To the Shareholders:
The audited financial statements of Daily Journal Corporation (the “Company”), for the fiscal year ended September 30, 2020, are part of the Company's annual report and should draw substantial shareholder attention.
My own conclusions, predictions, and explanations are laid out below:
- In fiscal 2020, the Company's newspaper business, after many years as a cash cow, approximately broke even with revenue of $14,695,000, which was down 14% from revenue in the prior year primarily due to the COVID-19 pandemic.
- In fiscal 2020, the Company's much more important software business, after many years of losses, approximately broke even with revenue of $35,247,000, up 12% from revenue in the prior year. And this result came after project delays related to the COVID-19 pandemic pushed some revenue out of fiscal 2020 and into later years, primarily due to the closure of courts and other justice agencies.
- At September 30, 2020, the Company had not only its two businesses, but also a large trove of liquid wealth consisting of $28,963,000 in cash and marketable common stocks with a value of $179,368,000, offset by $29,493,000 in margin debt. This trove of liquid wealth backs up the Company's operating businesses. After all, investing in marketable securities is not really our business. The Company's liquid wealth came from retained newspaper earnings, multiplied by seizing opportunities of a type no longer widely available. The value of the marketable securities reached $260 million on December 31, 2020, up 45% over their value at September 30, 2020, and shareholders should not expect any significant appreciation above that level anytime soon.
- The market price of one share of the Company's outstanding common stock at December 31, 2020 was $404. And this price was reached amid (1) much speculative frenzy and (2) much forced buying by index funds.
- I am very optimistic about the eventual success of the Company's software business, but I expect this to take considerable time. In the Company's newspaper business, my best hope is for it to turn a modest profit each year for many years to come.
- I admire not only Jerry Salzman, but also the employees who report to him. It has been amazing how well these talented employees have served the Company's customers and shareholders.
We won't be able to join each other in person this year, but I hope that many shareholders will join our annual meeting online. In the meeting, Jerry and I, as usual, will answer many questions.
Charles T. Munger
Chairman
Charlie Munger (Trades, Portfolio): Ladies and gentlemen, wherever you are, via Yahoo finance's website. Themeeting will come to order.
I'm Charlie Munger (Trades, Portfolio), Chairman, and to my right is Jerry Salzman, CEO.
The directors are Gerry Salzman, Peter Kaufman, Mary Conlin, Gary Wilcox—who's retiring now—and myself. Ellen Ireland will be inspector of elections.
On December 18, 2020—the record date—there were 1,380,746 shares of common stock of the company outstanding. The total number of shares, represented by proxies at this meeting, are 995,682, which are more than enough to constitute a quorum making the meeting duly held. The first order of business is to reelect the four directors and the votes are as follows: Charles Munger, 679,481, Gerald Salzman, 660,287, Peter Kaufman, 593,336, Mary Conlon, 651,493. Because we have the proxies those directors are now reelected.
The second proposal is to ratify the appointment of our certified public accountant: Baker Tilly US, LLP. The votes in favor of that are 995,356 against 120. That's interesting—who in the hell is voting against the accountants? But the accountants are duly elected. We will now proceed to the question period.
Go ahead.
Question: In this year'sannual letter, you mentioned the share price increase was driven byspeculative frenzy and forced index buying. I would imagine that applies to the broad market too. What are the psychological implications of this type of market behavior? What could investors do to cope better with periodical frenzy?
Charlie Munger (Trades, Portfolio): Well, these things do happen in a market economy. You get crazy booms.Remember the Dot Com boom when every little building in Silicon Valley ran into a huge price and a few months later about a third of them were vacant. There are these periods in capitalism. I've been around for a long time and my policy has always been to just write them out. And I think that's what shareholders do.
In fact, what a lot of shareholders actually do is crowd in buying stocks on frenzy—frequently on credit—because they see that they're going up. And, of course, that's a very dangerous way to invest. I think that shareholders should be more sensible and not crowd into stocks and buy them just because they're going up and they like to gamble.
Kipling once wrote a poem called The Women (The Ladies) and the concluding line was to the effect that you should learn about women from him instead of doing it yourself, because, he says, I know you won't follow my advice.
Question: What are Mr. Munger's thoughts on the recent GameStop short squeeze by socialmedia and the resulting implications on short selling in the future? And another shareholder asked: Dear Mr. Munger, please share your thoughts on the recent /r/WallStreetBets GameStop short squeeze. It seems to involve a lot of your standard causes of human misjudgment.
