My Notes from the 2016 Daily Journal Annual Meeting, featuring Charlie Munger

 

Charlie MungerCharlie Munger:  So we have this newspaper, which formerly had monopolistic qualities. It, like many newspapers, was a fine business and it required some management, even so, but it was foolproof. Of course, the world changed for us, as for other newspapers and a million a year pre‑taxes is what we have left. Whether it will keep going down a little or hold there, I don’t know.

If you’re holding this stock because you want that newspaper to come back to its former glory, I suspect you’ve developed some different rationale. See, what we did as we were shrinking toward oblivion is we made a lot of money out of the foreclosure boom. We had more than 80 percent of the foreclosure notice business. It was like being an undertaker in a plague year. It was huge prosperity for us coming at a time when everybody else was in total agony.

That gave us a lot of money. We used that money to buy securities at low prices during the panic. Aided by that peculiar response to the deterioration of our newspaper business, we have entered this software business. That has been a slow, expensive, troublesome thing. We’ve written off practically everything we spent on it. We had plenty of taxable income to do that with.

What’s happened is that we now have more software revenues than we have print revenues. That business is doing way better. It isn’t doing better in terms of reported earnings. On the sales field, we’re just doing better and better and better, because our product we honestly believe is way better than our main competitors.

There’s an endless market for software in these public agencies ‑‑ district attorneys, adoption agencies, courts…You can hardly imagine anything more sure to keep flourishing and to keep needing more and better software systems. It’s agony to do business with a whole bunch of public bodies and their consultants and their bureaucracies and so on. It’s such agony that a lot of big companies that are in software don’t come near it.

You know if you are Microsoft you’re used to easy money. This just looks like agony. They did buy one little business which is about half as difficult as ours. I think it’s worth more than they paid for, but it’s not a great success. The really big boys find our niche in the software market such absolute agony that they tend to stay out of it.

I think our products are probably better than those of our main opposition, but of course our opposition has way more of the market. As nearly as I can tell we are gaining every month. What you people have now is sort of a venture capital operation in the software business with the tag‑end remnants of a newspaper attached.

This stock may be reasonable if you like highly valued venture capital investment. For you old time Ben and Graham groupies, you are in a new territory. I am not saying it won’t work, but if it works you don’t really deserve it.

Q:   In the next year, could you tell us about one or two opportunities that you are really excited about for Journal Technologies, and also in the next year what’s one or two hurdles or threats that you are concerned about?

Charlie:  The one I was mostly excited about in daily Journal Technologies was getting the contract from the Los Angeles Courts. It’s one of the biggest court systems on earth. That was, as far as I was concerned, a crucial milestone on the task that we are chosen.

You can stop to think about it, if we succeed in saturating California with a huge success, it may well spread elsewhere. It already is elsewhere. We bought this little nothing of a software company peopled in a little valley in Utah. It turns out that they’re very good at all this service to all these clients who need endless service. We now have how many employees in Utah, Jerry?

Gerry Salzman, DJCO CEO:  Between 80 and 90.

Charlie:  Between 80 and 90, and how many do we have in headquarters?

Gerry:  The total for Journal Technology would be around 155 we have an office here, Logan, and in Corona, California as a result of the acquisition of ISD Corporation.

Charlie:  How many people on our traditional business? The newspaper?

Gerry:  Approximately 115.

Charlie:  We’ve crossed over into the new business. The new business is interesting because it’s a big market. If we ever get entrenched in it, it will be very sticky business, which has occurred to us as we’ve suffered all this agony.

At least we were suffering agonies in an attempt to get into a position from which we’d be hard to dislodge. That’s…What was the second question?

Q:  What is a threat or a hurdle that you’re concerned about?

Charlie:  Well, the main threat or hurdle is that we want to be the most important player in this new niche, which is a big, big niche. Of course, we’re concerned about that. I don’t regard that battle as won. I regard it as going well but not won. Heck, I’d even say going very well but not won.

Q:   I’m from Stanford University. First we have a group of students. We are very grateful that you donated the Munger building, and many of us live there. It’s one of the most beautiful buildings on our campus. You say you want to stay in a circle of competence. Then a few years ago Warren Buffet decided to buy IBM. Then he’s still very optimistic, and some people say maybe he walked out of this circle of competence.

Charlie:  Well, IBM is a lot like us. They have the traditional business that was very large and very sticky. Of course, the world changed. In a lot of what flourished in the new world, they were not the leader. Up came Oracle, Microsoft, and all kinds of other people who were formerly not so large.

They didn’t do well eventually in the personal computers even though they’d pretty well started it. IBM is in a position a lot like us where they have an old business from which cash continues to flow, but they want a new product that’s a hit. Now the product they have chosen to back is this…I call it the automated check list.

Well, the automated check list is a very good idea. It may be particularly useful in things like medicine, but is it the kind of super market that may replace a lot of what made IBM great? I would say the jury is out on that, and I don’t really have an opinion. In other words, I’m neither a believer nor a disbeliever. I regard it as a mystery. It could happen, and it could not happen as far as I’m concerned.

I do think the old business of IBM is very sticky and will die slowly. It’s not a cinch. The truth of the matter is that at Berkshire’s size we have to make great big bets and hold them for long periods. That’s a tough game.

We have to make bets that are not the kind of shooting‑fish‑in‑the‑barrel kind of bets we used to make, and that’s one of them. If you want enlightenment on that one, why the answer my friend is blowing in the wind. It may work in a mediocre way. It may work big. I just don’t know.

Q:  Two questions for you. The first is, what advice do you give to your grandchildren, as they launch into young adulthood, after college? The second question is, do you have a favorite investment story from the old days?

