Charlie Munger Daily Journal 2021 Shareholder Meeting, Part 2

This is Part 2 of Charlie Munger (Trades, Portfolio)'s 2021 Daily Journal annual meeting notes. Read Part 1 here.

Question: Charlie, you are known as an advocate for learning from one's mistakes. What canyou learn from the Barry “Dutton's” bookstore building deal in Brentwood and how would you apply that new knowledge or experience in the future?

Charlie Munger (Trades, Portfolio): I think I've learned to avoid zoning work. When I was young, I rezoned someproperties very successfully. And I was like Rip Van Winkle; when I tried to come back to it, I found that the world had changed. And I don't think you'll find me engaged in the massive rezonings in the future.

Question: What advice would you give to someone who is trying to stay within their circle ofcompetence but finding that the pace of technical technological innovation is rapidly reducing that circle?

Charlie Munger (Trades, Portfolio): Well, of course, if they bring in a brand new technology you don't understandat all, you're at something of a disadvantage. And my advice would be if you have a fixable disadvantage, remove it. And if it's unfixable, learn to live without it. What else can you do?

You fix what you can fit, and what you can't fix, you endure.

Question: You are one of the oldest and greatest thinkers of our time. Any tips for someone whowants to work on and improve their ability to hold two opposing views at the same time? Any tips on how to generate insight in these types of situations?

Charlie Munger (Trades, Portfolio): Well, I do have a tip. At times in my life, I have put myself to a standard that I think has helped me: I think I'm not really equipped to comment on this subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time; if you're looking for disconfirming evidence and putting yourself on a grill, that's a good way to help remove ignorance.

What happens is that every human being tends to believe way more than he should in what he's worked hard to find out or where he's announced publicly that he already believes. In other words, when we shout our knowledge out, we're really pounding it out. We're not enlarging it. And, I was always aware of that and so I've accepted these damned annual meetings. I've been pretty quiet.

Question: Eugene Abegg seems like he was one of the best bankers of the last century,achieving both extremely low loan loss rates and earning around 2% on assets over a long time period. I think the bankers of today could learn a lot from Eugene, but little is known of him.

How did Eugene achieve incredibly low loan losses over the long term while so many other bankers have failed miserably?

Charlie Munger (Trades, Portfolio): Well that's an easy one. He was a very smart man. He lived in a particulartown. He knew everybody and everything. He had excellent judgment. He cared terribly about not making bad loans or incurring dumb expenses. So he was just a perfect banker if you wanted never to have any trouble.

Of course, it really helped to know everybody in town. If I had stayed in Omaha, where I was raised, and gotten into the banking business, I would have been a hell of a good banker. Because even as a boy, I knew a lot about who was sound who wasn't sound in Ohama. And that's the way Eugene was in his community.

Furthermore, he'd gone through the Great Depression. He'd been a receiver for a bank. Of course, that made him very leery of dumb loans. And, of course, he hated costs. He was just a very old-fashioned sound thinker.

Of course, that will still work. But it's hard for anybody. He really knew everything you had to do to avoid credit losses in a small town in Illinois.

Question: Charlie, you have been a long-time admirer of Singapore and Lee Kuan Yew. You oncesaid to study the life and work of Lee Kuan Yew. You are going to be flabbergasted. I would be curious to know how you started your interest in Singapore and Lee Kuan Yew. Have you met Lee Kuan Yew in person? And if there is one thing the world could learn from Singapore, what would that be?

Charlie Munger (Trades, Portfolio): Well, Lee Kuan Yew had the best record as a nation builder. If you're willing tocount small nations in the group, he had probably the best record that ever existed in the history of the world. He took over a malarial swamp with no army, no nothing. And, pretty soon, he turned that into this gloriously prosperous place.

His method for doing it was so simple. The mantra he said over and over again is very simple. He said, figure out what works and do it. Now, it sounds like anybody would know that made sense. But you know, most people don't do that. They don't work that hard at figuring out what works and what doesn't. And they don't just keep everlastingly at it the way he did.

He was a very smart man and he had a lot of good ideas. He absolutely took over a malarial swamp and turned it into modern Singapore—in his own lifetime. It was absolutely incredible.

