The Essential Munger

8/14/2019 The Essential Munger

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The Essential Munger

My trip to the Wesco Annual Meeting is sadly now at a conclusion and Ineed to thank my thoughtful wife for the birthday gift of a lifetime. Ihave literally been on intellectual and sensory overload since landing

Monday morning and at the end of it all I have a satisfied exhaustion. There is simply too much to say for one post and I cannot do theexperience any justice here. Before I get to the meeting itself I willbriefly describe my impressions. I'm a big believer in themes – themesthat succinctly capture an event in clear, concise declarations. That'swhere I will begin as I start at the end.

At the end of his three-hour talk Charlie concluded with a beautifulencapsulation of what it takes to succeed. He called it a "seamless webof deserved trust" which is what is necessary to run any corporation of size. The payoff is huge. Think about it. With trust comes enormous

efficiencies and second and third order positive effects. How doesBerkshire run with such a small headquarters staff? They couldn't do itwithout trust. All networks, no matter what they are require a basictrust to function. Think about your personal web of people. Charliementioned the basic trust required in something as simple as thefamily unit. Think back through the history of man – we formed asgroups and later as tribes which all have this basic requirement. Thinkback to the Berkshire meeting when Charlie mentioned picking theright people as being more important than picking the right business.So true. I had the luxury of being surrounded the entire week withgreat, first-class people from all walks of life and backgrounds. I will

make special mention to Defelice for what I think was two solid days of non-stop talking walking/driving around Pasadena (probably a mutualpent up demand to extrovert all of this thought and philosophy). Let'sface it; you can't do that with just anyone....

Charlie Munger obviously surrounds himself with great people – youcould see it everywhere. Think of the positive second order effects thatthis spawns – a ripple effect of positive results. It can't help but be anyother way. A seamless web of mutual trust...

This leads me naturally to the book – Poor Charlie's Almanac, which set

the tone for this year I think. The book was edited by Peter Kaufmanwho knows Munger as well as anyone and who took the task toassemble the project with the assistance of some great, energetictalent that works in his company (note the ripple effect of Mungersurrounding himself with great people – a cascading of the same in apattern of trust and mutual respect). Kaufman used a very Munger-likemulti-disciplinary approach with lots of inversion to design the entireconstruct – I think that Munger would have done it exactly the same



way. So he essentially designed the book using Munger's ownphilosophy as the design methodology. He and his expert team puteverything into this book and I think that the result is nothing short of breathtaking. The book provides a personal and professional contextfor Munger's speeches and underlying philosophy. It's far more than a

simple compilation of Munger's speeches – when one has a betterunderstanding of the man then one naturally has a betterunderstanding of the all important question of – why. Why thephilosophy and how did he derive it? How does it manifest itself in hisday-to-day affairs? The design of the book was done with painstakingattention to detail in every way. All of this dense, intellectualphilosophy boiled down to the essence in a readable and fun formatthat's hard to put down. Internalize that book and you've got theMunger philosophy. Not only that, but the physical qualities are all of the highest quality – the paper, the binding – everything. It's what youwould expect of something affiliated with Munger....

And what's that Munger philosophy saying today...?

Other than the all-important webs of trust Munger had a lot to say. Iwas writing furiously and still missing a lot so apologies in advance if Igaffed something. Here were my main take-aways in no orderwhatsoever – it's what stuck with me.

- Buffett and Munger have lowered their bar. For investors I think this iseminently important. "We're not waiting for 1974 or 1984 for thatmatter." Why? Munger sees two possible outcomes 1) the "classic bust"

or 2) Japan. My take - If we get Japan then we're looking at years of very low market returns where finding good valuations from theselevels is not going to be so easy. We'll have to muddle through. "I'venever seen in my career where all asset classes are simultaneously sohigh." The chances of finding Coke selling for what it was when Buffettbought just may not happen – yet there are worse things that you cando with your money than put it into Budweiser which is a dominantfranchise selling at a good price. Munger talked a little about things notbeing "a lollapalooza" (I think BUD fits here).... It's just going to bedamn harder for us. So accept the reality....get a grip... and come toterms with it in a rational way. Munger said, "The world is not going to

give you extra return just because you want it. It is far easier to reduceyour wants." My take - We just might get a financial meltdown....thenagain maybe not. Be wary of "inverse speculation" where you'rewaiting for the implosion thinking that you might get things at insanelycheap valuations - it that happens great, but we just may have tomuddle and pick our shots and accept it because that's just the way itis.



- Wal Mart. Charlie Munger loves Wal Mart. Remember his commentabout how romanticizing small-town America may be misplaced? Hethinks Wal Mart does a LOT of good for society. He talked about the 70yr old ladies working in Wal Mart because they WANT to be there andwere happy. He talked about what good it does for society by bringing

value to the customers. I think that at some price – not far from here –that Wal Mart has to be seriously considered by BRK – take a look atthe market cap and the volume and form your own conclusions. Buffettand Munger love the company – it's obviously a dominant franchisethat's not going to be knocked off the hill in my lifetime. I'll be mildlysurprised if given the above commentary on lowering the bar and WalMart's societal impact (a definition of dominance in my book) if theydon't make a move.