Charlie Munger (Trades, Portfolio): Well, it certainly does and that's the kind of thing that can happen when youget a whole lot of people who are using liquid stock markets to gamble the way they would on embedding on resources.
And that's what we have going in the stock market in a frenzy that's fed by people who are getting commissions and other revenues out of this new bunch of gamblers.
And, of course, when things get extreme you have things like that short squeeze. It's not generally noticed by the public but clearinghouses clear all these trades. And when things get as crazy as they were in the event you're talking about, there are threats of clearinghouse failure. So it gets very dangerous. And it's really stupid to have a culture that encourages as much gambling in stocks by people who have the mindset of race track betters. And, of course, it's going to create trouble as it did.
I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them. And if you're selling them gambling services where you make profits off of the top, like many of these new brokers who specialize in luring the amateurs in, I think it's a dirty way to make money. And I think that we're crazy to allow it.
Question: What do you hope the future of the Daily Journal Corporation looks like in a decade?
Charlie Munger (Trades, Portfolio): Well, I certainly hope that they succeed mightily in their software endeavor toautomate all these courts for the modern world. And, I think that could happen, but, of course, that's not a sure thing. I hope the newspaper survives too. And that's not a sure thing either.
Question: The highly configurable JTI product may help e-suites integrate deeply into newjurisdictions as agencies and citizens become familiar with the courthouse software. Today, the majority of contractual revenue that can be identified is from implementations and licenses. What are the main sources of ancillary revenue expected once the products have gone live and how meaningful will the products like eFile-it, ePay-it, cloud hosting services, and others become?
Charlie Munger (Trades, Portfolio): Well, we don't really know where it's all going. We do know one thing and thatis that the courts of the whole world are going to be taken into the modern age. And, as Gerry has just said to me just after breakfast, you wouldn't want to invest in a parking lot by a courthouse for the future because an awful lot of the court proceedings are going to go to the internet. This is a highly desirable thing. If you go to a little country like Estonia, the whole damn country is on the internet and it's a very good idea.
So, I think you can count on the fact that what we're doing is going to be a big growing field. That's the good news. The bad news is it's not clear who's gonna win all the business or how much money is going to be made. Generally speaking, people assume that we're a normal software company like Microsoft or something. We are in fact being a more difficult type of software business than Microsoft. When you respond to software by the RFP process, it's a very difficult, demanding business and it's less profitable and less sure than what Microsoft does. We love it anyway. It's doing a big public service.
Question: We have a couple of questions about J.P. “Rick” Guerin. Would you share a fewstories about him and your fondest memory?
Charlie Munger (Trades, Portfolio): Well, he was one of my closest friends for many decades. And, he was verygood company and a splendid gentleman. Of course, we accomplished quite a bit working together.
Rick was part of the group which consisted of Warren Buffett (Trades, Portfolio), Rick Guerin, and Charlie Munger (Trades, Portfolio) that bought control of Blue Chip Stamps when it was widely distributed in an anti-trust settlement. We were together in that for a long, long time, and then Rick and I did the Daily Journal together on another occasion.
Rick was always humorous. Always intelligent. I tell a story on Rick that he took the Navy's IQ test and got one of the highest scores ever recorded and left early. That doesn't happen. That's the reason he rose so fast in life. He was just so damn smart.
He was fun to be with because he was always jumping out of airplanes and parachutes and running marathons and so on, doing all kinds of things I would never consider doing. And he was a great kidder. He loved to kid people.
He was very courageous and generous in helping everybody around him all his life. We miss Rick terribly. But he was 90 years of age. He had a long and wonderful run. He was old as I am. When these people go, there is none replacing them. Gerry, can you ever remember Rick down? He was always upbeat.
Gerald Salzman: Always upbeat, yes. And interested and up to speed and didn't have to take alot of time to get background information to make his comments. Always on point.
Charlie Munger (Trades, Portfolio): Well, it helps to be able to leave the IQ test early with the highest score.
Questions: Now that we are cash flow positive—assuming the software business is investingorganically as much as it can—what is the philosophical thinking with respect to capital allocation at the Daily Journal. Are traditional dividends and share repurchases the likely end-state—assuming our software business grows into a bonafide company—or will buying and holding securities from time to time be what the board is comfortable with? Everyone knows this isn't a small cap Berkshire Hathaway. I'm just trying to get a feel for what the long-term capital allocation is.