He was a one party system but he could always be removed by the electorate. He was not a dictator. And he was just so good. He was death on corruption which was a very good idea. There's hardly anything he touched he didn't improve.

When I look at the modern Singapore health system, it costs 20% of what the American system costs. And, of course, it works way better than our medical system. That's entirely due to the practical talent of Lee Kuan Yew. Just time after time, he would choose the right system.

In Singapore, you get a savings account the day you're born. If you don't spend the money, you and your heirs get to spend it eventually. In other words, it's your money. So, to some extent, everybody buying medical services in Singapore is paying for it themselves. Of course, people behave more sensibly when they're spending their own money.

Just time after time he would do something like that. That recognized reality and worked way better than what other people were doing. There aren't that many people like Lee Kuan Yew that have ever lived. So, of course, I admire him. I have a bust of Lee Kuan Yew in my house. I admire him that much.

Question: What is the biggest lie currently being perpetuated by the investment complex?

Charlie Munger (Trades, Portfolio): Well, commission-free trading is a very good candidate for that if you want toemphasize disgusting-wise. Commission-free trading is not free.

Question: Do you think it's best to invest in the common stocks of businesses early or while theyare more nascent and the industry is smaller, or wait until they are the clear winner of a more mature industry?

Charlie Munger (Trades, Portfolio): I think Warren and I are better at buying mature industries than we are atbacking startups like Sequoia. The best venture capital operation probably in the whole world is Sequoia's and they are very good at this early stage investing. I would hate to compete with Sequoia in their field. I think they'd run rings around me.

So, I think for some folks, early-stage investing is best, and for other folks, what I've done in my life is best.

Question: Last year, almost every ecommerce, internet, and internet adjacent stock was up 100plus percent. You've said recently that Sequoia is the greatest investment firm ever. Do you think that digital economy has reached a tipping point such that this time is different and that conventional valuation measures for these types of companies are dead, or does this environment remind you of 1999? How do you reconcile the idea of paying 50 or 60 times revenue for a growing but unprofitable business with the more traditional value investing concept of a margin of safety?

Charlie Munger (Trades, Portfolio): Well, generally speaking, I don't try and compete with Sequoia. You can arguethat I got close to Sequoia when with Li Lu (Trades, Portfolio) we bought into BYD. That was not a startup, but it was so small and thinly traded that we were buying into a venture capital type investment but in the public market.

With that one exception, I've stayed out of Sequoia's business because they're so much better at it than I would be and I don't know how to do it the way they do it.

Question: Of the various types of moats and competitive advantages, which types do you thinkwill be most important in the years ahead, and what combinations of competitive advantages can you imagine will create any new types of moats?

Charlie Munger (Trades, Portfolio): That's too hard in general a question for me. The one thing I will say is that alot of the moats that looked impassable, people found a way to displace. Think of all the monopoly newspapers that used to be, in effect, part of the government of the United States. And they're all dying—every damn one of them almost. A lot of the old moats are going away, and, of course, people are creating new moats all the time. That's the nature of capitalism. It's like evolution in biology.

New species are created and old species are dying. Of course, it's hard to negotiate in such a field. But there's no rule that life has to be easy on the mental side. Of course, it's going to be difficult.

Question: I enjoyed your Caltech interview and wanted you to elaborate and provide moreinsights on your point of great investors and great chess players. How are they similar or different? Have you seen the television show Queen's Gambit on Netflix?

Charlie Munger (Trades, Portfolio): I have seen an episode or two of the Queen's Gambit.

What I think is interesting about chess is, to some extent, you can't learn it unless you have a certain natural gift. And even if you have a natural gift, you can't be good at it unless you start playing at a very young age and get huge experience. So, it's a very interesting competitive field.

I think people have the theory that any intelligent hardworking person can get to be a great investor. I think any intelligent person can get to be pretty good as an investor and avoid certain obvious traps. But I don't think everybody can be a great investor or a great chess player.

I knew a man once, Henry Singleton, who was not a chess champion. But he could play chess blindfolded at just below the Grandmaster level. But Henry was a genius. And there aren't many people that can do that. And if you can't do that, you're not gonna win the great chess championships of the world and you're not gonna do as well in business as Henry Singleton did.