- On U.S. decline. "Over the long-term the eclipse rate of greatcivilizations is 100%." Nice lead in. Munger is optimistic on the ability

of our culture to withstand a lot of abuse – but just as you don't abusea good spouse, it's a sin to abuse your country. He calls for a return tothe old values. I took that to mean integrity, hard work, decency,honesty, etc. And of course the punch line – "If we swept away acertain class of people it would be quite desirable." Context isimportant here – because preceding this nice quip was a good lectureon corporate governance etc. I suggest that folks read Diamond's book"Collapse" and then discuss the prospects of China – But Munger thinkswell of Asia.

- He talked a lot about the enterprising spirit and hard work of the

Asian class – note that our grad schools are full of Asian descendents. The Confucian value system has enormous benefit. Samsung engineersare having staff meetings at 11 PM at night – who's going to win?Munger says, "We need them (Asians)." And another classic – "If theMunger children get displaced, that's just too damn bad for theMungers." Obviously the man loves meritocracy. "We don't likecompeting against Chinese manufacturing and it's not just low tech. The amount of talent there is amazing and they've just been held downby ridiculous systems." I think of the Friedman quote, "to be one in amillion in China means there are 1300 just like you." Jim Rogers of course talks a lot about the coming Chinese century.

- On Berkshire. For them to buy back shares the prices would have tobe lower. Take what you will of that but I do not buy the quickconclusion that BRK is not under-valued. It's blatantly obvious to me –they just don't like the thought of share buy-backs for Berkshirebecause it creates a win-lose situation – I think they feel they'd be"Screwing" the shareholders whom they bought from. The competitionto buy entire companies has "gotten ridiculous" but won't stay that



way.

- On Buffett. Take a good hard look at his last 5 or 6 buys – the record is just like the Buffett record of old. But the size of the positions justdoesn't move the needle nearly as much. Take heart – the

Buffett/Munger philosophy of equity investing – of betting big on highprobability events etc. is alive and well. But...."We're willing to endureour misfortune in having so much."

- On insurance. Buffett and Jain do not use the actuarial techniques astaught in the fine schools.... They're useless for what these guys do. Heused the example of - if you don't have a hurricane for a long time thenthe normal way of doing these things is that the probability would godown and you'd lower your premiums... of course this line of thinking isinsane. "It just doesn't work that way."

Reading recommendations. 1) Poor Charlie's Almanac; 2) Read the bestpeople; 3) Fiasco; 4) He's not "reading romance novels and detectivestories" (ha ha)

On Currencies. It's a zero sum game. Someone who devotes their lifeto it might do OK but it's not something he likes. Why do a zero-sumgame when you can instead buy an enterprise, which works on yourbehalf?

On AIG. Talked in glowing terms of Hank Greenberg who was trying todo the right thing for AIG and who they have had good dealings with in

the past. Hank has done a lot of good for insurance.

On Spitzer. Spitzer has done a lot of good. Using the media hasincreased both pressure and speed to get positive results – the changein corporate behavior due to the "public hangings" (I LOVE this sort of phraseology) has had an enormous and positive impact on corporatebehavior in America. It's worked marvelously well in reinsurance. All of the scandals have now resulted in a lot of places cleaning up their act –the result is good. "Not everything is going to hell in a bucket incivilization." But as for hedge funds "I confidently predict morescandals."

Compensation. I liked this example. Think of your typical corporateboardroom. There's a long rectangular table with your authority figuresitting at the end. "There are enormous psychological forces at play." There is the human urge to please authority...there is social proof...there is commitment....there are all sorts of forces at play which resultin ever higher pay.... Pretty fascinating when you think of it that way....Next staff meeting I'm going to plant myself at the head of the table



and start talking numbers!

Conduct Unbecoming. As a military officer I loved this example. Hereferred to his time in the Army Air Corps and the culture of the officerethos. It is essentially a mortal sin to do something which is "conduct

unbecoming an officer." Thinks that corporate America would do well tohave something similar – pointed to IBM where the guy took libertywith his position and filled the email system with all sorts of crap thatwas "unbecoming." There are just some basic things that leadersshould and should not do – it's simple.

Friction Costs. Munger figures that 5% of American GDP is pissed awayin money friction costs of one kind or another. People getting the 5%are a very high percentage of the smart which is probably not thenation's best use – are they going to be attracted to "developing bettersoap at Proctor and Gamble?" asking rhetorically.....

That's going to have to sum it up for now – up at 4:30 am for flighthome on another bankrupt and inefficient American airline with apissed off labor force.... I guess they lack a basic web of trust.

HB

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The Essential Munger