Charlie Munger - February 10, 2016 - Daily Journal annual ... · PDF fileAdam Blum –...

Adam Blum – Daily Journal Corporation 2016 Annual Meeting with Charlie Munger February 10, 2016

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Adam Blum notes from Charlie Munger annual meeting

Notes are presented in order of questions asked. I tried to transcribe as much as possible. Apologies in advance for errors or items I missed. This was my third DJCO meeting to attend and by far the most well-attended.

-Adam

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DJCO Meeting Business “Gerry Salzman [Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Treasurer, Assistant Secretary and Director] has all the titles in the world.”

“I asked Mr. Salzman to attach affidavits to the minutes reflecting all that. Does anyone want to vote personally who hasn’t voted? [Doesn’t look up and without skipping a beat, says] Alright.”

“I never know why people do this. I can’t understand these vote totals. I think Salzman gets more votes than I do because he’s younger [77] and does more work than I do, but he’s hardly a spring chicken.”

“60,000 votes against retaining BDO as auditor. I don’t know why 60,000 people are mad at BDO, but it’s a big firm.”

Munger Intro Monologue: Someone in the crowd: “Will you put the microphone closer?” Munger, pulling the wireless microphone attached to his shirt almost inside his mouth: “Yeah, except it’s on me. I’m wearing it.”


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“Maybe I’ll talk for a minute. What’s interesting about this company is it’s a newspaper historically that relied on a combination of public service notices [for lawyers] and ads which gave it a monopoly to raise subscription fees every year. Like with others, technology changed and classifieds went to hell and lawyers no longer needed to get the info in print. As we sit here it makes about $1mm per year pretax. Can you hear me? This is a very low tech company. Can we switch to a low tech mic?”

“Some of you groupies may remember this [microphone issues] happened once at the Wesco meeting and there again with endless money we were unable to have folks hear us. Amazing with high tech we still get glitches.”

“Anyway, the newspaper was a fine business. It was foolproof. Of course the world changed. Whether it’ll keep going down a little or hold flat, I don’t know. Any of you holding it [DJCO shares] hoping the newspaper comes back, change your rationale.”

“The boom in foreclosure was a boon for us – we were the undertaker in a plague era that allowed us to use our profits to buy securities [Wells Fargo at $8] in the panic.”

“A peculiar response on our part to the print industry’s deterioration, the software business has been slow and expensive, and we have written off everything we spent on it. We now have more software revenues than print, and that business is doing better and better and better, because the product is better than competitors’ [products], and there’s an endless market for software in public agencies. I can hardly imagine any better a market, but it is agony to do business with public agencies and bureaucracies, and big companies shy away. Really big boys find the niche to be such absolute agony, so they tend to stay out. The opposition has more share but worse products. Microsoft bought a small competitor with a market which is half as interesting.”

“The stock [DJCO] may be reasonable if you like a VC business, but for you old time Ben Graham groupies, you’re in for it. You’re in new territory with Daily Journal. I am not saying it won’t work, but if it does, you won’t deserve it.”

Questions: Gentleman begins by giving Charlie the option to answer one of two questions, and Munger replies “What would you like to talk about? No, you’re asking the questions.”

DJCO’s technology business: What Charlie was most excited about for Journal Technologies was winning the contract for Los Angeles courts, which is a crucial milestone, as this is one of the biggest court systems on earth. If they can saturate California with huge success, they will spread elsewhere. “We bought this little nothing of a software company in Utah. Is it in Utah or I don’t know? Turns out they’re very good.” 80-90 employees in Utah and 155 at headquarters and about 150 in traditional newspaper business, so they’ve crossed over into a new business. “It is interesting, because it is a big market, and if we can get entrenched, it will be very sticky. This occurred to us as we suffered all this agony. At least we will be in a position that will be hard to dislodge.”

Hurdles facing Journal Technologies: “The main hurdle is to be a big player in a new niche. It is going very well, but not won.”

IBM investment made by BRK seemingly not going so well: IBM is a lot like Daily Journal, with a traditional business that was sticky, then the world changed, and up came Oracle and Microsoft and others who were formerly not so large. “They have an old business from which cash continues to flow, but they want a new product that is a hit – an automated checklist or some sort of thing [Munger’s way of describing the cloud would be my guess]” – this is very good idea and particularly useful in medicine – it could replace what made IBM great, but Charlie has no opinion. “I am neither a believer nor a disbeliever; it is a mystery. I would say the jury is out. It may work in a mediocre way, it may work big, I just don’t know. The old business is sticky and will die slowly.” BRK having to make big bets is a tough game, as they’re no longer shooting fish in a barrel. “The answer my friend, is blowing in the wind.”

Advice to grandkids: “I was not able to change my children very much. The old Clarence Darrow story of reading the [William Ernest Henley] poem comes to mind, ‘I am the master of my fate, I am the captain of my soul.’ Hell, I can’t even pull an oar with my kids, I am the master of none, and regarding grandkids, hell, thank god they’re someone else’s problem. I’ve served my time.”


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Investment story from younger days: In 1962, Al Marshall [his partner at Wheeler, Munger] asked him to help bid on oil royalties, “and under peculiar rules of stupid civilization, the only bidders were cheap and shady bastards who were insiders to the space who low bid everything, and so we bid a little high to win, and are getting thousands of dollars a year off of a single $1,000. The trouble with that story is it only happened once. The trick in life is when you get to one, two or three great deals, which is your fair allotment, you gotta do something about it.”

“Blue Chip Stamps and Wesco were some of the most screamingly successful investments in the history of mankind, and only five or six transactions carried all the freight - just doing a few things over a long period of time - those nothing companies worked out fairly well out of a few good decisions. You make your money by the waiting, not til next depression, but a fair amount of patience is required followed by pretty aggressive discipline when the time comes. Imagine putting all the foreclosure boom money to work in 1 day on the bottom tick of the market (Wells Fargo stock bought at $8). Sure it was luck, but it wasn’t luck that we had the money ready to deploy and were willing to do so when others were fearful.”

“We were always opportunistic and wanted to buy the best thing conveniently available that we could understand. Early on, we looked a lot at float businesses in the public markets, but nowadays we have so much float it isn’t as useful, and Europe and Japan rates are negative, so we can’t get great returns on the cash that the float gives us. We made so much money off those float businesses it was obscene.”

Software-based businesses: “It has its good spots and bad spots; some are the most profitable businesses ever, and others fail.”

On Journal Technologies: “Nobody’s offered us a high multiple for it, so we haven’t had the opportunity [to sell]. It is a lot of pain now for success later. It is VC that happens to be located in a publicly traded company. If it works, it will evolve into a pretty huge business and only a few will succeed. Little companies we buy are not acquisitions like Berkshire makes. We are not established and not assured of success. We made a VC assault on this part of market and needed momentum from various services and just bought them. We don’t view them as traditional acquisitions, and if you don’t like it, you can dump it [DJCO stock].”

Question about optimal CEO compensation scheme: “We don’t follow anyone else. We do whatever makes sense under the circumstances, and around here we just ask Gerry [Salzman] to do everything and give him an unlimited budget - that’s how we do things here.”

“Get the mic closer to your mouth.” (to a guy whose accent he didn’t understand)

BYD: “BYD has 220,000 employees, so it is a big company now. That too was VC when we went into it, but the company has done amazing things. The founder was the 8th son of peasant and became an engineer with a PhD and borrowed $300k from Bank of China or something and then got into the battery market dominated by big Japanese firms and won patent litigation in Japan. He is a remarkable man doing insane things. BYD is now one of biggest lithium battery makers in world and sold 10k cars last month, more than Tesla. We can only hope the DJCO ‘VC play’ works out half as well as we think BYD will. It is very helpful that people are dying on streets of Beijing and can’t breathe the air - and with those subsidies and all [for clean energy] - do you really want a forklift spewing out carbon monoxide in the middle of your warehouse? It was an accident for Berkshire to do this VC stuff just as it was an accident for DJCO to do VC stuff in software.”

Discount rate to use to value a company in circle of competence: “We use both the risk-free rate and opportunity cost. If you happen to have a rich uncle who’ll sell you a business for 10% of what it’s worth, opportunity cost is your friend. Most people don’t pay enough attention to opportunity cost. American university faculty members and other important people hardly know their ass from a plate of squash.” [note, I am not sure what he said, but it sounded like “plate of squash”]

“We don’t use numeric formulas and take into account many factors, like a bridge hand. There never will be a formula that will make you rich. If that were true, every person who got A’s in algebra would be rich.”

“We don’t want any lousy businesses. We used to make money buying them and wringing money out, but it is painful, especially when you’re rich. Sometimes it happens by accident, and then it is like dealing with your relatives and you hope to get rid of them but can’t really.”


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Mental models used to make investing easier: “There’s no way to make investing easy. Anyone who finds it easy, you’re living in an illusion. This is an intelligent group of people [at the meeting]. We collect them. It is hard for all of us. The constant quest for wisdom and a temperamental reaction to opportunity will never be obsolete.”

How to reduce errors in life: “Warren and I and [DJCO director J.P.] Guerin do two things. One, we spend a lot of time thinking. Our schedules are not crowded, and we look like academics more than businessmen. It is a soft life waiting for a few opportunities, and we seize them and are ok with waiting for a while and nothing happens. Warren is sitting on an empire, and all he has on his schedule is a haircut this week. He has plenty of time to think. Luckily so many of you groupies [attendees] are so obscure, you’ll have plenty of time to think. Second, multitasking is not the highest quality thought man is capable of doing unless you’re chief nurse of hospital. If not, be satisfied with life in shallows. I didn’t have #2 plan; I wasn’t going to dance lead in Bolshoi Ballet or stand on the mound in Yankee Stadium. The constant search for wisdom or opportunity is important. It applies to the personal life too. Most of you aren't going to have five or six opportunities to marry a wonderful person. Most of you aren’t going to get one. Most of you get an ordinary chance, which leads to an ordinary result.”

On the Wells Fargo buys: “When Berkshire bought Wells Fargo, the world was unglued in real estate lending-driven banking panic. We knew their bank lending officers weren’t ordinary. They grew up in the garment district as cynics and were careful and better [than others]. This was an information advantage that we had that Wells Fargo had this special capacity. When DJCO bought into Wells Fargo at $8, we knew the bankers were more rational than ordinary bankers. No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.”

On synthesis of disciplines: “Saying one is in favor of synthesis is like saying one is in favor of reality. It is easy to say we want to be good at it, but the rewards system pays for extreme specialization. You’re usually way better off being a deep expert than someone an inch deep in a lot of disciplines. It [Synthesis] is helpful to some but not the best career advice for most people. The trouble is you make terrible mistakes everywhere else without it, so synthesis should be a second attack on the world after specialization. It is defensive, and it helps one to not be blindsided by the rest of world.”

On being rational: “I worked at being rational young and kept doing it. Do it til you’re as old as me, it is a good idea and it is a lot of fun if you’re good at it. I can hardly think of anything more fun. And I have a lot of cousins [like-minded folks] in the room. You don’t have to be emperor of Japan. You can be a very constructive citizen by being rational. Just avoid where the standard result is awful. Anger, jealousy, resentment, self-pity, etc. They’re a one-way ticket to hell, and many people wallow in them, and it’s a disaster for them and everyone around them. Self-pity won’t improve anything if you’re dying of cancer. Keep your chin up, and forget about it.”

Treating marriage as an investment seeking ROI: [Speechless at the question for a few seconds shaking his head] – “Different folks can live in different ways. Marriage is the best practical long term deal for most people. The science says they live longer and are happier. Sure some marriages fail and are made in hell and all that, but marriage is the best chance in world as difficult as it is. I love Asian culture. The Confucian idea of family being all you have and family values are very important. Society goes to hell if you don’t have family values.”

“Thanks for the belated 29th [92nd] birthday [January 1, 1924] wishes.”

On DJCO buying land: We bought land in Logan, Utah because we think we’ll be there a long time. I haven’t seen it, but it has a river that flows by. We bought the land here [in L.A.] too. We bought cheap and built cheap, and there’s nothing wrong with owning some real estate. It is not a way to get ahead, but it simplifies life.”

On Trump: “Well, he did make money for quite a while. My attitude is that anybody who makes money running a casino is not morally qualified to be President. It is a very dirty way to make money.”

Greatest accomplishment: “My family life is more important than wealth and prominence, but I hated poverty and obscurity and have satisfaction in coming a long way from where I started. People who stand atop Everest are proud they got up there even though they’re only there for 15 seconds. Cicero says happy men in old age look back on a lot of achievements. Some say that’s damn selfish, but I like it. I’ve always hated poverty and obscurity and finally found my way out of them.”


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Advice to folks: “My advice is to have good behavior, be dependable, live in morality. It makes things easier, and you don’t have to remember your lies. Old fashioned good behavior and a little generosity are good. We all know people who, when they die, people come to funeral to make sure they’re dead. Kipling’s If is great poetry but doesn’t exist in college now because isn’t politically correct. ‘Be a man, my son;’ you don’t want to be a child or an angry twit. In this political situation, so many candidates are disgraceful on both sides. Sure, politicians have been politicians for a long time, so we need to operate and vote constructively. There’s so much automatic anger and hatred, and who the hell can tell whether the next fifty years will be better based on how we vote? Muslim behavioral rules read like The Old Testament, which of course they copied. They claim the rules are directly from God, but everyone knows they stole them from the Jews.”

Oil prices: “Well that’s a simple set of questions. I don’t know about correlation between bond prices and economic growth - oh you said oil - if oil had been cheaper and easier, then growth would’ve been greater, so expensive oil will make life harder. Exxon Mobil and Chevron became good investments, because the damn price of oil rose faster than their production went down. This is unlike any other business. Your stock goes up when your units go down. Asininity. But alas, the Middle East with a bunch or free energy for all these years has had dysfunctional economies, so maybe in that sense tougher [higher priced] oil is better. It is like my old Harvard Law professor said, ‘Charlie, let me know your problem, and I will make it harder for you.’”

How to think of two mental models at once: “Barely. I am barely able to think of two things at once. This is true stress, this multitasking stuff. I was often barely able to think of the right answer time after time, and sometimes I failed.”

Valeant [led into a diatribe]: “The Valeant comments last year gave me nothing but trouble. It probably wasn’t wise of me to inject myself, and I had no dog in that hunt or interest in that business. It is just that you people come so far to see me, that I feel obligated to tell you things. I drew retaliation to Warren. Valeant is an extreme example of greed and led to some crazed person [Bill Ackman] calling Warren [Buffett] a sinner for owning Coke. If anyone is mad today, just get mad at Warren. He can handle it. He is a philosophical man. I couldn’t resist calling attention to it. These crazy false values and this crazy excess is bad morals and it’s bad policy. It’s bad for the nation. It’s just bad, bad, bad, and a lot of it is in American finance. There’s no question that Elizabeth Warren is right when she says American finance is out of control and has too much evil and folly in it. She and Bernie [Sanders], not two of my favorite people, are right. Manipulative hucksters are out there trying to cheat people with lousy accounting and a crazy trading culture. It is very bad for all of us, this huge overdevelopment of finance, and it is hard to do anything about it.”

“We go back to Edwardian England or before. Three hundred men owned half the land and had nothing to do, and even the butlers had butlers. So they got bored and had too much leisure and started gambling, and then things fanned out and multiplied capital by 30x or so, and now we have all kinds of people with all this time to sit around and gamble and not just cards or horses. Now we bet on securities and derivatives and athletic contests. The public market operating with transactions is a daily casino. People want to sit there but have none of the trouble with it. Too much of the new wealth has gone to the owners of the casino or to the gamblers. The exaltation of that group hasn’t been good. I am, to some extent, a member of that group, because I didn’t make my career in surgery. I have some worries I’ll be a bad example for the youth. We don’t want to just be shrewd about buying little pieces of paper. We need to be charitable and run businesses. This is a serious and bad issue, and I hate to agree with Elizabeth Warren, but she is right, and there’s no way of stopping it without big legislative change. As the cyclicality of this goes on, big busts hurt us more than the big booms help us. We saw that when the [Great] Depression happened and rise of Hitler. Post-Weimar hyperinflation didn’t spawn Hitler. Hitler really rose out of Great Depression. People were so demoralized that they were snookered. [Alan] Greenspan, he is an amiable man, but he was an idiot. This is a man whose hero is Ayn Rand who believed in no government, we got the decision making we deserved, and he didn’t see reality the way it was. If an ax murder happens in free markets, it is ok because it happened in free markets. Garbage, and a lot of these people who say this are in my [political] party.”

On General Motors: “That’s simple. GM is in the Berkshire portfolio, because a young man who works for Warren likes it, and Warren lets them do what they please. When he was a young man, Warren didn't like when old men told him what he couldn’t do. So he refrains from that with our young men. I haven’t the faintest idea why he likes it. Maybe it is cheap and there’ll be another god damn government bailout. The industry is too competitive. Everyone relies on the same suppliers, and cars last long time with little service, and leases of cars are all at cheap rents. This has the earmarks of a commoditized and difficult market and will shrink one of these days. If I was investing, I would want something way the hell better than others, and that’s hard to find.”


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Oil prices: “I wouldn’t have predicted oil would fall so low, and it is generally true that we can get periods of extreme prices in commodities as we see now with iron ore. Commodities can do strange things…up and down…and they have macroeconomic consequences. If you’re in Australia [iron ore] or in the tar sands of Canada [oil], it is terrible now. We are in a weird period, but that’s the nature of the human condition with free markets. I have never accurately predicted those swings. We just get into good businesses and let the cycles happen.”

On books he recommends: “You people send me thirty books a week, and I tend to skim them so rapidly that you’re ruining my joy. I can’t resist reading the damn things, and it is too much. I am no longer a good book source.”

On charity: “I never wanted to tackle world peace. I read enough biographies. Carnegie did all this with The Hague and the like. And the ink was barely dry when the crazy European monarchs stumbled into World War I, and that was quite demoralizing to Carnegie. If he couldn’t do it [tackle world peace], I’ll leave it alone. I like to create dormitories and science teaching facilities. It is interesting to me and modest, and it is easy to do them better than most people. I do what I am good at and suggest you do the same.”

Income inequality: “My attitude is that both [Thomas] Piketty and [Bernie] Sanders are a little nuts. People passionate about egality gave us the Soviet Union and all those murders and Communist China and the starvation and lovely North Korea. I am suspicious of all this passion that brings about such bad examples. China had egality and was starving but adopted property rights, and living standards increased 10x, but that created a lot of inequality. Sanders doesn’t understand this at all and has a religion for it; he is ‘Johnny One Note.’ As an intellectual, Bernie is a disgrace. Now, I don’t think he’s any worse than some of our Republicans. But at least they’re crazy in a different way. But I wouldn’t have him [Bernie] marry into my family just for his personal traits. As thinker, he is bad. Egality has one effect: people will tolerate different outcomes, if the outcomes are deserved, according to Aristotle. People are understanding that Tiger Woods is so rich. Who is getting undeserved money in America now? Not Gates or creators of businesses. Financiers are among those who do receive undeserved wealth and have caused envy. Even the man talking [referring to himself] is guilty of this. We don’t want a lot of undeserved wealth for doing nothing or acting counterproductively. Fixing undeserved wealth would be extraordinary. Normal investment partnerships pay no taxes on unrealized gains. Naturally, enormous liquid wealth created not taxed is resented and would be more so if people actually understood it.”