Charlie Munger (Trades, Portfolio): Well, the business around here that has the most promise is our softwarebusiness automating the courts. And we're gonna play that as hard as we can. And, we hope to do well in it. [As for] marketable securities, we prefer owning common stocks to holding cash under current conditions and it's kind of an accident that we have so much in marketable securities.
Question: In recent years, Berkshire Hathaway has provided much greater insight into thecompany's succession thoughts and has made available at the annual meeting the company's leading managers that will steer Berkshire's future. These actions have given some shareholders more visibility and comfort on their investment. Can you provide similar insight regarding the future at the Daily Journal and would you consider implementing policies like those at Berkshire so shareholders can get to know the up-and-coming leaders in the organization?
Charlie Munger (Trades, Portfolio): Well, the people doing the computer software are doing magnificently well—the people under Gerry: Maryjo and Danny. We hope they'll continue doing magnificently well. But, of course, it's a very difficult field. There's a lot of competition and we're a very small company compared to our main competitor. And so, we can't promise we're going to succeed. All we can promise is that we're gonna try and so far as I can tell, we're doing pretty well. Gerry, don't you think we're doing pretty well?
Gerald Salzman: I think so, Charlie.
Charlie Munger (Trades, Portfolio): I would go further. I don't think Gerry is surprised that the people doing thework—Maryjo and Danny—are doing well. But I'm flabbergasted at how well they're doing.
Gerald Salzman: Charlie refers to the courts, many times. The JTI software has been configuredfor other judicial and justice agencies, including district attorneys, prosecutors, public defenders, probation, etc. So we have one basic system configured in a number of different ways, including worker's comp for a large state in the United States.
Charlie Munger (Trades, Portfolio): It's a huge field in which we have a very interesting toehold with the strongesttoeholds in Australia and California. We can't promise what the outcome will be but we are trying pretty hard and we get some favorable impressions of progress. One thing I can promise is that I won't contribute much to it because I don't understand it.
Questions: Many observers see market behavior that reminds them of the Dot Com bubble: wildspeculation, endless SPACs, and IPOs soaring on their first day of trading. Do you agree that there is a close parallel to the late 90s and that this, therefore, “must end badly?”
Charlie Munger (Trades, Portfolio): Yes, I think it must end badly but I don't know when.
Question: It seems like everyone—including actors, athletes, singers, and politicians—is gettinginto the business of promoting their own SPAC. What do you think of all of the SPACs and the promoters pushing them?
Charlie Munger (Trades, Portfolio): Well, I don't participate at all. And I think the world would be better offwithout them. I think this kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble. It's just that the investment banking profession will sell shit as long as shit can be sold.
Question: Last February, you spoke about the wretched excess in the financial system. Given thedevelopments over the past year, could you give us an update on your assessment of wretched excess in the system? Where does it appear most egregious?
Charlie Munger (Trades, Portfolio): Well, it's most egregious in the momentum trading by novice investors lured inby new types of brokerage operations like Robinhood. I think all of this activity is regrettable. I think civilization would do better without it.
You'll remember that when the first big bubble came, which was the South Sea bubble in England back in the 1700s, it created such havoc eventually when it blew up that England didn't allow hardly any public trading and securities of any companies for decades thereafter. It just created the most unholy mess.
So human greed and the aggression of the brokerage community create these bubbles from time to time. And I think wise people should just stay out of them.
Question: In your past speeches, you have mentioned the term functional equivalent ofembezzlement to describe situations where bubbles can form because both parties involved in a bubble believe the asset to be worth more than it truly is. Can U.S. Treasury bonds be such a case today? And what are the implications, since Treasury assets underpin the value of every other asset? Thank you for all you do to educate us.
Charlie Munger (Trades, Portfolio): Well no, I don't think we have a bubble in Treasury securities. I think they're abad investment when interest rates are this low. I never buy any and neither does Daily Journal. But, no, I don't think Treasury securities are a big problem.
I do think that we don't know what these artificially low interest rates are going to do or how the economy is going to work in the future as governments print all this extra money. The only opinion I have there is that I don't think anybody knows what's going to happen for sure. Larry Summers has recently been quoted as being worried that we're having too much stimulus. And I don't know whether he's right or not.
Question: Previously, you have said; It takes character to sit with all that cash and do nothing. Ididn't get to where I am by going after mediocre opportunities. In the past few years, equity prices have increased significantly and cash has arguably become riskier due to central banking policy. Have you considered amending this quote or lowering your standards?