I think some of these things are very difficult and I think, by and large, it's a mistake to hire investment management—to hire armies of people to make conclusions. You're better off concentrating your decision power on one person the way the Li Lu (Trades, Portfolio) partnership does and then choose the right person.

I don't think it's easy for ordinary people to become great investors.

Question: You identified the opportunity in electrification and invested in BYD. How do you thinkabout the hydrogen opportunity for transportation and how does it compare to the electric opportunity, specifically thinking about trucks versus cars. Will we have fewer gas stations or truck stops in the future?

Charlie Munger (Trades, Portfolio): Well, I hope we don't have fewer truck stocks because Berkshire Hathaway isdeeply involved in truck stops. But, of course, I think there will be more automation in transportation of all kinds in the future.

I don't think I've got any great insight about hydrogen. But I do think having a whole system to sell hydrogen is difficult. On the other hand, the buses in Los Angeles work on natural gas. All the buses. And it has saved Los Angeles a fortune because gas is so much cheaper than gasoline. I've seen the whole bus system shift from gasoline or diesel to gas and so it obviously isn't impossible, but you'd have to create a whole new system of supply for it.

I don't even know how much more difficult—or how much more dangerous—it would be to deal with hydrogen than it is to deal with gasoline which is also a dangerous substance.

You've reached the limit of my circle of competence. I can't help you.

Question: What would management [of Daily Journal] do with a sudden windfall of profits?

How would they think about current opportunities with low rates and low inflation?

Charlie Munger (Trades, Portfolio): Well, it's not easy to handle accumulated money in the current environmentwhen these stocks are so high and partials of real estate of certain kinds are also very inflated. So it's very difficult. And all I can say is that we'll do the best we can.

When it gets difficult, I don't think there's any automatic fix for difficulty. I think when difficulty comes, I expect to have my share.

Question: Does management, in your opinion, have a moral responsibility to have their sharestrade as close to fair value as possible?

Charlie Munger (Trades, Portfolio): I don't think you can make that a moral responsibility. Because if you do that,I'm a moral leper. The daily journal stock sells way above the price I would pay if I was buying new stock. So, no I don't think it's the responsibility of management to assure where the stock sells.

I think management should tell it like it is at all times and not be a big promoter of its own stock.

Question: In 1999, the year the Daily Journal bought Sustain Technologies, the traditionalbusiness employed 355 full-time employees and 61 part-time employees. In 2010, that was down to 165 full-time employees and 15 part-time employees. This year's annual report suggests that the traditional business has 97 full-time employees. Has the quality of the publication suffered as the employment levels have decreased? Or, has the digital revolution caused enormous productivity improvements in those businesses?

Charlie Munger (Trades, Portfolio): Well, of course, the places downsized. They had to because the traditionalbusiness newspaper business is shrinking. Gerry, being a sound thinker, you know, did the very unpleasant work of shrinking it appropriately without bothering me or Rick. It showsed how wise we were to put him there in the first place.

Has the quality gone down? Well, I don't think the quality of publishing public notice advertising has gone down. But, I hardly think the editorial quality could go way up when employees were going down. My guess is we have suffered some editorial quality. Gerry, you have a comment on that?

Gerald Salzman: There are a number of factors that come into play here. And you mentionedtechnology—that's very, very important. Many of our systems are in the cloud. All except for the legal advertising system which we had to build because nobody else has the volume that we have. Our editorial system and our advertising system are all in the cloud. Accounting is also in the cloud.

The disruption from the decline in newspapers has had a significant impact. Classified advertising is down significantly. In display advertising, for example, we now utilize a very friendly company that worked with us for 25 years and now they are helping us sell advertising.

Also, fortunately before the pandemic, we got out of the conference-type events and we were not subjected to the problems of no conferences nobody to attend.

When you look at what's happened in California [in terms of] the price of real estate and rentals, we've reduced the number of offices we have both for Journal Technology and for the Daily Journal. It's very difficult to hire reporters in the San Francisco area with all the demands coming from the internet companies wanting to have an editorial product.

