Mungerisms: Charlie Munger's Unscripted Wisdom

Mungerisms: Charlie Unscripted

Highlights from Berkshire Hathaway and Wesco Financial annual meetings, compiled by Whitney Tilson.

The remarks and commentary below reflect the period covered by Tilson’s original compilation. Statements about holdings, fees, market conditions, and people’s roles refer to that period.

"The wisdom of the wise, and the experience of ages, may be preserved by quotations." -Isaac Disraeli

Warren Buffett and Charlie Munger built a remarkable investment record. Passing up the chance to learn from them would be, to use one of Charlie's favorite words, "Bonkers."

What I enjoy most about studying Warren and Charlie is how far the lessons extend beyond investing. Their discussions connect rational thinking with integrity, happiness, and kindness.

Learning from Warren wasn't hard: there were many books about him; he regularly gives speeches, writes articles, and makes public appearances; and he's published lengthy annual letters for decades (you can read the last thirty of them for free at www.berkshirehathaway.com; if you haven't done so already, what are you waiting for?!). But Charlie is more private: There are only two books about him, and he is a far less prolific writer and speaker.

For this reason, many people fail to recognize that Charlie is a genius in his own right, and that he has had a profound effect on Warren's investment philosophy, which Warren freely acknowledges. The dynamic between them is pretty funny to watch. On stage at the Berkshire annual meeting, Warren generally takes the first stab at answering a question, but then usually turns and says, "Charlie?" Immobile and expressionless (they could easily substitute a mannequin for him, and no one would notice most of the time), Charlie typically replies, "I have nothing to add." Those five words have become a trademark of Charlie's that often delights both Warren and the audience. (In fact, at the special meeting for the Gen Re acquisition in September 1998, Warren actually showed up with a cardboard cutout of Charlie and a recording of Charlie saying, "I have nothing to add." According to one of my friends in attendance, "Warren would get that impish look each of the half dozen or so times he used it.") Those words also reflect both Charlie's abrupt, curmudgeonly nature-at least that's his public persona-and the "two-minds-as-one" relationship of brilliant partners joined in their thoughts.

But when Charlie does have something to add, it is often piercing and insightful, and he doesn't pull any punches. To use his own words, Charlie is a "cranky, old fashioned" man and has never worried about being politically correct-he just calls it the way he sees it.

Since Warren does most of the talking at the Berkshire meeting, I always like to attend the Wesco annual meeting a few days later in Pasadena to hear Charlie's in-depth thinking (he is the chairman of Wesco Financial, a holding company with a structure similar to Berkshire's, which owns 80.1 percent of Wesco). One needn't even be a shareholder to attend; Charlie-as he and Warren do at the Berkshire meeting-welcomes all pilgrims to the church of Graham, Dodd, Buffett, and Munger. I've never regretted making the cross-country trip so soon after returning from Omaha, as Charlie's mind remains in peak form. During the 2003 meeting, as Charlie made one insightful observation after another, one of my friends leaned over and whispered to me, "This is one unbelievable eighty-year-old!" Indeed!

As a teacher and a thinker, Charlie is Warren's equal, and I've learned a great deal from him, which is why I agreed to contribute when Peter Kaufman began assembling this book.

This chapter is intended to complement Charlie's formal writings and speeches that appear elsewhere in this book. Drawn from my notes from the Berkshire and Wesco annual meetings over the past five years, this is a collection of the most insightful, provocative, spontaneous, funny things Charlie said at these meetings. Since almost all of his remarks are in response to questions from shareholders, he comments extensively on Berkshire Hathaway and many business- and investing related topics. To make Charlie's teachings more accessible, I've organized them by topic and also done some light editing, but the goal is to let him speak for himself. Enjoy!

"I have been associated for many years with a man legendary for good judgment, and it never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles." -Munger

Keys to Our Success

1. It is occasionally possible for a tortoise, content to assimilate proven insights of his best predecessors, to outrun hares that seek originality or don't wish to be left out of some crowd folly that ignores the best work of the past. This happens as the tortoise stumbles on some particularly effective way to apply the best previous work, or simply avoids standard calamities. We try more to profit from always remembering the obvious than from grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

2. We don't claim to have perfect morals, but at least we have a huge area of things that, while legal, are beneath us. We won't do them. Currently, there's a culture in America that says that anything that won't send you to prison is okay. We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble. I don't think you should come anywhere near that line. We don't deserve much credit for this. It helps us make more money. I'd like to believe that we'd behave well even if it didn't work. But more often, we've made extra money from doing the right thing.

Remember Louis Vincent's rule: Tell the truth, and you won't have to remember your lies. It's such a simple concept.

Comments on Berkshire Hathaway

Berkshire Is a Hell of a Business

We're like the hedgehog that only knows one big thing: If you can generate float [cash from insurance premiums that Berkshire can invest before claims must be paid] at three percent and invest it in businesses that generate thirteen percent, that's a pretty good business. The businesses that Berkshire has acquired will return thirteen percent pretax on what we paid for them, maybe more. With a cost of capital of three percent generated via other people's money in the form of float-that's a hell of a business. That's the reason Berkshire shareholders needn't totally despair. Berkshire is not as good as it was in terms of percentage compounding [going forward], but it's still a hell of a business.

I hate to be an optimist, but we have added a lot of wonderful businesses to Berkshire over the past few years.

Berkshire's Past Returns

Berkshire's past record has been almost ridiculous. If Berkshire had used even half the leverage of, say, Rupert Murdoch, it would be five times its current size.

Berkshire's Future Outlook

One of the smartest things a person can do is dampen investment expectations, especially with Berkshire. That would be mature and responsible. I like our model, and we should do nicely.

The future will be harder for Berkshire Hathaway for two reasons:

1. We're so big. It limits our investment options to more competitive areas that are examined by very smart people like Alice Schroeder [the insurance analyst from Paine Webber and then Morgan Stanley, who was sitting in the audience].
2. The current climate offers prospects in common stocks over the next fifteen to twenty years that are way less than we've experienced over the past fifteen to twenty years. Read Warren's Fortune article-I totally agree with it. ["Mr. Buffett on the Stock market," 11/22/99]

Berkshire Hathaway's value will be higher in twenty years, but it is certain that the annual rate of percentage growth will be much lower. But this is not a tragedy. We're content. Berkshire Hathaway and Wesco will accumulate cash every year, and we have a structure that gives us enormous flexibility. While we're too big to buy the stock of a small company, we have the advantage of having entire companies offered to us. Something has always turned up for us. I'm not discouraged, but I don't think your money here is going to do anything like what you're used to. It's a finite and very competitive world. All large aggregations of capital eventually find it hell on earth to grow and thus find a lower rate of return.

