2017 Daily Journal Shareholder Meeting Transcript + Q&A with Charlie Munger

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MUNGER: The essence of what’s going on here, of course, is we have a corporation that was in a branch of the newspaper business, and our branch of the newspaper business, like most newspaper businesses, has gone to hell compared to what it was in its peak years. And almost every other newspaper business is going to hell with no pardon. They’re just disappearing. 

What we have is this computer software business where we’re serving the same customers to some extent, except now they’re all over the country. Even some of them outside the country. With this...we were selling software to all these courts and public agencies, whereas before we were giving information to lawyers and other people and publishing public notices. 

And our software business is of a type where it’s a long, tough slog. But we’re slogging very well and we really love the people who are doing it for us. We’ve got a lot of wonderful people and in our software business, the implementers and the computer programmers and the people that deal with the public agencies, and the ethos of the place is very admirable. Everybody’s trying to get ahead here by doing the work right and serving the customers right and having a lot of financial wherewithal where money is never a problem and doing what we’re supposed to do. And so, it’s a pleasure to people like Rick Guerin and myself to watch all these young people doing this, and of course we’re very glad to be able to do it when we should be dead [laughter]. 

A lot of you people came into this because Berkshire was successful and Guerin was successful, and for various odd reasons of history. And most of you are accidentally in the software business, and I am too because Guerin did it when I wasn’t paying much attention. I don’t do this kind of venture capital stuff and he doesn’t either, but he did it here. And so if there’s anything wrong with what happens in our software business, you’re looking at the man who caused it all over here. I’ll take credit for the successes, but if there’s failure you’re looking at the man here who got us into this. 

It is amazing to me some of the things that are happening in our software business. We just are getting a contract from South Australia. Now, if anybody told me when I was young that a Daily Journal company would be automating the courts of South Australia, I mean—I hardly know where it is. Anyway, it’s amazing what’s happening, and it’s a fair amount of fun to watch, probably because we’re doing more winning than losing. I’ve never been able to enjoy losses the way some people do. I would much rather win. 

And I really like to work with good people instead of the opposite, and we’ve got a lot of good employees in our software business. We’ve got a bunch of implementers in Utah who are really good at it and who we really trust. And then the customers like them. We’ve got all these computer programmers and so forth around here—and a game of service like that when it’s complicated, what you have to do is minimize your glitches and crawl out of them very rapidly in a way where the customers trust you. And our people are good at that and they get better and better, and they’re trying to get ahead by being good with the service. Not by having some politician as a consultant. Some of our competitors do that kind of stuff, but we’re trying to slog our way out by doing the work right. 

When I was a lawyer, there’s a saying I’ve always used, “The best business-getter any lawyer ever has is the work that’s already on his desk.” And that’s the basic ethos of our software business. If we just keep doing it right I don’t think we have to worry about the future. Not that we won’t have our downdrafts and our failures, but we are actually grinding ahead slowly in that software business. 

And it’s very interesting because Guerin and I know practically nothing about it, and Gerry didn’t come up as a software engineer, so we’re basically doing something that’s quite difficult. We are judging people because we don’t understand what the people do. That’s what Andrew Carnegie did, of course. He didn’t know anything about making steel, but he knew a lot about judging whether the people he was trusting were good making steel. And of course that’s what Berkshire’s done if you stop and think about it. We have a lot of businesses at Berkshire that neither Warren nor I could contribute much to, but we’re pretty good at judging which people are capable of running those businesses. 

But this is pretty extreme here, the little Daily Journal Company going into the computer software business. It’s a long, slow kind of business, RFPs. The first time we contact a customer until we started making money, maybe five years. So it’s like deciding to start prospecting for oil in Borneo or something, and they just keep doing that over and over again and the money goes out and the effort goes out, and it starts coming in five years from now. 

I love that kind of stuff. Not when I think we’re taking territory, it doesn’t look good then we write it all off and we don’t report wonderful numbers or anything. But if it makes sense in the long term, we just don’t give a damn what it looks like over the short term, and we know we’ve collected a bunch of shareholders that share our ideas. After all, we’re running a cult, not a normal company, and I think most of you feel you’re willing to wait. I‘ve lived all my life with people who are into deferred gratification; in fact, most of them will never have any fun, they just defer gratification all the way to the end. That’s what we do. It does cause you to get rich, so we’re going to have a lot of rich dead people, but we can incite a lot of envy. A lot of you when the people walk by your grave and there will be this nice grave with this nice monument and they’ll say, “God, what a great grave, I wish I were under it”. 

But at any rate, deferred gratification really does work if what you’re interested in doing is growing a business that gets better and better or getting rich yourself so that your grave can look nice to outsiders. Guerin and I have never taken any money out of this company in all these years. We don’t take salaries, we don’t take directors fees. We’re a peculiar example. I wish our example spread more because I think if you’re wealthy and own a big share of a company and you get to decide what it does and whether it liquidates or whether it keeps going, that’s a nice position to be in. And maybe you shouldn’t try and grab all the money in addition. And that’s my theory on executive compensation. 

And some of the old fashioned guys like Carnegie never took a salary to speak of. Cornelius Vanderbilt didn’t take any—of course he owned the whole place practically—and he would have considered it beneath him. He lived on the dividends like the shareholders did, and so there’s a lot of those old fashioned ideas here in the Daily Journal company. I’ll first take a bunch of questions about the Daily Journal, and after that we’ll take questions on anything you want to talk about. 

Q: Hi, Brad Gillespie from Chicago. At least year’s meeting you talked about the milestone of getting the LA court system here at Journal Technologies, and I was wondering in the last year as it’s gone by, what good milestones have happened and what bad things have happened with that? 

MUNGER: Gerry, you take that one. I’ll answer it [in brief]: It’s going fine. 

GERRY: We have three case types for Los Angeles. One case type went live last April, another case type will go live this coming July, and the third case type is about 10 to 12 months later after that. We have to work within the Los Angeles schedule. After all, they have a lot of people to train and that becomes a very important factor. Training is critical because if the end users aren’t trained properly, virtually everything falls apart, and so that’s the schedule. We discussed it this morning, and we meet with the court about three miles from here virtually every day, and we have a good team from the court, and I think they’re very excited about what they’re doing, and that’s critical to us that the court feels good about the system. 

MUNGER: One good thing about what we’re doing is it’s slow and it’s agony in the delays between the first customer contact and finally getting into a decent revenue stream. But once you succeed it’s a very sticky business, very sticky business. And the fact that it’s difficult to do means it’s difficult for people to change much, and so if you go slog through all this tough territory we’re slogging through, there’s a reward out there somewhere, and we’re not in a small business. 

It has way more potential than the original print business we had, giving information about the appellate cases to lawyers. It’s a big market and the people have no option but to charge ahead. These courts and district attorneys, public defenders, all these people that we’re serving, they’re overwhelmed with options, better systems and more software. So it’s a huge market, and the fact that it’s so awful to grind through means that the people that want easy gratification don’t come in. If it seems slow and painful to you, we kind of like it that way. 

Q: Another Daily Journal question. I’d be curious on your thoughts about...we’re slowly grinding through, but it seems like Tyler Technologies is going to be through a lot quicker with just just one name in 24 states. So, I was just wondering how you think your competitive position versus Tyler is doing? 

MUNGER: Well, Tyler is an extremely aggressive company and they were bigger faster, and so I liked the ethos of our operation better than I like theirs. If I were buying software, I’d rather buy ours than theirs, so our system is to keep fighting the game, and I wish all the customers I had in life were like Tyler. 

Q: Hi. I’m Gaspar from Marina del Rey. Thanks for your answers so far. I’m a little nervous about the rate of revenue growth going down a little bit, the expenses going up. I appreciate what you’re saying about deferred gratification. Any major milestones in the next three to five years that you think you’d like to hit, or any major customers that you’d like to get that would really help things along? 

MUNGER: Well, I’ll take the first question. It feels like we’re proceeding slowly, but we bought a bunch of contracts in effect for money. And we knew that they were going to end, and so we’re amortizing the cost of those contracts. But it was really an anticipated decline that we got big revenues up front for taking, so we’re not declining as much as...we’re getting ahead. There’s a little blip in the figures.  

Now, the second part of the question was? 

Q: Any major jumps or acquisitions you’d like to make or customers that you’d like to acquire in the next... 

MUNGER: Every contract that’s significant is a major jump, and the business is so big they’re whole states. I mean, this is a huge business and everybody is just scrambling at the first parts of something that’s going to grow bigger and bigger and last and last. And as long as we’re doing the work right, why, it’s likely to work out right. 

Q: The Daily Journal owns a lot of Wells Fargo. Can you comment? 

MUNGER: Well, of course Wells Fargo had a glitch. The truth of the matter is they made a business judgment that was wrong. They got so caught up in cross-selling and so forth, having tough incentive systems that they got the incentive systems so aggressive that they—some people reacted badly and did things they shouldn’t. And then they used some misjudgment in reacting to the trouble they got in. I don’t think anything’s fundamentally wrong for the long-pull with Wells Fargo. They made a mistake and it was an easy mistake to make. 

The smartest man I ever knew made a similar mistake. Henry Singleton—who was the smartest single human being I knew in my whole life—and Henry Singleton of Teledyne also had very aggressive incentive systems like Wells Fargo. And his customers—many of them subsidiaries—was the government. And of course it’s not that hard to cheat the government. And with his very aggressive incentive systems two to three out of 20 subsidiaries cheated the government. So he’s got three scandals at once. 

It wasn’t that Henry was trying to cheat the government, it’s just that he got a little aggressive
in applying the incentives and he got blindsided. That can happen to anybody. I don’t regard getting the incentives a little aggressive at Wells Fargo as a mistake. I think the mistake there was when the bad news came they didn’t recognize it rightly. They made a mistake, but what happens in a tough system like capitalism, you make a mistake like that and pretty soon you’re gone. 

Q: Randy Garden from Phoenix, Arizona. I’m a Daily Journal shareholder. This is for Gerry or Charlie. Congratulations for inverting and not doing things wrong in regard to Daily Journal. What about, do you have any insight into the Alameda court system and the problems that Tyler’s having over there? 

MUNGER: Well, no, but I’m not dissatisfied with it. I don’t think I want to criticize Tyler any more than I have. So I think one of our competitors you’ll be sad to know is having some problems with pleasing a customer. You can see the salt tears running down my cheeks. 

Q: I have a quick question on your software fees in terms of your revenue lines. What portion of that is recurring versus one-time fees? 

MUNGER: That is so complicated that I’m not even going to try to answer it. I will just answer in substance. There’s a lot that’s recurring if we stay in there. You can’t look at our financial statements and make very good judgments about what’s going to happen. It’s the nature of our game, but it’s confusing. It confuses us a little bit, and so we’re not quoting that on purpose. It’s a very complex, confusing system when you’ve got all these RFPs and...it’s very complicated. 

Q: Any other questions about the business. So, you purchased the building in Logan—which I believe is used exclusively in Journal Technologies—but in accounting it’s under the traditional business. I’m wondering why in the segments. 

MUNGER:  Gerry, I give you that one. He says why is Logan somehow in the traditional business? It shouldn’t be. 

GERRY: The Daily Journal purchased the building and they own the building. And Journal Technologies pays rent to the parent company for that and the amount of rent is not—what we would consider—material from that perspective. And because it’s owned by the Daily Journal that’s how we originally classified it. No real significant reasons. Now all the expenses are on the Daily Journal’s, or on the General Technologies’ books. 

MUNGER: That’s some quirk of accounting. It doesn’t really matter. 

Q: I just want to follow up on the question of incentives. You were explaining at Wells Fargo that you might’ve been a little too aggressive, but you don’t have a problem with aggressive incentives. Can you expand on that a little more? 

MUNGER: Well, how do you know that they’re aggressive until you try? They didn’t react enough to the bad news fast enough, and of course that’s a very dangerous thing to do. I don’t think it impairs the future of Wells Fargo. As a matter of fact, they’ll be better for it. The one nice thing about doing something dumb is you probably won’t do it again. 

Q: So this isn’t a Gerry general question, but my question comes from the perspective of someone early in their career who’s trying to figure out which of several paths to pursue. Two thoughts that seem helpful for this purpose are 1) figuring out what work you have the possibility of becoming the best at, and 2) ascertaining what kind of work would most help society. Do you think these ideas are the right ones to focus on and if so, how would you go about answering them? 

MUNGER: Well, in terms of picking what to do, I want to report to all of you that in my whole life I’ve never succeeded much in something I wasn’t interested in. So, I don’t think you’re going to succeed if what you’re doing all day doesn’t interest you. And you’ve got to find something you’re interested in because it’s just too much to expect of human nature that you’re going to be very good at something you deeply dislike doing. And so that’s one big issue. 

And of course you have to play in a game where you’ve got some unusual talents, even though you don’t want to play. If you’re 5'1”, you don’t want to play basketball against a guy that’s 8’3”. It’s just too hard. And so you’ve got to figure out a game where you have an advantage, and it has to be something that you’re deeply interested in. 

Now you get into the ethical side of life, well, of course you want to be ethical. On the other hand, you can’t, you’re just dreaming of how you think the world should be run and that it’s too dirty for you to get near it. You can get so consumed by some kind of ideological notion—particularly in a left-wing university—it’s like you think you’re handling ethics. And what you’re doing is not working and you’re watching a wave go by. And maybe you’re smoking a little pot to boot. This is not the Munger system. 

My hero is Maimonides, and all that philosophy, and all that writing he did after working 10 or 12 hours a day as a practicing physician all his life. He believed in the engaged life, and so I recommend that you engage life. You spend all your time thinking about some politician who wants it this way or that way. If you’re sure you know what’s right, you’re on the wrong track. You want to do something every day where you’re coping with the reality. You want to be more like Maimonides and less like Bernie Sanders. 

Q: I have a question on American Express. What does increasing the litany of payments weaken as [unintelligible] as a value proposition in the long-rum? Is American Express’s value proposition more in terms of payment, or is it more in terms of service and rewards? 

MUNGER: Well, I’m going to give you an answer that will be very helpful to you because you’re somewhat confused about what the exact future of American Express will be. I’m confused too. I think that if you think you understand exactly what’s going to happen to payment systems 10 years out, you’re probably under some state of delusion. It’s very hard to know. 

So if you’re confused, all I can say is welcome to the club. They’re doing the best they can. They’ve got some huge advantages that they’re...it’s a reasonable bet, but nobody knows. I don’t know if IBM is going to sell that much of Watson. I always say I’m agnostic on the subject. You’re talking about a payment system 10 years out. I’m agnostic on that too. I think if you keep trying and do the right thing and you play the game hard, your chances are better, but I don’t think those things are knowable. Think of how fast they change. 

Q: Hi, Mr. Munger. Do you think domestic natural gas exploration and production is a good business despite the capital intensity? Thank you. 

MUNGER: Well, that’s a different subject. I have a different feeling about the energy business than practically anyone else in America. I wish we weren’t producing all this natural gas. I would be delighted to have the condensate that’s coming out of our shale deposits of natural gas just lie there untapped for decades in the future, and pay extra a bunch of Arabs to use up their oil. But nobody else in America seems to feel my way. But I’m into deferred gratification.

The oil and gas is not going away, and I think it’s just as important as the topsoil in Iowa. If any of you said, “Oh, goodie. I found a way to make money. We’ll ship all our topsoil from Iowa to Greenland” I wouldn’t think that was a very good idea. And so I don’t think that hastening to use up all of our oil and gas is a good idea, but I’m practically the only one in the country that feels that way. There’s not enough deferred gratification in it to please me, but I don’t see any advantage. I regard our oil and gas reserves just as chemical feedstocks that are essential in civilization. Leave aside their energy content, I’d be delighted to use them up more slowly. By the way, I’m sure I’m right and the other 99% of the people are wrong. 

But no, I don’t know. The oil and gas business is very peculiar. The people who succeed in most other businesses are doing way more physical volume than they did in the past. But a place like Exxon, the physical volume goes down by two thirds, it’s just that the price of oil goes up faster than the physical volume goes down. That is a very peculiar way to make money and it may well continue, but it’s confusing. We’re not used to it. 

Q: Mr. Munger, as an 18-year-old interested in many disciplines, I was wondering how you can thrive as a polymath in a world that celebrates specialization. 

MUNGER: Well, that’s a good question. I don’t think operating over many disciplines as I do is a good idea for most people. I think it’s fun, that’s why I’ve done it. And I’m better at it than most people would be. And I don’t think I’m good at being the very best at handling differential equations. So it’s been a wonderful path for me, but I think the correct path for everybody else is to specialize and get very good at something that society rewards and then get very efficient at doing it. 

But even if you do that, I think you should spend 10 or 20 percent of your time in trying to know all the big ideas in all the other disciplines. Otherwise, I use the same phrase over and over again...otherwise, you’re like a one-legged man in an ass-kicking contest. It’s just not going to work very well. You have to know the big ideas in all the disciplines to be safe if you have a life lived outside a cave. But no, I think you don’t want to neglect your business as a dentist to think great thoughts about Proust. 

Q: Mr. Munger, question about Lollapalooza effects. What are you observing now in your study of current events that’s causing you concern, and how can you use that interdisciplinary approach to spot them in events? Thank you. 

