The venerable Charlie Munger is one of my investing heroes. On 15 February 2023, he participated in a 2.5 hour Q&A session during the annual shareholder’s meeting for Daily Journal Corporation (he’s a shareholder and board member of the company). Munger’s already 99, so I count it a blessing for the world that he’s still able to share his thoughts publicly.
Shortly after Munger’s Q&A ended, my friend Thomas Chua posted a transcript and video of the session at his excellent investing website Steady Compounding. The italicised passages between the two horizontal lines below are my favourite pieces of Munger’s wisdom after I went through Thomas’s article.
1) On the worst human behaviour that leads to bad decision-making
Well, what.. If I had to name one factor that dominates human bad decisions, you would be what I call denial. If the truth is unpleasant enough, people kind of, their mind plays tricks on them, and they can, it isn’t really happening. And of course, that causes enormous destruction of business where people go out throwing money into the way they used to do things, even if they know this isn’t gonna work at all well, and the way the world is now having changed.
And if you want an example of how denial was affecting things, take the world of Investment Management. How many managers are going to beat the indexes, all costs considered? I would say, maybe 5%, consistently beat the averages. Everybody else is living in a state of extreme denial. They’re used to charging big fees and so forth, for stuff that isn’t doing their clients any good. It’s a deep moral depravity. If some widow comes to you with $500,000, and you charge her one point a year for, you could put her in the indexes. But you need the one point. So people just charge some widow a considerable fee for worthless advice. And the whole profession is full of that kind of denial. It’s everywhere.
So I had to say, and I always quote Demosthenes. It’s a long time ago, Demosthenes, and that’s 2,000, more than 2,000 years ago. And he said, “What people wish is what they believe.” Think of how much of that goes on. And so of course, it’s hugely important. And you can just see it, I would say the agency costs of money management. There are just so many billions, it’s uncountable. And nobody can face it. Who wants to? To keep your kids in school, you won’t quit, you need the fees, you need the broker fees, you need this and that, so you do what’s good for you and bad for them.
Now, I don’t think Berkshire does that. And I don’t think Guerin and I did it at the Daily Journal. Guerin and I never took a dime of salary or directors fees or anything. If I have business, I talk on my phone or use my car, I don’t charge into the Daily Journal. That’s unheard of. It shouldn’t be unheard of. And it goes on in Berkshire. It goes out in the Daily Journal. But we have an incentive plan now in this Journal Technologies, and it has a million dollars worth of Daily Journal stock. That did not come from the company issuing those shares. I gave those shares to the company to use in compensating the employees. And I learned that trick, so to speak, from BYD, which is one of the securities we hold in our securities portfolio. And BYD at one time in its history, the founder chairman, he didn’t use the company’s stock to reward the executives. He used his own stock, and it was a big reward too. Well last year what happened? BYD last year made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion in a brand new auto business for all practical purposes. It’s incredible what’s happened.
And so there is some of this old fashioned capitalist virtue left in the Daily Journal and there’s some left in Berkshire Hathaway. And there’s some left at BYD. But most places everybody’s trying to take what they need, and just rationalising whether it’s deserved or not.
2) On why leverage can be used wisely
Well, I use a little bit on my way up and so did Warren by the way. The Buffett partnership used leverage regularly, every year of its life. What Warren would do was he would buy a bunch of stocks and then he borrowed and those stocks, he would buy under these… they used to call them event arbitrage, liquidations, mergers, and so forth. And that was not, didn’t go down with the market – that was like an independent banking business and Ben Graham’s name for that type of investment, he called them Jewish treasury bills. And it always amuses me that’s what he would call them but Warren used leverage to buy Jewish treasury bills on the way up and it worked fine for him…
Berkshire has stock in Activision Blizzard. And you can argue whether that’ll go through or not, I don’t know. But but but that’s the Jewish treasury bill. Well, yeah, so we’ve had arbitrage but we sort of stopped doing it because it’s such a crowded place. But here’s a little Berkshire doing it again in Activision Blizzard, and Munger using a little leverage at the Daily Journal Corporation. You could argue I used leverage to buy BYD, you could argue it’s the best thing I’ve ever done for the Daily Journal. I think most people should avoid it but maybe not everybody need play by those rules. I have a friend who says, “The young man knows the rules of the old man knows the exceptions.” He’s lived right? You know.
3) On what went wrong with Jack Ma and Alibaba in China
Well, of course, it was a very interesting thing. Jack Ma was a dominant capitalist in Alibaba. And one day he got up and made a public speech where he basically said the Communist Party is full of malarkey. They don’t know their ass from their elbow. They’re no damn good, and I’m smart. And of course, the Communist Party didn’t really like his speech. And pretty soon he just sort of disappeared from view for months on end. And now he’s out of [Alibaba]. It was pretty stupid, it’s like poking a bear in the nose with a sharp stick. It’s not smart. And Jack Ma got way out of line by popping off the way he did to the Chinese government. And of course, it hurt Alibaba.