“But inequality is the natural outcome of a successful, advancing civilization. What the hell is the guy at the top 1% to do? Is he the main problem? When you get rich, you finally realize how little power the rich really have - they will spend a lot and get practically nowhere. Piketty and Sanders are wrong, but undeserved wealth needs some attention.”

On BofA: “BofA we bought, because it was for less than it was worth, and that was in the old days of our investing, so culture of that versus US Bank versus Wells Fargo was irrelevant.”

Self-driving cars: “Sure, it is bad for GEICO, but it won’t happen quickly and will be quite slow. The first thing people did was buy more cars when they got money, but that is waning.”

On making a book list: “I don’t want to be a book recommender for the world. That’d be quite time consuming. You will have to find another.”

On Ron Burkle giving Munger credit for giving Ron credibility when Ron was young: “The last big trading stamp company [Blue Chip Stamps] customer was [a grocery store] controlled by Ron’s dad, and I met him in what was an attempt to preserve the last customer, and in due course I failed in all activities, and then Ron did nothing but succeed, so maybe you should ask him about credibility coming from me.”

On unicorns in Silicon Valley: “My circle of competence doesn’t include correctly predicting which new companies in Silicon Valley will succeed. All this is manipulated finance. VCs are an honorable part of finance for allocating capital to new businesses, but they don’t escape their share of sin. Each new round is at a higher value, and they sneak in a clause that no one in the old rounds gets anything until the new guys get paid [liquidation preference], and this deliberate obfuscation is a Ponzi scheme. Large amounts of easy money cause regrettably despicable human behavior.”


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Value investing: “Fundamental value investing will always be relevant . To succeed, always buy for less than what it is worth, and be smarter than market. It will never go out of style. High frequency traders have all the contribution to economy of a bunch of rats to a granary, sucking out while contributing nothing to civilization.”

Approach to spending time with family: “I am not a wonderful example. I did the best I could.”

On Nick Saban: “I don’t know anything about coaches. I am better about the ballet.”

People he admires: “This is one of the advantages of being a reader. I consort with the best people who ever lived - people like surgeons, actors, a lot of constructive and intelligent people who improve the world for the rest of us. Dan Evans (former US Senator and Governor of Washington State), I met him on the Costco board. He was a sensible, admirable high grade politician. With all these gerrymandered people who like only people who are like them damn selves, he stood out. You want to be the kind of person others name in their wills to raise their children if they die unexpectedly. Then you know you’re doing something right. People very shrewd about their wills.”

Thinking and reading: “As an attorney, the most important client was myself. Reading and thinking. The beauty of doing it [reading and thinking], is if you’re good at it, you don’t have to do much else.”

Conquering fear: “I avoided circumstances that automatically cause reasonable fear. Like my son says, ‘if at first you don’t succeed, well, so much for hang-gliding.’ I don’t seek out fear to get thrills or even the appearance of fear. I am not a lover of danger or the appearance of danger, so fear is not my thing. I have just lived a long time. I had fears when younger, but gradually they melted away.”

Coke on decline and does BRK’s major holding in the stock provide cover for it?: “For many decades, the product was water and sugar, and it grew every year like the March of the Inevitable, but in recent years this declined, and in recent years Coke’s vast offering and infrastructure with new products are growing. The power is really in that vast distribution network. It is still a strong company and will be respectable, but it is not like it used to be.”

Munger enters


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Munger and Salzman

Munger and Salzman


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Selfie

Munger reading the votes


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Munger eating peanut brittle

From the seats


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Friends (3rd time to meet)

Himalaya Capital’s Li Lu, a Buffett protégé


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DJCO Director and editor of Poor Charlie’s Almanack, Peter Kaufman

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