MUNGER: Well, I coined that term the “Lollapalooza effect” because when I realized I didn’t know
any psychology—and that was a mistake on my part—I bought the three main textbooks for introductory psychology and I read through them. And of course being Charlie Munger, I decided the psychologists were doing it all wrong and I could do it better. And one of the ideas that I came up with—which wasn’t in any of the books—was that the Lollapalooza effects came when three or four of these tendencies were operating at once in the same situation. 

I could see that it wasn’t linear. You’ve got Lollapalooza effects, but the psychology people couldn’t do experiments where four or five things were happening at once because it got too complicated for them and they couldn’t publish. So they were ignoring the most important thing in their own profession. 

And of course the other thing that was important was to synthesize psychology with all else. And the trouble with the psychology profession is they don’t know anything about “all else”, and you can’t synthesize one thing you know with something you don’t if you don’t know the other thing. So that’s why I came up with that Lollapalooza stuff. And by the way, I’ve been lonely ever since. I’m not making any ground there. And by the way, I’m totally right. 

Q: Charlie, I’m Paul Smith from Los Altos, California. My question relates to a comment you made some years ago about Warren Buffett. I think you said that he has become a significantly better investor since he turned 65, which I found a remarkable comment. I was wondering if you could share information about that that maybe we haven’t heard before. I know you’ve commented he’s a learning machine, and we all know the aversion to retail that came out of the Diversified episode, and so on. It would just be interesting, is there something that’s changed about his risk assessment or his horizons, or any color there would be fantastic to hear. Thank you. 

MUNGER: Well, if you’re in a game and you’re passionate about learning more all the time and getting better and honing your own skills a little more, etcetera, etcetera, of course you do better over time. And some people are better at that than others. It’s amazing what Warren has done. Berkshire would be a very modest company now if Warren never learned anything. He never would’ve given anything back. I mean, any territory he took he was going to hold it. 

But what really happened was, we were out in the new fields and buying whole businesses, and we bought into things like ISCAR that Warren never would have bought when he was younger. Ben Graham would have never bought ISCAR. He paid five times book or something for ISCAR. It wasn’t in the Graham playbook, and Warren—who learned under Graham—just, he learned better over time, and I’ve learned better. 

The nice thing about the game we’re in is that you can keep learning, and we’re still doing it. Imagine, we’re in the press for CNBC for all of a sudden buying airline stocks. What have we said about the airline business? We thought it was a joke it was such a terrible business, and now if you put all of those stocks together we own one minor airline. We did the same thing in railroads. We said railroads are no damn good, you know, too many of them, truck competition, and we were right. It was a terrible business for about 80 years. But finally they got down to four big railroads and it was a better business, and something similar is happening in the airline business. 

On the other hand, this very morning I sat down in my library with my daughter-in-law and she booked a round trip ticket to Europe, including taxes, it was like 4 or 5 hundred dollars. I was like, “we’re buying into the airline business?” It may work out to be a good idea for the same reason that our railroad business turned out to be a good idea, but there’s some chance that it might not. 

In the old days—I frequently talk to Warren about the old days—and for years and years and years, what we did was shoot fish in a barrel. But it was so easy that we didn’t want to shoot at the fish while they were moving, so we waited until they slowed down and then we shot at them with a shotgun. It was just that easy. And it’s gotten harder and harder and harder, and now we get little edges...before, we had total cinches. And it isn’t any less interesting. We do not make the same returns we made when we could run around and pick this low-hanging fruit off trees that offered a lot of it. 

So now we go into things. We bought the Exxon position. You want to know why Warren bought Exxon? As a cash substitute. He would never have done that in the old days. We had a lot of cash and we thought Exxon was better than cash over the short term. That’s a different kind of thinking from the way Warren came up. He’s changed, and I think he’s changed when he buys airlines, and he’s changed when he buys Apple. 

Think of the hooting we’ve done over the years about high tech. We just don’t understand it, it’s
not in our central competency, the worst business in the world is airlines, and what do we do? We appear in the press with Apple and a bunch of airlines. I don’t think we’ve gone crazy. I think the answer is we’re adapting reasonably to a business that’s gotten very much more difficult, and I don’t think we have a cinch in either of those positions. I think we have the odds a little bit in our favor, and if that’s the best advantage we can get, we’ll just have to live on the advantage we can get. 

I used to say you have marry the best person that will have you, and I’m afraid that’s a rule of life. And you have to get by in life with the best advantage you can get, and things have gotten so difficult in the investment world that we have to be satisfied with the type of advantage that we didn’t use to get. On the other hand, the thing that caused it to be so difficult was when we got so enormously rich and that’s not a bad tradeoff. 

Q: Mr. Munger, at last year’s meeting you said Donald Trump was not morally qualified to be President, and now that he is President, do you still agree with that? Or do you think he’s qualified in any capacity? 

MUNGER: Well, I’ve gotten more mellow. I always try and think about the good along with what’s not good, and I think some of this stuff where they’re reexamining options about the whole tax system of the country—I think that’s a very constructive thing. When Donald Trump says he wouldn’t touch Social Security, when a lot of highfalutin Republicans have all kinds of schemes for razing Social Security, I’m with Donald Trump. If I were running the world I’d have his exact attitude about Social Security, I wouldn’t touch it. So, he’s not wrong on everything and just because he isn’t like us...roll with it. Accept a little danger. What the hell, you’re not going to live forever anyhow. 

Q: Hi, Charlie. I was wondering what was the most meaningful thing that you did with your life? 

MUNGER:  Well, I think that family and children is the most meaningful thing that most people do with their life, and I’ve been reasonably fortunate. I don’t think I am a perfect husband. I’m lucky to have had as much felicity as I got, and I always needed a certain amount of toleration from the fairer sex. I started wrong and I never completely fixed myself. I can tell this group about...you come here as a cult to talk to the cult leader? I want to take you back in history again. You’ll see what an inferior person you’re now trusting. 

When I was a freshman in Omaha Central High, there was a family friend, a girl my age, and she had gone off to summer camp the year before and she met a blonde goddess—a voluptuous 13-year-old—and I was a skinny underdeveloped whatever and so forth. “You gotta take my blonde goddess to the dance”. And so, I wanted to impress this blonde goddess and so I pretended to smoke, which I didn’t, and she was wearing a net dress and I set her on fire. But I was quick-witted, and I threw a Coca-Cola all over her and in due time the fire was out, and that’s the last I saw of the blonde goddess. And then I said, “Well, I’ve got to make more time with the girls”. And I wanted to get a letter at Omaha Central High. Of course, I was no good at any sport. So, I went down to the rifle range and learned they gave letters in rifle shooting. And I was so skinny that I could shoot a hundred every time in the sitting position by sitting cross-legged and putting one elbow on each foot. Try it, you’ll break your neck, but I could shoot a hundred every time. 

So I was a good rifle shooter and they gave me a letter. But I was so skinny and short and underdeveloped that it went from one armpit to the other, and I walked down the hallway trying to impress the girls and they wouldn’t turn their head. What they said was, how did a skinny little unattractive little runt like that get a letter? 

And then I had another experience. There was a girl who had a name, I still remember it—Zibby Bruington. She was a senior—and a very popular senior—and I was a nerd sophomore. And somehow she agreed to go with me to a party in one of the out-buildings of the Omaha Country Club. Perhaps because she liked one of my friends, who was a big strapping fellow. So I took Zibby to this party in my 1934 Ford. And it sleeted and got rainy and so forth, and I managed to stick the Ford in the mud and I couldn’t get out of it. And Zibby and I had to walk for several miles through sleet. That was the last I ever saw of Zibby Bruington. 

And then my car stayed in the mud and I neglected to put in antifreeze, and the temperature went way down and suddenly the block broke. It was too expensive to fix. Then I lost my car, and my father wouldn’t buy a new one because he said “why should I buy a new car for a guy whose dumb enough not to put antifreeze in it”? This is the person you’re coming for miles to see. And so, I didn’t get a new car. My life is just one long litany of mistakes and failure and it went on and on and on.

And politics...I ran to be the president of the DSIC in grade school, The Dundee School Improvement Association. I had the most popular boy in school as my campaign manager. I came in second by miles. I was a total failure in politics. There’s hardly anything I succeeded at. Now, I tell you all of this because I know a nerd when I see one and there are a lot of nerds here who can tell stories like mine. And I want you to feel it’s not hopeless. Just keep trying. 

Oh, yeah, Guerin wants me to repeat the story of Max Plank. According to the story, Max Plank—when he won the Nobel Prize—was invited to run around Germany giving lectures and a chauffeur drove him. And after giving the lecture about 20 times, the chauffeur memorized it and he said, “you know, since Professor Plank is so boring, why don’t you just sit in the audience and I—the chauffeur—will give your talk”. And so, the chauffeur got up and gave Max Plank’s talk on physics and some professors started asking some terrible questions and the chauffeur said, “well, I’m surprised that in an advanced city like Munich, people are asking elementary questions like that. I’m going to ask my chauffeur to answer that.“

While I’m telling jokes I might tell one of my favorite stories about the plane that’s flying over the Mediterranean. The pilot’s voice comes on and he says, “A terrible thing just happened. We’re losing both engines. We’re going to have to land in the Mediterranean”. And he says, “The plane will stay afloat for a very short time, and we’ll be able to open the door just long enough so that everybody can get out. We have to do this in an orderly fashion. Everybody who can swim, go to the right wing and stand there, and everybody who can’t swim go to the left wing and just stand there”. And he says, “Those of you on the right wing, you’ll find a little island in the direction of the sun, it’s two miles off, and as the plane goes under just swim over to the island, you’ll be fine. And for those of you on the left wing, thank you for flying Air Italia”. 

Q: Hello, Mr. Munger. William [unintelligable]. Wonderful stories. With regard to the proliferation of index funds, do you think that there may be issues with liquidity any time we go through another large crisis? And then, do you think that that will create large discrepancies between the price of the index fund and the values of the securities underneath? 

MUNGER: Well, the index funds of the S&P, it’s like 75 percent of the market, so I don’t think the exact problem you’re talking about is going to be a big problem because you’re talking about the S&P index. But is there a point where index funds theoretically can’t work? Of course. If everybody bought nothing but index funds, the whole world wouldn’t work as people expect. 

There’s also the problem...one of the reasons you buy a big index like the S&P is because if you buy a small index and it gets popular, you have a self-defeating situation. When the Nifty 50 were the rage, JP Morgan talked everybody into buying just 50 stocks and they didn’t care what the price was, they just bought those 50 stocks. Of course in due time, their own buying forced those 50 stocks up to 60 times earnings whereupon it broke and everything went down by like two-thirds quite fast. In other words, if you get too much faddishness in one sector or in one narrow index, of course you can get catastrophic changes like they had with the Nifty 50 in that former era. 

I don’t see that happening when the index is three-quarters of the whole market. The problem is the whole thing can’t work perfectly forever, but it will work for a long time. The indexes have caused just absolute agony among the intelligent investment professionals because basically 95% of the people have almost no chance of beating it over time. And yet all the people expect—if they have some money—they can hire somebody who will let them beat the indexes. And of course the honest, sensible people know we’re selling something they can’t quite deliver. And that has to be agony. Most people handle that with denial. They think that it will be better next year, or they just don’t want to think about that and I understand that. I mean, I don’t want to think of my own death either, but it’s a terrible problem beating those indexes. And it’s a problem that investment professionals didn’t have in the past. 

And what’s happening of course is that the prices for managing really big sums of money are going down, down, down, 20 basis points and so on. The people who rose in investment management didn’t do it by getting paid 20 basis points, but that’s where we’re going I think in terms of people who manage big portfolios of the American Equities in the equivalent of the S&P. It’s a huge, huge, problem. It makes your generation of money managers have way more difficulties, and it causes a lot of worry and fretfulness. And I think the people who are worried and fretful are absolutely right. 

I would hate to manage a trillion dollars in the big stocks and try and beat the indexes. I don’t think I could do it. In fact if you look at Berkshire, take out a hundred decisions—which is like two a year—the success of Berkshire came from two decisions a year over 50 years. We may have beaten the indexes, but we didn’t do it by having big portfolios of securities and having subdivisions managing the drugs and subdivisions. And so the indexes are a hell of a problem for you people. But you know, why shouldn’t life be hard? It’s what had to happen, what’s happened now. 

If you take these people doing some of those early trading by computer algorithms that worked, then somebody else would come in and do the same thing with the same algorithm and play the same game. And of course the returns went down. Well, that’s what’s happening in the whole field is the returns you’re really going to get are being pushed down by the progress of the sums. 

Q: Thank you, Mr. Munger. My name is Nick Anderson. I’m from Brooklyn, California. I have two questions for you. My first question is what books or experiences were the most formative to you in your early career? And the second question is where and how do you tell your most ambitious grandchildren to look for business opportunities? 

MUNGER: Well, I don’t spend any time telling my grandchildren what business opportunities to look for. I don’t have that much hope. I’m going to have trouble getting my grandchildren to work at all. 

Anyway, I don’t think there’s an easy way to handle a problem of doing better and better with finances. Obviously, if you’re glued together and honorable and get up every morning and keep doing and keep learning every day, and you’re willing to go in for a lot of deferred gratification
all your life, you’re going to succeed. It may not be as much as you want, but you’re going to succeed. 

And so, the main thing is to just keep in there and be glued together, and get rid of your stupidities as fast as you can, and avoid the bad people as much as you can and you’ll do reasonably well. But try teaching that to your grandchildren. I think the only way you have a chance is sort of by example, so if you want to improve your grandchildren, the best way is to fix yourself. 

Oh, books. You cultists send me so many books that I can scarcely walk into my own library, so I’m reading so many now because I never throw one away—I at least scan and so I’ve gotten so I make a kaleidoscope of those new books.  I just read this new book by Ed Thorp, the guy who beat the dealer in Las Vegas, and then he did computer algorithm trading. I really liked the book. For one thing, the guy had a really good marriage and he seemed grateful for it and it was touching. For another, he was a very smart man. He was a mathematician using a high IQ to, a) beat the dealer in Las Vegas and so forth, and then, b), use these computer algorithms to do this massive trading. I found it very interesting, and since some of you people are nerds and maybe you might like a love story, I recommend Thorp’s new book. It’s an interesting thing to do to beat the dealer in Las Vegas...wearing disguises and so on. 

And Peter Kaufman told me a story about somebody he knows that did the same thing as Thorp did. He said he did it more extreme. He wore disguises and so forth. He won $4 million dollars I think in the casinos, and that was hard to do because casinos don’t like playing against people who might win. And then he went into the stock market where he made $4 billion dollars, again clever algorithms. You know, these people are mathematically gifted. It’s still going on, and I don’t think many of you are going to do it. There can’t be many people who are mathematically gifted enough and manipulate statistics and everything else so well that they find little algorithms that will make them $4 billion dollars. But there are a few, and so some of them started just like Thorp. So, Thorp’s book is interesting and I recommend it to you. 

Q: Hi, Mr. Munger. Thanks for being such a great teacher. This question, a position for the idea of filial piety, the Confucian idea. In this generation, how can we fulfill our filial duties? 

MUNGER: I didn’t quite catch…

Q: How can we in my generation, I at least will be staying far away from my parents, so how can I fulfill my filial duties the best way as you see it? 

MUNGER: I like filial piety. They worship old men, rich old men. That is my kind of a system. But I think the idea of caring about your ancestors and caring about your traditions, I think all that stuff
is a big part of what’s desirable. I really admire the Confucians for that notion that it’s not a game that’s played just in one life. It’s a game where you’re handing the baton off, and you’re accepting the baton from your predecessor. So if filial piety is your game, why, I think it’s a very good thing. Think about how rootless we’d all be if we had no families at all, no predecessors, no decedents, it would be a very different life. Think what we owe the people who figure out things in the past that make our civilization work. So, I’m all for filial piety and its close cousins. 

Q: Good morning, Mr. Munger. Jesse Koltes from New York. You said that “any year in which you don’t destroy one of your best loved ideas is a wasted year.” It’s well known that you helped coach Warren towards quality, which was a difficult transition for him. I was wondering if you could speak to the hardest idea that you’ve ever destroyed. 

MUNGER: Well, I’ve done so many dumb things that I think I’m very busy destroying bad ideas because I keep having them, so it’s hard for me to just single out one from such a multitude. But I actually like it when I destroy a bad idea because I think I remember...I guess it’s my duty to destroy old ideas. I know so many people whose main problem in life is that the old ideas displace the entry
of new ideas that are better. That is the absolute standard outcome in life. There’s an old German folk saying that describes that, it says, “We’re too soon old and too late smart.” That’s everybody’s problem, and the reason we’re too late smart is the stupid ideas we already have, we can’t get rid of. 

Now it’s a good thing that we have that problem. In marriage that may be good for the stability of marriage that we stick with our old ideas, but in most fields you want to get rid of your old ideas. It’s a good habit, and it gives you a big advantage in the competitive game of life. Other people are so very bad at it. What happens is, as you spout ideas out, what you’re doing is you’re pounding them in. And so you get these ideas and then you start agitating and saying them and so forth and of course, the person you’re really convincing is you who already had the ideas. You’re just pounding them in harder and harder. 

