes the kind of investing Berkshire engages in difficult to do. Its tough to think long term when everyone around you is getting rewarded for meeting quarterly targets.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett: Activist Investors Can Sometimes Be Useful
- Jim Chanos: This Berkshire Hathaway-Backed Health Care Company Is an Insurance Fraud
- Jack Bogle: Keep Your Serious Indexed Money Separate From Your Fun Money
Not a Premium Member of GuruFocus? Sign up for afree 7-day trial here.