All those factors come into play and if you go back a little further, we eliminated California Lawyer magazine and we had one time a newspaper in Seattle and one in Denver. At about the same time, we bought a newspaper in Phoenix and that worked out extremely well. It's difficult to break into the legal advertising system which supports so many newspapers, not only in California but elsewhere.

Charlie Munger (Trades, Portfolio): It's very hard to have a shrinking business. Gerry has done magnificently well.

It was totally required.

Question: Do you believe the market is going through a long-term value slump similar to 1999,or do you believe technology has caused a permanent change in how companies should be valued?

Charlie Munger (Trades, Portfolio): I don't know how permanent it's going to be but it certainly caused a change.

Of course, it's hard to know what the future holds when in a complex system where you can't predict a lot of things. Generally, what people do is they have financial reserves so they have some options if trouble comes, and they adapt the way Gerry has to require downsizings or require upsizings.

One of the interesting things about the Daily Journal is that we made all that money in the foreclosure boom. So we were like an undertaker who suddenly got prosperous in a plague year. It's a funny way to make money. That happened because Gerry and I bought these little newspapers all over the state just as a precaution to make sure we could serve public notice advertising wherever it arose in the state.

That turned out to be a wonderful idea and that's one of the reasons we made all this money. So, the shareholders have been lucky to have somebody like Gerry here who could learn what he didn't know and fix it.

Question: You've spent much of your life contributing your wisdom to schools and hospitals.How would you advise these institutions to manage their endowments over the coming decades?

Charlie Munger (Trades, Portfolio): Well, the one charitable institution where I have had some influence for a verylong time has a whole bunch of hotshot financiers in every branch of wealth management there is on the board. And that institution has two assets in its endowment account. One is a big interest in Li Lu (Trades, Portfolio)'s China fund, which is a limited partnership, and the other is a Vanguard index fund. As a result of holding those two positions, we have a lower cost than anybody else and we make more money than practically everybody else. So you now know what I do in charitable institutions.

By the way, that's not the normal outcome in America. The wealth management industry has a crisis on its hands. They really need the world to stay the way it is. And that isn't necessarily right for its customers.

Question: It is estimated that the Gates Foundation has saved well over 100 million lives.Buffett's donations to the foundation have obviously helped to save many millions. Are Berkshire's managers aware that through their efforts to create business success at Berkshire that they have been involved in saving millions of lives?

Charlie Munger (Trades, Portfolio): I'm sure some are, but, by and large, that's not what Warren is known for. Hedoesn't mind at all not getting credit for his charitable donations.

Question: Is the oil and gas industry the new newspapers?

Charlie Munger (Trades, Portfolio): I don't think so. I think the oil and gas industry will be here for a long, longtime. As a matter of fact, it will be here for a long, long time if we stop using many hydrocarbons in transportation.

The hydrocarbons are also needed as chemical feedstocks. I don't think that hydrocarbons are going. I'm not saying that oil and gas is going to be a wonderful business but I don't think it's going away. I don't think it's like the newspaper business.

Question: Do you believe global warming is an existential threat to humankind? If so, how doyou think society should address it, especially because poor countries require much more cheap energy to reduce poverty?

Charlie Munger (Trades, Portfolio): Well, of course, it's very hard to fix the global warming problem when thepoorer countries need to burn coal to stay alive and so on. So, it's a serious problem. On the other hand, we have a fair amount of time to do it. A rich civilization can afford to do it if we absolutely have to.

If the seas were to rise 60 feet, which could happen in another 100 years or so, we'd have to build enormous barriers to sea entry. Florida would have a really serious problem.

On the other hand, it could be handled. Bill Gates (Trades, Portfolio) has written a book on this subject recently in which he concludes that it would be expensive but it could be handled. And his conclusion is that mankind should just step up to it and do it. I kind of admire the way Bill takes on these very hard problems. I tend to avoid the ones which I'm not good at and I'm not good at a lot of different problems.

Question: What books are you currently reading and what can you reccomend?

Charlie Munger (Trades, Portfolio): I think I'll skip that one.

Question: Ben Franklin said: Were it offered to my choice, I should have no objection to arepetition of the same life from its beginning, only asking the advantages authors have in a second edition, to correct some faults of the first. If you were offered a fresh start today, what would you do differently in life and in investing?

Charlie Munger (Trades, Portfolio): Ben Franklin was one of the wisest men who ever lived. And yet he made a lotof mistakes in the course of living his life. Of course, if he had a chance to do it over again, he would avoid those mistakes. We would all say that.

He was very amiable the way he talked about it. But, of course, if we got a chance to do it again, we would do it better. The number of people who ever got a chance to do it again is zero. So it's a very theoretical discussion.

There's an old German proverb I've always liked. It says that man is too soon old and too late smart. That's true whether you're Benjamin Franklin or Joe klutz.

We all live with that problem. We're all pretty forgiving of ourselves too which is probably a good thing.

I wouldn't change my life all that well. I think most people who are assuming tolerable success in life are about as happy as they were ordained to be. They wouldn't be a lot happier if they were richer or a lot less happy if they'd been poor. I think most people are born with a happystat. That happystat has more to do with their happiness and their outcomes in life.

Question: Your advice given on choosing a good spouse inPoor Charlie's Almanacis terse. Youhave said that the single best way is to deserve a good spouse because a good spouse is by definition not nuts. That is true and makes sense. However, could you be more specific? You used examples of Lee Kuan Yew's good judgment in choosing someone with brains over certain physical attributes in your past interview. Could you give more examples both good and bad ones from your personal observations or through vicarious readings?

Charlie Munger (Trades, Portfolio): Well, I can't top Lee Kuan Yew's example. In his early education, he was thesecond-ranked student in the school. He was that smart. And there was one woman who was a year older than he was who was the first-ranked student in the school. So he married her. Of course, his son, who is a bright man, is now Prime Minister of Singapore.

A little wisdom in spouse selection is very desirable. You can hardly think of a decision that matters more to human felicity than who you marry.

Question: Given all of your donations to physics, what is your favorite way of applying physicsto society's problems and also to investing?

Charlie Munger (Trades, Portfolio): I don't think I use much physics in solving my investment problems but itoccasionally helps me.

Occasionally, some damned fool will suggest something that violates the laws of physics and I always turn off my mind the minute I realize the poor bastard doesn't know any physics.

Question: How important is the analysis of company culture in the investment process?

Charlie Munger (Trades, Portfolio): It's quite important—part of the success of a company like Costco. It's beenamazing that one little company starting up not that many decades ago could become as big as Costco did as fast as Costco did. Part of the reason for that was cultural. They have created a strong culture of fanaticism about cost, quality, efficiency, and honor. All the good things. And, of course, it's all worked. Culture is very important.

Question: You often advocate for learning from other people's big calamities and stupidities.What would be a mistake at the Daily Journal which we can all learn from?

Charlie Munger (Trades, Portfolio): Gerry, what's the biggest mistake we've made?

Gerald Salzman: Well, we don't think aboutmistakes. We take the situation as it is and try tosolve it.

Charlie Munger (Trades, Portfolio): I can't think of a… We paid high prices for some little companies in the courseof trying to enter the court software business. But I don't think that's going to end up with a mistake. God knows it was difficult but I don't think it's a mistake.

I don't think we have made a lot of horrible mistakes. Look around all this real estate. We bought all these buildings cheaply. They're in a place that's gotten more valuable.

I don't think it was a mistake to buy the Daily Journal when we did, paying the price we did. We paid two and a half million for it. We got a dividend of two and a half million shortly thereafter. Everything you see is profit.

I think we've coped pretty well so far.

Question: If you had a chance to make an addition or revision toPoor Charlie's Almanac, whatwould that be?

Charlie Munger (Trades, Portfolio): I don't have any wonderful new thoughts. To the extent that my thoughtshave helped my life, I think I've pretty well run the course. I don't think I'm likely to have any new thoughts that are going to work miracles either. But, I find that the old ways of doing things still work.

I've been engaged in recent years in trying to create a better type of student dormitory. I find that by working at that, I can actually make some improvements even though I'm old. So, I'm kind of pleased that I'm still functioning at all. I'm not trying to move mountains.

Question: Do you believe any psychological personality tests, such as the Myers-Briggs TypeIndicator, to be of any good in choosing a compatible partner, given that choosing a spouse is probably the most important decision one can make in life. Could you please elaborate on the subject and could you consider giving a talk on this particular subject? The most important decision in life to benefit those who are single, perhaps including some of your grandchildren and great-grandchildren.

Charlie Munger (Trades, Portfolio): Well, you know, I had a failed marriage, so I don't think I'm in the perfectposition to advise the young about marriage. No, I don't think I have anything to contribute.

Question: What have you done to live such a long life? Could you share the secret to living along, healthy, and happy life?

Charlie Munger (Trades, Portfolio): I think I'm alive because of a lucky genetic accident. I don't think I can teachyou how to retroactively get a new accident yourself. Gerry's lived a long time too and I think we both have been lucky. No, I don't have any secrets. I think I would have lived a long time if I had lived a different life.

A happy life is very simple.

The first rule of a happy life is low expectations. That's one you can easily arrange. If you have unrealistic expectations, you're going to be miserable all your life. I was good at having low expectations and that helped me.

Also, when you get reverses, if you just suck it in cope, that helps if you don't just fretfully stew yourself into a lot of misery.

There are certain behavioral rules. Rose Blumpkin had quite an effect on the Berkshire culture. She created a business with like 500 depression dollars that became a huge business. You know what her mottoes were? Always tell the truth and never lie to anybody about anything.

Those are pretty good rules and they're pretty simple.

A lot of the good rules of life are like that. They're just very simple. Do it right the first time.

That's a really good rule.

Question: It's been a year sincethe coronavirus pandemic came to the U.S. What have you alllearned about running a business in the past year? Has there been anything that has surprised you, and what would be your best advice to someone starting a business now?

Charlie Munger (Trades, Portfolio): I don't think I have a lot of wonderful advice about starting a business butwhat you've learned in the pandemic is that we can do with a lot less travel and a lot more Zooming.

When the pandemic is over, I don't think we're going back to just the way things were. I think we're into a lot less travel and a lot more Zooming. I think the world is gonna be quite different.

A lot of the people who are doing this remote work—a lot are going to work three days a week in the office and two days a week at home. A lot of things are going to change. I expect that and I welcome it.

Question: Can you share some parting thoughts with the viewers who are watching all aroundthe world?

Charlie Munger (Trades, Portfolio): We're really old both of us. And I think both of us have done the same thing;we just suck it in and cope. We don't have any other secrets, do we Jerry?

Gerald Salzman: None. You have to be concerned about employees' lives. That's very, veryimportant. And, for example, here, we must have 30 or 40 deaths. We expect many of our employees to always be at client court offices because we work with them very closely to make sure they get what they need. We do, as Charlie indicates, have a lot of travel. That's been greatly curtailed. And we can't go to many offices because they're closed.

As for some of our technology, like eFiling for example, the courts are closed. We are very excited to look forward to enabling the courts to function as we know that they want to and will in the future.

So, you have to be a little closer to the employees' needs, desires, babysitting, and all those activities that were kind of taken for granted in the past. It doesn't happen anymore. Everybody's got a different situation. Nothing is particularly obvious for everybody to do the same thing. And, we have to function as an informal committee in that we have to bring our employees and our clients together to work out what they already know and how we can help them do a better job—a more efficient job.

So, the people part has changed quite considerably being a small company. We're beholden to the guidelines of the county of Los Angeles and other counties. We have offices in all the major cities in California and also in Logan, Utah. We are subject to the orders and directions of those counties which, before, really didn't impact anything.

Charlie Munger (Trades, Portfolio): There's one thing that we're quite passionate about and that is serving thecustomers who have trusted us. And, we are really interested in doing a good job in Australia, in California, and all the other places where people have trusted us.

You can hardly think of anything more important in life than being reliable for the people who trust you.

We're going to bust our ass to try and do a good job. The Daily Journal shareholders will have to take whatever outcome comes from caring more about our customers than is at all common.