Charlie Munger (Trades, Portfolio): I think everybody is willing to hold stocks at higher price-earnings multipleswhen interest rates are as low as they are now. And so I don't think it's necessarily crazy that good companies sell at way higher multiples than they used to.
On the other hand, as you say, I didn't get rich by buying stocks at high price-earnings multiples in the midst of crazy speculative booms. I'm not going to change. I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower. Everybody is.
Question: Do you think value investing is still relevant in a GDP-decreasing world? And, whatabout passive investing?
Charlie Munger (Trades, Portfolio): Well, that is easy. Value Investing will never go out of style. Because valueinvesting—the way I conceive it—is always wanting to get more value than you pay for when you buy a stock. That approach will never go out of style.
Some people think that value investing is you chase companies that have a lot of cash and they're in a lousy business or something. I don't define that as value investing. I think all good investing is value investing. It's just that some people look for values in strong companies and some look for values in weak companies. Every value investor tries to get more value than he pays for.
What is interesting is that in wealth management, a lot of people think that if they have a hundred stocks they're investing more professionally than they are if they have four or five. I regard this as insanity. Absolute insanity.
I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they're way above average. I think it's much easier to find five than it is to find a hundred.
I call it deworsification—which I copied from somebody. I'm way more comfortable owning two or three stocks which I think I know something about and where I think I have an advantage.
Question: Why is Berkshire Hathaway selling shares of Wells Fargo as quickly as one can andthe Daily Journal has sold one share? If it's not good enough for Berkshire, shouldn't we have the same standards?
Charlie Munger (Trades, Portfolio): Well, I don't think it's required that webe exactly the same on everything. Wehave different tax considerations. There's no question about the fact that Wells Fargo has disappointed long-term investors like Berkshire because the old management—which is now removed—were not consciously malevolent or thieving but they had terrible judgment in having a culture of cross-selling where the incentives on the poorly paid employees were too great to sell stuff that customers didn't really need. And when the evidence came in that the system wasn't working very well because some of the employees were cheating some of the customers, they came down hard on the customers instead of changing the system. That was a big error in judgment. And, of course, it's regrettable.
So, you can understand why Warren got disenchanted with Wells Fargo. I think I'm a little more lenient. I expect less out of bankers than he does.
Question: What is the wisdom behind holding bank stocks compared to other stocks. Are theymore stable?
Charlie Munger (Trades, Portfolio): Well, I think all stocks can fluctuate. I do think banking run intelligently is avery good business. But, a very wise man said on an earlier occasion: The trouble with banking is that we have more banks than we have bankers.
The kind of executives who have a Buffett-like mindset and never get in trouble are a minority group, not a majority group. It's hard to run a bank intelligently. There's a lot of temptation to do dumb things which will make the earnings next quarter go up but are bad for the long term. And some bankers yield to the temptations. It's difficult, but it's not impossible investing in bank stocks successfully.
Question: What is the biggest competitive threat to U.S. banks like Bank of America and USBank—both equity holdings of the Daily Journal Corporation—over the long term? Is it digital wallets like PayPal, Square, or Apple Pay? Is it Bitcoin, decentralized finance, or something else?
Charlie Munger (Trades, Portfolio): Well, I don't think I know exactly what the future of banking is and I don'tthink I know how the payment system will evolve. I do think that a properly run bank is a great contributor to civilization and that the central banks of the world like controlling their own banking system and their own money supplies.
So, I don't think Bitcoin is going to end up as the medium of exchange for the world. It's too volatile to serve well as a medium of exchange. It's really kind of an artificial substitute for gold, and since I never buy any gold, I never buy any Bitcoin. I recommend that other people follow my practice. Bitcoin reminds me of what Oscar Wilde said about fox hunting. He said it was the pursuit of the uneatable by the unspeakable.
Question: Has your opinion on cryptocurrencies remained the same? And would the DailyJournal consider Bitcoin or any other cryptocurrency as an asset on the balance sheet similar to what Tesla recently did?
Charlie Munger (Trades, Portfolio): We will not be following Tesla into bitcoin.
Question: BYD is in the Daily Journal stock portfolio with a very big paper gain. The stock hasgained so much this year and last year. The stock appreciated probably way more than intrinsic value. How do you decide to hold on to a stock or sell some?