One of the reasons I don’t spend much time telling the world what I think about how the Federal Reserve System should behave and so forth, is I know that I’m just pounding the ideas into my own head when I think I’m telling the other people how to run things. So, I think you have to have mental habits that...I don’t like it when young people get violently convinced on every damn cause or something. They think they know everything. Some 17-year-old wants to tell the whole world what ought to be done about abortion or foreign policy in the Middle East or something. All he’s doing when he or she spouts about what he deeply believes is pounding the ideas he already has in, which is a very dumb idea when you’re just starting and have a lot to learn. 

So, it’s very important, that habit of getting rid of the dumb ideas. One of the things I do is pat myself on the back every time I get rid of the dumb idea. You’d say, could you really reinforce your own good behavior? Yeah, you can. When other people don’t praise you, you can praise yourself. I have a big system of patting myself on the back. Every time I get rid of a much- beloved idea I pat myself on the back—sometimes several times—and I recommend this same mental habit to all of you. The price we pay for being able to accept a new idea is just awesomely large. Indeed, a lot of people die because they can’t get new ideas through their head. 

Q: Hello, Charlie. My name’s Donald Schaffer. I used to work as a petroleum engineer and from my experience of that, and I was kind of in it through all of the whole shale stuff that’s happened, and my perception is that as an industry itself it just continuously has gotten more and more complex and more technical, and that as the economy in general expands and you have more division of labor and specialization, it seems to me that it will be very hard, like it could be a challenge for investors unless there is some more specialization or something. I guess my question is as it gets more...do you think that capital allocators are going to need to become more specialized going forward? 

MUNGER: Well, you petroleum people of course have to get more specialized because the oil is harder to get, and you have to learn new tricks to get it, and so you’re absolutely right. Generally, specialization is the way to go with people. It’s just I have an example of something different. It’s awkward for me because...but I don’t want to encourage people to do it the way I did because I don’t think it will work for most people. I think the basic ideas of being rational and disciplined and deferring gratification, those will work good. If you want to get rich the way I did by learning a little bit about a hell of a lot, I don’t recommend it to others. 

Now, I’ve get a story there that I tell. A young man comes to see Mozart and says, “I want to compose symphonies”. And Mozart says, “you’re too young to compose symphonies”. He’s 20 years old. He says, “but you were composing symphonies when you were 10 years old” and Mozart says, “yeah, but I wasn’t running around asking other people how to do it”. 

I don’t think I’m a good example to the young. I don’t want to encourage people to follow my particular path. I like all the general precepts, but I would not...if you’re a proctologist, I do not want a proctologist that knows Schopenhauer, or astrophysics, I want a man who’s specialized. That’s the way the market is and you should never forget that. On the other hand, I don’t think you’d have much of a life if all you did was proctology. 

Q: Hi. Philip [unintelligable]. The question is for Charlie. Warren and you are known for saying that if you worked with a small sum of capital—maybe like even 10 million dollars—Warren publicly said that he could guarantee that it would compound at 50 percent a year. So my question is can you provide some examples? And then I would kindly ask that you provide as many examples as possible, and be as specific as possible. 

MUNGER: Well, the minute I hear somebody that really wants to get rich at a rapid rate with specifics, that is not what we’re trying to do here. You want to leave some mystery so that you yourself can amuse yourself, finding your own way. You know, the ideas that I’ve had in my life are quite few, but the lesson I can give you is a few, is all you need and don’t be disappointed. When you find the few of course, you’ve got to act aggressively—that’s the Munger system. And I learned that indirectly from a man I never met, which was my mother’s maternal grandfather. 

He was a pioneer when he came out to Iowa and fought in the Black Hawk War and so on. And eventually after enormous hardship...well, he was the richest man in town and he owned the bank and so on. As he sat there in his old age, my mother knew him because she’d go to Algona, Iowa, where he lived. Had the big house in the middle of town, iron fence, capacious lawns, big barns. What Grandpa Ingham used to tell her is, “there’s just a few opportunities you get in a whole life”. This guy took over Iowa when the land was black topsoil in Iowa was cheap, but he didn’t get that many opportunities. It was just a few that enabled him to become prosperous. 

He bought a few farms every time there was a panic, you know, and he’d lease them to thrifty Germans. You couldn’t lose money with leasing a farm to a German in Iowa, but he only did a few things, and I’m afraid that’s the case. You’re not going to find a million wonderful ideas. These people with the computer algorithms do it, but they have a computer sifting the whole world. It’s like placer mining. And of course every niche they’re in, if somebody else comes in, the niche starts leaching away. And I don’t think it’s that honorable to make a living that way. I would rather make my money in some other way than outsmarting the trading system, so I have a little computer algorithm that just leaches a little out of everybody’s trade. 

I always say that those people have all the social utility of a bunch of rats in a granary. It’s not that great a way to make money. I would say that if you make your money that way that you should be very charitable with it because you’ve got a lot to atone for. I don’t think it’s an ambition we should encourage. And the rest of us who aren’t just leaching a little off the top because we’re great at computer science—and that’s what this room is full of—and if you’re not finding it harder now, you don’t understand it. That’s my lesson. 

Q: Hi, Mr. Munger. My name is Camden [unintelligible] and I’d like to know what’s your favorite industry and why it’s your favorite industry? 

MUNGER: I didn’t quite follow that. 

Q: All I wanted to know, what’s your favorite industry and why it’s your favorite industry? 

MUNGER: My favorite industry. Well, my favorite industry is taking care of my own affairs. And it’s fun, it’s creative, and it’s the job that life has given me, and I think that you should do the job well that life gives you. A lot of the places where the industries are doing a great job for the world, it’s very hard to make money out of it because these wild enthusiasms come into it. So, I don’t have a favorite industry. 

Q:Charlie, a few years ago you were [unintelligible] on and identifying the monkey business account. Is there any current monkey business in Corporate America that worries you? 

MUNGER: Well, the answer is yes, but not as extreme as Valeant. That was really something. That was really something. I probably shouldn’t have done that, but you come so far, and since you’re cult members you like being here. And I feel an obligation to tell you something sort of interesting, and I just went straight into Valeant that year. It was really pretty disgusting. 

The interesting thing is how many high-grade people that took in. It was too good to be true. There was a lot wrong with Valeant. It was so aggressive. It was drugs people needed. It was just...take the difference between Valeant and the Daily Journal Company, and the foreclosure boom came, we had 80 percent of the foreclosure business in our area. It’s a big area, Southern California and Northern California too. It would have been very easy for us to raise the prices and make, I don’t know, $50 million more or something like that. All these people were losing their houses, a lot of them perfectly decent people. It never...the idea that just right in the middle of that we’d make all the money we could, which some of our competitors did by the way. We just didn’t do it. 

I don’t think capitalism requires that you make all the money that you can. I think there are times when you should be satisfied with less based on just ideas of decency. And at Valeant, they just looked at it like a game like chess. They didn’t think about any human consequences, they didn’t think about anything but getting what they wanted—which was money and glory—and they just stepped way over the line. And of course in the end they were cheating. 

But I don’t have a new one. I got a lot of publicity over that Valeant thing. I’m not looking for—I don’t want this room to have twice as many people next year, and I don’t want me not to be here either. 

Q: Mr. Munger, Tim Medley. Thank you for your advice over the past 30 years. My question relates to a talk you gave to the Foundation Financial Officers in 1998 here in California, and in that talk you were critical of the complexity and the expense of many foundation portfolios and you said specifically, “An institution with almost all wealth invested long-term in just three fine domestic corporations is securely rich.” And you gave as an example the Woodruff Foundation in Coca-Cola. So if you had a foundation today with let’s say a billion dollars, would you be comfortable with it being invested in just three stocks? 

MUNGER: Well, let’s take the foundation. I’ll change your question around in order to answer
it. Am I comfortable with a non-diversified portfolio? Of course I am. If you say the Mungers—I care about the Mungers—the Mungers have three stocks: we have a block of Berkshire, we have a block of Costco, we have a block of Li Lu’s Fund, and the rest is dribs and drabs. So am I comfortable? Am I securely rich? You’re damn right I am. 

Could other people be just as comfortable as I who didn’t have a vast portfolio with a lot of names in it, many of whom neither they nor their advisors understand? Of course they’d be better off if they did what I did. And are three stocks enough? What are the chances that Costco’s going to fail? What are the chances that Berkshire Hathaway’s going to fail? What are the chances that Li Lu’s portfolio in China is going to fail? The chances that any one of those things happening is almost zero, the chances that all three of them are going to fail. 

That’s one of the good ideas I had when I was young. When I started investing my little piddly savings as a lawyer, I tried to figure out how much diversification I would need if I had a 10 percentage advantage every year over stocks generally. I just worked it out. I didn’t have any formula. I just worked it out with my high school algebra, and I realized that if I was going to be there for 30 or 40 years, I’d be about 99% sure that it would be just fine if I never owned more than three stocks and my average holding period is three or four years. 

Once I had done that with my little pencil, I just...I never for a moment believed this balderdash they teach about. Why diversification? Diversification is a rule for those who don’t know anything. Warren calls them “know-nothing investors”. If you’re a know-nothing investor, of course you’re going to own the average. But if you’re not a know-nothing —if you’re actually capable of figuring out something that will work better—you’re just hurting yourselves looking for 50 when three will suffice. Hell, one will suffice if you do it right. One. If you have one cinch, what else do you need in life? 

And so, the whole idea that the know-something investor needs a lot of diversification—to think we’re paying these professors to teach this crap to our young. And people think they should be paid by telling us to diversify. Where it’s right, it’s an idiot decision, and where it’s wrong, you shouldn’t be teaching what’s wrong. 

What’s gone on in corporate finance teaching is that people are getting paid for dispensing balderdash, and since I never believed that it was a great help to me, it helps if you’re out in the market and the other people are believing balderdash and you know what the hell’s going on, it’s a big help. So of course you don’t want a lot. 

If you’re Uncle Horace, who has no children, has an immense business which is immensely secure and powerful, and he’s going to leave it all to you—if you come to work in the business you don’t need any diversification. You don’t need any corporate finance professors. You should go to work for Uncle Horace. It’s a cinch. You only need one cinch, and sometimes the market gives you the equivalent of an Uncle Horace and when it does, step up to the pie-cart with a big pan. Pie carts like that don’t come very often. When they do you have to have the gumption and the determination to seize the opportunity assuredly. 

I was lucky. Imagine learning that from your dead great-grandfather at a very young age. But you know, I spent my whole life with dead people. They’re so much better than many of the people I’m with here on earth. All the dead people in the world, you can learn a lot from them and they’re very convenient to reach. You reach out and grab a book. None of those problems with transportation. So I really recommend making friends among the imminent dead, which of course I did very early. And it’s been enormously helpful. Some of you wouldn’t go with me, but Adam Smith really did. 

Q: My question is about the Irish economy and Irish banking. I know that Berkshire Hathaway was a shareholder in Irish banks pre-2008. I’m wondering if you could you comment on how the Irish economy and the Irish banking system proceeds, with the UK not being part of the European Union, going forward. 

MUNGER: Well, that of course was a mistake, and it was a mistake that we shouldn’t have made because both Warren and I know you can’t really trust the figures put out by the banking industry. And the people who run banks are subject to enormous temptations that lead them astray because it’s easy to make a bank report from earnings. But a thing that any idiot could do, which is make it a little more gamey. And of course that’s dangerous, and yet the temptations are very great. So we shouldn’t have made that mistake, but we did. And that’s a good lesson too, that even if you’re really good at something you will occasionally drift and do a dumb mistake. 

And now what’s the question about the bank? They went crazy in Ireland—the bankers—and we went crazy when we trusted their damn statements and it was a mistake. Now, what Ireland has done was very smart in reducing all these taxes. Not all the English-speaking people with practically no taxes, and there’s a fair amount of charm and so forth in Ireland. It’s not like it’s a terrible place to be. They just sucked in half the world into Ireland where they got these...Gates went there very early with Microsoft, and so on, and they took a place that was really a backward place that had a sort of internal civil war for 60 or 70 years and bad opportunities, and they really brought in a lot of prosperity, and they did that by this competitive lowering of taxes and so on. 

So it worked for Ireland, so I think Ireland deserves a lot of credit for the way they advanced their country. And of course they were going to have a thing where all the countries keep trying to reduce their taxes to suck in the foreign...but it won’t work for everybody, but it did work for Ireland. So I think Ireland deserves a lot of credit, and of course they recovered pretty well from a very major collapse. Irish are like the Scottish. I always think that those Gallics are pretty unusual people, and I’m very glad that I had a Scottish-Irish great-grandmother. 

Q: Charlie, on your right.. I just want to thank you firstly and foremost for being such an amazing teacher to me and all the investors around the world. My question is in regards to Lee Kuan Yew, and you’ve on several occasions spoken about the economic miracle that is Singapore, and then how it was transferred on by Deng Xiaoping to China. What are your thoughts about India that’s going through a similar change with the prime minister who also idolizes his people and wants to create a similar sort of situation? I’d like you’re thoughts on that. Thank you. 

MUNGER: Well, that’s a very intelligent question, and I’m not saying all the other questions weren’t. I regard...Lee Kuan Yew may have been the best nation builder that ever lived. He took over a malarial swamp with no assets, no natural resources, nothing, surrounded by a bunch of Muslims who hated him, hated him. In fact, he was being spat out by the Muslim country. They didn’t want a bunch of damn Chinese in their country. That’s how Singapore was formed as a country—the Muslims spat it out. And so here he is, no assets, no money, no nothing. People were dying of malaria, lots of corruption—and he creates in a very short time, by historical standards, modern Singapore. It was a huge, huge, huge success. It was such a success, there is no other precedent in the history of the world that is any stronger. 

Now China’s more important because there are more Chinese, but you can give Lee Kuan
Yew a lot of the credit for creating modern China because a lot of those pragmatic communist leaders—they saw a bunch of Chinese that were rich when they were poor and they said, “to hell with this”. Remember the old communist said, “I don’t care whether the cat is black or white, I care whether he catches mice”. He wanted some of the success that Singapore got and he copied the playbook. So I think the communist leadership that copied Lee Kuan Yew was right. I think Lee Kuan Yew was right. And of course, I have two busts of somebody else in my house. One is Benjamin Franklin, and the other is Lee Kuan Yew. So, that’s what I think of him. 

Now you turn to India, and I would say I’d rather work with a bunch of Chinese than I would Indian civilization mired down, caste system, over-population, assimilating the worst stupidities of the democratic system. Which, by the way Lee Kuan Yew avoided. It’s hard to get anything done in India and the bribes are just awful. So all I can say is, it’s not going to be easy for India to follow the example of Lee Kuan Yew. 

I think that India will move ahead, but it is so defective as they get ahead, and of course the Indians I know are fabulous people. They’re just as talented as the Chinese. I’m not speaking about the Indian populace, but the system and the poverty and the corruption, and the crazy democratic thing where you let anybody that screams stop all progress. It mires India with problems that Lee Kuan Yew didn’t have. 

Now, I don’t think those Indian problems are always easy to fix. Let me give you an example. The Korean steel company, POSCO, invented a new way of creating steel out of lousy iron ore and lousy coal. And there’s some province in India that has lots of lousy iron ore and lots of lousy coal, which there’s not much use for. And this one process would take their lousy iron ore and the coal and make a lot of steel, and they got a lot of cheap labor. 

So, POSCO and India were made for each other, and they made a deal with the province to get together and use the POSCO know-how and the India lousy iron ore and lousy coal. And eight
or nine or ten years later with everybody screaming and objecting and farmers lying down in the road, or whatever’s going on, they canceled the whole thing. In China they would have just done it. Lee Kuan Yew would have done it in Malaysia. India is grossly defective because they’ve taken the worst aspects of our culture—allowing a whole bunch of idiots to scream and stop everything and they’ve copied it. And so, they have taken the worst aspects of democracy and then they forged their own chains and put them on themselves. So, no, I do not like the prospects of India compared to the prospects of...and I don’t think that India’s going to do as well as Lee Kuan Yew. 

Q: Hi, my name’s [unintelligible] and I’d like to ask a question about the [unintelligible] loss. In ’73 your investment firm with Mr. Wheeler lost over 30 percent and again in ’74. That’s over half in two years, so what happened, and have you been doing it differently since then? 

MUNGER: Would you have him restate that for me because I don’t hear as well as I used to? 

Q: So, what happened in ’73 and ’74 when your investment firm lost over half? 

MUNGER: Oh, that’s very simple. That is very easy. That’s a good lesson. That’s a good question. What happened is the value of my partnership where I was running, went down by 50 percent in one year, and the market went down by 40 percent or something. It was a once-in-30-year recession. I mean, monopoly newspapers were selling at three, four times earnings. At the bottom tick, I was down from the peak, 50 percent. You’re right about that. That has happened to me three times in my Berkshire stock, so I regard it as part of manhood. If you’re going to be in this game for the long pull—which is the way to do it—you’d better be able to handle a 50% decline without fussing too much about it. And so, my lesson to all of you is conduct your life so that you can handle a 50% decline with aplomb and grace. Don’t try to avoid it. It will come. In fact, I would say if it doesn’t come, you’re not being aggressive enough. 

Q: Thank you for having us, and thank you for your awesome employees for tolerating many more people in here than normal. My question relates to... 

MUNGER: They might think it’s their last chance. 

Q: My question relates to your paper on the biases of psychology of human misjudgment. You spoke about choosing great people earlier, and I’m curious, how do you evaluate, handle, and manage people knowing they might exhibit or suffer from biases you are not? And how have you and Mr. Buffett become such fine judges of character, not just someone’s skills and abilities? 