Personally, I think Berkshire will be a lot bigger and stronger than it is. Whether the stock will be a good investment from today's price is another question. The one thing we've always guaranteed is that the future will be a lot worse than the past.

The future returns of Berkshire and Wesco won't be as good in the future as they have been in the past. [This is true of all large, successful companies.] The only difference is that we'll tell you.

Berkshire Hathaway's Culture

Our culture is very old-fashioned, like Ben Franklin's or Andrew Carnegie's. Can you imagine Carnegie hiring consultants?! It's amazing how well this approach still works. A lot of the businesses we buy are kind of cranky and old-fashioned like us.

For many of our shareholders, our stock is all they own, and we're acutely aware of that. Our culture [of conservatism] runs pretty deep.

This is an amazingly sound place. We are more disaster-resistant than most other places. We haven't pushed it as hard as other people would have pushed it.

I'm happy having ninety percent of my net worth in Berkshire stock. We're going to try to compound it at a reasonable rate without taking unreasonable risk of using leverage. If we can't do this, then that's just too damn bad.

Berkshire's and Wesco's Stock Prices

We like the stocks of both Berkshire and Wesco to trade within hailing distance of what we think of as intrinsic value. When it runs up, we try to talk it down. That's not at all common in Corporate America, but that's the way we act.

I don't want to go back to Go. I've been to Go. A lot of our shareholders take a majority of their net worth in Berkshire, and they don't want to go back to go either.

Today, it seems to be regarded as the duty of CEOs to make the stock go up. This leads to all sorts of foolish behavior. We want to tell it like it is.

Berkshire Shareholders

We like our current shareholders and don't want to entice anyone to become one. I think our reporting, considering the complexity of the enterprise, is better than that of any enterprise I know at giving shareholders the information they need. We do it conscientiously.

Berkshire's Acquisition Strategy

Two-thirds of acquisitions don't work. Ours work because we don't try to do acquisitions-we wait for no-brainers.

Competition for Acquisitions

We've had private equity competitors for a long time, but one way or another, we've managed to buy quite a few things. The general assumption is that it must be easy to sit behind a desk and people will bring in one good opportunity after another-this was the attitude in venture capital until a few years ago. This was not the case at all for us-we scrounge around for companies to buy. For twenty years, we didn't buy more than one or two per year. It's fair to say that we were rooting around. There were no commissioned salesmen. Anytime you sit there waiting for a deal to come by, you're in a very dangerous seat.

Managers of Acquired Companies

We've bought business after business because we admire the founders and what they've done with their lives. In almost all cases, they've stayed on, and our expectations have not been disappointed. What matters most: passion or competence that was inborn? Berkshire is full of people who have a peculiar passion for their own business. I would argue passion is more important than brain power. I don't think our managers who come to this meeting are picking up new tricks; they know all the tricks related to their business-but this is an interesting place and it gets more interesting every year and they like being part of it.

Managing Subsidiaries

By and large, we've chosen people we admire enormously to have the power beneath us. It's easy for us to get along with them on average because we love and admire them. And they create the culture for whatever invention and reality recognition is going on in their businesses. And included in that reality recognition is the recognition that previous conclusions were incorrect.

It would help current shareholders to hear our CEOs [of the Berkshire operating subsidiaries], but we promised them they could spend one hundred percent of their time on their businesses. We place no impediments on them running their businesses. Many have expressed to me how happy they are that they don't have to spend twenty-five percent of their time on activities they don't like.

There Are certain virtues that are common in all of Berkshire's subsidiaries. We don't create them-we select companies that have them already. We just don't screw it up. We have decentralized power to a point just short of total abdication.

Synergies

The reason we avoid the word "synergy" is because people generally claim more synergistic benefits than will come. Yes, it exists, but there are so many false promises. Berkshire is full of synergies-we don't avoid synergies, just claims of synergies.

Making the Right Personnel Decisions

It's amazing how few times over the decades we've had to remove a person-far less than other companies. It's not that we're soft or foolish, it's that we're wiser and luckier. Most people would look back and say their worst mistake was not firing someone soon enough. [We don't say that.] Our record is fabulous. We're old fashioned. For example, in the case of CORT Business Services [a furniture rental business that Wesco acquired], Warren said to me, "You're going to love Paul Arnold [CORT's CEO]." And he was right. Paul's been running the business since he was in law school and loves it.

Berkshire's Insurance Operations

Reinsurance is not as much of a commodity business as it might appear. There's such a huge time lag between when the policy is written and when it is paid that the customer has to evaluate the insurer's future willingness and ability to pay. We have a reputational advantage, though it's not as big as it should be.

I do think we get some advantage in reinsurance because people trust our willingness and ability to pay, so it's not a commodity. I think we have some special talents. That being said, I think it's dangerous to rely on special methods, better to own lots of monopolistic businesses with unregulated prices. But that's not the world today. We have made money exercising our talents and will continue to do so.

I'm glad we have insurance, though it's not a no-brainer, I'm warning you. We have to be smart to make this work. The overall result is that we're going to do pretty well-meaning in the top ten percent [of the industry]-because we do different things and we're willing to do some unpleasant things. Generally speaking, we're mildly optimistic about our insurance operations.

Growing float at a sizeable rate at low cost is almost impossible-but we intend to do it anyway.

I've been amazed by the growth and cost of our float. It's wonderful to generate billions of dollars of float at a cost way below Treasury notes.

Lumpy results and being willing to write less insurance business if market conditions are unfavorable...that is one of our advantages as an insurer-we don't give a damn about lumpy results. Everyone else is trying to please Wall Street. This is not a small advantage.

Nobody else does it, but to me not worrying about trying to please Wall Street is obviously the only way to go. A lot about Berkshire is like this. Being controlling owners is key, it would be hard for a committee to make these kinds of decisions.

Berkshire Hathaway Repurchasing Shares

In the past when Berkshire had gotten cheap we have found other even cheaper stocks to buy. I would always prefer this. It's more fun to have the companies so lacking in repute that we can make money for some shareholders by buying out others.

Splitting Berkshire Stock to Create More Liquidity

I think the notion that liquidity of tradeable common stock is a great contributor to capitalism is mostly twaddle. The liquidity gives us these crazy booms so it has as many problems as virtues.

[Buffett: Berkshire trades $50 million of stock per day, so very few people will have a problem selling it. But we're trying to create more people who have the problem of owning stock worth so much that liquidity is an issue.]

Why Don't More Companies and Investors Copy Berkshire Hathaway?

It's a good question. Our approach has worked for us. Look at the fun we, our managers, and our shareholders are having. More people should copy us. It's not difficult, but it looks difficult because it's unconventional-it isn't the way things are normally done. We have low overhead, don't have quarterly goals and budgets or a standard personnel system, and our investing is much more concentrated than the average. It's simple and common sense.