Charlie Munger (Trades, Portfolio): Well, that's a very good question. BYD stock did nothing for the first five yearswe held it. Last year it quintupled. What happened is that BYD is very well positioned for the transfer of Chinese automobile production from gasoline-driven cars to electricity-driven cars. You can imagine it's in a wonderful position and that excited the people in China which has its share of crazy speculators. And so, the stock went way up.
We admire the company and like its position. And we pay huge taxes to a combination of the federal government and the state of California when we sell something. On balance, we hold in certain of these position when, normally, we wouldn't buy a new position. Practically everybody does that.
One of my smartest friends in venture capital is constantly getting huge clumps of stocks at nosebleed prices. And what he does is he sells about half of them always. That way, whatever happens, he feels smart. I don't follow that practice but I don't criticize it either.
Question: Do you believe the valuations for electric car manufacturers are in bubble territory?Both Berkshire and Li Lu (Trades, Portfolio) own BYD Company which you spoke highly of in the past. BYD sells at nearly 200 P/E. This is cheap compared to Tesla currently valued at over 1100 times P/E and 24 times sales. I know Berkshire is a long-term owner and rarely sells securities of high-quality companies it owns in its portfolio simply because it's overvalued. For example, Coca-Cola in the past. However, is there a price too high that the company's future profits simply cannot justify? And since we are on the subject of selling potentially overvalued security, could you provide your systems for selling securities?
Charlie Munger (Trades, Portfolio): Well, I so rarely hold a company like BYD that goes to a nosebleed price that Idon't think I've got a system yet. I'm just learning as I go along. I think you can count on the fact that if we really like the company and we like the management—and that is the way we feel about BYD—we're likely to be a little too loyal. I don't think we'll change on that.
Question: Why, almost two years ago, did you believe that Costco was the only U.S. stock worthbuying? And why did you feel that Amazon had more to fear from Costco than Costco had to fear from Amazon? And if you believe Jeff Bezos is one of the best businessmen you have ever known, would you consider investing early in any of the new projects he will inevitably focus his attention on now that he will not have to be as concerned about the day to day responsibilities of Amazon?
Charlie Munger (Trades, Portfolio): I'm a great admirer of Jeff Bezos whom I consider one of the smartestbusinessmen who ever lived. But I won't be following him. We have our crotchets and I just don't know enough about it to want to go into that activity. When you get into these hard questions, there's a lot of very intelligent honorable people who reach opposite conclusions.
Costco I do think has one thing that Amazon does not. People really trust Costco will be delivering enormous value. And that is why Costco presents some danger to Amazon. They've got a better reputation for providing value than practically anybody, including Amazon.
Question: How do you control your investments in a world where reasonable companies with agood image like General Electric sink rapidly into the bottomland of the stock market. How do you recognize a potential downfall in a company you hold/invest in? Or, is it impossible to realize a deterioration quickly enough to exit without a loss?
Charlie Munger (Trades, Portfolio): Well, I never owned a share of General Electric because I didn't like theculture. And, I was not surprised when it blew up. I do think the present CEO is an extraordinarily able man and the directors made a very wise choice when they put him in charge. And I think the directors of GE deserve a lot of credit for making Larry Culp the CEO. If anybody can fix it, he can.
Question: You famously run investments through your mental checklist. Is there anything thatyou wish you had added to your checklist sooner?
Charlie Munger (Trades, Portfolio): Well, I'm constantly making mistakes where I can, in retrospect, realize that Ishould have decided differently. And I think that that is inevitable because it's difficult to be a good investor.
I'm pretty easy on myself these days. I'm satisfied with the way things have worked out and I'm not gnashing my teeth when other people are doing better.
I think that the methods that I've used including the checklists are the correct methods and I'm grateful that I found them as early as I did and that the methods have worked as well as they have. I recommend that other people follow my example.
It reminds me of the key phrase and Bunyan's Pilgrim's Progress in which he says: My sword I leave to him who can wear it. I'm afraid that's the way we all have to leave our swords.
Question: You and Warren have been adept at quickly sizing people up, particularly businessleaders and potential business partners. What do you look for in a leader? And do you and Warren have any tricks or shortcuts to size people up quickly and accurately?
Charlie Munger (Trades, Portfolio): Well, of course, if a person is a chronic drunk, we avoid him. Everybody hasshortcuts to screen out certain hazards. And we probably have more of those shortcuts than others. They've served us well over the years.