Charlie:  Well, regarding the grandchildren, I was not able to change my children very much. My situation reminds me of what Clarence Darrow said when he read the great poem that ended, “I am the master of my fate, I am the captain of my soul.” Clarence Darrow said, “‘Master of my fate’?” He says, “Hell, I don’t even pull an oar!”

That’s the way I feel about changing the children. Regarding the grandchildren, thank God they are somebody else’s problem. I’ve served my time. What was the second question?

Nick Henderson:  The second question is, did you have a favorite investment story from your younger days?

Charlie:  Well, investment stories from my younger days. I want to tell a story I’ve never told before. Years ago, 1962, my friend Al Marshall came to me and said, “I want your help in bidding for some oil royalties that are being put up by auction.” I soon realized that under the peculiar rules of an idiot civilization, the only people that were going to bid for these oil royalties were oil royalty brokers who are a scroungy, dishonorable cheap bunch of bastards.

I realized that none of them would ever bid a fair price. So we just bid high enough to get some of these royalties. We can’t possibly fail at an auction where they excluded everybody but kind of shady, difficult cheap bastards. So we bid for those oil royalties, and we finance the thing with an oil payment.

We each put up $1,000. For many, many years, up until the last collapse, the buggars were netting $100,000 a year, 50 years later, more than 50 years later, out of $1,000 investment.

Now, the trouble with that story, is that it only happened once. That’s true with most good investment stories. You don’t get very many. It isn’t like that kind of opportunity comes along every day. The trick in life is that when you get the one or two or three that are your fair allotment for a lifetime, you got to do something about them. So that is your story. That is my story from my youthful days.

Q:  My question is, how does the current energy environment compared to the early 80s, when you were running Wesco, are there any notable similarities or differences this time?

Charlie:  Well, of course, we owned Wesco for a long time. What was interesting about both Blue Chip Stamps which controlled Wesco and Wesco, is that they eventually were some of the most screamingly successful investments in the history of mankind. What’s interesting about those outcomes is that it was only five or six transactions that carried all the freight, really heavy freight.

Now, that is really interesting when you stop to think about it. You try and do a zillion little acquisitions and then churn headquarters, and it’s hard. The trading stamp business, the savings and loans associations, are pretty well gone, and yet they worked out fairly well. There again, just a few good decisions over a long period of time.

Some great investment success once said, “You make your money by the waiting.” Now that doesn’t mean you sit around waiting for the next depression, because you can’t do that. A fair amount of patience is required in some of these good investment records. Patience followed by pretty aggressive conduct when the time comes.

Imagine sitting there having all this money rolling in from the foreclosure room and deploying it in like one day. At the bottom tick, for some of those stocks, now that was luck. It was luck that we had caught the bottom tick. It wasn’t luck that we had the money on hand when other people didn’t, or willing to deploy it when other people were fearful.

Q:  I had a question about Berkshire and one about the Daily Journal. Historically, Berkshire was built around its insurance operations to provide a low cost source of capital. What other business models did you try/consider but ultimately did not pursue?

Charlie:  We were always opportunistic. We wanted to buy the best thing that was conveniently available, that we could understand. In the early days, we thought we had a special advantage as investors in marketable securities. We tended to look carefully at float businesses. Nowadays of course, we’ve got enormous float that hasn’t been much use to us. Such is the nature of life.

We made so much money out of those float businesses, it was obscene in the early days. It’s not a tragedy that now our float businesses don’t give much advantage about the float. Berkshire’s cash, which is large, is not getting much of a return. In Europe, the rates are negative. In Japan, the rates are negative.

Q:  The Daily Journal is involved in the software business. What do you think about the attractiveness of the average software business versus others you’re familiar with such as industrial franchises?

Charlie:  Software‑based businesses have become some of the most profitable businesses on Earth. Other software companies are failing and shrinking. So it is like the rest of capitalism. It has its good spots and its bad spots, and as I said, the one we’re pursuing I think will be sticky if we succeed in it.

Q:  It seems like Journal Technologies is growing slower than some of their competitors. Would you ever consider selling Journal Technologies at a high multiple?

Charlie:  Well, nobody’s offered us a high multiple for Journal Technologies. We have not had the problem or the opportunity. It’s a peculiar part of the software business, involving a lot of agony now for a payoff way later and you can’t judge it as a normal business or as a normal roll‑up of profitable companies.

It’s venture capital. It just happens to be located in a publicly traded company. It is venture capital, and if it works, it could gradually evolve into a pretty huge business.

Of course, everybody is trying to evolve into a pretty huge business and only a few will succeed. We’re not like a normal software business and those little companies, those are not acquisitions, like Berkshire Hathaway makes acquisitions. Those were not established companies that were sure to succeed and relatively foolproof.

We were going to make our venture capital type assault on this peculiar part of the software market. We needed momentum from other sales forces and service operations and so forth, so we just bought them. Don’t judge those things by the standards of normal corporate acquisitions. Those are part of venture capital. If you don’t like it, you can lump it.

Q:  If you were to design CEO compensation for either an insurance company or a bank, how would you do that?

Charlie:  Both Berkshire and the Daily Journal have our own ways of doing things and we don’t follow anybody else’s established patterns. We just try and do whatever makes sense under the circumstances. Around here, we just ask Gerry to do everything. He has no budget, in terms of hiring other people to help him. That’s our system here.

Q: What are your expectations from BYD for next 10 years?

Charlie:  Well, BYD has 220,000 employees. That is a big company. That too, was venture capital when we went into it. ‘We’ meaning Berkshire.

That company has done amazing things. The man who created that company was the eighth son of a peasant. He went to engineering school and got a Ph.D. He started off by borrowing $300,000 from the Bank of China or somebody like that, and going into the small batteries for cell phones, which was totally dominated by high‑tech Japanese firms.

He succeeded in grabbing about a third of that market from a standing start. He won the intellectual property aspects of the litigation which followed. That litigation happened in Japan.

