Not a transcript, just detailed notes. Wisdom is Munger's; errors are mine.
Q: Would Daily Journal consider selling itself to a competitor if the offer was right, or is it going to remain an independent company?
Munger: Generally speaking, we like selling to people we like and admire. Not everybody would fit that category. We're trying to run it so that any intelligent person would want to buy it. My attitude in running the Daily Journal, with its technology thing, is that Google would be out of its mind not to buy it. It's going to take years for them to figure that out, though.
Q: Last year you talked about Belridge Oil and how you made a mistake not buying more when you had the chance. Can you talk about your investment process?
Munger: In those days, Belridge was a pink-sheet company. It was very valuable. It had a huge oil field, it wasn't even leased, they owned everything, they owned the land, they owned the oil field, everything. It had liquidating value way higher than the per share price -- maybe three times. It was just an incredible oil field that was going to last a long time, and it had very interesting secondary and tertiary recovery possibilities and they owned the whole field to do whatever they wanted with it. That's rare, too.
Why in the hell did I turn down the second block of shares I was offered? Chalk it up to my head up a place where it shouldn’t be. So, that's why I made that decision. It was crazy. So if any of you made any dumb decisions, you should feel very comfortable. You can survive a few. It was a mistake of omission, not comission, but it probably cost me $300 - $400 million. I just tell you that story to make you feel good about whatever investment mischances you've had in your own life. I never found a way of avoiding them all.
Q: Given your accumulated wisdom, what do you know today that you wish you knew when you were first started investing in stocks?
Munger: Like Warren [Buffett], when I was young I scrambled around doing anything that would work, and I could get a tiny little obscure company that was too cheap because they were on the pink-sheets, and all kinds of things. As I got more money, I decided I didn't like all that scratching around. I was thinking about things I didn't want to think about. I wanted to admire the people who were running the business. I wanted to admire the business, think it well-placed, and going to do well. So, I drifted into this, good people, good company field in my old age, and I found it much more comfortable, and my returns haven't gone down that much. It's remarkable.
Q: What would you tell a young man today about what he should be reading on a daily basis?
Munger: You've got to have a main publication that's using some editorial discretion because you can't read 500 pages. The Wall Street Journal, with its editing, is a very convenient thing for me, and I'll bet all of you read it, too. Who doesn't read the Wall Street Journal? Raise hands if you don't read it.
(One hand in the room goes up)
Munger: Why don't you read it?
Audience member: It's a publication I haven't picked up yet.
Munger: What planet do you live on?
Audience Member: I live in Marina Del Ray.
Munger: Well, that may explain it. (laughter) I regard The Wall Street Journal as a must-read publication. I don't think it's lost its basic integrity. I think it's a pretty admirable and useful publication. The editorials I always thought were a little nuts. You know, going way back. They were so right wing and so pure. But, it seems to me that the editorials are saner now.
Q: What architectural challenges did you have for the Munger Graduate Residence Hall at the University of Michigan?
Munger: That was interesting. The idea of getting a whole lot of graduate students from multiple disciplines in one big building, which was exceptionally well-located, close to everything, with exceptional common facilities, and to get a bunch of visiting professors and a bunch of fellows (who were sort of equivalent to the Lowell fellows at Harvard), struck me as a very useful thing to do for Michigan. What was architecturally interesting about it was to get that many people on that irreplaceable site, we had to take the windows out of most of the bedrooms. That was not an automatic sale.
What I did, since I knew it would work, is I mocked-up a model. If it hadn't done that, Michigan never would have accepted it [Munger’s $110 million donation for the building]. It just sounded awful. No windows in the bedrooms? About 80% of the bedrooms have no windows. That's how we got so many on the site. It costs a hundred dollars more a month to have a windowed bedroom. I’m capable of learning from a little episode like that. In the architectural profession, that ability is usually lacking. Particularly in a university setting where they're very tradition-bound. But, Michigan was smart: they saw it was right. It's going to be a non-event. Somebody has a fetish about a window in the bedroom, we've got some for fetishists.
Q: What books would you recommend?
Munger: People like you send me so many books, I don't have time to buy my own. Man came to dinner last night, a famous money manager. Brought me three books. I will like the books, I guarantee you. I have a torrent of books coming to me free. I'm a charity case. I actually like a lot of the books because the people have figured me out pretty well. So, I'm living in a very favored world and people give me free books. It was not my ambition in life to get into this position, but it happened, and I rather enjoy it.
Of course, I'm very selective, I sometimes skim. Sometimes I read one chapter and I sometimes read the damn thing twice. It's been my experience in life, if you just keep thinking and reading, you don't have to work.
Q: You mentioned recently that you enjoyed Ron Chernow's book on John D. Rockefeller, Sr.
Munger: Oh, hugely. If any of you haven't read that book, you should read it. That's a wonderful biography. [Titan, by Ron Chernow] It shows how high grade that man was as a business partner. He may have tough on competitors, but as a partner, he was one of the most admirable people who have ever lived. And as a philanthropist -- you can actually chart what his philanthropy has accomplished -- some of the most remarkable things in the whole history of philanthropy.
Let me give one example. In China, they had deaths by the millions every year. Woman tried to have a second child and their bones just wouldn't enable the child to be delivered. So the terrible, horrible deaths all these young women died, millions of them. Rockefeller sent doctors over there and they figured out that in 4,000 years of intense farming, they bleached something out of the soil that these women's bones needed. It was pretty cheap to put back. Lo and behold, he did all kinds of things like that.
Just for small amounts of money, doing huge amounts of good. Look at the people who were financed by the Rockefeller Foundation. Very admirable people, the physicists in the 1930's and so on. He totally revolutionized medical education in the United States with 50 million dollars. He really revolutionized medical education in the world. If you haven't read that book you ought to read it.
It doesn't deal adequately with his philanthropy. But it deals adequately with the way he handled his partners. He would do things like say, “I know this bothers you and it’s risky, but I think we have to do it. I'll put up all the money and if it fails, I'll take the loss. If it works, you can buy me out at my cost, so you’ll get the benefit.” When he did that, the other partners, who were also rich old men, would say, “Hell, John, if you feel that strongly about it, I'll put up my share."
Which is the right way. We had a person do that at Berkshire. The nice Mormon gentleman who sold us the furniture company in Utah [R.C. Willey Home Furnishings]. He wanted to go into Las Vegas and not open on Sunday. Which is not an intuitive decision. He said, "I'm asking you to do something very peculiar for my religion. I'll put up all the money, I'll take all the risk. If it works, you buy it out at my cost, and if it fails, I'll take the loss."
We weren't like Rockefeller. We took the deal. (laughter) That behavior is so rare, so noble, you shouldn't squelch it.
Q: I’m Jason Zweig from The Wall Street Journal. Thanks for the free ad. If you want I can ask Rupert [Murdoch] if he'd like to reciprocate for the Daily Journal. Late in his life, Ben Graham said that in his opinion there was no reason to imagine that an individual investor who thought appropriately couldn't outperform institutions. Do you think the relative playing field has shifted? Do individuals have a greater or a lesser advantage today?
Munger: In markets as big as this, some shrewd guy who’s willing to search out a few places where he has a real advantage will always do well. There are always going to be ways in markets this big for some smart people to figure out something where they'll make money at an unusual rate, just because they're smarter and more diligent. That will never go away.
I don't think there will ever be a universal easy solution where people can do that. The American market is tough now to outperform if you're buying big stocks in big quantities. I think it's a pretty damned efficient market, and I don't say it can't be done, but I just think it's plenty difficult. The evidence is overwhelming that even though there are zillions of people who have tried, the ordinary result is that they don't succeed.
I would hate the job, personally, of investing, say, in positions of a billion dollars each in 200 different stocks in America and outperforming the averages. I would shrink from that with horror. Peter Kaufman said something interesting to me the other day. He runs a very profitable company [Glenair, Inc.] that has very good returns on capital. He said, "You know, if somebody bought my company for three times sales, I wouldn't run it anymore, because I'd have a hard time justifying that price with anything I could do.” He's already rich, why should he do something that difficult? He doesn't have to.
I think that's what happened in America. People know their own business is lousy. They know another business that is way better. But it's not better if you have to pay thirty times earnings for it. It gets so difficult that it doesn't work. I figured this out, but the consultants and investment bankers keep selling the same nostrum that you can save yourself by paying thirty times earnings for the kind of business you wish you had, instead of the one you've got.
Berkshire has been a huge exception. In this year's annual report Warren intends to deal extensively with: Why did it happen at Berkshire? Will it continue? We've reached a size and the record is interesting enough that those are very important questions. If the rest of the world is as smart as I think it is, it will look at this report with great interest.
Part of what we did should be done by others, but it isn't. There are vast institutional pressures on people to do it differently. Will it continue? I think Berkshire's going to continue way better than most people think. Way better. But there's so much power in what we already have. Part of the reason we have a decent record is that we pick things that are easy. Other people think they're so smart, they can take on things that are really difficult, and that proves to be dangerous.
You have to be very patient, you have to wait until something comes along, which, at the price you're paying, is easy. That's contrary to human nature, just to sit there all day long doing nothing, waiting. It's easy for us, we have a lot of other things to do. But for an ordinary person, can you imagine just sitting for five years doing nothing? You don't feel active, you don't feel useful, so you do something stupid.
You'll find this year's Berkshire annual report very, very interesting. Three failing businesses together created Berkshire Hathaway. There are about the same number of shares outstanding now as they were then. I can't think of anything like it at this scale. You'd think people would be paying more attention to it than they do. I think it looks so peculiar that they can't handle it.
I read an article once by a famous man. I liked it so well (this was twenty-five years ago) that I sent him whatever I could send him without paying gift tax. I sent him $20,000 dollars and said, "I really liked your article, here's a token of my respect." He sent the money back. So, I called him and said, "Why are you sending it back to me. I don't care if you give it to your charwoman or the graduate student who works under you. For God sake's, keep the damn money.” Whereby, he took my money and gave it to some graduate student. His basic attitude was, if it was that easy, there must be something wrong with it.
I think that's part of the trouble with Berkshire Hathaway. It looks so damned easy, they think there must be something wrong with it. The people there don't work that hard. They have all these outside interests – Warren’s playing bridge twelve hours a week (laughter). They just keep spinning and winning and it just looks too easy. So it's confusing. There must be something wrong with it. (laughter)