But I regard Alibaba as one of the worst mistakes I ever made. In thinking about Alibaba, I got charmed with the idea of their position on the Chinese internet, I didn’t stop to realise it’s still a goddamn retailer. It’s gonna be a competitive business, the internet, it’s not gonna be a cakewalk for everybody.
4) On why Chinese companies provide good value
Well, that’s a very good question, of course. But I would argue that the chances of a big confrontation from China have gone down, not up because of what happened in Ukraine. I think that the Chinese leader is a very smart, practical person. Russia went into Ukraine and it looked like a cakewalk. I don’t think Taiwan looks like such a cakewalk anymore. I think it’s off the table in China for a long, long time. And I think that helps the prospects of investors who invest in China.
And the other thing that helps in terms of the China prospects are that you can buy the best, you can buy better, stronger companies at cheaper valuation in China than you can in the United States. The extra risk can be worth running, given the extra value you get. That’s why we’re in China. It’s not like we prefer being in some foreign country. Of course, I’d rather wait in Los Angeles right next to my house, you know, it’d be more convenient. But I can’t find that many investments, you know, right next to my house.
5) On why the Chinese government is well run
Well, I have more optimism about the leader of the Chinese party than most people do. He’s done a lot right too and, and, you know, he led that big anti corruption drive, he’s done a lot of things right. And I don’t know where this man lives. Where is there a place where the government is perfect in the world, I see zero. Democracies aren’t that brilliantly run either. So it’s natural to have some decisions made by government that don’t work well.
It’s natural to have decisions in each individual life that don’t work very well. We live in a world of sense, sorrow, and misdecisions. That’s, that’s, that’s, that’s what human beings get to cope with in their days of life. So I don’t expect the world to be free of folly and mistakes and so forth. And I just hope I’m invested with people who have more good judgments than bad judgements. I don’t know anybody who’s right all the time.
6) On why cryptocurrencies are a bad idea
Well, I don’t think there are good arguments against my position, I think the people who oppose my position are idiots. So I don’t think there is a rational argument against my position. This is an incredible thing. Naturally, people like to run gambling casinos where other people lose. And the people who invented this crypto crapo, which is my name for it. Sometimes I call it crypto crapo, and sometimes I call it crypto shit.
And it’s just ridiculous anybody would buy this stuff. You can think of hardly nothing on earth that has done more good to the human race than currency, national currencies. They were absolutely required to turn man from a goddamn successful ape into modern, successful humans. And human civilization has enabled all these convenient exchanges. So if somebody says I’m going to create something and sort of replaces the national currency, it’s like saying, I’m going to replace the national air, you know, it’s asinine. It isn’t even slightly stupid – it’s massively stupid. And, of course, it’s very dangerous.
Of course, the governments were totally wrong who permitted it. And of course, I’m not proud of my country for allowing this crap, what I call the crypto shit. It’s worthless. It’s no good. It’s crazy. It’ll do nothing but harm. It’s anti-social to allow it. And the guy who made the correct decision on this is the Chinese leader. The Chinese leader took one look at crypto shit and he says “not in my China.” And boom, oh, well, there isn’t any crypto shit in China. He’s right, we’re wrong. And there is no good argument on the other side. I get canceled by it.
There are a lot of issues you ought to be.. How big should the social safety net be? That’s a place where reasonable minds can disagree. And you should be able to state the case on the other side about as well as the case you believe in. But when you’re dealing with something as awful as crypto shit, it’s just unspeakable. It’s an absolute horror. And I’m ashamed of my country, that so many people believe in this kind of crap, and that the government allows it to exist. It is totally absolutely crazy, stupid gambling, with enormous house odds for the people on the other side, and they cheat. In addition to the cheating and the betting, it’s just crazy. So that is something that there’s only one correct answer for intelligent people. Just totally avoid it. And avoid all the people that are promoting it.
7) On why shorting stocks is miserable
No, I don’t short. I have made three short sales in my entire life. And they’re all more than 30 years ago. And one was a currency and there were two stock trades. The two stock trades, I made a big profit on one, I made a big loss on the other and they cancelled out. And when I ended my currency bet, I made a million dollars, but it was a very irritating way to me. I stopped. It was irritating. They kept asking for more margin. I kept sending over Treasury notes. It was very unpleasant. I made a profit in the end, but I never wanted to do it again.
8) On why the world will become more anti-business
I would say it’ll fluctuate naturally between administrations and so on. But I think basically the culture of the world will become more and more anti-business in the big democracies and I think taxes will go up not down. So I think in the investment world, it’s gonna get harder for everybody. But it’s been almost too easy in the past for the investment class. It’s natural it would have a period of getting harder. I don’t worry about it much because I’m going to be dead. You know, it won’t bother me very much.
9) On the secret to longevity…
Now I’m eating this peanut brittle. That’s what you want to do if you want to live to be 99. I don’t want to advertise my own product, but this is the key to longevity. I have almost no exercise, except when the Army Air Corps made me do exercise. I’ve done almost no exercise on purpose in my life. If I enjoyed an activity like tennis, I would exercise. But for the first 99 years, I’ve gotten by without doing any exercise at all.
10) On finding optimism in difficult circumstances
Well, I step out of my bed these days and sit down, sit down in my wheelchair. So I’m paying some price for old age, but I prefer it to being dead. And whenever I feel sad, maybe in a wheelchair, I think well, you know, Roosevelt ran the whole damn country for 12 years in a wheelchair. So I’m just trying to make this field here so they can last as long as Roosevelt did.
11) On the impact of inflation and interest rates on stocks
Well, there’s no question about the fact that interest rates have gone up. It’s hostile to stock prices. And they should go up and we couldn’t have kept them forever at zero. And I just think it’s just one more damn thing to adapt to. In investment life, there are headwinds and there are tailwinds.
And one of the headwinds is inflation. And I think more inflation over the next 100 years is inevitable, given the nature of democratic politics, politics and democracy. So I think we’ll have more inflation. That’s one of the reasons the Daily Journal owns common stocks instead of government bonds… Trump ran a deficit that was bigger than the Democrats did. All politicians in a democracy tend to be in favour of printing the money and spending it and that will cause some inflation over time. It may avoid a few recessions too so it may not be all bad, but it will do more harm than good, I think from this point forward.
12) On being unable to predict short-term movements
I think I’m pretty good at long run expectations. But I don’t think I’m good at short term wobbles. I don’t know the faintest idea what’s gonna happen short term.
13) On an idea he recently destroyed
Well, the idea that I destroyed, it wasn’t a good idea – it was a bad idea. When the internet came in, I got overcharmed by the people who were leading in online retailing. And I didn’t realise, it’s still retailing, you know. It may be online retailing, but it’s also still retailing and I just, I got a little out of focus. And that had me overestimate the future returns from Alibaba.
14) On the genius of Benjamin Franklin
Well, Ben Franklin was a genius. It was a small country, but remember, he started in absolute poverty. His father made soap out of the carcasses of dead animals which stank. That is a very low place to start from. And he was almost entirely self educated – two or three years of primary school and after that, he had to learn all by himself. Well to rise from that kind of a starting position and by the time he died, he was the best inventor in this country, the best scientists in this country, the best writer in this country, the best diplomat in this country. You know, thing after thing after thing he was the best there was in the whole United States.
He was a very unusual person, and he just got an extremely high IQ and a very kind of pithy way of talking that made him very useful to his fellow citizens. And he kept inventing all these things. Oh, man, imagine inventing the Franklin stove and bifocal glasses and all these things that we use all the time. I’m wearing bifocal glasses, as I’m looking at you. These are Ben Franklin glasses. What the hell kind of a man that just goes through life and his sight gets a little blurred and he invented the goddamn bifocals. And it was just one of his many inventions.
So he was a very, very remarkable person. And, of course, I admire somebody like that. We don’t get very many people like Ben Franklin. He was the best writer in his nation, and also the best scientist, and also the best inventor. When did that ever happen again? Yes, yes. All these other things. Yes. And he played four different musical instruments. And one of which he invented, the glass thing that he rubs his fingers on the glass. They still play it occasionally. But he actually played on four different instruments. He was a very amazing person. The country was lucky to have him.
15) On the importance of delayed gratification
I’m still doing it [referring to delayed gratification]. Now that I’m older, I buy these apartment houses, it gives me something to do. And we’re doing it, we run them the way everybody else runs them. Everybody else is trying to show high income so they can hike distributions. We’re trying to find ways to intelligently spend money to make them better. And of course, our apartments do better than other people do, because the man who runs them does it so well for me, the man or two young men who do it for me. But it’s all deferred gratification. We’re looking for opportunities to defer, other people are looking for ways to enjoy it. It’s a different way of going at life. I get more enjoyment out of my life doing it my way than theirs.
I learned this trick early. And you know, I’ve done that experiment with two marshmallows with little kids. Watch them how they work out in life by now. And the little kids who are good at defering the marshmallows are all also the people that succeed in life. It’s kind of sad that so much is inborn, so to speak. But you can learn to some extent too. I was very lucky. I just naturally took the deferred gratification very early in life. And, of course, it’s helped me ever since.
16) On how a country can achieve growth in GDP per capita over time
Well, what you got to do if you want growing GDP per capita, which is what everybody should want, you’ve got to have most of the property in private hands so that most of the people who are making decisions about our properties to be cared for, own the property in question. That makes the whole system so efficient that GDP per capita grows, in the system where we have easy exchanges due to the currency system and so on. And so that’s the main way of civilization getting rich is having all these exchanges, and having all the property in private hands.
If you like violin lessons, and I need your money, when we make a transaction, we’re gaining on both sides. So of course, GDP grows like crazy when you got a bunch of people who are spending their own money and owning their own businesses and so on.And nobody in the history of the world that I’m aware of has ever gotten from hunter-gathering, to modern civilization, except through a system where most of the property was privately owned and a lot of freedom of exchange.
And, by the way, I just said something that’s perfectly obvious, but isn’t really taught that way in most education. You can take a course on economics in college and not know what I just said. They don’t teach it exactly the same way.
17) On what has surprised him the most about investing
I would say some of the things that surprised me the most was how much dies. The business world is very much like the physical world, where all the animals die in the course of improving all the species, so they can live in niches and so forth. All the animals die and eventually all the species die. That’s the system.
And when I was young, I didn’t realise that that same system applied to what happens with capitalism, to all the businesses. They’re all on their way to dying is the answer, so other things can replace them in lieu. And it causes some remarkable death.
Imagine having Kodak die. It was one of the great trademarks of the world. There was nobody that didn’t use film. They dominated film. They knew more about the chemistry of film than anybody else on Earth. And of course, the whole damn business went to zero. And look at Xerox, which once owned the world. It’s just a pale shrink. It’s nothing compared to what it once was.
So practically everything dies on a big enough time scale. When I was young enough, that was just as obvious then. I didn’t see it for a while, you know, things that looked eternal and been around for a long time, I thought I would like to be that way when I was old. But a lot of them disappeared, practically everything dies in business. None of the eminence lasts forever.
Think of all the great department stores. Think about how long they were the most important thing in their little community. They were way ahead of everybody in furnishing, credit, convenience, and all seasons, you know, convenience, back and forth, use them in banks, elevators, and so forth, multiple floors, it looked like they were eternal. They’re basically all dying, or dead. And so once I understood that better, I think it made me a better investor I think.
18) On the best business people he knows
Well, some of the best people, I would argue that Jim Sinegal at Costco was about as well adapted for the executive career he got. And by the way, he didn’t go to Wharton, he didn’t go to the Harvard Business School. He started work at age 18, in a store and he rose to be CEO of Costco. And in fact, he was a founder, under a man named Sol Price. And I would argue that what he accomplished in his own lifetime was one of the most remarkable things in the whole history of business, in the history of the world. Jim Senegal, in his life – he’s still very much alive. He’s had one business through his whole life, basically. And he just got so damn good at it, there was practically nothing he didn’t understand, large or small. And there aren’t that many Jim Sinegals.
And I’ll tell you somebody else for the job of the kind he has. Greg Able, in a way, is just as good as Sinegal was. Yea he has a genius for the way he handles people and so forth and problems. And I can’t tell you how I admire somebody who has enough sense to kind of run these utilities as though he were the regulator. He’s not trying to pass on the cost because he can do it. He’s trying to, he’s trying to do it the way he’d wanted it done if he were the regulator instead of the executive. Of course, that’s the right way to run the utility. But how many are really well run that way? So there’s some admirable business people out there, and I’ve been lucky to have quite a few of them involved in my life.
The guy who ran TTI was a genius. TTI is a Berkshire subsidiary. At the Daily Journal people are saying how lucky you’d be if we still had our monopoly on, publishing our cases or something, we’d be like TTI. Well, TTI is just a march of triumphs and triumphs. And it was run by a guy, he got fired and created the business. Got fired from a general defence contractor, I forget which one. But he was a terrific guy. And, and he ran the business for us, he wouldn’t let us raise his pay. How many people have the problem with their managers – they won’t allow you to raise their pay?
19) On the best investments he’s made for Berkshire
Well, I would say, I’ve never helped do anything at Berkshire that was as good as BYD. And I only did it once. Our $270,000 investment there is worth about eight billion now, or maybe nine. And that’s a pretty good rate of return. We don’t do it all the time. We do it once in a lifetime.
Now we have had some other successes too, but, but hardly anything like that. We made one better investment. You know what it was? We paid an executive recruiter to get us an employee and he came up with Ajit Jain. The return that Ajit has made us compared to the amount we paid the executive recruiter, that was our best investment at Berkshire. I was very thankful to the executive recruiting firm for getting us Ajit Jain. But again, it only happened once.
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. I have an interest in Activision Blizzard and Costco among the companies mentioned. Holdings are subject to change at any time.