It was a very remarkable man doing an almost insanely ambitious thing. Out of that he now has two hundred‑some‑thousand employees and huge lithium battery plants going in. It’ll be one of the biggest lithium battery makers in the whole world very shortly.

Last month, he sold 10,000 electric cars in China, which is more than Tesla sold. Of course, nobody’s ever heard of BYD.

It’s an interesting company. Berkshire doesn’t do this venture capital stuff, and I hope the Daily Journal works out half as well as I expect BYD to work out.

BYD is in a position, on purpose, to benefit from this electrification trend in the world. It’s very helpful to them that people are dying on the streets of Beijing because they can’t breathe the air. They have to go to electric cars in Beijing.

They grabbed all these subsidies, and BYD’s ahead in terms of efficient manufacture of these electric cars and electric forklifts. Do you really want a forklift spewing out carbon monoxide in the middle of your warehouse? Electric forklifts are a very big idea.

They’re very well located, so that’s a very interesting venture capital investment. It was an accident, sort of, that Berkshire departed from its standard methods and did that one. It’s an accident that the Daily Journal is doing its version of venture capital. I would say that I only wish our prospects were as good as BYD’s. They might be, but it’s not the way to bet.

Q:  When you value a business or a company, what discount rate do you use? In some books and in some of people’s notes, for example, Warren Buffett uses a risk‑free rate, and sometimes makes some adjustment of the discount rate. Other notes I read is that you’re going to use an opportunity cost approach, meaning your next best investment. Which one of these is correct, or is there any way to reconcile them?

Charlie:  They’re both correct. Obviously, it’s relevant what the return you get on government bonds is. That affects the value of other assets and the general climate.

Obviously, your opportunity cost should cover your own investment decision making. If you happen to have a rich uncle who will sell you his business for 10 percent of what it’s worth, you don’t want to think about some other investment.

Your opportunity cost is so great. Considering everything else, you should forget about it. Most people don’t pay enough attention to opportunity cost.

Bridge players know about opportunity cost. Poker players know about opportunity cost. American faculty members and other important people, they hardly know their ass from a plate of hot squash.

Q:  When you try to arrive at the valuation number using the discount rate…

Charlie:  We don’t use numeric formulas that way. We take into account a whole lot of factors. It’s a multi‑factor thing. There are tradeoffs between factors.

It’s just like a bridge hand. You have to think of a lot of different things at once. There’s never going to be a formula that will make you rich just by going through some nerdy little process. If that were true, every mathematical nerd that gets ‘A’s in algebra would be rich.

That’s not the way it works. You found it to be comfortable thinking about a lot of different things at once and correctly thinking about a lot of different things at once. We don’t have a formula that will help you. All that stuff is relevant. Opportunity cost, of course, is crucial. Of course, the risk for your rate is part of a factor that determines how attractive some common stock is.

Q:  The final clarification: do you use the same rate for different business?

Charlie:  The answer is, no of course not. Different businesses get different treatments. They all are viewed in terms of value and they’re weighed one against another. Of course, we’ll pay more for a good business than for a lousy one. We really don’t want any lousy businesses anymore. We used to make money by buying lousy businesses and kind of wringing money out of them. That is a painful, difficult way to make money particularly if you’re already rich.

We don’t do much of it anymore. Sometimes we do it by accident because one of our businesses turns lousy. In that case we have to. It’s just like dealing with your relatives. You can’t get rid of them. We deal with those as best we can but we’re not looking for new ones.

Q:  You talked about these quick cut‑to‑the chase algorithms that you use. Do you arrive at that fluency only after having gone through your entire mental model checklist over a long period of time?

Charlie:  If you’re talking about multiple models that means you think about many different models. That’s the nature of reality, particularly if you’re an investor. There’s a wide variety of human activities and there’s no way to make that easy. Look you all are in the business, do you find it easy?

Anybody who finds it easy is wrong. You’re living in an illusion. It’s not easy. You occasionally get an easy one but not very many; mostly it’s hard. How many people find it hard to make good investments right now?

[No hands go up]

Yeah, it’s an intelligent group of people. We collect them.

Q:  Hi Charlie. You talk about making an effort to reduce standard errors and doing things like not participating in auction processes. I was wondering, in terms of your daily habits or your life habits, what you do, in terms of things that most people don’t, to reduce these errors.

Charlie:  There are two things Warren and I have done and [superinvestor and DJCO board member] Rick Guerin has done to a considerable extent. One is that we spend a lot of time thinking. Our schedules are not that crowded. We look like academics more than we look like businessmen. Our system has been to sift life for a few opportunities and seize a few of them.

We don’t mind long periods in which nothing happens. Warren is exactly the same way. Warren is sitting on top of an empire now. You look at his schedule some time and there’s — a haircut. Tuesday: haircut day. That’s what created one of the most successful business records in history. He has a lot of time to think.

That brings me to the subject of multitasking. All you people have gotten very good at multitasking. That would be fine if you are the chief nurse in a hospital. As an investor I think you’re on the wrong road. Multitasking will not be the highest quality thought man is capable of doing. Juggling two or three balls at once, where people come at you on their schedule, not yours, is not an ideal thinking environment.

Luckily, a lot of you are so obscure that you have plenty of time to think. I was in that position for a long time, and it helped me. I hope it works well for you. If it doesn’t, I think you’re going to have to be satisfied with life in the shallows. If it didn’t work for me, I didn’t have a number two plan. I was not going to dance the lead in the Bolshoi Ballet. Or stand on the mound in Yankee Stadium or something.

I do think that the constant search for wisdom and the constant search for the right kind of temperamental reaction to opportunity, that’ll never be obsolete. You can apply that to your personal life, too.