I was recently speaking with Jack McDonald, who teaches a course on investing rooted in our principles at Stanford Business School. He said it's lonely-like he's the Maytag repairman.

Comments on Buffett

It's hard to believe that he's getting better with each passing year. It won't go on forever, but Warren is actually improving. It's remarkable: Most seventy-two-year-old men are not improving, but Warren is.

Charlie's Influence on Warren

I think those authors give me more credit than I deserve. It is true that Warren had a touch of brain block from working under Ben Graham and making a ton of money-it's hard to switch from something that's worked so well. But if Charlie Munger had never lived, the Buffett record would still be pretty much what it is.

I think there's some mythology in this idea that I've been the great enlightener of Warren. He hasn't needed much enlightenment. But we know more now than five years ago.

What Happens When Buffett's Gone?

The key is having good businesses. There's a lot of momentum here. [However,] I don't think our successors will be as good as Warren at capital allocation.

Berkshire is drowning in money-we have great businesses pounding out money. If the stock went down, Berkshire could buy it back. There's no reason to think it will go to hell in a bucket, and I think there's reason to believe it could go on quite well. I'd be horrified if it isn't bigger and better over time, even after Warren dies.

When Warren is gone, the acquisition side of Berkshire will not do as well, but the rest will do well. And the acquisition side will do just fine. In any case, we've guaranteed you that the historical rate of growth will go down, and we wouldn't want to make a liar out of me. I think the top guy won't be as smart as Warren. But it's silly to complain: "What kind of world is this that gives me Warren Buffett for forty years, and then some bastard comes along who's worse?"

If anyone would have a reason to worry, it would be me, but having known the Buffett family for decades, I say to you: "Don't worry about it. You should be so lucky."

What If Charlie Dies?

As you can tell, we're planning on immortality here. What do you need-sitting on a pile of money and Warren Buffett sitting at the parent corporation?

Charlie as the Abominable No-Man

Buffett: You just have to learn how to calibrate his answers. If you ask Charlie something and he says "no," then we put all of our money in it. If he says "that's the stupidest thing I've ever heard," then we make a more moderate investment. If you calibrate his answers, you'll get a lot of wisdom.

Exchange at a recent Berkshire shareholders' meeting: Warren: "Charlie, do you have any additional comment?" Charlie: "No. I think you said it perfectly."

Chuck Rickershauser, former Munger Tolles partner and friend since 1964: "Warren told me a story once that, back in the early days of their relationship, when they had no financial connection and each had an investment partnership, Warren would frequently call up Charlie and say, 'I'm thinking of doing something' and describe it, and Charlie would say, 'my God, are you kidding? There's this risk and that risk.' They'd go right through all these risks that Charlie saw and Warren would usually say, 'I think you're right.' But once in a while, he would say, 'Charlie, I've heard everything you said, but I think I'm going to go ahead.' Warren said that it wasn't until that instant that he'd learn what Charlie really thought because occasionally Charlie would respond, 'Warren, if you do it, could I have a percentage of it?' People often think of Charlie as identifying risks and saying, 'No,' but it was his ability to identify the times to ask for a percentage that was most valuable."

Otis Booth, friend and business associate since 1956: "Charlie realizes that it is difficult to find something really good. So, if you say 'No' ninety percent of the time, you're not missing much in the world."

Investment Advice

The Importance of Temperament, Patience, and Curiosity

[One of the key elements to successful investing is having the right] temperament-most people are too fretful; they worry too much. Success means being very patient, but aggressive when it's time. And the more hard lessons you can learn vicariously rather than through your own hard experience, the better.

I think there's something to be said for developing the disposition to own stocks without fretting. [But] temperament alone won't do it. You need a lot of curiosity for a long, long time.

You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don't have that cast of mind, you're destined for failure even if you have a high I.Q.

Focus Investing

Our investment style has been given a name-focus investing-which implies ten holdings, not one hundred or four hundred. The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But ninety-eight percent of the investment world doesn't think this way. It's been good for us-and you-that we've done this. What's funny is that most big investment organizations don't think like this. They hire lots of people, evaluate Merck vs. Pfizer and every stock in the S&P 500, and think they can beat the market. You can't do it.

Our game is to recognize a business idea when it comes along. When one doesn't come along very often, opportunity comes to the prepared mind.

We have this investment discipline of waiting for a fat pitch. If I was offered the chance to go into a business where people would measure me against benchmarks, force me to be fully invested, crawl around looking over my shoulder, etc., I would hate it. I would regard it as putting me into shackles. Very few people have adopted our approach. Focus investing is growing somewhat, but what's really growing is the unlimited use of consultants to advise on asset allocation, to analyze other consultants, and so forth. Maybe two percent of people will come into our corner of the tent, and the rest of the ninety-eight percent will believe what they've been told [e.g., that markets are totally efficient].

Misteaching Investing

Beta and modern portfolio theory and the like none of it makes any sense to me. We're trying to buy businesses with sustainable competitive advantages at a low, or even a fair, price. How can professors spread this [nonsense that a stock's volatility is a measure of risk]? I've been waiting for this craziness to end for decades. It's been dented, but it's still out there. Warren once said to me, "I'm probably misjudging academia generally [in thinking so poorly of it] because the people that interact with me have bonkers theories."

Diversification

The idea of excessive diversification is madness. We don't believe that widespread diversification will yield a good result. We believe almost all good investments will involve relatively low diversification. If you took our top fifteen decisions out, we would have a pretty average record. It wasn't hyperactivity but a hell of a lot of patience. You stuck to your principles and when opportunities come along you pounced on them with vigor.

Sit-on-Your-Ass Investing

If you buy something because it's undervalued then you have to think about selling it when it approaches your calculation of its intrinsic value. That's hard. But if you buy a few great companies then you can sit on your ass. That's a good thing. We are partial to putting out large amounts of money when we don't have to make another decision.

What is a Better Business

There are two kinds of businesses. The first earns 12% and you can take the profits out at the end of the year. The second earns 12%, but all the excess cash must be reinvested—there's never any cash to take out. It reminds me of the guy who sells construction equipment. He looks at his used machines taken in as customers bought new ones and says there's all of my profit rusting in my yard. We hate that kind of business.

See's Candy: Case Study of a Better Business

If See's Candy, when we were buying it, had asked for $100,000 more... [Buffett chimed in: $10,000 more] Warren and I would have walked and that's how dumb we were.

Ira Marshall said you guys are crazy-there are some things you should pay up for, like quality businesses and people. You are underestimating quality. We listened to the criticism and changed our mind. This is a good lesson for anyone: the ability to take criticism constructively and learn from it. If you take the indirect lessons we learned from See's, you could say Berkshire was built on constructive criticism.

Mistakes

The most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but didn't act on it. They're huge mistakes-we've lost billions. And we keep doing it. We're getting better at it. We never get over it.