One of the great advantages of the way Berkshire operates is that we associate with a lot of marvelous people. And if you stop to think about it, that is also true at the Daily Journal.
What little newspaper company has come through the crisis of this destroying of all the newspapers better than the little Daily Journal? And we've had marvelous people here to help us do it through very difficult times and one of them is Gerry Salzman.
Gerry and I have been together, how many years Gerry?
Gerald Salzman: Early 70s.
Charlie Munger (Trades, Portfolio): Early 70s. And it's rather interesting. I recognized early that Gerry could runanything he wanted to run. And when the old CEO of the Daily Journal died, Gerry was managing the business affairs of the Munger Tolles law firm. But he previously worked for Rick Guerin and me in running a little mutual fund that we bought control of. And he made a very favorable impression.
I said to Rick, we're going to make Gerry the head of the Daily Journal. He gasped and said, but he's never had anything to do with newspapers or anything else. I said it won't matter. He'll be able to do it. And we immediately ascended, we put Gerry in, and he's made every decision wonderfully ever since. That's our system.
Tom Murphy used to say that his system of management was to delegate just short of total abdication. And that's the way we handled Gerry.
Question: Which do you think is crazier? Bitcoin at 50,000 or Tesla's fully diluted enterprisevalue of 1 trillion. What do you make of these two pricings?
Charlie Munger (Trades, Portfolio): Well, I have the same difficulty that Samuel Johnson once had when he got asimilar question. And he said; I can't decide the order of presidency between a flee and a louse.
I feel the same way about those choices. I don't know which is worse.
Question: Should there be a tax on buying stock now that Robinhood trades are free?
Charlie Munger (Trades, Portfolio): Robinhood trades are not free. When you pay for order flow, you're probablycharging your customers more and pretending to be free. It's a very dishonorable low-grade way to talk. Nobody should believe that Robinhood's trades are free.
Question: My question concerns China. In 1860, GDP per capita in China was 600. In 1978, theyear Deng Xiaoping took over, it was 300. Today, it hovers around 9500. Never before in the history of mankind have we seen such a rapid eradication of poverty, pulling approximately 800 million people out of destitution. You are on record as a zealous fan of the Chinese work ethic and Confucian value system. As we can see from the deteriorating U.S. relationship with China, the Western world does not understand China. What can we do to increase knowledge, understanding, and appreciation of the Chinese civilization?
Charlie Munger (Trades, Portfolio): Well, it's natural for people to think their own civilization and their own nationare better than everybody else. But everybody can't be better than everybody else.
You're right. China's economic record among the big nations is the best that ever existed in the history of the world. And that's very interesting.
A lot of people assume that since England led the Industrial Revolution and had free speech early that free speech is required to have a booming economy as prescribed by Adam Smith. But the Chinese have proved that you don't need free speech to have a wonderful economy. They just copied Adam Smith and left out the free speech and it worked fine for them.
As a matter of fact, it's not clear to me that China would have done better if they'd copied every aspect of English civilization. I think they would have come out worse because their position was so dire and the poverty was so extreme, they needed very extreme methods to get out of the fix they were in. So I think what China has done was probably right for China and that we shouldn't be so pompous as to be telling the Chinese they ought to behave like us because we like ourselves and our system. It's entirely possible that our system is right for us and their system is right for them.
Question: Mr. Munger is a champion of Chinese stocks. How concerned is he about Chinesegovernment interference as seen recently with Ant Financial, Alibaba, and Mr. Jack Ma. What, for example, is to stop the Chinese government from simply deciding one day to nationalize BYD?
Charlie Munger (Trades, Portfolio): Well, I consider that very unlikely. And, I think Jack Ma was very arrogant to betelling the Chinese government how dumb they were, how stupid their policies were, and so forth. Considering their system, that is not what he should have been doing.
I think the Chinese have behaved very shrewdly in managing their economy and they've gotten better results than we have in managing our economy. I think that that will probably continue.
Sure, we all love the kind of civilization we have. I'm not saying I wanted to live in China. I prefer the United States. But I do admire what the Chinese have done. How can you not? Nobody else has ever taken a big country out of poverty so fast and so on.
What I see in China now just staggers me. There are factories in China that are just absolutely full of robots and are working beautifully.
They're no longer using peasant girls to beat the brains out of our little shoe companies in America. They are joining the modern world very rapidly and they're getting very skillful at operating.