Most of you are not going to get five opportunities to marry some wonderful person. Most of you aren’t going to get one. You’re just going to have to make do with an ordinary result. The nature of ordinary results is that they’re ordinary.

Q:  You mentioned earlier about serendipitously bottom‑ticking Wells Fargo. As that decision came to the fore, other banks were failing. Why was Wells Fargo the one?

Charlie:   I’ll take you back one time before. When Berkshire bought into Wells Fargo, the world was coming unglued in a banking panic. Real estate lending had been the source of it. Wells Fargo had been huge in real estate lending. This is back when Berkshire bought its first Wells Fargo.

The answer was we knew that the lending officers at Wells Fargo were not normal bank lending officers. They had grown up, a lot of them, in the garment district. They had a cynical view of human life. They were appropriately careful. When they needed to intervene strongly, they did so, because they learned that was the right way to run a garment lending business.

They were just better. We knew they weren’t going to lose as much money as everybody thought they were, with their big real estate portfolio. They’d chosen it better, and they managed it better, etc. We had an information advantage, just based on general thinking. That gave us a big advantage, so we bought heavily.

Now, number two, The Daily Journal Corporation, when the world was coming unglued, when the Daily Journal bought its Wells Fargo stock. But again, we knew that the bankers at Wells Fargo were more rational than ordinary bankers.

It was a different kind of superiority and rationality. It wasn’t this big real estate portfolio and a shrewd way of handling developers, but it was still a shrewder way of being in banking. I don’t think anybody should ever buy a bank who doesn’t have a feeling for how really shrewd the management is.

Banking is a field where it’s easy to delude yourself and report big numbers that aren’t really being earned. It’s a very dangerous place for an investor. Without deep insight into banking you shouldn’t own it.

Q Two powerful mental models are the concept of specialization, and the multidisciplinary approach. Do you have any advice on synthesizing these two mental models?

Charlie:  Well, saying you’re in favor of synthesis is like saying you’re in favor of reality. Synthesis is reality, because we live in a world with multiple factors involved, and of course, you’ve got to have synthesis to understand the situation when two factors are intertwined. Of course, you want to be good at synthesis.

It’s easy to say you want to be good at synthesis, but it’s not what the reward system of the world pays for. They want extreme specialization. By the way, for most people, experience‑specialization is the way to succeed. Most people are way better off being a chiropodist, then trying to understand a little bit of all the disciplines. I don’t want a chiropodist that’s trying to be a poet. I want somebody that really knows a lot about feet. The rest of the world is that way.

This model of being good at synthesis across a lot of disciplines, it’s very helpful to some people. It’s not the correct career advice for most people. For most people, the correct career advice is figure out some clever specialty, and get very, very good at it, and get the labels the world rewards.

The trouble with it is, that’s all you do. You make terrible mistakes everywhere else, so that the synthesis should be your second attack on the world. It’s really defensive. Without synthesis, you’ll be blindsided in all the other parts of your life that aren’t chiropody.

Q: What advice can you give us on one who’s looking to improve his own rationality?

Charlie:  Well, I’d say if you start working at it young and keep doing it until you’re as old as I am, it’s a very good idea. It’s a very good idea, and it’s a lot of fun, particularly if you’re good at it. I can hardly think of anything that’s more fun. I think I have a lot of cousins in this room, and all I can say, “You’re on the right track.”

You don’t have to be the Emperor of Japan to get fun out of rationality. You can avoid a lot of hopeless messes. You can help other people scramble out of their messes. You can be a very constructive citizen if you’re always rational. Being rational means you avoid certain things. It’s like, I don’t want to go where I’m going to die. I don’t want to go where the standard result is awful.

Where is the standard result awful? Try anger. Try resentment. Try jealousy, envy. All these things are just one‑way tickets to hell, and yet some people just wallow in them. Of course, it’s a total disaster for them and everybody around them.

Another one that’s just awful is self‑pity. If you’re dying of cancer, don’t feel sorry for yourself. Chin up, suck it up, and wade through. The self‑pity is not going to improve anything, including dying with cancer. Self‑pity, forget about it. Get it out of your repertoire.

Q:  Hi, Mr. Munger. My name is Stephanie. I have a personal question for you, since you mentioned marriage. Increasingly, men and some women don’t find the ROI on a long‑term committed marriage worth it. I’m curious what your evaluation is of the investment of marriage.

Charlie:  I think different folks can live in different ways. All the evidence is that, marriage is the best practical alternative for most people. The statistics show it. They live longer. You measure happiness physiologically by time smiling, and so forth. Married people do better.

It isn’t a lot of marriages don’t fail and there aren’t more marriages that were made in hell. Considering how difficult the world is, it’s your best chance, for most people. Of course it should be valued.

That’s one of the things that I like about the Asian cultures. The Confucian idea that family’s really important, and friends too, for that matter. It’s a very sound idea. If we ever lost the family values, we would have one hell of a lousy civilization.

Q:  My question was around the decision to purchase the real estate at Logan, Utah versus deploying that capital elsewhere in the technology business.

Charlie:  We think we’re going to be in Logan, Utah for a long time. We have a very happy bunch of employees there. They like their work. They like their community. The like everything about it. It’s part of a business operation. We’ve got customers that come there. It’s a very presentable building.

I’ve never seen it, but it’s got a river that flows by. Of course, we’re glad to own this (DJCO Los Angeles) real estate. We bought it cheaply. We built it cheaply. It’s a nice piece of property. The neighborhood around them has steadily upgraded and gentrified, as we expected. There’s nothing wrong with owning a little real estate.

Our way of getting ahead was not to be real estate operators, but we don’t mind owning some real estate. It’s part of a business. It simplifies life.

Q:  Do you think a person who can’t make money running a New Jersey casino is qualified to be President of the United States?