There are two types of mistakes:

1. doing nothing that Warren calls "sucking my thumb" and
2. buying with an eyedropper things we should be buying a lot of.

After nearly making a terrible mistake not buying See's, we've made similar mistakes many times. We are apparently slow learners. These opportunity costs don't show up on financial statements but have cost us many billions. Since mistakes of omission [aren't visible], most people don't pay attention to them. We rub our noses in mistakes of omission-as we just did. [They had just discussed failing to buy Walmart stock because it moved up a bit, a $10 billion mistake.]

Buying into Stock Declines

Over many decades, our usual practice is that if [the stock of something we like] goes down, we buy more and more. Sometimes something happens, you realize you're wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices.

Attractive investment opportunities tend to be ephemeral. Really good investment opportunities aren't going to come along too often and won't last too long, so you've got to be ready to act. Have a prepared mind.

Opportunities for Small Investors

If you have only a little capital and are young today, there are fewer opportunities than when I was young. Back then, we had just come out of a depression. Capitalism was a bad word. There had been abuses in the 1920s. A joke going around then was the guy who said, "I bought stock for my old age and it worked-in six months, I feel like an old man!"

It's tougher for you, but that doesn't mean you won't do well-it just may take more time. But what the heck. You may live longer. I'd work with very small stocks, searching for unusual mispriced opportunities, but it's such a small world.

Short Selling

Being short and seeing a promoter take the stock up is very irritating. It's not worth it to have that much irritation in your life.

Moats and Sustainable Competitive Advantage

Old moats are getting filled in and new moats are harder to predict, so it's getting harder.

Learning Process

I don't know anyone who learned to be a great investor with great rapidity. Warren has gotten to be one hell of a lot better investor over the period I've known him, as have I. So the game is to keep learning. You gotta like the learning process.

I've watched Warren for decades. Warren has learned a lot, which has allowed him to [expand his circle of competence so he could invest in something like PetroChina]. If you're going to be an investor, you're going to make some investments where you don't have all the experience you need. But if you keep trying to get a little better over time, you'll start to make investments that are virtually certain to have a good outcome. The keys are discipline, hard work, and practice. It's like playing golf-you have to work on it.

If you don't keep learning, other people will pass you by.

Circle of Competence and Its Boundaries

There are a lot of things we pass on. We have three baskets: in, out, and too tough. We have to have a special insight, or we'll put it in the "too tough" basket. All you have to look for is a special area of competency and focus on that.

If you have competence, you know the edge. It wouldn't be a competence if you didn't know where the boundaries lie. [Asking whether you've passed the boundary is] a question that almost answers itself.

Cost of Capital and Opportunity Costs

[Buffett: Charlie and I don't know our cost of capital. It's taught at business schools, but we're skeptical. We just look to do the most intelligent thing we can with the capital that we have. We measure everything against our alternatives. I've never seen a cost-of-capital calculation that made sense to me. Have you, Charlie?] Never. If you take the best text in economics by Mankiw, he says intelligent people make decisions based on opportunity costs-in other words, it's your alternatives that matter. That's how we make all of our decisions. The rest of the world has gone off on some kick-there's even a cost of equity capital. A perfectly amazing mental malfunction.

Obviously, consideration of costs is key, including opportunity costs. Of course, capital isn't free. It's easy to figure out your cost of borrowing, but theorists went bonkers on the cost of equity capital. They say that if you're generating a one hundred percent return on capital, then you shouldn't invest in something that generates an eighty percent return on capital. It's crazy.

Value of Forecasts

People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There's always been a market for people who pretend to know the future. Listening to today's forecasters is just as crazy as when the king hired the guy to look at the sheep guts. It happens over and over and over.

IPOs

It is entirely possible that you could use our mental models to find good IPOs to buy. There are countless IPOs every year, and I'm sure that there are a few cinches that you could jump on. But the average person is going to get creamed. So if you think you're talented, good luck.

IPOs are too small for us, or too high tech-we won't understand them. So, if Warren's looking at them, I don't know about it.

Comments on the Market

Stocks, Rembrandts, and Bubbles

Stocks are valued partly like bonds, based on roughly rational projections of producing future cash. But they are also valued partly like Rembrandt paintings, purchased mostly because their prices have gone up so far. This situation, combined with big "wealth effects," at first up and later down, can conceivably produce much mischief.

[April 2000] It's the most extreme in modern capitalism. In the 1930s, we had the worst depression in 600 years. Today is almost as extreme in the opposite way.... We use the phrase "wretched excess" because the consequences are wretched.

Bonds are much more rational. No one thinks a bond's value will soar to the moon.

Future Market Returns

[November 2000] If stocks compound at fifteen percent going forward, then it will be due to a big "Rembrandt effect." This is not good. Look at what happened in Japan, where stocks traded at fifty to sixty times earnings. This led to a ten-year depression. I think that was a special situation, though. My guess is that we won't get extreme "Rembrandtization," and the returns [thereafter] will be six percent. If I'm wrong, it could be for a bad reason. If stocks trade more like Rembrandts in the future, then stocks will rise, but they will have no anchors. In this case, it's hard to predict how far, how high, and how long it will last.

[April 2001] I think generally that American investors should reduce their expectations. People aren't being a little stupid, but massively stupid. No one has an interest in saying this though.

[May 2001] We are not in a hog-heaven period. The investment game is getting more and more competitive.

I don't know if we'll ever see stocks in general at the mouth-watering levels that we saw in 1973-74 or even in 1982. I think there's a very excellent chance that neither Warren nor I will see those opportunities again, but that's not all bad. We'll just keep plugging away.

[Buffett: It's not out of the realm of possibility though. You can never predict what markets will do. In Japan, a ten-year bond is yielding five-eighths of one percent. Who could have ever imagined that?] If that could happen in Japan, something much less bad could happen in the U.S. We could be in for a period in which the average fancy-paid investment advisor just can't do very well.

Current Outlook

[May 2004] In terms of the general climate, I think it's pretty miserable for anyone who likes easy, sure money. Common stocks may be reasonably fairly valued, but they are not overwhelming bargains. Our cash is speaking for itself. If we had a lot of wonderful ideas, we wouldn't have so much cash. Berkshire and Wesco are full of cash that we don't know what to do with. Berkshire has $70 billion if you count the bonds, and Wesco is drowning in cash. It's the most extreme it's ever been. In the past, we've just been patient, and we were able to put it to work.

"Nothing to Add" Number Two

We continue with the question of how Charlie monitors broad economic trends and changes:

Question: "What macro statistics do you regularly monitor or find useful in your attempt to understand the broader economic landscape?"

Answer: "None. I find by staying abreast of our Berkshire subsidiaries and by regularly reading business newspapers and magazines, I am exposed to an enormous amount of material at the micro level. I find that what I see going on there pretty much informs me about what's happening at the macro level."