MUNGER: Well, I think partly we look smart because we pick such wonderful people to be our partners and our associates, even our employees and that’s going on right here. Gerry Salzman is not normal. He looks normal, but he’s a damn freak. Gerry does things across two or three disciplines that are almost beyond human and he’s always been that way. By the way, he’s just another Midwesterner. He’s come out of the soil back there. So, we’ve been very lucky to have these wonderful people. 

I wish...I’m not quite sure...I think one thing we’ve done that’s helped us to get wonderful people, I always say the best way to get a good spouse is to deserve one, and the best way to get a good partner is to be a good partner yourself. And I think Warren and I have both done good with that. But whatever the reason, we’ve had these marvelous partners, and they make us look a lot better than we are. You wouldn’t even be here if Gerry Salzman weren’t here. We did not have a number two choice to run the Daily Journal. And by the way, that happens to me all the time. We have an executive search or something, and there’s a number one and number two is like going off a cliff and we really...we need one. But there aren’t three good ones to pick where they’re all good and one’s a little better. Every executive search I’ve had, it seems to me there’s one guy who’s fine and everybody else is the pygmy. 

I think good people are hard to find, and people like Warren and I have had wonderful people who we’ve worked with all our lives and time after time. That’s one of the reasons Warren says he tap dances to work. You’d tap dance too if you interfaced with the people Warren interfaces with all day. They’re wonderful people and they win all the time instead of losing. Who doesn’t like winning in good company? So, if you can duplicate that, why, you’ve got a great future. I think we were a little lucky, and I can’t give you any luck. 

Q: We have a Chinese platform that focuses on reading content on people trying to invest out
of China, and China will become the largest pool of investment capital in the world just by nature of [unintelligible]. It’s the largest economy in the world with 30 percent savings rate. So they haven’t been able to invest because of capital controls, but that day will come, and since they’re at least a half a century behind in understanding about investing, what would be the first thing that you would tell a Chinese person who wants to invest in the US? What should they do with their money when they’re making their initial investment outside? 

MUNGER: Well, you’ve made an assumption I don’t follow. If I were a Chinese person of vast intellect and talent, discipline, all the good qualities, I would invest in China, not the United States. I think the fruit is hanging lower there and some of the companies are more entrenched, so I don’t agree with your proposition. I think they have a tendency to think we were backwards; therefore, when we get rich we should go over and invest in America. I think it’s always a mistake to look for a pie in the sky when you’ve got a big piece of pie right in your lap. And so, if I were...at current prices, I think an intelligent person would do better investing in China. 

Q: First of all, thank you for being a great teacher. I have two questions. Right here you said everyone should spend 10% to 20% on some big ideas. What are one or two big ideas that you are talking about? And then second question is whether... 

MUNGER: I can’t tell you what to invest in. 

Q: No, I’m not saying the big idea is that you don’t mean investment. You said specialize, but then spend time working on some big ideas. 

MUNGER: Well, the big ideas, I think you should be intelligent in improving yourself. You’re way better to take on a really big important idea that comes up all the time than some little tiny idea that you might not face. So, I always tried to grab the really big ideas in every discipline because why piddle around with the little ones and ignore the big ones? Just all the big ideas in every discipline are just very, very, very useful. 

Frequently, the problem in front of you is solvable if you reach outside the discipline you’re in and the idea is just over the fence. But if you’re trying to stay within the fence you won’t find it. I’ve done that so much in my life it’s almost embarrassing, and it makes me seem arrogant because I will frequently reach into the other fellow’s discipline and come up with an idea that he misses. And when I was young that caused me terrible problems. People hated me, and I probably shouldn’t have been as brash as I was, and I probably shouldn’t be as brash as I am now. 

I haven’t completed my self-improvement process. But it’s so much fun to get the right idea a little outside your own profession. So if you’re capable of doing it, by all means learn to do it, even if you just want to learn it defensively. I do not observe professional boundaries. 

My doctor constantly writes PSA test: prostate specific antigen. And I just cross it out and he says, “what the hell are you doing, why are you doing this”? And I say, well now, I’m trying to give you an opportunity to do something dumb. If I’ve got an unfixable cancer that’s growing fast in my prostate I’d like to find out three months in the future, not right now. And if I got one that’s growing slowly, I don’t want to encourage some doctor to do something dumb and intervene with it. So I say, I just cross it out. Most people are not crossing out their doctor’s prescriptions, but I think I know better. I don’t know better about the complex treatments and so forth, but I know it’s unwise for me to have a PSA test, so I just cross it out. I’m always doing that kind of thing and I recommend it to you when you get my age. Just go cross out that PSA test. Now the women I can’t help. 

Q: I want you to imagine you had the opportunity to invest in a couple money managers that you really liked, and they offer you a couple different ways to invest in a strategy. So, one way is through a limited partnership that would flow through the taxes, and the other way is through a corporation that would pay tax on the gains and the dividends. So basically, the corporation would serve no other function though, other than paying taxes. So, I think you’d be crazy to say that there is two ways of investing equally desirable, so my question is... 

MUNGER: You’re certainly right about that. It’s plumb crazy, and that’s exactly the way people who buy Berkshire are investing. It’s plumb crazy to have a big common stock portfolio in a corporation and pay taxes compared to investing in a partnership that doesn’t. And that’s just the way the Berkshire shareholders have invested. And they have made, whatever it is, 25% a year since we were there. But you’re right, it’s not the logical way to do it. 

Q: So my question is if you had to decide to invest in pool A or pool B, how would you decide on it? What method you would use to figure out what discount would make you indifferent to whether you would invest through the corporate tax-paying structure when it flows to the... 

MUNGER: I think it is totally asinine to invest in a portfolio of common stock through a corporation taxed under the Internal Revenue Code under Subchapter C or something. Totally asinine. At Berkshire, the public securities keep going down and down as a percentage of the total value, so it doesn’t matter. We’re getting to be sort of a normal corporation, but I don’t think anybody’s right mind should invest through a corporation in a puddle of securities. In fact, the disadvantage is so horrible. So, I wouldn’t even consider it. In other words...and I regard it as a minor miracle that we were able to get where we did. So, of course you’d invest in a partnership. 

Q: So, when anyone who invests in Berkshire has to decide what discount to put on a pool of securities that has a future tax lien on the gains, do you have any mental model for... 

MUNGER: Yeah, my model is to avoid it. We don’t want to invest in a portfolio of securities in somebody else’s corporation. You’re totally right, which you already knew by the way. 

Q: Mr. Munger, I am Sandra from China and I want to know what’s your new findings of China. Would you say business opportunities are just different because I remember you once said the Chinese were the first to be the one and got [unintelligible] years [unintelligible]. And also, a second question is after the US election, the Hedge Fund Manager, Ray Dalio, said the new administration could unleash the animal spirits which could lead to a better US economy? Do you buy this theory? Thank you. 

B: Well, I’m not sure I understood that completely, but I’ll do my best. What I like about China is that they have some companies that are very strong and still selling at low prices. And the Chinese are formidable workers and they make wonderful employees, and there’s a lot of strength in that system. And the Chinese government really tries to help its businesses. It does not behave like the government of India, which I don’t think runs its country right at all. And so that’s what I like about China. 

Of course, I have to admire taking a billion and half people in a state of poverty up that fast. That was never done in the history of the world and I admire them. You go to China, all those bullet trains that go into the heart of the city…what they’ve done is just an incredible achievement and they’ve done it not by borrowing money from Europe the way we did when we came up. They have taken a poor nation with a lot of poverty—and what they did is save half their income when they were poor and drive their nation way up with a lot of deferred gratification. So it was unbelievably admirable and unbelievably effective, so I admire that part of the Chinese picture. 

China has one problem. The problem with the Chinese people is they like to gamble and they actually believe in luck. Now that is stupid. What you don’t want to believe in is luck. You want to believe in odds. And China, there’s some reason in the culture—too many people believe in luck and gamble and that’s a national defect. 

Q: Hi. My name’s Alex Manfeld. I work with John Griffin in New York. I was curious, if the world changes a lot during a lifetime, by the time I’m closer to your age, what do you think will not change about what makes a good successful business? 

MUNGER: What will not change is that it won’t be that damned easy. There will be lots of... people will die that you love. You’ll have close breaks where it goes against you. There’s a lot of trouble that’s sure to come, and at the end you’ll know that it’s all over, and that’s the game. It’s a very funny game when you know when you start you have to lose. See, a dog doesn’t have to do that. We know from the start we can’t win. 

Somebody right said that the law of thermodynamics ought to be restated. You can’t win, you must lose, and you can’t get out of the game. So we all face this ultimate difficultly, but once you’ve accepted the limitations, you’ve got the problem of how to get through a lot and expand reasonably well. And I don’t think that’s that hard to figure out because if you do pretty well—considering what you started with and so forth—and you stand at the end and you’ve done incredibly, you’ve helped other people who needed help because you had the capacity and intelligence to do it and so on and so on. Set a reasonable example. It’s a pretty good thing to do and it’s quite interesting and the difficulties make it interesting. 

And something else happens that is really weird. We were talking about…in our director’s meeting that preceded this meeting…you always get glitches in something as complicated as a new software program going into a big new area, and you suddenly have reverses and troubles and you’re scrambling. And what I said is that I’ve noticed in a long lifetime that the people who really love you are the people where you scramble together with difficulty and you’ve jointly gotten through. And in the end those people will love you more than somebody who’s just shared in an even prosperity through the whole thing. 

So, this adversity that seems so awful when you’re scrambling through it actually is the [unintellible] of your success, your affection, every other damn thing. And if you didn’t have the adversity you wouldn’t have the bonds which are so useful in life that are going to come from handling adversity well. The idea that life is a series of adversities and each one is an opportunity to behave well instead of badly is a very, very, good idea. And I certainly recommend it to everybody in the room. And it works so well in old age because you get so many adversities you can’t fix. So you better have some technique for welcoming those adversities. 

Q: Hi, Charlie. My name is Sharee. You tell someone how one should situate themselves in a way where they can deal with a 50% downturn in a portfolio. For investors forming a partnership in today’s competitive market concentrating in those few rare and wonderful opportunities, do you believe that the 0/6/25 high watermark fees structure that the Buffett Partnership popularized is the fairest structure for both limited partners and the manager themselves? And could you also touch upon what fee structure you employed during your partnership? Thank you. 

MUNGER: Well, I did copy the Buffett formula more or less, and I do think it’s fair. And I think it’s still fair, and I’m looking at Mohnish who still uses it. I think it is fair and I wish it was more common. I basically don’t like it where businesses are scraping it off the top. If you’re advising other people, you ought to be a pretty rich pretty soon. Why would I take a lot of advice from somebody who couldn’t himself get pretty rich pretty soon? And if you’re pretty rich, why shouldn’t you put your money alongside your investors and grow up and down with them? And if there’s a bad stretch, why should you scrape money off the top when they’re going down and up? So I like the Buffett system, but it’s like so many things I like—it’s not spreading very much. My net influence in the world—even Warren’s—has been pretty small. Imagine how much copying we have in our executive compensation methods. It’s about three examples. Yes, I think it’s a fine system. 

Q: Hello. You spoke earlier about natural gas and the shipping of natural gas and that activity... 

MUNGER: If I were running the world as a benign despot, I wouldn’t be shipping any natural gas outside of the United States. 

Q: So, to tap into that view, you’ve been active in two states that are big in agriculture: Nebraska and California produce. What are your thoughts on the ag industry specifically tied to subsidies, all that stuff? I would think you’d view it as outdated and maybe it’s threatening a lot of resources, Maybe just inefficient and based on past methods. What’s your thought on ag and subsidies? 

MUNGER: Well, the interesting thing about agriculture is what’s happened in my lifetime, which is the productivity of naked land has gone up about 300%. And if it weren’t for that there would be a lot of starvation on earth. So, the ag system is one of the most interesting things that has happened in the last 60 or 70 years, and we literally tripled the [unintelligible] of land. And we did it all over the world, and there was just a few people who did it—the Rockefellers, Borlaug, and so forth. It was one of the most remarkable things in the whole history of the earth, and we need another doubling. And we’re probably going to get it and it’s absolutely incredible how well we’ve done. And it’s amazing how efficient our farmers are. 

We don’t have much socialization in farming. We’ve got a bunch of people who own the farms and manage them themselves. There’s not much waste and stupidity in farming. Now people complain that we’re using up the topsoil, which I think we are, and I think that’s more of a mistake. I would fix that if I were a benign despot, but leaving aside using up the topsoil up too fast, I think farming is one of the glories of civilization. So I think it’s been wonderful what’s happened in farming. 

Now in terms of subsidies, it matters to the farmers where they get their subsidies. And there’s no question about the fact that we’ve protected our farmers with subsidies, and the farmers we’re protecting are getting richer and richer because the farms are owned by fewer and fewer people, and own more and more acres per person. So, it’s very peculiar that we’re subsidizing people who are already filthy rich, to use up our topsoil a little faster and create stuff which we turn into ethanol, which is one of the stupidest ideas the world ever...you know, I’m a specialist in stupid ideas, but I would say turning corn into gasoline is about as stupid an idea. I would almost rather jump out of a 20-story building and think I could fly than turn dagnabbit corn into motor fuel. It’s really stupid, and yet that’s what our politics does. 

I’ve got no cure for the stupidity of politics. If I did the world it would be quite different, but I think that’s pretty minor whether we have subsidies or not. The main thing that’s happening that has enabled the present population of the world to stay alive is this agricultural revolution, and this very good management of our farmlands, and the improving agricultural standards in the rest of the world. And it’s gone on quietly that we haven’t even noticed it hardly. 

How many of you are just deeply aware of the fact that grain per acre has gone up by 3 or 4 hundred percent? That’s a huge stunt. And by the way, if you take those marigold seeds and don’t use hydrocarbons, the yields are lousy. We’re feeding ourselves because we don’t know how to turn oil into food. That’s one of the reasons I want to hold onto the oil. Something that can be turned into food is quite basic, and so I don’t mind conserving the oil instead of producing every last drop as fast as one can. It’s odd that my idea hasn’t spread to more of the people. I may have three or four other people who agree with me in this room, but you’re a bunch of admirer. In the rest of the world I’m all alone. 

Q: Hello, Charlie. Thank you for mentoring us. My question is this. You talked about emotions, you talked about discipline, and you talked about facing adversity. Can you flesh out more about the spiritual side of this, about how do you deal with it to pass up adversity with dealing with the struggles and ultimately life? Yeah. 

MUNGER: Well, just because you don’t have a specific theology and I don’t...you know, when I was a little kid and my grandfather sent me to bible school and they told me there was a talking snake in the Garden of Eden. I was very young, but I didn’t believe them and I haven’t changed. It doesn’t mean I am not spiritual. I just don’t need a talking snake to make me behave well. And I would say that the idea that came down to me—partly through my family—was that rationality is a moral duty. If you’re capable of being reasonable, it’s a moral failure to be unreasonable when you have the capacity to be reasonable. I think that’s a hair shirt that we should all take on, even if we’re pretty stupid because it’s good to be less stupid. 

So I think rationality is a moral duty and we all have a duty to get better. And of course we also have to adjust to the other people who we’re going through our journey with. I think it would be crazy not to have a social safety net when you’re as rich and successful as we are. Now I don’t think it has to be as dumb as the one we have, but of course we need a solid social safety net and that’s a moral idea. So I’m all for morality without the talking snakes. 

GERRY: We’re going to take two or three more questions and then I think Charlie will be here immediately after. And we have copies of two of Charlie’s writings. I think we made 400 copies and they would available on your way out. And also you probably... 

MUNGER: I was cleaning out my office because we’re moving and we just found these damn things, and [unintelligible] coming up from India and China. I gave them my old things. I haven’t even read them in years and years, so I’m just revisiting some of my past screeds. 

Q: Mr. Munger, Berkshire is the largest shareholder of Phillips 66, and Phillips 66 owns a general partner and limited partner stakes in two different MLPs. I was wondering what your thoughts are on the Master Limited Partnership structure in industry? And also, I was wondering if you have any preliminary thoughts on the proposed border adjustment tax. 

MUNGER: Well, let me take the last question first. David, we do not know what the border adjustment tax is. I don’t think the people who are proposing it know what it is, and I don’t think Trump and the Republicans in Congress have agreed on anything. So I think we’re just talking about... but do I think that some people rewriting the tax system might be a very good idea? The answer is yes. Do I think we should rely on consumption tax more? The answer is yes. Do I really care if somebody piles up a lot of money and leaves it to some foundation? That’s not my idea of a big evil. If they do want to live high on their private airplanes and their $300 dollar dinner checks, I’m all for taxing the people who are living high. So I like the idea of bigger consumption taxes, and I think there’s a lot to be said for a different kind of a tax structure. 

Q: Hi, Mr. Munger. You highlighted this idea of deferred gratification a lot today, and I just wanted to get your thoughts on what areas and aspects of life is it most valuable, and where should you not be [unintelligible] should you enjoy things now versus when you should just grind away and invest in the future? Thanks. 

MUNGER: Well, I don’t think you should use up your body by being stupid in handling it, and I don’t think you should be stupid in handling your money either. And I think there are a lot of things where the only way to win is to work a long time towards a goal that doesn’t come easily. Imagine becoming a doctor. That is a long grind, all those night shifts in the hospital and so and so on. It’s deferred gratification, but it’s a very honorable activity—being a doctor—and by and large our doctors are very nice people and they’ve been through a lot. So, I tend to admire the life of a doctor more than I admire the life of a derivatives trader and I hope all of you do too. And I think deferred gratification in the way our doctors behave is a very good thing for all the rest of us. 

Q: I had a very general question about the Circle of Competence. How do you know its limit and does it get redrawn from time to time, you think you know something and then you don’t? Does it always expand or does it contract? 

MUNGER: Well of course, you know some things that aren’t so. Of course if you’re dealing with a complex system, the rules of thumb that worked in the complex system in year one may not work in year 40. S in both cases it’s hard. The laws of physics you can count on, but the rules of thumb in a complex civilization changes as the civilization changes. And so you have to live with both kinds of uncertainty and you have to work longer. It’s not a bad thing. It’s interesting. We’re all the same here...who would want to live in a state of sameness? You might as well be dead. 

Part II: 2017 Daily Journal Shareholder Meeting Q&A with Charlie Munger

MUNGER: Why do you want to strain and have more danger when you're already filthy rich? As Warren says, “what difference does it make to him if he has an extra zero on his tombstone”?

Q: But Charlie, for return on excess capital, isn't that already taken into account leverage though, because return on equity is enhanced by leverage, but return on invested capital is not necessarily enhanced by leverage? 

MUNGER: Well, of course, everybody would rather have a business with a higher return on capital.

Q: Other than the Wall Street Journal, what's your habits…?

MUNGER: I've read through three or four newspapers when I get up in the morning, and I always have two or three books that I'm kind of reading back and forth between them, and that's what I do. Yeah, that's what I've done all my life. 

Q: What are your four papers?

MUNGER: Wall Street Journal, New York Times, Financial Times, LA Times. 

Q: No Washington Post? You don't want to be upset?

MUNGER: No Washington Post.

Q: I heard you speak about..

MUNGER: What about going to Medical School? That's a lot of work. You're not living high or this or that, but later you're a doctor and have a better life. That's deferred gratification.

Q: So, Charlie, you're the Chairman of the Good Samaritan Hospital. Do you have a recommendation or any suggestions to…?

MUNGER: Well, that's been a—I took that because it was basically a losing hand. And I play so many winning hands, I thought I should force myself to play a losing hand. And I must say it has been very difficult.

Q: Do you believe in like a single healthcare payer system or…?

MUNGER: I think a singlepayer health system would work a lot better, yes. I think it will eventually come. The existing system is a ridiculous—it's ridiculous. It's ridiculous. 

Q: How should we help our children to avoid envy and jealousy?

MUNGER: Avoid what?

Q: Envy and jealousy.

MUNGER: Well, you can't. 

Q: …what’s your go-to?

MUNGER: We don't have one. There are certain things we avoid because we don't think we have the competency to deal with them and there are certain things that we kind of like that we're used to and so we don't have a common set of rules and we don't have any formulas that are exact or anything like that. And some of the stuff we do, we just know it's a little better than our alternatives. We're getting all kinds of stuff now that we would not have done. We never would have bought Apple stock in the old days.

Q: ____? 

MUNGER: He seem very straightforward, but you see, I get a million letters from people who want to go work with Berkshire or come to work. I sometimes get a check for $50,000. "I'll pay this to work for you." I send the $50,000 back. I will say it's kind of a brash thing to do and I kind of admire it because it's kind of a smart ass stunt. I'm also a smart ass when I was young myself. But I’m not looking for another starting helper or something. I'm playing out the end game. Anybody who's playing out an endgame when they're 93 is crazy. It's an end game. 

Q: So, you bet against the jockey, not against the horse necessarily?

MUNGER: No, everything about—McKenzie, it's a killing game out of McKenzie. There are a lot of manipulative types like McKenzie.

Q: So, is it just simply your observation of people, more so than the quantitative factors—you don't need to look at the balance sheet when you're looking at the person ___

MUNGER: Well, I can see the chain letter aspects of the game and the huge leverage and the huge—it was just, he’s building a chain letter. It's intrinsically sort of dishonorable thing to do. The nature of your doing something that you can't contain and you make it look like it will. So, it's intrinsically sort of dishonorable. So I don't like chain letter operators. I don't like drunks. I don't like people who often lie. I don't like people who raise prices on drugs that people have to have by 500% overnight, just so—there's a lot of flags that were flying.

Q: Charlie, I work with Yahoo Finance. My name is Juliet. We see a lot of the folks boycotting retailers because they sell Trump brand merchandise and vice versa because...

MUNGER: I wouldn't do that. 

Q: Have you seen these boycotts?

MUNGER: I don't like all that. Basically, I'm not in favor of young people agitating and trying to change the whole world because they think they know so much. I think young people should learn more and shout less. So, I'm not sympathetic to anybody that—young people who are out in the streets agitating and they say the hell of a lot. That's not my system. I think if you got a Hitler or something, go on and agitate. But short of that, I think, that young people ought to learn more and shout less. 

Q: Did you personally...

MUNGER: They ought to act more like Chinese. 

Q: Did you personally know Richard Feynman?

MUNGER: Yes, I knew him slightly; very slightly.

Q: What do you think of him? 

MUNGER: Well he was a genius. On the other hand, he was a screwball. He absolutely was nuts about screwing lots of different women and going after the wives of his own graduate students. That’s disgusting. So he had his blind spot. In Physics, in teaching, he is one of the noblest people we'd ever had. But in his personal life, he was a little nuts.

Q: Charlie, I have a question about real estate and investments in ___.

MUNGER: Very bad. 

Q: When I look at real estate or stocks, real estate is just easier to evaluate—you know, comps and cash flow and replacement costs. It just seems an easier game than the equities market, provided that you don't ____?

MUNGER: Real estate?

Q: Yeah, real estate.

MUNGER: The trouble with real estate is that everybody else understands it and the people who you are dealing with and the competing with, they specialized in a little 12 blocks in a little industry. They know more about the industry than you do. And you got a lot of bullshitters and liars and brokers. So it's not that easy. It's not a bit easy. 

Your trouble is if it's easy—all these people, a whole bunch of ethnics that love real estate,. You know, Asians, Hasidic Jews, Indians from India, they all love real estate; they're smart people and they know everybody and they know the tricks. And the thing is you don't even see the good offers in real estate. They show the big investors and dealers. It’s not an easy game to play from a beginners point of view; whereas with stocks, you're equal with everybody if you're smart. In real estate, you don't even see the opportunities when you're a young person starting out. They go to others. The stock market's always open, except venture capital. Sequoia sees the good stuff. You can open an office—Joe Shmo Venture Capitalist—startups come to me. You’d starve to death.

You've gotta figure out what your competitive position is in what you're choosing. Real estate has a lot of difficulties. And those Patels from India that buy all the motels, they know more about motels than you do. They live in a god damn motel. They pay no income taxes. They don't pay much in worker’s compensation and every dime they get, they fix up the thing to buy another motel. Do you want to compete with the Patels? Not I.

Q: Do you like to?

MUNGER: Not I. 

Q: Charlie, I wanted to dig into this a little bit more. You and Warren, throughout your business history, you are incredible at judging people, whether it’s Mrs. B____

MUNGER: We were pretty good, yes.

Q: What was it that you looked for and what were the mistakes that you made that you learned from along the way in judging, you know, who would be good business partners to work with?

MUNGER: Well, first there's some very good people in Warren’s family—one of whom I worked under is Fred Buffett. So we have people we knew well who were really noble people. So we have a basis to compare people against and we have a basis to kind of compare in terms of capacity and talent and so forth. So, we have a lot of data in our heads that helped us and I think we have some genetic advantages. Not IQ points but just absolute quirks of nature that made us better. 

Q: Was it Harry Bottle, what was his name?

MUNGER: Yes, Harry Bottle.

Q: Tell me about Harry Bottle and what you saw in him that was so...

MUNGER: Well I worked with him in an electronics business that had gotten into terrible difficulties. He helped us work out of that business trouble by downsizing. He knew how to do it, and Warren had a business that needed downsizing and Warren didn't know how to do it. So, I put those two together and of course it worked well.

Q: Charlie, could you talk about the episode at Salomon Brothers and what you really learned about people from there as well because I know...

MUNGER: What I learned is that easy money and easy leveraging and so forth in investment banking—it creates a culture that's full of envy, jealousy, craziness, overreaching, over-leveraging. It's a very hard business to manage. It was out of control. The envy is—they went berserk. If one jerk got $4 million and the other guy was furious that he only got $3 million. They just seethe and cause trouble. It was a very difficult business to manage. I think a lot of easy money that comes in the finances just ruins frankly everybody.

Q: Do you have any thoughts on Apple Corporation?

MUNGER: Well, it's a very odd thing for us to do and obviously we've got no special insights as to how sticky Apple's business is. Apple's whole supply chain is like one man with two million employees. That's very peculiar and the man is not perfect. And on the other hand, Apple has a very sticky bunch of customers. Will they be able to keep that going and, if so, how long? I don't know, but I think the chances are pretty good that it's going to be quite sticky and that's why we bought it.

But, as I say, we have a slight edge in our favor there, which is not a big edge is. We're doing that because we don't find the stuff we used to find where we knew we couldn't lose. Apple we've merely got what we think is a little edge. We don't have a big insight that can't fail. But if you can't find—you got the money and you haveto put it somewhere. And if you can't find what you used to like, you have to put it with what ’s best available.

It's a nice problem to have to have so much money. We shouldn't be really complaining about that it got harder. The reason it got harder is because we got so much money.

We bought that Coca-Cola with a million shares. It took us eight months to buy a million shares of Coke. We were buying like half of what's trading every day. It's hard to get into all these big blocks.

Q: Are you friends with John Bogle or are you...

MUNGER: No, I just maybe I've met him once or something. Basically, I think he's right about his basic approach that not everyone is going to match the averages and he is. And his idea has succeeded and he succeeded and he was right. But he's kind of a one trick pony—I don't think he has another. He had one good idea in his lifetime and he rode it very hard. It's all you need. That's an example of one good idea. He pushed it hard and it worked. You don't need a lot of good ideas, but you do need one.

Q: Can you talk a little bit about BYD?

MUNGER: What do you want to talk about? What? That, again was something we never would have done in the early days. When I got into that, BYD was pounded down so hard, it was a Graham-type stock. It was a Graham-type stock—and more than just a startup—but a small company. 

Q: Would you see BYD doing the infrastructure here in the US or would they do...

MUNGER: No, no, no. BYD is now going into monorails. They'll do monorails in China.

Q: They wouldn't do that in the US, though? 

MUNGER: Oh, they would, but it would be pretty dumb. Monorails in the US have been a peanut business forever. It's hard. In China they can get permits. In China, they just go do it.

Q: How about energy storage?

MUNGER: Well BYD's big in this already.

Q: Do you see that happening here in the US?

MUNGER: Of course, everybody is going to do energy storage. You got to time shift the power if it comes from either the sun or the wind. Of course, there's going to be a lot of storage.

Q: This might sound like Max Planck chauffeur kind of knowledge, but when it comes to finding the sellout price—intrinsic value of the company—and you compare that to the marketcap, just BYD, let's say, how would you...

MUNGER: Oh, that's hard. And, again, we've learned things there. When we bought in, we can see that a venture capitalist would have paid 3x as much for that kind of a deal, so it was cheap. And we could see it was a good venture capital thing because the guy worked minor miracles already. So that was a cheap stock, but it was one that took some special insight and I wouldn't have had it if Li wouldn’t. 

It's Li Lu who found that. And once we were in it, I got to know Wang Chuanfu even though I can't speak a word or the language. And Wang Chuanfu is a genius and he's shrewd, and he's honest and he's fanatic and he loves his company and so on and so on and so on. And what he can do is just incredible. He learns whole new technologies. 

Q: So it's mostly qualitative?

MUNGER: It's partly what they have and it's partly it’s—basically I'm betting on the horseman there. I mean, because he's got a bunch of Chinese, young Chinese. You can't believe what those employees do. He's got 230,000 Chinese working for him. Berkshire only has 460,000 employees. That’s a lot of employees. I mean, he has a lot of employees and they can do things you can't believe when you look at those young Chinese girls.

Q: Would you buy the whole company if they'd allow that?

MUNGER: I don't think so because one of the reasons he succeeds is the Chinese are proud of an 8th son of a peasant that creates a little company all himself and it's doing so far. And all the other stuff they're doing—joint ventures and automobiles—they’re joint ventures with the West who was already ahead. So, in a sense, they love and they're proud of their own man--the son of a peasant who did it all himself and it's still Chinese. So, I wouldn't want to destroy that Chinese image by buying BYD. It works better the way it's going, but you're right, I am betting to some extent on the person.

I was in their battery separator plant. They have about five companies out there that are doing battery separators. That goo comes bilaterally and hangs together through its own chemical something cohesion. It's the most complicated damn process you ever saw. It's very hard to do. If you don't do it exactly right, the battery fails. He just learned that. Boom! What he needs to know he just figures out. There aren't many people who can do that.

Q: Do you see some of the qualities in an Elon Musk or somebody of that sort? 

MUNGER: No, I think that Wang Chaunfu knows what he can do and what would be really difficult. I think Elon Musk, he thinks he can do anything. I'd rather bet on the man that has some limit to his self-appraisal.

Q: Do you think Mr. Bezos knows the limits of his skills?

MUNGER: Way better than you think. Bezos is utterly brilliant and utterly, remorselessly ambitious. I would never bet against Jeff Bezos.

Q: Did you ever meet him?

MUNGER: Yeah, I met Bezos.

Q: You mentioned earlier about Coca-Cola becoming a little bit less efficient than they used to be?

MUNGER: For the first hundred years, all that caffeinated, carbonated sugar water with the same flavor just swept the earth. Every year, more money came in. They were drowning in money for the better part of a hundred years. Of course, it was interesting. But, of course, that kind of spoils you. Now, the basic stuff is going the other way.

Q: Do you think Coca-Cola and Pepsi still win the sparkling water battle?

MUNGER: I don't know. I think they're both very strong companies. And I think they both have a lot of momentum in place.

Q: Do you think that if they were run by 3G they would do better or worse?

MUNGER: Well I guarantee they’d do a lot better the second year. 

Q: If Glotz came to you, and asked you to make a new company today ____

MUNGER: Who?

Q: Glotz. There's an article "Turning $2 Million into $2 Trillion." It's about creating a company that would be worth $2 Trillion.

MUNGER: Yeah, I know, I gave the talk. 

Q: If he came to you today and wanted to do another company, what would you tell him?

MUNGER: Well, I wouldn't do that because I did that only retrospectively. I knew the outcome when created the story. Of course that's because it’s somewhat easier than starting now and projecting the future. So, I can explain the past a lot better than I can predict the future. Surprise, surprise. And by the way, that talk, it was a total failure when I gave it. It's been a total failure ever since. I think it’s absolutely right and there's a lot that we can learn in it. And a few nuts like you may make something out of it. But, in terms of the greater world, I bored the people. Some of them fell asleep. It was the most failed talk I ever gave so I published it when they did Poor Charlie's Almanack. I still think the basic lessons are right, it's just it's hard to understand. Most people don't understand basic psychology very well.

Q: Charlie, it looks like you hit a home run with the Physics Institute in Santa Barbara?

MUNGER: All I did was create a building. They already had the institute.

Q: But it looks fantastic, the whole idea and everything.

MUNGER: It's really wonderful. It’s amazing what you can do if you have a lot of intelligence and unlimited money. 

Q: How about a Munger Library somewhere? A Munger Library, like a presidential library? A Munger library, I'm a fan.

MUNGER: No I'm working on another student building in UCSB.

Q: Charlie, what scientific innovation going on right now that you're really excited about and what's one thing that you're really scared about?

MUNGER: I really am deeply aware of this agricultural revolution and everyone takes it granted. It wasn't—you know, it isn't like agricultural productivity increased by 300% a few decades. It was just amazing what happened. And, of course, the world needed it terribly and so I'm quite impressed. And more of that is coming. 

All that stuff about gene splicing to make plants grow better and gene splicing to make domestic animals produce better—all of that is coming and some are starting to work already. And now they'll push this cross breeding of seeds and a few more. It's a hugely important thing that's happening and the world needs it terribly. And it changed the whole world for everybody. We couldn't have this civilization without the food. And there's not that much arable land. We have to get more product out of our existing land. And our existing land—the way we're farming it intensively is degrading. And the reason we produced all that stuff is we pour chemicals and so forth into the land-—fungicides, herbicides, insecticides. 

But it’s just amazing what's happened. And not only have they created the miracle rice, the miracle grains—so I'm quite impressed by the fact that they keep doing that stuff. And to have 1% of the people produce all the food for America on their farms when it used to be 80% of the people? That's a huge, huge change in the human condition and we'd all be doing stoop labor instead of running around in airplanes to hear people talk if it weren't for all these revolutions that our predecessors created for us. So I always find it quite interesting and we need it. Costco, you know, buys a lot of produce now from vegetables grown in hot houses. By and large, those are Chinese. The Chinese, they, you know, 6 acre hothouse, they really know where every damn blade is growing and it's not that different from rice growing. I mean, they're just very good at it, and that has a lot of potential that is coming. So I like the agriculture stuff. Most people just ignore it; we take it for granted, but I'm quite impressed by it.

Q: Is America sufficiently proving to be a ham sandwich enterprise in the last few months? 

MUNGER: Well there's a lot of good left in the American economy and the American people partly because we're taking in so many talented people from these other nations. Think what we've taken in from China, India, even Japan. That's a lot of human talent. And in the old days, we got the poor people, you know, and that was harder. And now, the Chinese that are coming here, they’re not the poor Chinese—they’re the well-to-do Chinese and the children of successful Chinese families that are getting high grades and so forth; the same from India. 

Every once in a while I meet an untouchable who has just gotten off through the main technical institute of India and they succeeded, but most of the Indians I meet are all from the upper caste of India. We're sucking the brains out of India. And of course, that's good for us. Same for China, same with China.

Q: Is that a tragedy for China and India? 

MUNGER: Well they’ve got lot of people. They have a lot of brains left. People shortage is not—when you can sift a population that big, you'll get some smart people.

Q: Do you have any mental checklist to help you stick with that or prepare before you get the opportunity?

MUNGER: Well, if you haven't prepared, you won't have the courage to seize it. When I bought all that stock that The Daily Journal has—in like one day, you know—I knew something about the Bank of America. I've lived in the culture. I've known the Bank of America bankers. I know a lot about what's right with it and what's wrong with it. I knew a lot. I know a lot about Wells Fargo. I knew a lot about US Bank so___

Q: Did you pay cash or do you have to leverage up that day?

MUNGER: No, I had cash. 

Q: Do you have any thoughts on Chipotle, the safety issues there?

MUNGER: What?

Q: Chipotle and the activist involvement of that company and the food safety issues?

MUNGER: Well I do know this. That if you run a business where people have to trust your food, you just can't afford to have a scandal in food quality. Costco just sweats blood to avoid—now every once in a while, you get a few cases of some, you know, some fairly minor thing—nobody gets away. But they're just fanatic about preventing it and stamping it out when it happens and so forth. And they (Chipotle) got careless at that and, you know, the fried chicken coming in China, Yum Brand, the court have hurt them terribly. You can't afford to have a scandal if you're selling food. And when people adulterated the baby formula in China, China killed the people who did that. They're dead and they didn't take a long time of doing it, not a lot of appeals or anything. Kill our babies to make a little more money: “you never will be missed to have a little list off they went to the great beyond.” 

Q: Charlie, what about TransDigm?

MUNGER: What? I don't know TransDigm. What is TransDigm?

Q: So TransDigm, they're a supplier aircraft parts to Boeing and to Airbus and to Aerospace and defense companies, and there's been comparisons recently between TransDigm and Valeant. And I was curious if you have any thoughts on whether those comparisons...

MUNGER: Oh, I don't know anything about TransDigm. But of course, it's generally a little easier to cheat the government than anybody else, so a lot of people try and cheat the government. The defense contractors—and of course their suppliers also of the old culture—has some cheating. I regard it as a little bit dangerous territory, but I know nothing about TransDigm.

Q: Did Valeant clean itself out or is it still in the sewer?

MUNGER: Sure it's way better. You’d stop stealing if they've already cut off your left hand. You don't want to lose the other. 

Q: Charlie, did you know Sumner Redstone in law school and how do you think he could have handled his succession plans differently?

MUNGER: Well, I never knew Sumner Redstone but I followed him because he was a little ahead of me in Law School, but Sumner Redstone is a very peculiar man. Almost nobody has ever liked him. He's a very hard-driven, tough tomato, and basically almost nobody has ever liked him, including his wives and his children. And he's just gone through life. There's an old saying, "Screw them all except six and save those for pallbearers." And that is the way Sumner Redstone went through life. And I think he was in to the pallbearers because he lived so long. So I've used Sumner Redstone all my life as an example of what not to do. 

He started with some money, and he's very shrewd and hard-driven. You know he saved his life by hanging while the fire was up in his hands. He's a very determined, high IQ maniac, but nobody likes him and nobody ever did. And though he paid for sex in his old age, cheated him, you know always had one right after another.

That's not a life you want to admire. I used Sumner Redstone all my life as an example of what I don't want to be. But for sheer talent, drive and shrewdness, you would hardly find anybody stronger than Sumner. He didn't care if people liked him. I don't care if 95% of you don't like me, but I really need the other 5%. Sumner just...

Q: Do you have any thoughts on some of the smaller networks with quality content like Viacom, for example, with strong brands? Any thoughts on their future?

MUNGER: I have the general impression based on 60 years of experience (in the neighborhood), but the movie business is a tough business. Not a lot of people have done well at it, but I don't know how to create Star Wars. I don't know how to sell it for a price like that. I'm going to let somebody else make money in those difficult ways. I regard the movie business as a tough business. Now, if it's your only way up and you’re good at it, well then you have to do it. But I don't even think about those things I'm not good at. Take Netflix, who did House of Cards?

Q: Kevin Spacey.

MUNGER: I mean, the guy who gave him the money?

Q: Reed Hastings

MUNGER: Yeah, it's Netflix there, but HBO turned him down. And that was really stupid because it had worked in England; it couldn't fail. But, I'm just not attracted. I don't want to try and beat Reed Hastings or…

Q: Charlie, do you know Sol Price the founder of...

MUNGER: Very well. 

Q: Is he a good guy or...

MUNGER: A very good guy. Cranky but a very good human being; honorable, very honorable. What he liked about Costco he thought such an honorable way to make money. To try to make the stuff you're selling very good and very cheap for the people who bought it. And he was right. It was honorable and he did it very well.

Q: Do you think WalMart can turn into Sears? 

MUNGER: Well, not for a long time. 

Q: Charlie, do you think business moats are becoming more fragile with technology and transparency?

MUNGER: Well our ancestors were pretty good at creating fragile moats, too. I think it's natural with what's up in one era. Think of what I've lived through—DuPont looked impregnable; General Motors was the strongest corporation in the world;  Kodak was one of the; boom, boom. Well, they're gone. Xerox, I mean, it is hard to keep winning and the world keeps changing. Look, the Daily Journal is hard. Imagine going into computer programming and dealing with a lot of agencies all over the world—including South Australia—built a company like this. It’s not a bit easy, and if we haven't done it, we'd just be one more dying newspaper.

Q: Can you talk a bit more about the airlines and what's changed from a couple of decades ago to now?

MUNGER: Well I don't know that much about it, but I do know that it's more concentrated now and there's no real substitute for it. It isn’t like we have a substitute for air travel. And it's down to a relatively few players. In the old days, they could always start with a new airline. They had nothing but young people; they pay the pilots less; they don't have a union; and they could just start hitting the prices. They just kept ruining the business over and over again.

And even now, Southwest is just starting to go to Hawaii so the vicious competition is continual. Governments owned these airlines and do it to show off how strong they are, so I don't regard it as a perfect model and I don't think it's the greatest idea we ever had. It's just something, considering how pounded they were and how the world has changed a little. We though we had a little advantage by that particular gamble, but it's not a cinch.

Q: Is there an outlook on oil prices and ___?

MUNGER: I don't think oil prices will make that much difference over the long term. It's not that if the kerosene doubles in price, I don't think over time I don't think it matters that much to the airlines. You put hundreds of people on an airline or fly somewhere, it's pretty efficient and you can do a lot of flights per day. It’s worth a lot of money to the people who take the trip. And there's not going to be a new airport in Shanghai, you know, a lot of the airports are fixed and a lot of them are out of capacity.

It's obviously better than it was in the past. Whether it's good enough so it will do well, I don't know. Also, if it starts working, you get paid in advance for the tickets so there’s no credit. A lot of people lease the airliners, so if you make money, you can pile up pretty rapidly in cash.

Q: Is there a reason JetBlue wasn't in there?

MUNGER: I don't know anything about individual airlines, neither does Warren. We bought a bunch. It was a sector bet, it's not a bet on an individual airlines.

Q: When industries like airlines or railroads rationalize and turn around, how do you and Warren know? I mean...

MUNGER: We don't know. It was easy to—railroad it was all over when we went in. In the airlines it’s not over, but it's a little bit the same story; years of consolidation and bankruptcies. Three, four, five, six big bankruptcies are already in the airlines.

Q: So for 50 years, you've continually read about these industries even though you have disdain for them?

MUNGER: Yes, I talked about patience. I read Barron's for 50 years. In 50 years, I found one investment opportunity in Barron's. Out of which, I made about $80 million with almost no risk. I took the $80 million and gave it to Li Lu who turned it into $400 or $500 million. So, I have made $400 or $500 million on reading Barron's for 50 years and following one idea. 

Now, that doesn't help you very much, does it? I'm sorry but that's the way it really happened. If you can't do it, I didn't have a lot of ideas. I didn't find them that easily, but I did pounce on one. 

Q: Which one was that? Which idea was that? 

MUNGER: It was a little automotive supply company. Anyway, it was a cigar butt.

Q: Is that KMW?

MUNGER: No, I've forgotten the name, but it was a little—it was the Monroe shock absorber and all that stuff. The stock was a dollar and the junk bonds—which paid 11 3/8%—were 35. When I bought the junk bonds, they paid me the 35% and they went right to 107% and they called. And the stock went from 1 to 40, but of course I sold my stock at 15.

Q: What did the article in Barron said?

MUNGER: It said it was a cheap stock.

Q: How long did it take you to make that...

MUNGER: But that's a very funny way to be, to watch for 50 years and act once.

Q: How long did it take you to make that 15-bagger on that stock, from 1 to 15, right?

MUNGER: Maybe a couple of years.

Q: How long did it take you to make the decision to buy it once you read the article?

MUNGER: About an hour and a half.

Q: What was it about that company—an auto supply company?

MUNGER: Well I kind of knew, based on experience how sticky some of the auto secondary market was and how many old cars needed Monroe shock absorbers and I just knew it was too cheap. I didn't know it would work for sure, but I know—as I say—people were afraid it was going to go broke, obviously, if their bonds were selling at 35.

Q: How do you define the edge of Circle of Competency? What's your definition of the Circle of Competency?

MUNGER: Well, each person’s is his own, and it really helps to know what you can do and what you can't. I don't like to gamble against odds. I have not lost $1,000 in my life betting against race tracks or casinos. If the odds are against me, I just don't play and I won't amuse myself playing against the odds.

Now, I have occasionally played Bridge against better players, where I'm really playing for the instructions which I can afford. But that's because I like the learning. I do not like playing against the odds.

Q: Could you say one name that you invested in when you run your partnership that performed beautifully for you and explained as a case study what it was about that company that attracted you? Because there's not much about the Munger-Wheeler partnership?

MUNGER: Well we did all kinds of things in those days. In the first place, in those days we had what were called Jewish Treasury Bills and that was an event arbitrage. If a company sells out at $100 a share and the stock's selling at $95, for 60 years, people just went in and bought the stock at $95 and made the 20% per annum on average. For 60 years, Graham-Newman, Warren and I, and Goldman Sachs made 20% per year on anything we did in event arbitrage.

What happened was, when the stockholders were all on commission, when the deal is announced every stockbroker will call these clients and say, "Oh, your stock is way up, maybe you should sell that”. You know, they're getting commission, so you had dumb selling. And so, of course, we did well.

Nowadays, the people do not do all that well in event arbitrage. It's too tough-, the deals are just too crowded. But it just worked fine for all those years. We did all kinds of things in those days we can't do anymore.

Q: I was speaking with Rick Guerin and he was saying that if he was to start a fund today, he wouldn't do it. And he says he doesn't think it's hard because the size of a fund like Berkshire limits you to large companies. He just doesn't think that there's the same opportunities anywhere.

MUNGER: There aren't. That's why people come to this meeting. 

Q: Speaking of opportunities, Charlie, could you talk a little bit about your thoughts on John Malone as an operator and what do you think about the cable industry's moat going forward?

MUNGER: I've always been troubled by the cable industry. For one thing, it was family-disguised bribery when you have the franchises. I don't like to think about all the places that are getting their franchises by bribery, so I just sort of ignored it. I don't want to think about it. Malone is obviously something of a genius and he's a fanatic and doesn't like to pay taxes and he's been very successful. And I've just ignored it. I just don't want to think about it, so I haven’t, and I can afford the luxury and I don't have to think about everything. But, the starting bribery that got the franchises, I just didn't like it and so I just haven't thought about it and I'm still not thinking about it.

And the movie business I don't like either because it's been a bad business-—crooked labor unions, crazy agents, crazy screaming lawyers, idiosyncratic stars taking cocaine-—it’s just not my field. I just don’t want to be in it. 

And this other stuff…if I end up with the other stuff that I like, they got so many places in Berkshire that just do their work pretty well. I like that. You’d be amazed—the See's Candies, they make the good candy they work on it. We got lots of places like that. 

Our utility business, we probably have the best-run utilities in the United States. We care more about satisfying the regulator. We care more about safety records. We care more about everything we should care about. When we bought Northern Natural Gas—which Enron owned—of course, to show more earnings and more cash, they’d just done no maintenance. The goddamn pipeline can blowup and kill people.

The minute the ink dried on that, everybody took six months off and we spent—we went through all the pipelines and we just caught up on all of the deferred maintenance. We were not interested in killing people; that's the right way to behave. Enron was the wrong way to behave. Imagine deferring maintenance on a pipeline so you can show more cash. It's disgusting. It's like killing people on purpose so you can make more money on this. It's deeply immoral. But they fixed it—fast. Of course I'm glad to be associated with the people who behave like that. 

Greg Abel is a terrific operator and terrific guy—and he actually in Iowa and Nebraska (which are side by side), Nebraska has public power. They borrowed tax-exempt, built the new plants with General Electric and they're paying 3% on the debt or something. And he could run a big public power agency. Our Iowa Utility that Greg Abel runs right across the river—his rates are miles below Nebraska Public Power entirely financed, you know. And the other utility in Iowa, our rates are half theirs. Of course I like being associated with a company that can deliver the power for quite a while and more than 50% of all the power in Iowa comes from the wind. And the farmers are glad to have a few wind machines out among the corn so we just quietly created a revolution there. The regulators, the customers, everybody likes it. Of course I like people who do that and Berkshire's for all that stuff. 

Q: Do you think that cheaper solar over time—if it continues to get cheaper and cheaper—does that pose any potential threat to your utility business as people take on more in terms of generation? Is there any potential for death spiral there?

MUNGER: Well, Berkshire has something like $8 billion of solar, almost all of it in California. We can take or pay contracts from the two big utilities, and so the way we leverage for this, we'll probably get 15% or 18% or some ridiculous return on our equity. Just sitting on our asses while all these little mirrors out in the field. Now we have to polish them every once in a while. And they'd get better, but they won't get 50%. There's a limit on how much better we can get and the first one we had to track, now they all just lay there. The second one, they track East to West, but now, from the celestial stuff that goes on with changing of the seasons. The next ones will be pointed at the sun through every kind, but there's a limit on how efficient that stuff can get.

On the other hand, since it's free and it's coming in from the sun and doesn't pollute, and there's a lot of worthless desert in the United States, it’s a pretty sensible way to get power, eventually. And so, of course, there’s going to be more and more of it.

Q: But you don't think the ability to generate electricity at home or at a businesses-owned property—is that going to be some sort of threat at some point to the revenue model for all the capital that you may have?

MUNGER: Well people try and make money out of that crap, butI am very skeptical about all this home stuff. That works if the utility will pay twice what the power is worth then you can reduce your electric bill. Well why should the utility pay twice what the power is worth, you know? And so we think it’s more efficient to have some big place like us to create the solar and just sell it to the utility.

Q: Do you talk to Ted and Todd, the new investment guys at Berkshire, much? 

MUNGER: Not much, but I talk to them some and they're different. It’s not like they're clones, but they're both good in their own way and they both love Berkshire and they both make contributions. 

Q: Did you think of the incentive where each one gets 20% of their compensation from the other one's performance? Who thought about incentive? I thought that was brilliant.

MUNGER: I did. It’s brilliant but I don't think it's changed things at all. It's my own idea and it looks good to you people and it looked good to me when I did it. I don't think it's changed any behavior at all.

Q: Charlie, how do you feel about auto dealerships with their service components and low capital requirements?

MUNGER: That is very interesting. I don't want to be in the bottom 80% of the auto dealerships. I think these people are well up in the top 20%. And so, if we got 80 dealerships making $3 million a year after taxes, that's $240 million. And all these dealer protection laws—it’s entrenched. If we take this real estate—which tends to be very good—and then stick it our insurance companies where it’s a decent insurance asset—it’s what I call “okay”.

Q: So that's great then?

MUNGER: No, it's not great, it's okay.

Q: If it's okay to you, it must be pretty great.

MUNGER: No, no it’s not very good to me, it's “okay”. I would prefer doing it to not doing it, but there's nothing exciting about buying a bunch of auto dealerships. If you got $90 billion of float, you know, the idea of buying a bunch of auto dealerships that dominates—it's “okay”.

Q: Also, do you know Norbert Lou of Punch Card Capital and do you have any thoughts on him?

MUNGER: I don't know him. Why should I know him? 

Q: Charlie, going off of the auto question, what do you think about the advent of self-driving cars? How is that going to affect the ecosystem on insurance, scrap value, resale value?