Charlie:  He did make money for quite a while. My attitude is anybody who makes his living running a casino is not morally qualified to be President of the United States. I regard it as a very dirty way to make money.

Q:  What has given you personally the greatest sense of accomplishment? That’s question number one. Second is, if you had any advice to give to a younger version of yourself, what would it be?

Charlie:  My family life has been more important to me than the wealth or prominence. On the other hand, I hated poverty and obscurity. I tried to get out of them, and it has given me some satisfaction that I came a long way from where I started.

I think most people who come a long way from where they started feel pretty good about it. I think most of the people that finally sit on top of Everest, even though they only stay there for 15 seconds, they’re kind of proud of the fact they got up there. I think that’s good.

Cicero used to say that, “One way to be happy in old age is to remember a lot of achievements in your past.” Some people say, “That’s too damn self‑centered. You should be thinking about God or something,” but I agree with Cicero. It’s okay to live the kind of a life that you’re pleased with when you’re old and look back.

Q:  If you had any advice you would give a younger version of yourself, what would it be?

Charlie:  My advice is always so trite. The good behavior, the being dependable, the morality, it makes your life easier. It makes it work better. You don’t have to remember your lies, which get complicated if you lie all the time. In fact, it gets so complicated, you’re sure to fall off and be recognized as a liar.

I think all the old‑fashioned morality works. The old‑fashioned good behavior and a little generosity. We all know people where people come to their funeral to make sure they’re dead.

You do not want to be in that crowd. You want to live your life so people are actually going to miss you when you’re gone. Kipling’s “If” is great poetry. Kipling doesn’t exist in the modern college any more. It wasn’t politically correct. I think Kipling’s “If” is great poetry and its great advice.

“Keep your head when all about you are losing theirs.” What’s wrong with that? And the quote, “Be a Man, my son.” Why don’t you want to be a man? Do you want to be some idiot child all your life, some angry twit? There’s so many of them already. There’s so much to be gained by never being an angry twit. You want to be philosophical.

This political situation we all face now. Of course it’s disgraceful. It’s bad that a leading civilization has candidates for a high office like those we’re talking about. They’re not all in one party. You don’t want to get angry. After all, politicians have been politicians for a long, long time. You want to operate constructively, vote constructively.

There’s so much anger in politics now and so much automatic hatred. How can any of us really know whether the United States will be better 50 years from now because we vote Republican or vote Democratic in the next election? Who can tell what the exact mix is between compassion and something else?

By the way, the Muslim behavior rules read a lot like the Old Testament, which of course they copied. He claimed they came directly from God, but really, he stole them from the Jews.

Q::  How do you understand a new industry or new business you are trying to get into where the dynamics are different? How do you get deep insights into the specific domain? Second, what is the relationship between oil prices and economic growth?

Charlie: I think it’s obvious that if oil had been a little cheaper and easier, the growth would have been greater than mankind has had. In that sense, if oil gets very expensive and we still need it desperately, it will make life harder. There is that correlation between oil prices and economic growth.

On the other hand, some very peculiar things happen if you take Exxon, and Chevron, and so forth. What’s happened to make those things good investments over the long term is that the damn price of oil went up faster than their production went down. Name me another business where you get richer and richer if your production in real units keeps going down, down, down?

Not everybody would have predicted that in advance, including most of the economists. It’s a complicated subject.

There’s another trick to it. The people that really have a lot of free energy, like the people in the Middle East, have very dysfunctional economies. They’re like a bunch of rich people spending their capital and not knowing how to do anything anybody else wants to buy. Maybe in that sense, having a tougher hand has been good for us.

My answer to that question reminds me of my old Harvard Law professor who used to say, “Charlie, let me know what your problem is, and I’ll try to make it harder for you.” I’m afraid that’s what I have done for you. The second question was…?

Q:  How do you understand a new industry?

Charlie:  Oh yeah. The answer is, “barely.” I just barely have enough cognitive ability to do what I do. That’s because the world promoted me to the place where I’m stressed. If you are lucky, that will happened to you. That’s what you want to end up, stressed. You want to have your full powers called for. Believe you me, I’ve had that happen all my life.

I’ve just barely been able to think through the right answer, time after time after time. Sometimes I fail.

Q:  Charlie, last year at this meeting you had some very pointed comments and concerns about Valiant.

Charlie:  Caused me nothing but trouble.

Audience Member 4:  Do you have any updated thoughts on Valiant, and are there any current companies where you have concerns similar to your concerns about Valiant?

Charlie:  It probably wasn’t wise for me to inject myself. I have no dog in that hunt. I have no interest in the pharmaceutical business. I have no interest in Valiant. It’s just, you groupies have come so far, then to tell you amusing stories about life and make comments about the current affairs.

Valiant was such an extreme example of misbehavior and crazy greed and what have you. It ended up with one of the Valiant shareowners saying that Warren Buffett was a sinner because he owned Coca‑Cola.

I drew retaliation to Warren, by the way that’s a good place. If anybody’s mad at me today, why, get mad at Warren. He can handle it. He’s a very philosophical man. It is true that these crazy false values, and this crazy excess, it is bad morals, and it’s bad policy. It’s bad for the nation. It’s just bad, bad, bad. There’s a lot of it. And of course a lot of it is in American finance.

As for my judgment on American finance…the truth of the matter is that Elizabeth Warren would not agree with me on many subjects and I wouldn’t agree with her on many subjects. But she is basically right when she says that American finance is out of control and has too much evil and folly in it. It isn’t good for the rest of us.

Both Elizabeth Warren and Bernie Sanders, not two of my favorite people on Earth, are absolutely right on that subject. You all see what goes on in finance and the craziness, the bull, the promotions, the lousy accounting, the crazy trading cultures.