Critique on Corporate Management

Earnings Manipulation and Accounting Shenanigans

With so much money riding on reported numbers, human nature is to manipulate them. And with so many doing it, you get Serpico effects, where everyone rationalizes that it's okay because everyone else is doing it. It is always thus. Now, it's chain-letter mechanics. Because it's mixed with legitimate activities like venture capital, it looks respectable. But we're mixing respectable activity with disrespectable activity-hence my comment at the Berkshire Hathaway annual meeting about if you mix raisins with turds, you've still got turds. There is nothing in accounting that can prevent unscrupulous managers from engaging in a chain-letter type fraud.

Spotting Crooked Managements

Bernie Ebbers and Ken Lay were caricatures-they were easy to spot. They were almost psychopaths. But it's much harder to spot problems at companies like Royal Dutch [Shell]. But we don't learn because I'd still expect that Exxon's figures are fair. I want to make an apology. Last night, referring to some of our modern business tycoons I said that when they're talking, they're lying, and when they're quiet, they're stealing. This wasn't my witticism; it was used long ago to describe the robber barons.

Corporate America's Addiction to Extraordinary Charges

If it happens every year like clockwork, what's so extraordinary about it?

Corporate Governance

The cause of reform is hurt not helped when an activist makes an idiotic suggestion like saying that having Warren on the board of Coke is contrary to the interests of Coke. Nutty behavior undermines their cause.

Critique of the Money Management Business

Flawed Incentives

The general systems of money management [today] require people to pretend to do something they can't do and like something they don't. It's a terrible way to spend your life, but it's very well paid.

No Value Added

Mutual funds charge two percent per year and then brokers switch people between funds, costing another three to four percentage points. The poor guy in the general public is getting a terrible product from the professionals. I think it's disgusting. It's much better to be part of a system that delivers value to the people who try the product. But if it makes money, we tend to do it in this country.

It's a funny business because on a net basis, the whole investment management business together gives no value added to all buyers combined. That's the way it has to work.

Stockbrokers vs. Index Funds

It's hard to sit here at this annual meeting surrounded by smart, honorable stockbrokers who do well for their clients, and criticize them. But stockbrokers, in total, will do so poorly that the index fund will do better.

I think indexing is a wiser choice for the average foundation than what it is now doing in unleveraged equity investment-and particularly so as its present total croupier costs exceed one percent of principal per annum. Indexing can't work well forever if almost everybody turns to it. But it will work all right for a long time.

The Mutual Fund Scandal

The business of selecting investment managers was recently shown to be even harder by the revelation that a significant fraction of mutual fund managers took bribes to betray their own shareholders.

It was as if a man came up and said, "Why don't we kill your mother, and we'll split the insurance money?" And many people said, "Why, yes, I'd like some of that insurance money." And many of them think what happened to them was unjust.

Critique of Wall Street

Wall Street's Lack of Ethics

The ethics of Wall Street will always average out to mediocre at best.... This doesn't mean there aren't some wonderful, intelligent people on Wall Street-there are, like those in this room-but everyone I know has to fight his own firm [to do the right thing].

The general culture of investment banking has deteriorated over the years. We did a $6 million deal years ago for Diversified Retailing, and we were rigorously and intelligently screened. The bankers cared and wanted to protect their clients.

The culture now is that anything that can be sold for a profit will be. "Can you sell it?" is the moral test, and that's not an adequate test.

Salomon Case Study

It's amazing what went on. Salomon was at least as disciplined and rational as other investment banks, but by the end Salomon was begging for investment business from Robert Maxwell whose nickname was the bouncing Czech. You would think if this was his nickname investment banks wouldn't pursue his business.

Tilson’s notes describe Buffett recalling Salomon’s efforts to collect money owed by Maxwell, including a trip to England to seek repayment from his sons after his death. The editor notes that Salomon eventually recovered the money, which Munger called a minor miracle. The incentive problem was that a banker could increase his earnings by bringing in more of Maxwell’s business. Dubious clients could therefore be profitable for individual bankers while exposing the firm to losses.

Normandy America Case Study

Warren and Charlie chuckled to themselves as they recalled Salomon doing business with another shady character they didn't name. At the 2002 annual meeting, however, Charlie identified the company as Normandy America Inc., whose IPO Salomon had to pull before money exchanged hands when they discovered the promoter had completely manufactured his record. According to a report on the SEC's website, "Normandy's stock commenced trading on the NASDAQ National Market System on August 15, 1995. One day later, Normandy withdrew its offering from the market and rescinded all trades."

That was a wonderful experience [dripping with sarcasm]. Warren, Lou Simpson, and I were all on the board [of Salomon], we were the largest shareholders, and we said, "Don't do business with this guy." But they ignored us and said that the underwriting committee had approved it.

[Buffett: He had a neon sign on him saying "CROOK." He did go to jail. Incidentally, he claimed to have owned a lot of Berkshire stock and to have made a lot of money on it, but I checked the shareholder records and couldn't see it. It could have been in street name, but for a block that big, I think I would have found it (so he was probably lying about his Berkshire holdings).]

Critique of Accountants

Demise of Ethics Among the Major Accounting Firms

When I was younger, the major accounting firms were quite ethical places, and nobody got filthy rich. But in the space of twenty-five years, they sold out to terrible behavior, one little step at a time. Once you start doing something bad, then it's easy to take the next step-and in the end, you're a moral sewer. The idea that the major accounting firms of the country would sell obviously fraudulent tax shelters. . . . Too many law and accounting firms get roped into shady things. For example, tax shelters, with their contingency fees and secrecy, are a total abomination. You'll better understand the evil of top audit firms starting to sell fraudulent tax shelters when I tell you that one told me that they're better [than the others] because they only sold the schemes to their top twenty clients, so no one would notice.

Aggressive Accounting

We're so horrified by aggressive accounting [that is rampant in Corporate America] that we reach for ways to be conservative. It helps our business decisions and protects Berkshire. How did we get in situations where we're all so close to the line? Creative accounting is an absolute curse to a civilization. One could argue that double-entry bookkeeping was one of history's great advances. Using accounting for fraud and folly is a disgrace. In a democracy, it often takes a scandal to trigger reform. Enron was the most obvious example of a business culture gone wrong in a long, long time.

Misuse of EBITDA

I think that, every time you see the word EBITDA [earnings before interest, taxes, depreciation, and amortization], you should substitute the words "bullshit earnings."

Arthur Andersen

I regard [what happened to the innocent employees of Arthur Andersen] as very unfair, but capitalism without failure is like religion without hell. When it gets this bad and there's a lack of systems for control-which Arthur Andersen didn't have-maybe a firm should just go down.

We couldn't do anything that would bring down Berkshire. Arthur Andersen was particularly vulnerable because it was a partnership. A partnership must be extra careful in its behavior, choosing clients, etc.

The Scandal of American Pension Fund Accounting

The current practice [of using unrealistically high assumptions for pension plan returns] is a dumb and improper way to handle things. But if you talk to management, their eyes glaze over even before hostility comes.

Pension fund accounting is drifting into scandal by using unrealistic assumptions. It's human nature to extrapolate the recent past into the future but it is terrible that management goes along with it.

IBM just raised its return expectations for its pension fund to ten percent. [Year 2000] Most companies are at nine percent. We think six percent is more realistic. [Company leaders] may believe it-they're honest people-but subconsciously they believe it because they want to believe it. It makes earnings good so they can promote the stock.

The reason accountants don't say anything is best summed up by the saying, "Whose bread I eat, his song I sing." I think you're getting very foolish numbers in American Accounting. I don't think it's willful dishonesty but it might as well be.

Bad Accounting Leads to Immorality

People who have loose accounting standards are just inviting perfectly horrible behavior in other people. And it's a sin, it's an absolute sin. If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin because you'd be causing a lot of bad behavior, and the bad behavior would spread. Similarly, an institution that uses sloppy accounting commits a real human sin, and it's also a dumb way to do business.

Critique of Stock Options

Stock Options as Compensation

If you look at the impact of stock options, you'll see a lot of terrible behavior. To give a lot of options to a CEO who built the business and is in his sixties, to incent loyalty, is demented. Would the doctors at the Mayo Clinic or the lawyers at Cravath who are in their sixties work harder if they had options?

As our shareholders know, our system is different from most big corporations. We think it's less capricious. The stock option system may give extraordinary rewards to some people who did nothing, and give nothing to those who deserve a lot. Except where we inherit it [a stock option program], we don't use it.

Valuing Options and the Black-Scholes Model

Black-Scholes works for short-term options, but if it's a long-term option and you think you know something [about the underlying asset], it's insane to use Black-Scholes. Black-Scholes is a know-nothing system. If you know nothing about value-only price-then Black-Scholes is a pretty good guess at what a ninety-day option might be worth. But the minute you get into longer periods of time, it's crazy to get into Black-Scholes.

For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane.

Accounting for Stock Options

The theory that options have no cost has contributed to a lot of excesses, which is bad for the country because corporate compensation is perceived as unfair.

I'm so tired of this subject. I've been on this topic for so long. It's such a rotten way to run a civilization to make the accounting wrong. It's like getting the engineering wrong when making a bridge. When perfectly reputable people say options shouldn't be expensed, it's outrageous.

A stock option is both an expense and dilution. To argue anything else is insane. These people [the eighty-eight senators who voted to maintain the status quo of not expensing stock options] are stupid and dishonorable. They knew it was wrong and did it anyway. The only thing that's consistent is that the whole thing is disgusting.

I'd rather make my money playing piano in a whorehouse than account for options as recommended by John Doerr.

Warnings About Financial Institutions and Derivatives

Risks of Financial Institutions

The nature of a financial institution is that there are a lot of ways to go to hell. You can push credit too far, do a dumb acquisition, leverage yourself excessively-it's not just derivatives [that can bring about your downfall].

Maybe it's unique to us, but we're quite sensitive to financial risks. Financial institutions make us nervous when they're trying to do well.

We are exceptionally goosey of leveraged financial institutions. If they start talking about how good risk management is, it makes us nervous.

We fret way earlier than other people. We've left a lot of money on the table through early fretting. It's the way we are-you'll just have to live with it.

Derivatives

The system is almost insanely irresponsible. And what people think are fixes aren't really fixes. It's so complicated I can't do it justice here-but you can't believe the trillions of dollars involved. You can't believe the complexity. You can't believe how difficult it is to do the accounting. You can't believe how big the incentives are to have wishful thinking about values and wishful thinking about ability to clear.

People don't think about the consequences of the consequences. People start by trying to hedge against interest rate changes, which is very difficult and complicated. Then, the hedges make the [reported profits] lumpy. So then they use new derivatives to smooth this. Well, now you've morphed into lying. This turns into a Mad Hatter's Tea Party. This happens to vast, sophisticated corporations. Somebody has to step in and say, "We're not going to do it-it's just too hard."

I think a good litmus test of the mental and moral quality at any large institution [with significant derivatives exposure] would be to ask them, "Do you really understand your derivatives book?" Anyone who says yes is either crazy or lying.

It's easy to see [the dangers] when you talk about [what happened with] the energy derivatives-they went kerflooey. When [the companies] reached for the assets that were on their books, the money wasn't there. When it comes to financial assets, we haven't had any such denouement, and the accounting hasn't changed, so the denouement is ahead of us.

Derivatives are full of clauses that say if one party's credit gets downgraded, then it has to put up collateral. It's like margin-you can go broke [just putting up more margin]. In attempting to protect themselves, they've introduced instability. Nobody seems to recognize what a disaster of a system they've created. It's a demented system.

In engineering, people have a big margin of safety. But in the financial world, people don't give a damn about safety. They let it balloon and balloon and balloon. It's aided by false accounting. I'm more pessimistic about this than Warren.

Misuse of Derivatives: It's a Mad Hatter Tea Party

"Take some more tea," the March Hare said to Alice, very earnestly. "I've had nothing yet," Alice replied in an offended tone, "so I can't take more." "You mean you can't take LESS," said the Hatter, "it's very easy to take MORE than nothing."

From Lewis Carroll's Alice's Adventures in Wonderland.

The Hatter is the character popularly known as "The Mad Hatter" in Lewis Carroll's Alice's Adventures in Wonderland. He appears at a tea party and later as a trial witness. The "real" Hatter is generally believed to be Theophilus Carter, inventor of an alarm-clock bed, exhibited at the Great Exhibition of 1851, that tipped out the sleeper at waking time. Carter later owned a furniture shop, and became known as the "Mad Hatter" from his habit of standing in the door of his shop wearing a top hat. Sir John Tenniel is reported to have come to Oxford for the express purpose of sketching Carter for one of his Wonderland illustrations.

Accounting for Derivatives

I hate with a passion GAAP [Generally Accepted Accounting Principles] as applied to derivatives and swaps. JP Morgan sold out to this type of accounting to front-load revenues. I think it's a disgrace.

It's bonkers, and the accountants sold out. Everyone caved, adopted loose [accounting] standards, and created exotic derivatives linked to theoretical models. As a result, all kinds of earnings, blessed by accountants, are not really being earned. When you reach for the money, it melts away. It was never there.

It [accounting for derivatives] is just disgusting. It is a sewer, and if I'm right, there will be hell to pay in due course. All of you will have to prepare to deal with a blowup of derivative books.

To say accounting for derivatives in America is a sewer is an insult to sewage.

Likelihood of a Derivatives Blow Up

We tried to sell Gen Re's derivatives operation and couldn't, so we started liquidating it. We had to take big markdowns. I would confidently predict that most of the derivative books of [this country's] major banks cannot be liquidated for anything like what they're carried on the books at. When the denouement will happen and how severe it will be, I don't know. But I fear the consequences could be fearsome. I think there are major problems, worse than in the energy field, and look at the destruction there.

I'll be amazed if we don't have some kind of significant [derivatives-related] blow up in the next five to ten years.

I think we're the only big corporation in America to be running off its derivative book. It's a crazy idea for people who are already rich-like Berkshire-to be in this business. It's a crazy business for big banks to be in.

"You would be disgusted if you had a fair mind and spent a month really delving into a big derivative operation. You would think it was Lewis Carroll [author of Alice's Adventures in Wonderland]. You would think it was the Mad Hatter's Tea Party. And the false precision of these people is just unbelievable. They make the worst economics professors look like gods. Moreover, there is depravity augmenting the folly. Read the book F.I.A.S.C.O., by law professor and former derivatives trader Frank Partnoy, an insider account of depravity in derivative trading at one of the biggest and best-regarded Wall Street firms. The book will turn your stomach."

Critique of Lawyers, Law Firms, and Litigation

Demise of Ethics Among Law Firms

I never have the slightest interest in defending miscreants and helping them misbehave. But the general view is that it's wonderful what Johnnie Cochran did [getting O. J. Simpson off].

Lawyers Botched the Martha Stewart Case

What happened with Martha Stewart was that she heard some news, panicked, and sold the stock. It turns out that if she'd just told the truth, she'd have been okay. But because she had a vague idea that what she'd done was wrong, she had a totally phony story when the investigators came and she lied to them and that's a felony. And she did these acts after she'd hired highfalutin' lawyers! And I'm sure they charged her a lot. I do not invent these stories.

Were I her lawyer, I would have said, "You know, Martha, that's an interesting story, and I'm your lawyer, so I'm required to believe you, but nobody else will. So, you're going to have to come up with a different story, or you'll have to tell it through a different lawyer because I don't like losing cases." And it'll work. It's so simple. Literally, she went to prison for her behavior after she'd hired a lawyer!

The Tort System

What's particularly pernicious is the increasing political power of the plaintiffs' bar. State supreme court judges are generally on for life. The only thing that can jeopardize this is for them to really anger some important group-like the plaintiffs' bar. Thus, the judges allow junk science and the like.

Because of the tort system, there are whole areas for the already rich to avoid. For example, a company developed a new, safer, better police helmet but sold the product to a judgment-proof company [because the helmet-developer was afraid of liability]. It would be crazy for Berkshire to be in the business of providing security guards at airports. The system discourages the best companies from entering certain businesses.

Asbestos and Tort Reform

Asbestos has morphed into a situation with enormous amounts of fraud. People with serious injuries are being hurt [as more and more money flows to the plaintiffs' bar and to claimants with no current injuries]. The Supreme Court has practically invited Congress to step in, but Congress has refused due to the influence of the trial lawyers. I'd be surprised if there's a constructive solution in the next five years. I expect there will just be more of the current mess.

What's happened in asbestos is that a given group of people get mesothelioma- a horrible cancer that comes only from asbestos exposure and kills people. Then, there's another group of claimants who smoked two packs of cigarettes a day and have a spot on their lung. Then you get a lawyer who gets a doctor to testify that every spot is caused by asbestos. Once you effectively bribe a doctor, then you can get millions of people to sue on fears of getting cancer.

But there's not enough money [to pay all of the claimants], so people who are truly harmed don't get enough. In a southern state with a jury pool that hates all big companies [you get big judgments], but lawyers are stealing money from people who are hurt and giving it to people who aren't entitled. It's a bonkers system, but with federalism [states' rights], there's no way to stop it. The Supreme Court refused to step in.

Trying to buy people off is like trying to put out a fire by dousing it with gasoline. With word processors, lawyers can easily produce countless claimants. But only twenty-five percent of the money goes to claimants-the rest goes to the lawyers, doctors, etc.

If you want to be cynical, look at the perjury. There are only three solvent companies left facing asbestos claims, so plaintiffs can only remember those three names [when recalling which products they were exposed to decades ago]. It's a case of perjury being suborned by practicing lawyers.

The only people who can fix it are the Supreme Court or Congress. The Supreme Court, some people would say rightly, refused to get involved but I say they chickened out, and Congress given the politics has yet to step in.

There's an important lesson here: Once wrongdoers get rich, they get enormous political power and you can't stop it, so the key is to nip things like this in the bud.

It would be easy to fix the problem: The right way is to say we're not going to pay off all these little claims.

The Government's Lawsuit Against Microsoft

[April 2000] Someone whose salary is paid by U.S. taxpayers is happy to dramatically weaken the one place where we're winning big?!

Every business tries to turn this year's success into next year's greater success. It's hard for me to see why Microsoft is sinful to do this. If it's a sin, then I hope all of Berkshire Hathaway subsidiaries are sinners.

Mental Models

The Importance of Multiple Mental Models

You must know the big ideas in the big disciplines and use them routinely-all of them, not just a few. Most people are trained in one model-economics, for example-and try to solve all problems in one way. You know the old saying: To the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.

You need a different checklist and different mental models for different companies. I can never make it easy by saying, "Here are three things." You have to derive it yourself to ingrain it in your head for the rest of your life.

You can't learn those one hundred big ideas you really need the way many students do-where you learn 'em well enough to bang 'em back to the professor and get your grade, and then you empty them out as though you were emptying a bathtub so you can take in more water next time. If that's the way you learn the one hundred big models you're going to need, [you'll be] an "also ran" in the game of life. You have to learn the models so that they become part of your ever-used repertoire.

By the way, there's no rule that you can't add another model or two even fairly late in life. In fact, I've clearly done that. I got most of the big ones quite early however.

The happier mental realm I recommend is one from which no one willingly returns. A return would be like cutting off one's hands.

The Ethos of Not Fooling Yourself

It is ridiculous the way a lot of people cling to failed ideas. Keynes said it's not bringing in the new ideas that's so hard, it's getting rid of the old ones.

The ethos of not fooling yourself is one of the best you could possibly have. It's powerful because it's so rare.

Common (and Uncommon) Sense

Organized common (or uncommon) sense-very basic knowledge-is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little. Part of [having uncommon sense] is being able to tune out folly, as opposed to recognizing wisdom. If you bat away many things, you don't clutter yourself. We read a lot. I don't know anyone who's wise who doesn't read a lot. But that's not enough: You have to have a temperament to grab ideas and do sensible things. Most people don't grab the right ideas or don't know what to do with them.

