Charlie Munger's Comments in 1987 on Whether Buffett Paid Up for Cap Cities and Tom Murphy

I was reading the October 1987 issue of Outstanding Investor Digest and came across some interesting comments from Charlie Munger (Trades, Portfolio) on Tom Murphy and Warren Buffett’s purchase of Cap Cities from the 1987 Wesco annual meeting. Below are my notes and excerpts from the issue.

A question was raised regarding paying a premium for good management. Here is Charlie’s response, which is great but may not knock your socks off:

“As much as Warren makes a wonderful thing about the glories of the people, he's pretty well been able to arrange in his life that he didn't pay up for them. He bought the assets for a little less than they were worth and got the good people as an extra without paying for them.

Once you start paying for the wonderful things that people are going to do, when they start with no marvelous base in terms of momentum and asset value, I would say that's a little more dubious proposition than what we did. "I don't think there's anybody in America that I can think of where we'd buy the assets for more than they're worth because the people are wonderful. If it works for you, you're trying something that we're not trying for ourselves.

Apparently the shareholder wasn’t satisfied so they asked another interesting question: “Didn’t Buffett pay up for Cap Cities’ management?” This is when Charlie’s response became interesting:

“Yes, but Buffett's idea of paying up is instead of getting the assets for 50 cents on the dollar his definition of paying up is paying maybe 85 cents (on the dollar). There's that quotation in the Berkshire report from David Ogilvy that says if you hire people that are larger than we are, we become a group of giants. And that's exactly the way Buffett feels and that's the way I feel.

But other people interpret that to mean that if you take a pile of money and hire the very best people you can get, who’ve gotten A's in good business schools and who are honest and know the lingo of modern management and are nice to their wives and work hard and are just quality people, then it's sure to work. That's not what he means.

His definition of a wonderful person, is somebody who could fall out of a freight car with no money in a strange town and without cheating anybody become rich without waiting too long. And when he finds one of those, why naturally he's very pleased to back him. That person fits an entirely different definition of the way it’s done in ordinary business school.

When you try it the other way, just a nice young man who got A's in school conscientiously doing his best,that does not work well. If it did, why every corporation in America would work wonders instead of being at least the half-mess it really is.”

If you didn’t find the above comments from Charlie juicy enough, hopefully the following comments on humility will do the job.

“In my whole life, nobody has ever accused me of being humble. Although it's a trait that I much admire, I don't think I quite got my full share. And some of the people who work with us are the same. Mrs. Blumkin of Nebraska Furniture Mart - she is not humble. She is a very competent woman. But she is not humble. And the same for Tom Murphy.

I'll tell you a story about Murphy. He had this long list of incredible successes. First he was a boy wonder, and everything worked.

He finally bought this newspaper in Wilkes-Barre, Pennsylvania, thinking he would fix its terrible labor

troubles the way he fixed these other labor troubles at Womens' Wear Daily and at other publications. And, of course, it's in a tough coal mining community where unions are more important than jobs. And the union started a competing newspaper, and the place was surrounded by big tough guys with clubs. And it was just a great big mess. And the red ink was flowing out a couple of million dollars a year.

Here was his example of humility. He said to me, ‘Charlie, I pray a lot. I pray that God will keep me humble.’ And he's not kidding. He does pray. And he said, “God answered my prayer. I prayed to be humble. And God gave me Wilkes-Barre.”

We have that kind of humility based on personal experience and failure. We feel very chastened.

I think that realistic is probably a better word. The truth of the matter is that our abilities are not so high. And part of the reason for the successes we have had is I think we understand our limitations better than others. But I don't call that humility.

I have this friend who is really not very smart at all. He makes everybody explain things until he understands it. But he does have incredible patience. He doesn't do anything unless he understands it. And he's perfectly willing to have 5 years go by between deals. Meanwhile, he lives well within his means. You'd be surprised how rich this dumb man has become.

So you can be pretty modest if you understand your own limitations. It's better by far to be with a guy whose I.Q. is 130 who thinks it's 128 than with a guy whose I.Q. is 190 who thinks it's 250. The second guy is going to get into terrible trouble.

Operating within what's prudent to do with your given hand and your given ability is just a financial knack. But don't call it humility at all. I call that enlightened greed.”