It’s very bad for all of us that we have this huge overdevelopment of finance. And yet, it’s very hard to do anything about it. What happened, you look back to Edwardian England or a little before. Maybe 300 people, all males, owned half the land in England. They had nothing to do. I mean, their under butlers had under butlers.

What did they do? They went into the clubs of London and they sat around the card tables and they gambled with one another for high stakes. That’s what human nature does when people have a lot of leisure.

Fade in, fade out. Multiply the wealth per capita of the world by 30 or so. Now we’ve got all kinds of people who were like the Lords of England, who had all that time to sit around and play cards against one another and enjoy the thrills and pains of gambling. We have a vast gambling culture.

People have made it respectable. Instead of betting on horses or prize fights, they bet on the price of securities or the price of derivatives relating to securities. Of course you bet on athletic contests. We have a huge amount of legalized gambling. The public market that operates every day with transactions is an ideal casino.

There are a whole bunch of people who want to own the casino and make a lot of money without losing money on inventories or credit risks or any of the other irritating parts of business. Just to sit there and have every night go higher and higher. Who doesn’t want to be croupier in a casino? And very respectable people get drawn in when they see other people getting rich at it.

There’s way too much of that in America. Too much of the new wealth has gone to people who either own the casino or they’re good at outplaying others in the casino. I don’t think the exultation of that group has been good for the body politic or life generally.

I am to some extent a member of that group in a sense that, after all, I didn’t make my career in surgery. I’m always afraid that I’ll be a terrible example for the youth. They will think, I just want to make a lot of money with soft white hands and not do much for anybody else. I just want to be shrewd at buying little pieces of paper.

Even if you do that very honestly, I don’t consider that much of a life. Just being shrewd about buying little pieces of paper, being shrewder than other people, is not an adequate life.

It’s not a good example. It’s the reason that people like Warren and me are (a) charitable and (b) running businesses. We’re not just buying little pieces of paper. I think that we have something going in our nation that is really very serious and very bad. I hate to agree to Elizabeth Warren on this subject but she’s right.

I don’t see any way of stopping it, except with some big legislative change. You could say, “What difference does it make?” What happens is, as this cyclicality with gambling and securities and other assets goes on, what happens is the big busts hurt us more than the big booms help us. We saw that when the great depression ended in the rise of Adolf Hitler.

A lot of people think that Hitler rose because of the great Weimar inflation, but you know Germany recovered pretty well from the Weimar inflation. What they did is they destroyed the currency. They just issued a new currency. It’s rather interesting, they said all the people that got rid of their old mortgages and the inflation will put the mortgages back and they will back our new Reich mark

That had worked pretty well. Just like it worked fairly well in Argentina or Italy for that matter. What really enabled Hitler to rise was the great depression.

You put on top of the Weimar inflation the great depression and people were just so demoralized that they were subject to being snookered by a gutter snipe like Adolf Hitler. I think this stuff is deadly serious. These crazy booms should be nipped in the bud. People like Alan Greenspan, he’s an amiable man but he’s an idiot.

You should not make the head of the Federal Reserve, the governor of all banking, somebody whose hero is Ayn Rand who believed in no government at all. It was a very unlikely place to look for correct decision making. We probably got the kind of decision making we observed.

I think he’s an honest and amiable man but of course he just didn’t see reality the way it was. A lot of people think that if an axe murder happens in a free market well that has to be all right because free markets are all right. A lot of those people are in my party by the way.

Q: Does it make sense to have General Motors in the Berkshire portfolio.

Charlie: General Motors is in the Berkshire portfolio because one of our young men likes it, and Warren lets the young man do as they please.

Warren, when he was a young man, didn’t want any old men telling him what to do and, therefore, he delivers that kind of freedom to his young men. That’s just the way it is. I haven’t got the faintest idea why that young man likes General Motors. It is true it’s statistically cheap, and it may be protected by the federal government in the end. It may be a very good investment.

The auto industry is about as brutally competitive an industry now as I have ever seen them. Everybody knows how to make good cars, everybody. They rely on the same suppliers and the cars last a long time with very low service.

Everybody leases them at cheap ransom with of all kinds of incentives. It has all the ear‑marks of a very commoditized, difficult, super-competitive market. I don’t think the automobile industry is going to be a terribly easy place. It may actually shrink one of these days. In other words, the culture of everybody having two, three, or four cars could actually shrink.

If I were investing in the auto industry, I’d want some place that I thought was way the hell better competitor than the others and that’s hard to find.

Q:  What do you think of the economics of the oil market?

Charlie:  I would not have predicted that oil would reach its present price. If you’d forced me to bet I would have bet that what has happened wouldn’t have happened, but it did. It’s generally true with these commodities you can get periods of extreme high prices, like we had with iron ore, and extreme low prices, like we now have with iron ore.

Commodities can do strange things, goes up and down, in terms of prices. Of course, they have macroeconomics consequences. If you’re in Australia, having these commodities go way down is terrible. If you’re in the tar sands area of Canada, having oil prices go down to where they are now.

I don’t even know how economic it is to produce tar sands oil at $30 a barrel. My guess is it’s not very attractive and it may not work at all for many people. You’re in a weird period. It’s the nature of the human condition, with free markets and stuff like iron ore and oil, you’re going to have weird periods of high prices and weird periods of low prices.

I’ve never been able to predict accurately or make money from predicting accurately, those swings. We tend to just get into good businesses and then take the bumps as they fall.

Q:  Would you please recommend some books that you’ve enjoyed lately?

Charlie:  You people send me books, like 30 a week. I tend to skim them so rapidly that I no longer develop the joy of reading. I used to when I picked a few books of my own to read.

[laughter]

Charlie:  You’re ruining my judgment on the books. I can’t resist reading the damn things when you send them to me. No, I skim all of them. I like each one in its way because it’s different from anything else I normally do. I’m no longer a good book source.