MUNGER: You can change things so much that GEICO would be a bad business. Everything can change. That's the nature of the game, it's that your great business is being eroded by something at all times. I think it's a long time in the future. I think it's a very complicated subject. After all, if you're in a self-driving car, it works better if all the things are being self-driven by the same people. We have that already. The monorails don't have operators. Nobody's driving the monorail, but that's one guy who owns the whole thing, including the roadway. 

The minute you're sharing the roadway with other people—if I'm driving down the road and some guy goes up and stands there with a machine gun, I will turn around and I'll do something; a goddamn computer won't. He's not programmed to care about machine guns.

Q: What do you make of the legacy that you and Warren have left? Do you have any idea of the sort of impact you have worldwide? Does it always surprise you?

MUNGER: On what?

Q: On investing on just, basically, thinking, not just investing but just life...

MUNGER (as he opens a box of See’s peanut brittle): I think we've had some effect, but they're still teaching the Efficient Market theory in the business schools. And the old ideas die hard. And, by the way, it's roughly right, it's just the very hard form which everybody believed. They believed it was impossible. They don't think it was rare. They thought efficiency was absolutely inevitable—it like it was like Physics. I call it “Physics Envy”. That’s what they had in the finance field—they wanted to make their subject like physics. What kind of a nut would want to make stock markets like physics? It can't be like Physics. It's more like a mob at a football game.

(Charlie succeeds in removing plastic wrapping from the box of peanut brittle)

Q: Charlie, would you like to know why I think you should know who Norbert Lou is?

MUNGER: Yeah.

Q: Because he follows the Munger system. His hedge fund is called Punch Card Capital based on the philosophy of Punch card investing. And since '08 he's killed the markets and done well for his investors by just being invested in just three stocks—Well Fargo, Berkshire Hathaway and Baidu. I just thought you'd be interested.

MUNGER: Well, I am interested, and I'm not surprised. And I'm not surprised that it's worked. It’s just what recommended. And he’s picked some of the same stocks.

Q: Right, well he admires you very much. 

MUNGER: Well, think of what a simple way it was to get rich.

(Charlie opens the box of peanut brittle)

MUNGER: I’m going to share this with you gentleman, otherwise I’ll eat it all. 

Q: Charlie, were you surprised on election day?

MUNGER: Of course. Of course I was surprised on election day.

Q: Did you lose sleep for a few days?

MUNGER: Oh, no, because I expect to be disappointed with politics.

Q: So Charlie, you were able to change Warren from Ben Graham to high quality companies. Was there any change that he brought in your life and in any of your systems?

MUNGER: Well I didn't change him that much. You know Warren would have gotten their anyway. Maybe I'd accelerated it six months, but Warren would have figured out that what he was doing wouldn't scale.

Q: Well Charlie, we heard a lot about your granddad, but I'd hardly hear you talk about your dad, Alfred Munger. I'm wondering if you had any thoughts about some lessons he taught you.

MUNGER: Well I was very fond of my dad. My Grandfather Munger was more disciplined than my father. My father made a good income as a lawyer, which he carefully spent except for his life insurance and his house and so on. My grandfather always saved his money. Now when the Great Depression came along he could save the whole rest of the family. And so, naturally I remember him more when I talk to a bunch of investors. 

Q: In the Alfred Munger Foundation...

MUNGER: I named it after my father. That's not my grandfather.

(Peanut brittle crumbs fall on shirt)

Q: Right, and what does that do, that foundation?

MUNGER: I'm going to give away all that money before I’m dead if I last a little longer. It’s not that much money. 

Q: What do you want to give it to?

MUNGER: Whatever appeals to me at the time. I don't ask anybody.

Q: How do you think about creating impact through philanthropy?

MUNGER: What?

Q: Through giving away money?

MUNGER: I do it myself. I can give anything out I damn please. I regard it as a tax-exempt bunch of Munger money. I've got no staff; I just do it.

Q: Do you have any criteria that you follow or what kind of change are you trying to...

MUNGER: I do it when I want to do it and I give where I want to give it.

Q: What do you hope for your grandchildren?

MUNGER: Well, naturally, we hope the grandchildren will do well. And any grandchild—I've got one who’s running a little tiny partnership. My grandchildren are all doing different things. I got one at Google. He's a computer software engineer.

Q: Are there any other periodicals besides Barron's that you've read for 50 years and do you have any more inspiring anecdotes out of Forbes, Fortune, Wall Street Journal, Bloomberg Business Week?

MUNGER: I never bought, I've read Fortune for 60.

Q: Fortune for 60?

MUNGER: I've never bought a stock. And I was not kidding about that deferred gratification. 

Q: Isn’t it true you got a new car when you're like in your 50s or 60s, that was the first new car?

MUNGER: I bought them for my wives, but I always bought a Cadillac that had about 3,000 miles on it. It's a way cheaper. I flew around in coach airplanes. I would get to the Berkshire Hathaway meetings in coach and bunch of the shareholders—they were all in coach too. 

Q: Hi Charlie, I wanted to read you a quote and get your opinion on it. "My religion consists of a humble admiration of the illimitable superior spirit who reveals himself in the slight details we are able to perceive with our frail and feeble mind."

MUNGER: It sounds like that's not from…

Q: It's Einstein. What's your opinion on that?

MUNGER: Yeah, well, that's the way he felt. Well, I don't have his idea. He was good at puzzles because it's a big puzzle to him. So he naturally loved that great puzzle and the puzzle maker in the sky. It made it difficult that you couldn't figure it out. I've a different point than Einstein. Of course, I couldn’t figure out the puzzles like he did. 

Q: Can you rephrase that? I don't understand the answer.

MUNGER: Well, Einstein has his own slant to religion. There's certainly no conventional theology on Einstein. He ___ be nice to other people or anything like that. He just thought there must be some God out there that created this wonderful puzzles for me to solve. That's a peculiar kind of a religion, but that was Einstein.

Q: Charlie, you mentioned that one of your greatest achievements was having a family. Can you tell us a little bit more about what you would do differently with the family, or things that you did really well with the family in terms of investing into the family?

MUNGER: Well I had a lot of children and I educated them all and I'll take the results as they fall. Now, I have a lot of very admirable children, some of whom were out there today. And that’s a huge blessing. One of the things I like about them is that they're decent, generous people. One of my daughters who was there, she had a friend who is married to a total jerk, bitter divorce. My daughter has just bought her a house! I think she owns the house, but this other family lives in it. That's a nice generous thing to do if you're rich.

Q: Wow.

MUNGER: I'm glad my children are like that and not like Sumner Redstone.

Q: What's your opinion of The Giving Pledge?

MUNGER: Well, I told Gates that I wouldn't do it because I've already flouted it. When Nancy died, I—she left it up to me—to decide where it went. But I knew she would want it to go to the children. Every wife is always afraid the old man will have his money taken away by some nurse or something—by his dotage. I knew Nancy would want it to go to the children, so I shunted more than half of the money of the fortune—quite a bit more than half—to the children.

So I've already totally violated the spirit of Gates’s pledge. And I said, "Bill, I'm not going to publicly be a spokesman for something I’ve already totally flouted”. Now I flouted it because I knew my wife—who had helped me all these years—would have wanted it that way. I'm not a good example for his pledge. So I won't do it. I won't pretend to be doing something that I really didn't do.

Q: Charlie, maybe a little bit too personal, but is there anything that you'd like to share about your wife, Mrs. Munger?

MUNGER: A long life has many disappointments and agonies in it. I watched a sister die a horrible death of Parkinson's disease—dying young at 64. I'd lost my first son to leukemia, a miserable slow death. At the end, he kind of knew it was coming. I might have been lying to him all along but it was just so awkward and it was just pure agony. You have some of those agonies that are going to happen. There's not so much agony when somebody who's really old dies. You know, they deteriorate so much you almost don't miss them, which I'm doing a good job of.

You just take the hardships as they come. You take the blessings as they come. You have fun out of figuring out the puzzles as best as you can. It's really, we're very blessed to have—and we're in the United States. We're not in India, we're not under some crazy dictator like Russia or live where everybody sticks out for a bribe like India. We have a lot to be thankful for here. 

And we have a lot of options, and we can change jobs, we can move around, we can do this and do that. We get a huge mixture here with all the cultures of the world without having to travel. So we’re not restricted to one merry little group of Bulgarian farmers making olive oil or something. We got this great mixture of people who are quite interesting and quite different and they're all cross-marrying, which makes it even more interesting. Now, it's amazing to me there was a lot of anti-Jewish prejudice when I was young and now every family I know, they’re all cross-married. I don't have a friend, I believe, with a big family that doesn't have a Jewish in-law. That old idea has sort of died.

Q: How did you meet your wife?

MUNGER: My wife of 52 years died 7 years ago. There was a mutual friend who introduced us. We were both divorced, both the same age, both had two children. And I would say I owe a debt of gratitude to the people who introduced us.

Q: Charlie, I've heard you and Mohnish both talk a lot about the power of cloning great ideas and I was wondering what you think about the flaws or limitations or dangers of cloning. For example, when you're not true to yourself, like when does one get in trouble with cloning and it doesn't work?

MUNGER: Well cloning is not an ambiguous word when you use it biologically. But if you take it into some other field, cloning is a very interesting idea. You do move ideas from one place and bring them into another. If that's cloning, I do it all the time. I like cloning.

Q: Charlie, can you take us back when you bought the Buffalo Newspaper and just the stress that you had to go through because it looks like it was going to go under, right, at one point, for a while, right?

MUNGER: We were never the weakest in the town, so we were betting we'd be the survivor. And we were. So it was unpleasant because it showed no return for a long time. But when the other guy finally turned up his toes, we suddenly started making a lot of money. It just was delayed gratification. For seven years we made no profits, then they disappear and the sky rains gold. Earnings went from nothing to $70 million a year pretax, boom, boom.

Q: On the topic of cloning, do you really believe that Mohnish said that if investors look at the 13Fs of super investors, that they can beat the market by picking their spots? And we’ll add spinoffs. 

MUNGER: It's a very plausible idea and I'd encourage one young man to look at it, so I can hardly say that it has no merit. Of course it's useful if I were you people to look at what other—what you regard as great—investors are doing for ideas. The trouble with it is that if you'd pick people as late in the game as Berkshire Hathaway, you're buying our limitations caused by size. You really need to do it from some guy that's operating in smaller places and finding places with more advantage. And of course, it's hard to identify the people in the small game, but it's not an idea that won't work.

If I were you people, of course I would do that. I would want to know exactly what the shrewd people were doing and I would look at every one of them, of course. That would be a no-brainer for me.

Q: What do you mean by "you encourage one young man to pursue it," what do you mean?

MUNGER: Well that young man is my grandson. He has a fair amount of money, fascinated by securities and so I advised him “why don't you start there”?

Q: Do you think the equity positions in Berkshire will do better for Berkshire going forward or the wholly-owned businesses?

MUNGER: Well I think that wholly owned businesses will because we won't be paying any taxes on selling and I think they’ll continue to grow and I think they'll do better. I think the wholly owned businesses of Berkshire—or the the 80% owned or what have you—are on average, better than the S&P. So I think we'll do better in that part than the S&P. And I don't think our stocks located in a corporation subject to taxation will do enough better than the S&P when paying the taxes. But if we're buying the stocks with the float in some insurance company, of course it changes.

But no, I would say that of course, if you buy Berkshire, you should not be buying it on the strength of its little insurance portfolio. Look, we’ve got 8 billion dollars—that’s the biggest market cap in the country; considerable period, put $8 billion into it. And it's not that big a deal with a $400b market cap. And it was easier to get into it all than other things.

People who buy Berkshire—when you bought Berkshire back 30 or 40 years ago you were getting a bunch of marketable securities that did this, count em up and the businesses were free. Of course those people made a lot of money. We outperformed the market by miles in those days and the businesses did well. And now, we've got businesses that are averaging out doing well and our marketable securities are a small percentage of our cap.

There were years when we had more marketable securities per share than our book value per share. Now, it’s quite different. And of course the market at its present modal—it’s a different world. The one thing about Berkshire that's interesting is we do get some opportunities that other people don't get. If you're 3G and want a partner for your next deal, who the hell are they going to come to? They know we're a good partner, so we see stuff other people don't see. That helps. 

Q: Charlie, moving on to one of the smaller positions in Berkshire portfolio. There was a recent position made in Sirius XM, could you talk about...

MUNGER: With what?

Q: Sirius XM, could you talk a little about radio assets and your outlook on radio assets?

(Charlie eats more peanut brittle)

MUNGER: I don't know anything about radio assets except that it's a very mature market and you got AM radio which is basically an auto market, not to listen to the radio. People driving, very peculiar and totally concentrated. I don't know who even bought. I never think about it.

Q: How much of your success can be attributed to Occam’s Razor?

MUNGER: Well, Occam's Razor is of course a good idea. It’s a basic idea. Occam's Razor is like telling a fisherman to fish where the fish are. Of course you'll do better.

Q: In those businesses that are not wholly-owned, but maybe 85% owned, the 15% ownership, when there is massive investment within that business, how does that affect the ownership of the 15%?

MUNGER: Take Nebraska Furniture Mart, owned by the parts of the Blumkin family that didn't want to sell. They love the business, they're very rich, they have an enormous portfolio of marketable securities within there, you know. That came out of money left in their 20% because they have a lot of surplus money that they’ve accumulated outside the furniture business. And it’s very interesting, Warren says those people who he kind of treats like sons—you know people in the same community—and he lets them control the dividend policy of the company. It never made much difference to us, the dividends are mostly tax-free. He said “whatever dividend policy…” we own 80% of it! So he says to the minority owners to just choose the dividend policy for the whole company. Whatever you want is fine with me.

Warren's always doing things like that with the right people. So does Li Lu. I got to tell you a story about Li Lu that you will like. Now General Electric was famous for always negotiating down to the wire and just before they were at close, they'll add one final twist. And, of course, it always worked, the other guy was all invested, so everybody feels robbed and cheated and mad, but they get their way in that last final twist.

So, Li Lu made a couple of venture investments and he made this one with this guy. The guy made us a lot of money in a previous deal and we're now going in with him again on another—a very high-grade guy and smart and so forth.

Now we come to the General Electric moment. Li Lu said, "I have to make one change in this investment." It sounds just like General Electric just about to close. I didn't tell Li Lu to do it; he did it himself. He said, "You know, this is a small amount of money to us and you got your whole net worth in it. I cannot sign this thing if you won’t let me put in a clause saying if it all goes to hell we'll give you your money back.” That was the change he wanted. Now, you can imagine how likely we were to see the next venture capital investment. Nobody has to tell Li Lu to do that stuff. Some of these people, it's in their gene power. It's just such a smart thing to do. It looks generous and it is generous, but there's huge self-interest in it.

Q: Is there a little reciprocity opportunity there?

MUNGER: What? Well it’s the right way to behave anyway and the second way, it helps you. And Berkshire is helped by its past behavior to see things that a lot of people don't see. But how many people-—would Sumner Redstone ever have done that? Would General Electric have ever done that? They have a whole culture of behaving otherwise. 

Q: Ben Franklin talked about morality being the best policy, but then you see, the Sumner Redstones and the Icahns and the Trumps doing really well by acting kind of the opposite to Li Lu. How do you reconcile that and still come out with no doubt is the correct answer that it's wiser to be moral?

MUNGER: Well, of course, Sumner Redstone—when I graduated from Harvard Law School, we’re a lot of years we're apart—and he ended up with more money than I did, so you can say he's the success. But that's not the way I look at it. And so I don't think it's just a financial game, and I think it's better to do it the other way and you sometimes you think you're getting by with this, but General Electric has a letter they fill out when they take something over. The letter says, "Dear Joe Shmo”-—a major supplier to this business they just bought—“we're going to accomplish wonderful things together. We are blah, blah, blah. But we have to harmonize the systems of General Electric with blah, blah, blah and you're going to be paid in 90 days instead of 30 days”. Which is just a horrible imposition on the supplier.

They had a whole department that's just organized to brutalize their suppliers into furnishing all the money. They did it with one supplier that I know. And of course, the sales manager said, “Why don’t we tell them to go fuck themselves”? And the guy says “no don't do that." He says, "Just bring me all of the stuff where General Electric is my customer where they’ve got no alternative." And he just raised the prices by about four times.

I think it's a mistake to be quite that brutal. They compete in GE based on who can get the suppliers to furnish more and more of the capital. They're very tough. Now, it's a great company with great products and they got some very good people—and I think Jeff Immelt is a good guy—but I would be very uncomfortable doing that.

My theory of life is win-win. I want suppliers that trust me and I trust them. And I don't want to screw the suppliers as hard as I can.

Q: How did you feel when Berkshire put money into GE in the crisis?

MUNGER: Well, it was fine. It was sure to work with a high coupon and it did work. When we buy something like that, we're not making a big moral judgment about the company. I don't think GE is that immoral. On average, GE is one of our better companies in terms of fanaticism about defect absence and they're very good on that stuff.

But if I want to get ahead with a final twist on every deal just before the closing, I'm brutalizing all my suppliers to the last nickel on when I pay them. That’s not my system

Q: (Question inaudible because Charlie is eating peanut brittle)

MUNGER: Yeah.

Q: Can you go a bit more in detail with that?