Question: It seems likely that the current Fed policy of keeping interest rates near zero will onlyexacerbate the income disparity in this country by benefiting those who own the financial assets. What do you think we can do to help those who are currently falling behind as a result of this pandemic?
Charlie Munger (Trades, Portfolio): It's hard to know what exact macroeconomic policy is correct. No one knowsfor sure just how much government intervention is wise and at what point the government should stop intervening.
I don't think we have any great gift at making macroeconomic predictions. I think that to some extent the complaint about the rich getting richer as a result of the COVID panic is a misplaced concern. Nobody was trying to make the rich richer. We were trying to save the whole economy under terrible conditions. And I think, by and large, we made the most practical decisions that were available to us.
We made the rich richer, not as a deliberate choice, but because it was an accidental byproduct of trying to save the whole civilization. And it was probably wise that we acted exactly as we did. It wasn't some malevolence of the rich that caused it. It was an accident. And the next time around the poor will get richer faster than the rich. That thing circulates.
Who gets rich faster by class is going to vary over time and I don't think anybody should be too concerned by it. As a matter of fact, what happens is to make a nation rich, you need a free market system. And if you have a free market system that's trying to get rich in the way recommended by Adam Smith, what happens is that it's a very irritating system because the poverty that causes so much misery is also causing the growth that makes everybody get out of poverty. In other words, to some extent, it's a self-correcting system. That makes the whole thing very awkward. And it's a shame that the economics textbooks don't emphasize how much a growing economy needs poverty in order to get out of poverty. If you try and reduce the poverty too much, it's counterproductive. These are very difficult questions and most people assume that it's simple. If we could make the world richer by just raising the minimum wage to $100,000 a second or something, of course we would do it but. But we can't.
Question: Mr. Munger recently raised the alarm about the level of money printing taking place.What are his thoughts on modern monetary theory?
Charlie Munger (Trades, Portfolio): Modern monetary theory means that people are less worried about aninflationary disaster like Weimar Germany from government printing of money and spending it.
So far the evidence would be that maybe the monetary modern monetary theory is right. Put me down as skeptical. I don't know the answer.
Question: The Federal Reserve appears to be supporting asset prices. Do you think this is aworthwhile policy objective given the effect it has on creating financial excesses and income inequality? What do you think the long-term consequences will be?
Charlie Munger (Trades, Portfolio): Well, I don't know how well the economy's doing to work in the future. And Idon't think that we or the Daily Journal is getting ahead because we've got some wonderful macroeconomic insight.
I do think that I'm way less afraid of inequality than most people who are bleeding about it. I think that inequality is absolutely an inevitable consequence of having the policies that make a nation grow richer and richer and elevate the poor. So, I don't mind a little inequality and what I notice is that the rich families generally lose their power and wealth—and pretty fast. So I don't worry that the country is being ruined by a few people over getting ahead a little faster than the rest of us.
I think the Chinese were very smart. Imagine a bunch of Chinese communists turning a whole lot of Chinese and the billionaires in a big hurry. And what did the Chinese communists do with respect to death taxes? The death tax in China is zero. That's what the communists are doing. I think they're probably right, by the way.
Question: Many believe that inequality accelerated by this pandemic has reached alarminglevels that demand drastic solutions such as a wealth tax. Do you agree with the premise and if so how would you address inequality?
Charlie Munger (Trades, Portfolio): I think any rich nation ought to have a social safety net that expands a littlewith its wealth. That's what we've been doing throughout my whole lifetime. And I applaud the result. I think the result would have been worse if either party had been in control all by itself for the whole period. In other words, I think the system of checks and balances and elections that our founders gave us actually gave us pretty much the right policies during my lifetime. I hope that that will continue in the future. But I do think politics is getting more full of hatred and irrationality than it used to be in America and I don't think that's good.
Questions: Many major businesses and high net worth individuals have been leaving California.Can you speak to the causes, the trend, and make some predictions?
Charlie Munger (Trades, Portfolio): Yes, I think that is rising as we sit here. I just see more and more of the richpeople leaving. And, of course, I think it's vastly stupid for any state to be user-friendly to the rich people. They do way more good than harm. They lose their money fast enough. You don't need to worry about them.
Washington State is actually considering a wealth tax at the state level. I think that would be insanity. I predict that if they do that, a lot of people will leave Washington.
Question: With all the work from home with Zoom and other technology, what do you think thefuture of commercial real estate looks like?
