This is Part 2 of Munger's lecture discussing his Daily Journal business. Read Part 1 here.
Q: Would Daily Journal consider selling itself to a competitor if the offer was right, or is it going to remain an independent company?
Munger: Generally speaking, we like selling to people we like andadmire. Not everybody would fit that category. We're trying to run it so that any intelligent person would want to buy it. My attitude in running the Daily Journal, with its technology thing, is that Google would be out of its mind not to buy it. It's going to take years for them to figure that out, though.
Q: Last year you talked about Belridge Oil and how you made a mistake not buying more when you had the chance. Can you talk about your investment process?
Munger:
In those days, Belridge was a pink-sheet company. It was veryvaluable. It had a huge oil field, it wasn't even leased, they owned everything, they owned the land, they owned the oil field, everything. It had liquidating value way higher than the per share price — maybe three times. It was just an incredible oil field that was going to last a long time, and it had very interesting secondary and tertiary recovery possibilities and they owned the whole field to do whatever they wanted with it. That's rare, too.
Why in the hell did I turn down the second block of shares I was offered? Chalk it up to my head up a place where it shouldn't be. So, that's why I made that decision. It was crazy. So if any of you made any dumb decisions, you should feel very comfortable. You can survive a few. It was a mistake of omission, not comission, but it probably cost me $300 – $400 million. I just tell you that story to make you feel good about whatever investment mischances you've had in your own life. I never found a way of avoiding them all.
Q: Given your accumulated wisdom, what do you know today that you wish you knew when you were first started investing in stocks?
Munger:
Like Warren [Buffett], when I was young I scrambled arounddoing anything that would work, and I could get a tiny little obscure company that was too cheap because they were on the pink-sheets, and all kinds of things. As I got more money, I decided I didn't like all that scratching around. I was thinking about things I didn't want to think about. I wanted to admire the people who were running the business. I wanted to admire the business, think it well-placed, and going to do well. So, I drifted into this, good people, good company field in my old age, and I found it much more comfortable, and my returns haven't gone down that much. It's remarkable.
Q: What would you tell a young man today about what he should be reading on a daily basis?
Munger:
You've got to have a main publication that's using someeditorial discretion because you can't read 500 pages. The Wall Street Journal, with its editing, is a very convenient thing for me, and I'll bet allof you read it, too. Who doesn't read the Wall Street Journal? Raise hands if you don't read it.
(One hand in the room goes up)
Munger: Why don't you read it?
Audience member: It's a publication I haven't picked up yet.
Munger:
What planet do you live on?
Audience Member: I live in Marina Del Ray.
Munger:
Well, that may explain it. (laughter) I regardThe Wall Street Journal as a must-read publication. I don't think it's lost its basicintegrity. I think it's a pretty admirable and useful publication. The editorials I always thought were a little nuts. You know, going way back. They were so right wing and so pure. But, it seems to me that the editorials are saner now.
Q: What architectural challenges did you have for the Munger Graduate Residence Hall at the University of Michigan?
Munger:
That was interesting. The idea of getting a whole lot ofgraduate students from multiple disciplines in one big building, which was exceptionally well-located, close to everything, with exceptional common facilities, and to get a bunch of visiting professors and a bunch of fellows (who were sort of equivalent to the Lowell fellows at Harvard), struck me as a very useful thing to do for Michigan. What was architecturally interesting about it was to get that many people on that irreplaceable site, we had to take the windows out of most of the bedrooms. That was not an automatic sale.
What I did, since I knew it would work, is I mocked-up a model. If it hadn't done that, Michigan never would have accepted it [Munger's $110 million donation for the building]. It just sounded awful. No windows in the bedrooms? About 80% of the bedrooms have no windows. That's how we got so many on the site. It costs a hundred dollars more a month to have a windowed bedroom. I'm capable of learning from a little episode like that. In the architectural profession, that ability is usually lacking. Particularly in a university setting where they're very tradition-bound. But, Michigan was smart: they saw it was right. It's going to be a non-event. Somebody has a fetish about a window in the bedroom, we've got some for fetishists.
Q: What books would you recommend?
Munger:
People like you send me so many books, I don't have time tobuy my own. Man came to dinner last night, a famous money manager. Brought me three books. I will like the books, I guarantee you. I have a torrent of books coming to me free. I'm a charity case. I actually like a lot of the books because the people have figured me out pretty well. So, I'm living in a very favored world and people give me free books. It was not my ambition in life to get into this position, but it happened, and I rather enjoy it.
Of course, I'm very selective, I sometimes skim. Sometimes I read one chapter and I sometimes read the damn thing twice. It's been my experience in life, if you just keep thinking and reading, you don't have to work.
Q: You mentioned recently that you enjoyed Ron Chernow's book on John D. Rockefeller, Sr.
Munger:
Oh, hugely. If any of you haven't read that book, you shouldread it. That's a wonderful biography. [Titan, by Ron Chernow] It shows how high grade that man was as a business partner. He may have tough on competitors, but as a partner, he was one of the most admirable people who have ever lived. And as a philanthropist — you can actually chart what his philanthropy has accomplished — some of the most remarkable things in the whole history of philanthropy.
Let me give one example. In China, they had deaths by the millions every year. Woman tried to have a second child and their bones just wouldn't enable the child to be delivered. So the terrible, horrible deaths all these young women died, millions of them. Rockefeller sent doctors over there and they figured out that in 4,000 years of intense farming, they bleached something out of the soil that these women's bones needed. It was pretty cheap to put back. Lo and behold, he did all kinds of things like that.
Just for small amounts of money, doing huge amounts of good. Look at the people who were financed by the Rockefeller Foundation. Very admirable people, the physicists in the 1930′s and so on. He totally revolutionized medical education in the United States with 50 million dollars. He really revolutionized medical education in the world. If you haven't read that book you ought to read it.
It doesn't deal adequately with his philanthropy. But it deals adequately with the way he handled his partners. He would do things like say, “I know this bothers you and it's risky, but I think we have to do it. I'll put up all the money and if it fails, I'll take the loss. If it works, you can buy me out at my cost, so you'll get the benefit.” When he did that, the other partners, who were also rich old men, would say, “Hell, John, if you feel that strongly about it, I'll put up my share.”
Which is the right way. We had a person do that at Berkshire. The nice Mormon gentleman who sold us the furniture company in Utah [R.C. Willey Home Furnishings]. He wanted to go into Las Vegas and not open on Sunday. Which is not an intuitive decision. He said, “I'm asking you to do something very peculiar for my religion. I'll put up all the money, I'll take all the risk. If it works, you buy it out at my cost, and if it fails, I'll take the loss.”
We weren't like Rockefeller. We took the deal. (laughter) That behavior is so rare, so noble, you shouldn't squelch it.
Q: I'm Jason Zweig from The Wall Street Journal. Thanks for the free ad. If you want I can ask Rupert [Murdoch] if he'd like to reciprocate for the Daily Journal. Late in his life, Ben Graham said that in his opinion there was no reason to imagine that an individual investor who thought appropriately couldn't outperform institutions. Do you think the relative playing field has shifted? Do individuals have a greater or a lesser
advantage today?Munger:
In markets as big as this, some shrewd guy who's willing tosearch out a few places where he has a real advantage will always do well. There's always going to be ways in markets this big for some smart people to figure out something where they'll make money at an unusual rate, just because they're smarter and more diligent. That will never go away.
I don't think there will ever be a universal easy solution where people can do that. The American market is tough now to outperform if you're buying big stocks in big quantities. I think it's a pretty damned efficient market, and I don't say it can't be done, but I just think it's plenty difficult. The evidence is overwhelming that even though there are zillions of people who have tried, the ordinary result is that they don't succeed.
I would hate the job, personally, of investing, say, in positions of a billion dollars each in 200 different stocks in America and outperforming the averages. I would shrink from that with horror. Peter Kaufman said something interesting to me the other day. He runs a very profitable company [Glenair, Inc.] that has very good returns on capital. He said, “You know, if somebody bought my company for three times sales, I wouldn't run it anymore, because I'd have a hard time justifying that price with anything I could do.” He's already rich, why should he do something that difficult? He doesn't have to.
I think that's what happened in America. People know their own business is lousy. They know another business that is way better. But it's not better if you have to pay thirty times earnings for it. It gets so difficult that it doesn't work. I figured this out, but the consultants and investment bankers keep selling the same nostrum that you can save yourself by paying thirty times earnings for the kind of business you wish you had, instead of the one you've got.
Berkshire has been a huge exception. In this year's annual report Warren intends to deal extensively with: Why did it happen at Berkshire? Will it continue? We've reached a size and the record is interesting enough that those are very important questions. If the rest of the world is as smart as I think it is, it will look at this report with great interest.
Part of what we did should be done by others, but it isn't. There are vast institutional pressures on people to do it differently. Will it continue? I think Berkshire's going to continue way better than most people think.
Way better. But there's so much power in what we already have. Part of the reason we have a decent record is that we pick things that are easy. Other people think they're so smart, they can take on things that are really difficult, and that proves to be dangerous.
You have to be very patient, you have to wait until something comes along, which, at the price you're paying, is easy. That's contrary to human nature, just to sit there all day long doing nothing, waiting. It's easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don't feel active, you don't feel useful, so you do something stupid.
You'll find that this year's Berkshire annual report very, very interesting. Three failing businesses together created Berkshire Hathaway. There are about the same number of shares outstanding now as they were then. I can't think of anything like it at this scale. You'd think people would be paying more attention to it than they do. I think it looks so peculiar that they can't handle it.
I read an article once by a famous man. I liked it so well (this was twenty-five years ago) that I sent him whatever I could send him without paying gift tax. I sent him $20,000 dollars and said, “I really liked your article, here's a token of my respect.” He sent the money back. So, I called him and said, “Why are you sending it back to me. I don't care if you give it to your charwoman or the graduate student who works under you. For God sake's, keep the damn money.” Whereby, he took my money and gave it to some graduate student. His basic attitude was, if it was that easy, there must be something wrong with it.
I think that's part of the trouble with Berkshire Hathaway. It looks so damned easy, they think there must be something wrong with it. The people there don't work that hard. They have all these outside interests – Warren's playing bridge twelve hours a week (laughter). They just keep spinning and winning and it just looks too easy. So it's confusing. There must be something wrong with it. (laughter)
Q: What are your thoughts about Elon Musk [CEO of Tesla, SpaceX, SolarCity] and what he's doing?
Munger:
I think Elon Musk is a genius and I don't use that word lightly.I think he's also one of the boldest men that ever came down the pike. Put me down as saying I've always been afraid of the guy whose IQ is 190 and he thinks it's 250. I like to think there's a little of that risk with Elon. He is a certified genius.
Q: What daily habits would you recommend practicing?
Munger:
I have never succeeded very much in anything in which I wasnot very interested. If you can't somehow find yourself very interested in something, I don't think you'll succeed very much, even if you're fairly smart. I think that having this deep interest in something is part of the game. If your only interest is Chinese calligraphy I think that's what you're going to have to do. I don't see how you can succeed in astrophysics if you're only interested in calligraphy.
Q: If you were to start another Berkshire, in what form or structure would establish this. A partnership or a Ccorp?
Munger:
That's a very intelligent question. Berkshire happened byaccident. Having a lot of marketable securities inside a corporation with 35% taxes on every gain: No investment vehicle chooses that. It's insane. We just stumbled into it. Now we made it work, but it's a huge disadvantage. It just shows that odd things can happen. The bumble bee shouldn't have been able to fly as well as it did, but it did.
We bought a lot of things that we just held, including a whole lot of private companies, so no capital gains taxes there. No dividend taxes. And, buying so many marketable securities that we just sat on. Not that we don't pay a lot of taxes, but we have a lot of capital gains taxes that are accrued but not paid on the balance sheet.
We made it work, but is it an intelligent system? No, it's insane. The correct system is to have a partnership. That is such an easy question, I'm surprised you asked it. Maybe you're promoting private partnerships and you knew what my answer would be. (laughter)
Q: Can you tell us about your method?
Munger:
Let me show you how my system works. Floated into myaccount yesterday, some old retirement IRA or something. I got a call: there's 120 thousand lying here, what do you want to do with it? Something I had forgotten about it. You know what I said, the great investor? “Give me your number and I'll call you back.” I wanted to invest this money in U.S. Securities. I couldn't think of a no brainer security in my whole brain. I have plenty of things I can do that are okay, but I don't have a big no-brainer.
I think it's hard on the big securities, now. Take Costco (COST). Is Costco worth 25 times earnings? I think: Yes. Am I ready to sell any Costco? No. Would I buy more Costco at 25X earnings? I'm probably wrong, but I'd certainly rather buy Costco at 25X earnings than 90% of the other stocks. But I'm so spoiled it's hard for me to buy anything at 25X earnings.
There's no rule I can't have crochets [crochet: a highly eccentric or individual opinion o preference, perhaps akin to ‘heuristic' - PD]. I don't have to be totally rational. Don't w all do that? We probably should, as a matter of fact. Certainly a crochet that says this i too hard for me, I'm not going to try to understand it. That's a very useful crotchet.
Q: You mentioned the academic and financial illiteracy in the U.S. There seems to be a reluctance to begin teaching these principals in the education system. What are the possible solutions?
Munger:
I think if you expect totally rationality either in humans orhuman institutions, you're expecting what's not going to happen. What is a little surprising is how stupid academia could be. The capital assets pricing mode is taught as gospel.
I could understand teaching the Bible as Gospel if you're a Christian, but why is the capital asset pricing model taught as if it were a principle of physics? To teach that stuff and have students actually work out problems, the way they would in algebra. Of course it's twaddle. There's a lot of silliness in economics.
Take a simple case. Japan, a modern nation, tried every Keynesian and monetary trick. They print money like crazy. You can't find a pothole in Japan on the side of a mountain, they've got so much stimulus. They had 25 years of stasis. Every economist in the world would have said that's impossible. They have all these tricks we taught them, they're playing our tricks, and they're befuddled. They're trying to solve their problem within this little narrow construct that somebody taught them.
What happened was that Japan rose as an export powerhouse. Right behind them were a bunch of people who were starving in subsistence agriculture and crowded them out of their own market. Think it's fun for Japan to compete with Korea? And China? Of course it got harder in Japan. But of course, the economists can't figure it out. They're looking only at Economics 101. If you're a prosperous businessman and some tough competitor opens across the street, is that good for you? It's not very complicated, you just have to keep an open mind and examine all the possibilities.
Q: What do you think is a pragmatic number of companies to own in a portfolio?
Munger:
I don't think there's any one answer to that. It all depends.Obviously if you run an index fund and are scraping money off the top, there's no limit to what you can own. That is a pretty good business. They deserve the success they've had because they outperform people who use the conventional methods.
I talked to a very smart money manager not long ago. I ordinarily don't talk to money managers. I met with this guy because he agrees with me on practically everything, so he must be very smart. (laughter) He told me that he indexes the U.S. equities and he hires managers to work everywhere else. He regards the big time U.S. market as so tough that he's better off just indexing it. He finds more inefficient markets in other parts of the world. I think that's a very intelligent response.
Q: Have you had any thoughts on the recent troubles at Tesco (TESO)?
Munger:
Tesco owned the world for a long time. It looked inevitable.Berkshire bought some. I think Lou Simpson (Trades, Portfolio) bought it originally, and Warren bought some more. They had a formula that really worked. Then one day it stopped working so well. Partly it was hubris. They thought they were so smart, they could do something difficult that was fresh and easy, and some other adventures like that they found were way harder.
Then the home market got tougher, just as the Japanese had trouble when behind them rose Japan and Korea. Tesla got in trouble when Aldi came in one side and other people came in on the other. It got tougher. How many big companies stay totally on top forever? Maybe Wrigley's Gum.
Basically, the normal result is what happened to Tesco. Listen, Aldi is a tough competitor. Ruthlessly low cost, limited assortment, all private label. It's terribly efficient. You think Costco's any good for the rest of the grocery stores? And Sam's Club? It's a competitive world out there. Somebody is always starting something. Even for the branded goods makers, who looked so invincible for forty years. The natural course of competition is that it gets tough. It's the people who expect everything to just keep going wonderfully who are nuts.
Q: Can you tell us about your partnership with Warren Buffet?
Munger:
People don't normally get a divorce after they've been togetherfor this long. We've adjusted to it. (laughter) If we were going to get a divorce we would have done it earlier. I think the honest answer is pretty modest on my part. Einstein needed somebody to talk to. (laughter) As good as he was, needed a talking foil. I've occasionally helped in some other ways, but, basically, you would not want to sit home alone by yourself making the decisions. If Einstein couldn't do it, I don't think you should try it.
Audience member: Einstein had his wife, who was a physicist.
Munger:
She was not very good.
Q: What do you think of Obamacare?
Munger:
I thought you were going to ask a hard question. All you wantto know is have we unraveled the mysteries of Obamacare. I can't do that. If you're an old rich man you can say impolitic things. If I were the benevolent despot of the United States, I would have single payer medicine that people were able to opt out of and buy their own forms of private care, either from places like Kaiser or from individual doctors. I think we're at a big competitive disadvantage to other countries that don't have this big cost built into their manufacturing. And, I think that paying for medicine per item for all the old people causes a lot of unnecessary treatment. It wastes a lot of money and hastens a lot of death in this country. The medical interventions that are made purely for money are a national disgrace.
Now I've practically offended everybody. Brings out the absolute worst in me. I basically think the existing system is crazy.
Q: Do you think the increases in the standard of living that we've seen in this country for most people are likely to continue?
Munger:
I think that it gets harder — just as Japan has troubles being asprosperous as it was against these powerful neighbors with these big populations getting more prosperous and eating Japan's lunch. If you have a system where a lot of people prospered in manufacturing, and you get free trade in rising countries like China, Vietnam, Mexico, and so forth, of course it's going to be harder for the people who had high-paying union manufacturing jobs under the old system.
It's in the nature of things that some people are going up and some people are going down, and it's the nature of politicians to identify anybody who is going down and try to make them feel terribly abused, and to profit personally by exploiting the angst. But there's some angst where the best solution is just to suck it up and cope. In other words, I don't think you can run a country that eliminates up and down distributional changes between groups. I think that's the flux of life.
What are we going to do about it? We live in one world. China comes up. The rise of China has not been good for American unionized textile workers. Now, China can't even make textiles; that's going to Vietnam. That kind of flux is just is natural, and the productivity comes from the fact that people suffer all the creative destruction of capitalism. So they don't like the damn flux when it happens to catch them. But the flux in total is making the whole boat go up, and the fact that the boat never goes up with every group going up exactly the same all the time is inevitable.
Even if the government controlled everything, they'd still rig the system so some people went and others went down. Just put me down as not too worried about a lot of this modern clap trap.
Q: How do you and Warren balance the need for simplicity with the need to fully understand these complex ideas?
Munger:
The interesting thing about Berkshire is that the results areprodigious and the people who are getting the results aren't prodigies. How did non-prodigies get prodigious results? This is a very interesting question that I hope we deal with in the annual report. The answer is: You've got a little better methods. One thing is absolutely essential: You know the edge of your own competency. That really helps and substitutes for a lot of IQ points. You know what you know and what you don't know, and you work it. I've had that concept down. You learn what to avoid.
One of my habits is, I get the no-brainers off my desk immediately. Otherwise it gets cluttered. Some people just pile up the desk and then get totally dysfunctional. I hardly know another human being in the world who's better at this than Jerry Salzman [Daily Journal CEO]. He would have been unable to do what he's done in life without that one trick. He makes a decision, maybe it'll be wrong, but his batting average is very high and the time span is approximately zero. That is just a huge trick to master.
The other thing we do if the problem is really hard and important, we rag it. You keep working at it and going back to it and so forth. You have a lot of time to do that because of all the things you avoid that other people do. We just have a few tricks, and they work so well, but they're not copied so much.
Some of you will get imprisoned. I would hate to be in a place where I had to pretend to believe all the things I don't believe in order to handle my daily work and discussions. I just described the working lives of practically everybody. But not Warren, not Charlie. Sure, there are a few subjects we'd consider taboo, but mostly we can approach reality the way it is. If you work for some big company there are catechisms, there are all kinds of behaviors that are forbidden. If you're in academia there are all kinds of things constraining you.
Q: I went through One Santa Fe today [a new real estate development close to the Daily Journal HQ], and I'm curious about if you might turn this into a development site .
Munger:
We already developed all the property we own. I think webought these parcels fairly cheaply and we built these very nice, efficient buildings, and we have more than we need. Our business is shrinking. The last thing we're thinking about is developing. If you'd like to rent what we have, contact Gerry after the meeting. (laughter)
Q: I'm interested in your thoughts about how you think about Berkshire's intrinsic value relative to its book value?
Munger:
I think Warren's ideas are pretty coherent and pretty right forBerkshire. I've got no disagreement with Warren on that. At a certain price, of course, we'd buy. But as long as we're doing as well as we are, we don't mind buying other things. We don't mind all these bolt-on acquisitions we have. If you ask me how much Berkshire's going to be able to spend intelligently, in just its utility business over the next fifteen years, it's a perfectly enormous amount of money. The chance we won't have a good return on that business is about zero. I think two years from now we will be the biggest utility company in the United States.
We'll deal with our assets at least as well as most people, probably better. We'll have huge opportunities. I like it. The fact that in one state, when we were young and poor, we could find things that paid 12%, and now we may have to make utility investments at 9% or 10%, probably with float that cost us nothing, that's okay. We're slowing down a little. (laughter) We've very favored to have these opportunities when interest rates are approximately zero. The idea to create more power and transmission and so on and get a guaranteed return on the investment is quite a favorable one to have.
Q: How did the advances in technology affect the natural course of competition?
Munger:
Berkshire, of course, has consciously avoided rapidtechnological obsolescence. We own a railroad, we own a bunch of utilities, we own big insurance companies. Obsolescence is what's happened to the Daily Journal. We had a gold mine here for years. The advance sheets that lawyers need were published six weeks after the decisions were made. We had a big printing press. We could publish those daily, and the lawyers all had to subscribe, and we raised the subscription prices every year, substantially. It was wonderful. We looked like geniuses. Then, the technology changed. Now the lawyers get their stuff over the internet. It's way worse, and that's just the way the world is. So we don't like these technological changes. But at Berkshire we have tried to avoid them as much as we can.
Even where we look highly technical, like in carbide cutting tools [Iscar], we're one of the leaders in the whole world, and it's complicated. It's a good business, and I don't mind the technological complexity where we totally dominate, or pretty close to it. We don't solve the problem of technological obsolescence, we avoid it. I've failed you here at the Daily Journal. I'm sorry.
And, of course, Berkshire's failed in a lot of places. There are all kinds of things that happened to us. We couldn't fix the textile companies in New England. Our jewelry stores are not going to set any records: there are too many jewelry stores, it's just too tough. We haven't found some miracle exemption from the laws of nature. We have ducked a lot of the problems other people have willingly taken on.
Warren said, “We have not learned to jump over seven-foot fences. We found a way to step over little mud puddles and seize chunks of gold on the other side.” You see, there aren't enough mud puddles with gold on the other side, but there have been just enough for us. We work at it.
Q: Why did you feel comfortable grabbing Wells Fargo (ticker: WFC) in the depths of the downturn?
Munger:
It was too cheap and we had the money. As a matter of fact, webought it within one day of the bottom tick, so that was remarkable. You can say I was a little lucky on that. But, it wasn't hard to realize that something was cheap.
Q: You're going to have a hard time convincing us that you failed at Daily Journal.
Munger:
That's an interesting story. We bought Daily Journal for 2million 7. We took the 2 million 7 back about three or four years later. Everything that's here now is profit. In that sense it's a good record, but it's a not record like Berkshire. It's pretty good for a failing business. (laughter)