MUNGER: That was Conwood. Now it's an addictive product. People are totally hooked. They’re number two person in the market. They all believe in their product, every damn one of them is chewing tobacco, and the figures were just unbelievable. There was virtually no financial risk, there was nothing but money. And the cancers caused by that mouth tobacco, maybe 5% of the cancer you get from cigarettes. But it’s not zil. You definitely are going to kill people with that product and who had no reason to die. Warren and I—it was the best deal we ever saw, we couldn’t lose money doing it—we passed.

Jay Pritzker—who was then head of trustees or something at the University of Chicago Medical School; the Pritzker’s are big in Chicago—he just snapped it up so fast. The Pritzkers made $2 or $3 billion out of that. But do we miss the $2 or $3 billion we would easily have had? Not an iota. Do we have moments’ regret? Not an iota. We are way better off not making a killing out of a product we knew going in was a killing product. Why should we do that?

On the other hand, if it was just a marketable security, we wouldn't feel that the morality of it was ours. But if it’s going to be our subsidiary, we’re going to be paying the people who are advertising tobacco. That’s just too much for us. We're not going to do it.

Q: Charlie is there any one question you've anticipated being asked in your whole life that you have not been asked yet?

MUNGER: Some people ask me, "What question should I ask you?" It won’t help me. Anyway…

Q: Do you have a favorite Mrs. B story you can share with us?

MUNGER: She’s very peremptory and bossy. She was illiterate in English although she was fluent in Yiddish. And she could make arithmetic computations in her head that you can't make. She knew exactly how many yards there were in twenty six and a half by a hundred and four and a quarter in her head. And she was there, but she was a very bossy, domineering, hardworking woman. And she worked herself 100 hours a week and she had sons-in-law who were the nicest people and they work maybe 50 hours a week after they were filthy rich. She called them "those bums."

We know a lot of characters. The other one is we bought a business from—that’s half-owned by a daughter of Moses Annenberg. She was a very rich woman and she owned half of this business which was her husband's business. And she was trying to get a Cadillac. Her husband died, but she had a company car, and she wanted the Cadillac. And so she told her lawyer to ask, “Mr. Buffett, give me the Cadillac”. And she told the lawyer what to say, “Tell Warren," she said, "that a lot of people give money to poor people, but that's easy. They get their reward and fulfillment in helping the poor. The real charity that’s unusual is giving money to the rich." And so, she made that pitch to Warren. The lawyer was very embarrassed to do it. Tell her to ? wholesale blue book, which she gladly did. But she first made the pitch that we should give her the car because it's so much more generous to give to the rich because it’s so unusual. 

That woman had an adopted child who was a genius. And so she would rent Carnegie Hall and let the child conduct an orchestra. The rich can get quite eccentric.

Q: Charlie, can you go back to the Nixon years when you bought the Washington Post and how that whole situation panned out?

MUNGER: The market capital of The Washington Post was $75 million when we bought it. You could have sold it in an afternoon—every single asset for $400 or $500 million. So it was a good business, and not just a Graham stock. But it was also a Graham stock because it was so cheap. And they also had a business that was likely to destroy its competitor, making it a monopoly. Now it was only a tiny little amount of money that can go in. That is what makes it hard for you people. It's a great investment but merely able to absorb $4 or $5 million.

Which we did and, and by the way, that $4 or $5 million—well maybe it was $10 million. We got $10 million into it. At the top it was a billion. But we only did that once. So it's a great story, but now that helped us way back to have that extra billion on the balance sheet, but that wasn’t an opportunity that would take billions of dollars. That's why, what happened inthe past at Berkshire can't happen again. That little opportunity for a $10 million investment was wonderful, but we don't have a lot. If you'd look at Berkshire, you'd think we'd have 10 investments that are each up say 10 times. We put in a billion dollars, and now it's $10 billion. Now we have $100 billion in 10 companies. But we don't. We have 3 or something and it's not that damned easy to find these damn things that you can identify. It's not that damned easy.

Q: Thank you, again, Charlie for all your continuous sharing. We appreciate it.

MUNGER: I'm glad you guys are still having fun doing it, and I’m glad you're not discouraged. You shouldn't be, but you know everybody who did the value investing in my generation and plugged away at it—they didn't have to be that smart even-—they all did well. And yours is going to be more difficult.

But you know, you want something to do anyway—that’s kind of interesting to do. So the fact that it's difficult shouldn't discourage you that much.

Q: Is there a good systematic approach to learning from one's mistakes, like so you don't repeat them. Is there something that's worked for you in terms of post-mortems?

MUNGER: We were active enough so we had some mistakes to remember. It's hard to learn—we learned a lot vicariously because it's so much cheaper. We also learned a lot from unpleasant experience and. So just doing it, you'll automatically get mistakes. Nobody can avoid them. Of course you'll learn from every one. Mohnish is good at post-mortem-ing his mistakes.

Q: What did you say when Dexter Shoes came up? Were you for it or against it at the time? 

MUNGER: Well I didn’t look at it very hard. The company was: loved by all the retailers; it was the number one supplier to JC Penny; it surpassed everything; it was a solid earner; it dominated Maine; they were nice people; and, of course, the Chinese hadn't come up by that time. They just came up so fast and they just took no prisoners in the shoe business. And they weren't just cheaper by a little—they were half-priced. And of course, the shoe business is not that easy of a business. Of course people bought the half-priced shoes. And the business just went to hell very fast.

But that business, because it created such a huge lesson and it looks awful in terms of what the Berkshire stock is worth—I mean we're the main charity in Maine if you call us. But at the time, it was 2% of one year's performance. That's what we lost by having it go to zero. So, our return from one year went down by two percentage points. Now to be sure, if we bought our own stock instead of this thing—or not given away our stock—it’s a huge error. But we learned from it, didn't we? I just think that if you just keep going, you'll make some mistakes, and of course you'll learn from them. How could you not learn from that one?

We learn how awful it is to have somebody who's really way lower priced to come in—hard—and no amount of managerial skill could protect us. Now we have other shoe businesses, some little niches that make $20 million a year or something after taxes. Maybe a little bit of that is leftover Dexter even, but we make do. Don't you all have mistakes that are painful and didn't you learn from them? Isn't that good?

But I don't know what I would do now. I live surrounded by Capital Guardian people. They have over a trillion dollars and there are all these guys that get A’s in business school and they treat them well and they divide them up and they get expertise in various places. And it doesn't work to beat the indexes.

I knew that company when it was smaller—you know $500 or $600 million. They'd beat the indexes by a point a year, you know. It was fine because they were drawing the fees off the top from the clients. Now they have lagged by a point a year (or whatever the hell it is) and they handle that the way everybody does—by denial; they just don't face it.

I was there the other day and this very nice portfolio manager who’s a very smart, polished, generous, nice man. The assistant is very nice, polished, intelligent woman. And he said, "Well, you know, we outperform in my fund—which has $100 million—by 2 percentage points a year.” I raised my eyebrow. I just looked at him for a while. He said, "Well, I mean, that we outperform our competitors by 2 percentage points a year.” And I said, "Yes, and that over performance, a lot of it was a long time ago when you had way less money." And there was another horrified pause and, finally, the woman says, "He's on to us." And we go on and discuss something else.

Anyway, it is awkward. You know, you want to keep getting paid, you like going to work, you fly around interviewing management and so forth, and when all is said and done—and they did it for a long time before—but it just got harder. And then I see people leave. They say, “I'm not going to manage $30 billion, I’ll manage $3 billion. And now I’ll outperform.”  And they've had that happen two or three times. And the new guys don't outperform either because the new client still wants 10 stocks or something. 

Oh and there’s another experiment they’ve done about five—not five, three times—at Capital Guardian. Follow what the great investors are doing. That's one way. They said, "We get the best idea from our best people and we'll make a portfolio just of our best ideas from our best people. Nothing could be more plausible." They've done it three times and it has failed every time.

Now, how would you predict that? Well I can predict it because I know psychology. When you pound out an idea as a good idea, you're pounding it in. So by asking people for their best ideas, they were getting the stuff that people had most pounded in so they believed. So of course it didn't work. And they stopped doing it because it didn't work. They didn't know why it didn't work because they hadn't read the psychology books. But they knew it didn't work so they stopped, and it's so plausible.

Now I don't think that's true at Berkshire. I think at Berkshire, if you asked me and Warren for our best ideas that would have worked. But it did not work in a place like that with a more conventional manager. By the way, I don't think it would have worked that perfectly at Berkshire. I think it would work better than it did at Capital Guardian. But isn't that interesting how that would not work?

Q: Is it still true you talk to Warren once a week now?

MUNGER: No, no. It would be like talking to yourself; we don't have any new ideas-—87 and 93. I mean, what the hell?

Anyway, but the young men make some contributions that cause us to think about things we wouldn't have thought about before. We would not have bought the airlines or the Apple if the young man hadn't come up with the idea. But once they did, Warren and ran with it. And Warren was pretty great. It was hard to buy that much airline stock. It doesn't sound like much airline stock, you know by Berkshire standards. But we had to be a hell of a percentage of the market for a pretty long time. It's very hard to manage a lot money. 

Q: It must be an awkward conversation with Bill Gates after you bought the Apple stock. 

MUNGER: Bill Gates doesn't have any delusions on that subject. Bill Gates bought that $150 million worth of Apple and I think they sold it.

Q: It was a good buy.

MUNGER: Yeah, but it was not a good sale. Oh, I got another story for you that you’ll like. 

Yeah get that thing (peanut brittle out of here or I’ll eat it all). 

Al Gore has come into you fella’s business. Al Gore, he has made $300 or $400 million in your business and he is not very smart. He smoked a lot of pot. He coasted through Harvard with a Gentlemen’s C. But he had one obsessive idea that global warming was a terrible thing and he understandably predicted the world for it. So his idea when he went into investment counseling is he was not going to put any CO2 in the air. So he found some partner to go into investment counseling with and he says, "we are not going to have any CO2”. But this partner is a value investor. And a good one. 

So what they did was Gore hired his staff to find people who didn't put CO2 in the air. And of course, that put him into services-—Microsoft and all these service companies that were just ideally located. And this value investor picked the best service companies. So all of a sudden the clients are making hundreds of millions of dollars and they're paying part of it to Al Gore, and now Al Gore has hundreds of millions of dollars in your profession. And he’s an idiot. It's an interesting story and a true one.

So, if you were idiots about global warming and aggressively pushed your theory—by the way, it’s not the only one. There's an investment, there's a leveraged buyout operator in Los Angeles that I know casually. He's made 35% per annum for 30 years. All he buys are services companies.

Instead of buying, you know, 100% and letting the management have 10%, he always tries to buy 60% and let the old manager who created the company own the other 40%. And he buys nothing but service companies, and he knows a lot about it. And with that formula, it's like, you know—inventories, receivables—there are all kinds of horrible things in business that if you just buy service companies, you can avoid. And it's amazing how well it’s worked for this guy who does the LBOs just the way it worked for Al Gore-—35% per annum.

And he's smart because he's causing people to have more of their own skin in the game. They know more about it. They're more like partners, you know. The new manager is not an employee, they're really—if some other guy owned 40% and you own 60%— that’s a different relationship. And he’s the founder. What a clever way to do it and it worked better. And of course, he knows more about it when he does nothing but service companies.

I know another guy who does nothing but mail order internet companies—also an LBO operator. He's made 20 some percent per annum for a long, long time. But he knows more about getting customers and this ratio, and he knows more about these damn mail order internet companies. And he really knows a lot.

So, two specialists, you know each one with a different specialty-—both working. Interesting, and that's why I made all that talk about how specialization frequently works. I've had more fun to go out and do everything, but these specialists do better averaged out. They know a lot.

Q: So how’s our little mail order business—Oriental Trading—doing?

MUNGER: That's one of this guys’s. This guy sold it. Not to us but to the one previous to us. Well it's a very humdrum damn business that's right there in Omaha. It’s a non-event. It may be better than something else you'd put insurance float into, but it's going nowhere. But you know, if your float costs you nothing, and you suddenly make 10-12% on it, it's beguiling. We’ve got enough float now. 

Speaking of Ajit. There's only between two transactions like that in the history of the world—$10 billion each—Ajit does both of them. If you want him to do a...

Q: You mean the reinsurance with AIG?

MUNGER: Yeah, that's the second one. Where else is AIG going to go? Who would you trust to pay off a lot of stuff 30 years except Berkshire? Nobody. It's nice to be in that position and we get along with them.

Q: Charlie, do you still do a lot of work with Ron Burkle, you know in the supermarket financing…?

MUNGER: I have not seen Ron Burkle for 35 years. He always tells people what a great friend he is of mine. I like Ron Burkle's father who was our last customer for trading stamps. And I liked Ron when he was eager. But Ron when he's made a lot of money is a bit insufferable. Yeah, he's my good friend if you listen to him.

Q: You show up in pretty much every biography of him that's ever written.

MUNGER: The one he really knows is Bill Clinton because because he furnished him with girls. He's talking about the wrong-—he has other friendships that are closer.

Q: When you look at what's made you and Warren have relatively happy lives, is there some aspect of that that’s imitable for the rest of us?

MUNGER: Well it’s all imitable. If your marriage reasonably works and if your family life reasonably works-—I don't mean perfectly because nobody's family always works perfectly, particularly with the children-—and if your partnerships work well—we’ve had marvelous partners. Warren has been a marvelous partner for me. I'd been a good partner for him. All of our other subsidiary partnerships would still overlap totally a bit marvelous. I do not have a big failed partnership of any kind, and that's because I am a good partner, and Warren is a good partner. And so, it's like, if you want a good spouse, deserve one. If you want to have a good partner, be a good partner. It's a very simple system and it's worked very well. Of course, it wouldn't work without it. And also, get rid of the bureaucracy. If you deal with good people you trust-—expense, trouble, lawyers checking-—we’re always closing something with no audit. We basically are very old-fashioned.

We bought the Northern Natural pipelines and they need money Monday and it was like Saturday; that was lots of money. We came up and the lawyers were having a fit, and we gave them the money and bought the pipeline and worked out the details later.

Other people can't do that. Their whole culture is—there’s all kinds of bureaucrats that all want something to do. They can't make an exception.

Q: Going back to Enron, do you have any insight into whether Kinder Morgan would be a successor or rejector Enron culture?

MUNGER: Well I don't think Kinder Morgan is anything like Enron. Enron was total fraud and bullshit and craziness and manipulation—it went berserk. And Kinder Morgan may puff a little and pretend that cash flow is really cash and there isn’t really an obligation to replace it. He may, but it's not Enron. Enron was just pure disgusting, awful. 

And I think most of those limited partnerships have a slight touch of the old mining companies on the San Francisco Exchange. They've all paid monthly dividends as they get into the ore. And of course, once they've done that, they had two divisions. They had the "shuck the suckers" division on the mining exchange in San Francisco. The bunch of miners that went into mine, it was like a two-handled pump. They’d flood the mine, the stock would go down, they’d buy it. They’d pump the water out of the mine, pay a big monthly dividend…they’re shucking suckers over here by fraudulent, illegal means (by modern standards). It was disgusting. But to some extent, the master limited partnerships—they pretend that the cash is really free when a lot of it really isn't. They're taking out money the business is going to need to replace what it's doing. In that sense, it's sort of a mildly immoral way of doing things and they're doing it because they can get by with it. Do you have a different view about the master limited partnerships?

Q: No, it's amazing how they raise so much equity where they were…

MUNGER: Yeah, well, it's kind of dishonorable. The old conglomerate business where they issue the stock and then the stock sells at 30 times and you just keep buying a bunch of ordinary businesses. That was just like a chain letter. It was dishonorable. There's a lot that goes on with finance that's dishonorable.

Q: So what do you think about the last couple of books that have been written about you? And if there was an author here, what would you tell him if he was writing a book about you?

MUNGER: I haven't read—what books are you talking about?

Q: The Tao of Charlie Munger and...

MUNGER: Oh, I never finished it.

Q: Any thoughts on the books that have been written about you?

MUNGER: Well I have to say, I don't finish them. Of course, people are going to attend to look at stuff that has been written about them when it's distributed. But when they just copy old quotes and so forth, why should I read it?

Q: Hey Charlie, I believe you've said that if you could have lunch with anybody, it would be Benjamin Franklin, and if you did, what would you ask him or what would you talk about?

MUNGER: Well, it's hard to offer all that. Benjamin Franklin has already me taught me what I want to know because he left such a record and his biographers have been so good, and he was so famous in his own lifetime. And for so long. So, I already have had my conversations with Benjamin Franklin. He actually gave us the autobiography. And then the various biographies I've read, pick up pieces about the rest of the story.

It was interesting and he failed in his relationship with his only surviving son who was loyal to the crown. And that rupture never healed, and it was just too much. Then the son had a duty not to publicly have a big fight with his father who had raised him and gotten his fancy position with the crown for him and everything else. And the son felt that he had to protect the position he had.

You do understand why they’d feel that way. Most people wouldn't do that. They would reconcile somehow or pretend to reconcile. But that really ruptures it. He didn’t even talk to that son at the end. And Franklin was capable of having more resentment than I have. I have conquered resentment better than Franklin did. I'm not that mad about the people I disapprove of. That's why I kissed off that Trump stuff by making a compliment today. I don't think much of Trump as you can imagine. Imagine me voting for Hillary Clinton. It was very hard to push the pen, but I did.

Q: Are you hungry? 

MUNGER: No I’m fine. I’ve been eating brittle. I think I should go.