Charlie Munger (Trades, Portfolio): Real estate has always been a difficult field. And some types of real estate inrecent years has been particularly difficult. I think office buildings are now in some trouble and, of course, commercial real estate rented to stores has been in a lot of trouble for a long time. Apartments have come through better. But, I don't think I've got a lot to contribute. I own some apartment houses, so I like that investment, provided you've got a perfect management which is hard to get.
Question: I was wondering if you could share some thoughts on Haven, particularly why it wasultimately closed. What were the lessons learned?
Charlie Munger (Trades, Portfolio): I don't know anything about Haven. Give me a new question.
Question: You've said several times that the best wayto learn about business is to study themulti-decade financial results of great companies. You've even said business schools that don't adopt this method are doing their students a disservice. Would you mind elaborating on how a professor or individual should go about building a curriculum around this approach? What, for example, would you recommend as course materials?
Charlie Munger (Trades, Portfolio): Well, here's what I meant. By the way, the Harvard Business School, when itstarted out way early, they started out with a history of the business. They'd take you through the building of the canals and the building of the railroads and so on and so on. You saw the ebb and flow of industry and the creative destruction of the economic changes and so on. It was a background that helped everybody. And, of course, what I'm saying is that if I were teaching business I would start the way Harvard Business School did a long time ago.
I think they stopped because if you taught that course, you'd be stealing the best cases from the individual professors of marketing and so on and so on. And I just think it was academically inconvenient for them. But, of course, you should start out by studying the history of capitalism, how it worked, and why before you start studying business. And they don't do that very well—I'm talking about the business schools.
If you stop to think about it, business success long term is a lot like biology. And in biology, what happens is the individuals all die, and eventually, so do all the species. Capitalism is almost as brutal as that. Think of what's died in my lifetime. Just think of the things that were once prosperous that are now in failure or gone. Whoever dreamed when I was young that Kodak and General Motors would go bankrupt. You know, it's just, it's incredible what's happened in terms of the destruction. Of course, that history is useful to know.
Question: [The questioner] quotes a commencement address you gave in 2007 at USC LawSchool. I'll paraphrase here. If a civilization can progress only when it invents the method of invention, you can only progress when you learn the method of learning. I was very lucky. I came to law school having learned the method of learning and nothing has served me better in my long life than continuous learning. [The questioner] would like to know what Charlie's method of learning is.
Charlie Munger (Trades, Portfolio): I think I had the right temperament. When people gave me a good idea and Icould see it was a good idea, I quickly mastered it and started using it for the rest of my life. You'd say that everybody does that in their education but I don't think everybody does. It's such a simple idea.
Without the method of learning, you're like a one-legged man in an ass-kicking contest. It's just not gonna work.
Take Gerry. Do you think the Daily Journal would have hundreds of millions of marketable securities now if Gerry didn't know how to learn something new? He didn't know one damn thing about the Daily Journal when we made him head of it. But he knew how to learn what he didn't know. Of course, that's a useful thing. And by the way, I think it's hard to teach. I think it's just to some extent you either have it or you don't.
Questions: Why are some people incapable of learning new ideas and behaviors?
Charlie Munger (Trades, Portfolio): It's partly culture but a lot of it is just born in and it's a quirk. Some peoplehave a natural trend toward good judgment, and with other people, their life is just a series of mistakes over and over again.
Question: You have revised your famous talk on the standard causes of human misjudgmentwith considerable new material back in 2005. Now 16 years have passed. Is there any new material?
Charlie Munger (Trades, Portfolio): No, I would say that… of course, there's some new material in misjudgment.
But, but by and large, most of the knowledge has been available for a long time.
What prevents the wide use of helpful psychological insight is the fact that psychology gets really useful when you integrate it with all other knowledge. But they don't teach that in the psychology department because the academic system rewards little experiments that develop more insight into psychological tendencies instead of synthesizing what's already been discovered with the rest of knowledge. The psychology professors don't know all that much about the rest of knowledge and they have no incentive to master it. If you don't have master the rest of the knowledge you can't synthesize it with psychology. That's an interesting example of self-learning.
When I saw that psychology was necessary and I didn't have it, I didn't just learn the little tendencies well enough to get A's in psychology. I learned those tendencies well enough to synthesize it with the rest of knowledge. And that's the right way to do it. But show me a psychology department that knows how to do that. It's one of the most ignorant professions in the world.
Read Part 2 of the 2021 Daily Journal meeting notes here.
Also check out:
