CHARLIE 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.
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.
BRAD GILLESPIE:
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?
CHARLIE 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.
CHARLIE 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 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 [like] 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.
MALE SPEAKER:
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, they're just one main, 24 states. So, I was just wondering how you think your competitive position versus Tyler is doing?
CHARLIE 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.
GASPAR:
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?
CHARLIE 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 anticipated at the time 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?
GASPAR:
Any major jumps or acquisitions you'd like to make or customers that you'd like to acquire in the next...
CHARLIE 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, so I'm all right. It's likely to work out right.
MALE SPEAKER:
The Daily Journal owns a lot of Wells Fargo. Can you comment?
CHARLIE 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 capital, you make a mistake like that and pretty soon you're gone.
RANDY GARDEN:
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?
CHARLIE 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.
MALE SPEAKER:
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?
CHARLIE 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.
FEMALE SPEAKER:
Any other questions about the business?
MALE SPEAKER:
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.
CHARLIE 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.
CHARLIE MUNGER:
That's some quirk of accounting. It doesn't really matter.
MALE SPEAKER:
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?
CHARLIE 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.
MALE SPEAKER:
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?
CHARLIE 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 how you play. If you're 5 foot, 1, you don't want to play basketball against a guy that's 8 feet, 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. 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.
MALE SPEAKER:
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 as in like this American Express value proposition more in terms of payment, or is it more in terms of service and rewards?
CHARLIE 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.
MALE SPEAKER:
Hi, Mr. Munger. Do you think domestic natural gas exploration and production is a good business despite the capital intensity? Thank you.
CHARLIE MUNGER:
Well, that's a different subject. I have a different feeling about the energy business than practically anybody else in America. I wish we weren't producing all this natural gas. I would be delighted to have the [unintelligible] that's coming out of our shale deposits of natural gas just lie there untapped for decades in the future and pay extra. You want your 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 percent 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.
MALE SPEAKER:
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.
CHARLIE 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.
MALE SPEAKER:
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.
CHARLIE 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 (Trades, Portfolio), 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.
PAUL SMITH:
Charlie, I'm Paul Smith from Los Altos, California. My question relates to a comment you made some years ago about Warren Buffett (Trades, Portfolio). 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.
CHARLIE 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 play[book], 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 talked 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.
MALE SPEAKER:
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?
CHARLIE 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 [unintelligible] 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.
MALE SPEAKER:
Hi, Charlie. I was wondering what was the most meaningful thing that you did with your life?
CHARLIE 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 fair 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 this 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 it's 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.
WILLIAM:
Hello, Mr. Munger. William. 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?
CHARLIE 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 percent 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.
NICK ANDERSON:
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?
CHARLIE 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.
MALE SPEAKER:
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 fulfil our filial duties?
CHARLIE MUNGER:
I didn't quite catch.
MALE SPEAKER:
How can we in my generation, I at least will be staying far away from my parents, so how can I fulfil my filial duties the best way as you see it?
CHARLIE 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.
JESSE KOLTES:
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.
CHARLIE 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.
DONALD SCHAFFER:
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?
CHARLIE 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.
Read Part 2 of the 2017 Daily Journal shareholder meeting here.
