Charlie Munger Holds Court
Charlie Munger, who runs Wesco Financial, is the famed right-hand-man of Warren Buffett -- but is also a master investor in his own right. At Wesco's annual meeting last week, he shared his always-blunt opinions on the expected returns from Berkshire Hathaway and Wesco stocks as well as equities in general, the scandalous state of pension fund accounting, the decline of public schools, and more.
By Whitney Tilson
Published on the Motley Fool web site, 5/8/01
Given that more than 10,000 people attend Berkshire Hathaway’s (NYSE: BRK.A) annual meeting each year, I’m always surprised by the paltry attendance -- maybe a couple hundred people -- at the annual meeting of Wesco Financial (AMEX: WSC), which is 80.1%-owned by Berkshire and whose CEO is Berkshire Vice Chairman Charlie Munger. One needn’t even be a Wesco shareholder to attend.
While Buffett gets all the attention -- and is, according to Munger, the superior investor -- Munger is himself an investment genius and, were it not for Buffett, might well be acclaimed the world’s greatest investor. Before Munger joined forces with Buffett in the mid-1970s, his investment partnership compounded at an average rate of 24.3% annually -- vs. only 6.4% for the Dow -- between 1962 and 1975.
As I did in last week’s column on the Berkshire Hathaway annual meeting, I will try to distill more than 20 pages of notes down to the most important things I heard. (My notes can be seen in their entirety at my website.) I’ve added a little commentary, but will generally let Munger speak for himself. Recording devices were not allowed in the meeting, so in many cases I am paraphrasing because I couldn’t write quickly enough.
Future returns from equities: stocks and Rembrandts
“If I’m wrong [about future stock market returns being in the mid-single digits], it could be for a bad reason. Stocks partly sell like bonds, based on expectations of future cash streams, and partly like Rembrandts, based on the fact that they’ve gone up in the past and are fashionable. If they trade more like Rembrandts in the future, then stocks will rise, but they will have no anchors. In this case, it’s hard to predict how far, how high, and how long it will last.
“If stocks compound at 15% going forward, then it will be due to a big ‘Rembrandt effect.’ This is not good. Look at what happened in Japan, where stocks traded at 50 to 60 times earnings.
This led to a 10-year depression. I think that was a special situation, though. My guess is that we won’t get extreme ‘Rembrandtization’ and the returns will be 6%.”
Berkshire’s past returns
“Berkshire’s past record has been almost ridiculous. If Berkshire had used even half the leverage of, say, Rupert Murdoch, it would be five times its current size.”
Future returns on Berkshire Hathaway and Wesco
“The future returns of Berkshire and Wesco won’t be as good in the future as they have been in the past. The only difference is that we’ll tell you. Today, it seems to be regarded as the duty of CEOs to make the stock go up. This leads to all sorts of foolish behavior. We want to tell it like it is.
“I’m happy having 90% of my net worth in Berkshire stock. We’re going to try to compound it at a reasonable rate without taking unreasonable risk or using leverage. If we can’t do this, then that’s just too damn bad.”
Berkshire is “a hell of a business”
“The businesses that Berkshire has acquired will return 13% pre-tax on what we paid for them, maybe more. With a cost of capital of 3% -- generated via other peoples’ money in the form of float -- that’s a hell of a business. That’s the reason Berkshire shareholders needn’t totally despair. Berkshire is not as good as it was in terms of percentage compounding [going forward], but it’s still a hell of a business.”
Wesco vs. Berkshire Hathaway
“You shouldn’t buy Wesco stock instead of Berkshire’s.”
“This is an amazingly sound place. We are more disaster-resistant than most other places. We haven’t pushed it as hard as other people would have pushed it. I don’t want to go back to Go.
I’ve been to Go. A lot of our shareholders have a majority of their net worth in Berkshire, and they don’t want to go back to Go either.”
“The reason we avoid the word ‘synergy’ is because people generally claim more synergistic benefits than will come. Yes, it exists, but there are so many false promises. Berkshire is full of synergies -- we don’t avoid synergies, just claims of synergies.”
The scandal of American pension fund accounting
“IBM (NYSE: IBM) just raised its return expectations for its pension fund to 10%. [Editor’s note: Companies can make adjustments to the assumptions that make up the value of their pension funds, which can affect reported earnings.] Most companies are at 9%. We think 6% is more realistic. They may believe it -- they’re honest people -- but subconsciously they believe it because they WANT to believe it. It makes earnings good so they can promote the stock.
“The reason accountants don’t say anything is best summed up by the saying, ‘Whose bread I eat, his song I sing.’ I think you’re getting very foolish numbers in American accounting. I don’t think it’s willful dishonesty, but it might as well be.”
Corporate America’s addiction to “extraordinary” charges
“If it happens every year like clockwork, what’s so extraordinary about it?”
“We’re exceptionally goosey of leveraged financial institutions. If they start talking about risk management [e.g., how good it is], it makes us nervous. We fret way earlier than other people.
We left a lot of money on the table through early fretting. It’s the way we are -- you’ll just have to live with it.”
“I don’t want to be in the position of criticizing Freddie Mac (NYSE: FRE). It’s had a wonderful record so far and for all I know, its risk management is perfect.”
The decline of public schools
“You could argue that [the decline of public schools] is one of the major disasters in our lifetimes. We took one of the greatest successes in the history of the earth and turned it into one of the greatest disasters in the history of the earth.”
I asked a tongue-in-cheek question: “Mr. Munger, I recently read about a Mayo Clinic study that showed that optimists live 20% longer than pessimists. I’m concerned because in the Berkshire Hathaway movie last weekend, you were referred to as the ‘No-Man.’ Is it too late for you to turn over a new leaf, so that we can benefit from your investing prowess as long as possible?” He laughed and said, “Is there such thing as a cheerful pessimist? That’s what I am.”
At the meeting, Munger passed out a booklet with six of his writings and speeches that he used in a course he taught recently at Stanford Law School. To my knowledge, one of the essays,
“The Great Financial Scandal of 2003,” has never been released to the public. (More details regarding the contents of this booklet are available on my website.)
I will write Munger shortly and ask for permission to post on the Web the first three articles in the booklet (the other three are copyrighted). If he says yes, I will include a link in a future column.
Guest columnist Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. He owned shares of Berkshire Hathaway and Wesco at the time of publication. Mr. Tilson appreciates your feedback at Tilson@Tilsonfunds.com. To read his previous columns for The Motley Fool and other writings, visit http://www.tilsonfunds.com/.