Q:  Do you mind sharing with us some highlights of your philanthropic work?

Charlie:  I’ve never wanted to tackle problems like world peace. I read an autobiography that Carnegie thought he was so smart and so rich. He had thought he’d use his money to bring out world peace. He created the Court at The Hague and all kinds of very expensive things.

The ink was barely dry on his creations when the crazy monarchs of Europe stumbled into World War I, with the carnage and the poison gas, and the agony, and stupidity. It was quite demoralizing to Carnegie. I’m not trying to bring on world peace. I’ve watched Carnegie try it and I’ve decided if he couldn’t do it I’m going to leave it alone.

I don’t take on those big subjects. I like to create dormitories and science teaching facilities, stuff like that. It’s a pretty modest activity, but it’s interesting to me. It’s easy to do them better than most people do them. I have no feeling I have any advantage in bringing out world peace, but I think I’m pretty good at dormitories. I do what I’m good at and I suggest that all of you do the same thing.

Q:   With Senator Sanders building his campaign around income inequality and so many people of my generation starting to feel the burn, how would you address this issue?

Charlie:  That’s a very good question, because it’s so au currant with Piketty and then Sanders. My attitude is both Sanders and Piketty are a little nuts.

[laughter]

Charlie:  The people who really were passionate about egality and wanted to bring it about by government action gave us things like the Soviet Union, a lot of deaths and the agony and the poverty that they have now in spite of having passed out all resources. Communist China, they got egality and think of the unnecessary deaths and so forth. North Korea. I’m suspicious of all of this passion for egality that has such bad examples.

On the other hand, if you want to look at what non‑egality brings us, let’s just take Communist China. Communist China had egality, meaning that three quarters of their people were dirt poor, subsistence level poor, but they had the advantage of the equal, they were all struggling to get enough to eat and to live through. Of course, when they adopted some private property and more property rights, what they got was living standards have advanced by a factor of ten or so. More quickly than anybody ever had but, of course a lot more inequality. They had all these rich Chinese and they didn’t have before. I think it was a very good bargain for the Chinese to have.

In other words, I don’t think Sanders understands this at all. He doesn’t want to understand it. He has a religion. He’s had it for thirty years. He’s a Johnny‑one‑note. It doesn’t matter, as an intellectual, he is a disgrace. Now, I think we’d all be glad to have him marry into the family based on his personal characteristics. But as a thinker, he’s pretty bad. I don’t think he’s any worse than some of our Republicans, but at least they’re crazy in a different way.

Egality has one effect in a democracy that Aristotle commented on. People will cheerfully tolerate considerable differences of outcome if they seem deserved. Nobody minds the fact that Tiger Woods has a big income when he’s the best golfer that’s ever lived. Find somebody who’s done some new wonder for the world or who’s a surgeon that’s way better than other surgeons, etc. But differences in outcome that are seen as undeserved tend to disrupt democracy. That’s why Aristotle commented on it.

Who is getting the undeserved money in America now? It’s a good question. It is not Bill Gates. It is not the people who create the new companies and gamble on wind. We don’t resent their success. It’s a lot of the financiers, who may remind you too much of the man talking.

We have lot of undeserved wealth that I think has caused a lot of envy. To some extent, envy is always a bad idea. It’s also inevitable we’re going to have a lot of it. We have a lot of undeserved wealth in the financial class. In many cases for doing nothing or acting counterproductively. Fixing the obviously undeserved wealth of a lot of people would be a constructive thing.

If you take the ordinary investment partnership, which some of you no doubt run, not only do they get capital gains on what for anybody else would be ordinary income. They don’t pay any income tax at all on enormous accretions of wealth because the unrealized appreciation is gradually shifted to the general partner. He can take securities out when he leaves the business and not recognize the gain. We have enormous liquid fortunes being made with no taxes at all. Naturally that’s resented. It will be resented even more if people understood it.

[laughter]

Charlie:  It’s not very complicated to understand. I think by and large inequality is a natural outcome of a successful civilization that is improving for everybody. All the stuff about the wealth of the top one percent or one‑tenth of one percent. What the hell can a guy do who’s in the top 1,000?

He has to eat the same food watch the same television. He has to leave the money to something, usually philanthropy. Is he the main problem we have? He is not really using the wealth very much and most of these guys are not that interested in politics. People like to talk about the terrible influences the rich have in politics, but if you are rich you realize how little influence the rich really have when you see a lot of people lay out a lot of money who are rich and get gradually nowhere. I think these people are raging about inequality like Piketty and Sanders are wrong. The people who say the undeserved wealth deserves some attention. I think they are right and a huge source of the undeserved wealth is coming to finance.

Q:  I’m curious if the decision of buying Bank of America was driven by its low price or by its culture?

Charlie:  The Bank of America was bought the way we used to buy securities. It just got problems so hard that it was selling for less than its worth, way less. There’s a lot in the Bank of America which is sound.

Q: I’m pretty excited about the prospects of self‑driving cars over the next 10 to 20 years. It seems like the technology is moving very quickly but as a Berkshire shareholder I’m worried about the implications for the entire auto‑insurance industry if accidents hopefully become a thing of the past. That’s good for civilization, bad for auto‑insurance business. I would love to hear your thoughts on that.

Charlie:  Well, you are right. If all the cars run around without drivers it would be bad for GEICO.

[laughter]

Charlie:  I don’t think it’s going to happen very quickly. In fact, I think it’s going to be quite slow. Before, the first thing people did when they got extra wealth is they bought more cars. Even if we don’t get self‑driving cars, that culture may be weaning. Not so much in the Third World but in places like America.

Q:  If you could maybe publish a book list, we can continue learning with the books in your personal library.

Charlie:  I don’t want to be a book recommender for the world.

[laughter]

Charlie:  It would be quite time‑consuming. I’m afraid you’ll have to find another.

Q: A lot of people here have the ability to do well but they don’t have the opportunity to meet the right people. Ronald Burkle credits you with giving him credibility when he was attempting to acquire grocery stores at age 30. Who was your mutual acquaintance? How was Ronald Burkle able to meet you in the early 1980s?

Charlie:  In those days we had a lot of declining businesses. Our last big trading stamp culture was the company that Ron Burkle’s father controlled. That’s where I met Ron Burkle. It was an attempt to preserve that customer. In due course I failed in all activities. Ron Burkle on the other hand left that occasion and did nothing but succeed, so maybe you should ask him.

[laughter]

Q:  What’s your view on Unicorn companies like Airbnb and Uber? Do you think those companies at such high valuations can ever go public?

Charlie:  My attitude is that I have a circle of competence that does not include greatly predicting which new companies in Silicon Valley or dependent on Silicon Valley are going to succeed. I tend to avoid the subject entirely and make my way in other fashions. However, I will comment on that one thing: manipulative finance.

As these venture capitalists, part of the finance industry ‑‑ the constructive part ‑‑ these are people who make their living more honorably than the rest of the people in finance because they are actually allocating capital into businesses. The venture capitalists are useful members of finance but they don’t escape their share of sin.

What they gotten in the habit of doing is creating these rounds of private financing, and each new one is at a higher value but they just sneak a little clause in saying that nobody who previously bought into the venture gets anything until the new guys are preferred. That is all like a Ponzi scheme. It’s a disgusting, tricky, dishonorable thing to do, particularly since it’s obscured. Of course, it’s being deliberately obscured. Even our most reputable part of finance has dirty, sleazy activities creeping in. It will ever be thus. Large amounts of easy money cause regrettable human behavior. It’s Munger’s Rule.

Q:  The environment that we invest in right now is very different from when you started, with high‑frequency trading, momentum trading, and all that. Do you think fundamental value investing is losing relevance?

Charlie:  I don’t think fundamental value investment will ever be irrelevant, because of course you must succeed in investment. You have to buy things for less than they’re worth instead of more than they’re worth. You have to be smarter than the market. That will never go out of style. That is like arithmetic. It’s going to always be with us.

As far as high‑frequency trading, that is a complicated subject. I think the high‑frequency traders of the world ‑‑ many of whom are personally admirable, honorable people ‑‑ they have all the contribution to the American economy that a bunch of rats do in a granary.

[laughter]

Charlie:  They’re just sucking some of the resources out for themselves while contributing nothing to the civilization.

Q: Is there a specific approach you take to spending quality time with family?

Charlie:  I don’t think I want to treat myself as some kind of a wonderful example of family life. I did the best I could, but I have a feeling they’d all agree there are some imperfections.

[laughter]

Q: Whom do you admire?

Charlie: Of course, there are a lot of historical people I admire. That’s one of the advantages of being a reader, is you can consort with some of the best people who ever lived. That’s what I do with a lot of my time.

I admire a lot of people. Take surgeons that do way the hell better than other surgeons and do big volumes. Take some actor that gets to be the best actor in the world, and moves and entertains a lot of people. There are a lot of people who are constructive, intelligent, generous, and improve the world for the rest of us. There are a lot of people who are good examples.

I spent some time ‑‑ because I was on the Costco board for a long time ‑‑ with Dan Evans who was both the senator and governor in the State of Washington, generally, admirable, sensible, high‑grade politician. There are so few politicians like Dan Evans.

We got all these gerrymandered districts and all these crazies on the right and crazies on the left who like only people like themselves. When you do find a Dan Evans, you really admire him and like him. There will always be admirable people.

My God, that’s what we all want to be. We want to be admirable. We want to be is the kind of people other people name in their will to raise their children. If a lot of people are doing that you’ll know you’re doing something right. People are very shrewd about guessing who will be good at raising their children.

Audience Member:  When you were a busy attorney, you sold your most important client an hour a day. I’m guessing that you spend that time reading and thinking.

Charlie:  No, that was my most important client, was myself. You’re right about that. It was reading and thinking. The beauty of doing enough reading and thinking is that if you’re good at it you don’t have to do much else.

Q: I was once given the advice that it’s really important to conquer fear. I was wondering if you could speak to your relationship to fear, and whether you’ve conquered it.

Charlie:  Generally, I’ve avoided certain stances which automatically caused reasonable fear. If you want to go hang gliding, you have to select another partner.

[laughter]

Charlie:  My son Philip is in the audience. He had a saying when he was young, he’d say, “If at first you don’t succeed, well, so much for hang gliding.”

[laughter]

Charlie:  I don’t seek out fear to get thrills. I don’t even seek out the appearance of fear when it’s really safe. Generally, I’m not a great lover of danger or even the appearance of danger. That’s not my thing. I don’t think I’ve felt much fear for a long time.

Q:  How did you get there?

Charlie:  I just lived a long time.

[laughter]

Charlie:  I had fears when I was younger, but they gradually melted away.

Q: There was a Bloomberg article that suggested that Berkshire’s investment gives Coke management cover to not really address the future of the beverage business.

Charlie:  That’s an easy one. Coke, for many decades, the basic product ‑‑ full‑sugar Coke ‑‑ grew every year. It was like an inevitable march of time. In recent years, full‑sugared Coke is declining.

Fortunately, the Coca‑Cola Company has a vast distribution business infrastructure and a lot of other products. While Coca‑Cola as an individual product is declining some, instead of going up the way it always did before, the rest of the businesses are, on average, rising.

I think Coke is still a pretty strong company, and will be a respectable investment. It’s not like it used to be when it was like shooting fish in a barrel.