The more basic knowledge you have, the less new knowledge you have to get. A chessmaster comes to Omaha during Berkshire's annual meeting and can play multiple opponents blindfolded in an exhibition. His knowledge of the board allows him to do this.

Henry E. Singleton (1916-1999): Business and Chess Master

Singleton was co-founder of Teledyne, Inc. and chief executive of the Los Angeles-based conglomerate for three decades. He attended the Naval Academy, then transferred to MIT where he received Bachelors, Masters, and PhD degrees in Electrical Engineering. An enormously skilled chess player, he was only 100 points below the Grandmaster level and could play without looking at the board.

From 1963 to 1990, Teledyne returned an astounding 20.4 percent compound annual return to shareholders-a period in which the S&P 500 returned 8.0 percent. Adroitly repurchasing 90 percent of Teledyne's outstanding shares primarily between 1972 and 1984, Singleton built a record as a manager and capital allocator with few peers in modern business history.

Sharing Buffett's admiration for Henry E. Singleton, Charlie wonders, "Given the many talents and record, have we learned enough from him?"

"Henry Singleton has the best operating and capital deployment record in American business...if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as Singleton."

Critique of Academia

Fatal Disconnectedness

There's a lot wrong [with American universities]. I'd remove three-fourths of the faculty-everything but the hard sciences. But nobody's going to do that, so we will have to live with the defects. It's amazing how wrong-headed the teaching is. There is fatal disconnectedness. You have these squirrely people in each department who don't see the big picture.

I think liberal arts faculty at major universities have views that are not very sound at least on public policy issues. However, they may know a lot of French. Whitehead spoke of the fatal disconnectedness of academic disciplines wherein each professor didn't even know the models of the other disciplines much less try to synthesize those disciplines with his own. I think there is a modern name for this approach that Whitehead did not like and that name is bonkers.

How to Be Happy, Get Rich, and Other Advice

Tips on How to Be Happy and Successful

If all you succeed in doing in life is getting rich by buying little pieces of paper, it's a failed life. Life is more than being shrewd in wealth accumulation. A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc.

Just avoid things like AIDS situations, racing trains to the crossing, and doing cocaine. Develop good mental habits.

Avoid evil, particularly if they're attractive members of the opposite sex.

If your new behavior earns a little temporary unpopularity with your peer group, then the hell with them.

Be Satisfied with What You Have

There is one truth that perhaps you typical investment counsel would disagree with: If you are comfortable and rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting rich faster than you. This is not a tragedy. Look at Stanley Druckenmiller who ran one of George Soros' funds which suffered large losses in speculative Tech and Biotech stocks. He always had to be the best and couldn't stand that others were beating him by investing in these sectors.

Soros couldn't bear to see others make money in the technology sector without him, and he got killed. It doesn't bother us at all [that others are making money in the tech sector].

Beware of Envy

The idea of caring that someone is making money faster [than you are] is one of the deadly sins. Envy is a really stupid sin because it's the only one you could never possibly have any fun at. There's a lot of pain and no fun. Why would you want to get on that trolley?

How to Get Rich

[A young shareholder asked Charlie how to follow in his footsteps, and Charlie brought down the house by saying:] We get these questions a lot from the enterprising young. It's a very intelligent question; You look at some old guy who's rich and you ask, "How can I become like you, except faster?" Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts.... Slug it out one inch at a time, day by day. At the end of the day-if you live long enough-most people get what they deserve.

How to Find a Good Spouse

What's the best way to get a good spouse? The best single way is to deserve a good spouse because a good spouse is by definition not nuts.

The Importance of Reading

In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time-none, zero. You'd be amazed at how much Warren reads-and at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

I am a biography nut myself. And I think when you're trying to teach the great concepts that work, it helps to tie them into the lives and personalities of the people who developed them. I think you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It's way better than just being given the basic concepts.

Reduce Material Needs

Most people will see declining returns on their investments. If you're worried about inflation, the best defense is not to have a lot of silly needs in your life-you don't need a lot of material goods.

Philanthropy

[Warren and I] feel that those of us who have been very fortunate have a duty to give back. Whether one gives a lot as one goes along as I do, or a little and then a lot [when one dies] as Warren does, is a matter of personal preference. I would hate to have people ask me for money all day long. Warren couldn't stand it.

Avoid Debt

Once you get into debt, it's hell to get out. Don't let credit card debt carry over. You can't get ahead paying eighteen percent.

The Decline of Public Schools

You could argue that [the decline of public schools] is one of the major disasters in our lifetime. We took one of the greatest successes in the history of the earth and turned it into one of the greatest disasters in the history of the earth.

Japan's Recession

Anyone has to be flabbergasted by Japan's recession, which has endured for ten years, despite interest rates below one percent. The government is playing all the monetary games, but it's not working. If you had described this situation to Harvard economists, they could have said it's impossible. Yet at the same time, there's an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures. The Chinese are gamblers.

This is a classic example of what it takes to be a successful investor: one must draw from many disciplines. Imagine an economist standing up at a meeting of economists and giving my explanation. It wouldn't be politically correct, but the tools of economics don't explain what's going on.

Humor

I would rather throw a viper down my shirt front than hire a compensation consultant.

When asked at a cocktail party whether he played the piano, Charlie replied: "I don't know, I have never tried."

I always like it when someone attractive to me agrees with me, so I have fond memories of Phil Fisher.

It is of course normal for self-appraisal to be more positive than external appraisal; indeed a problem of this sort may have given you your speaker today.

In the corporate world, if you have analysts, due diligence, and no horse sense, you have just described hell.

It's been so long since we've bought anything that [asking us about our market impact when we're trading] is like asking Rip Van Winkle about the past twenty years.

When I first moved to California, there was a part-time legislature that was controlled by gambling interests, race track owners, and liquor distributors, who wined and dined the legislators, supplied them with prostitutes, etc. I think I prefer that to today's full-time legislature.

[On the book Deep Simplicity], it's pretty hard to understand everything, but if you can't understand it, you can always give it to a more intelligent friend.

If you rise in life, you have to behave in a certain way. You can go to a strip club if you're a beer-swilling sand shoveler, but if you're the bishop of Boston, you shouldn't go.

I think the people who are attracted to be prison guards are not nature's noblemen to begin with.

You don't want to be like the motion picture executive who had many people at his funeral, but they were there just to make sure he was dead. Or how about the guy who, at his funeral, the priest said, "Won't anyone stand up and say anything nice about the deceased?" and finally someone said, "Well, his brother was worse."

[Responding to a question at the 1999 Berkshire Hathaway annual meeting about the year 2000 compliance issue, Munger replied:] I find it interesting that there is such a problem. You know, it was predictable that the year 2000 would come.

When you mix raisins and turds you have still got turds. Comparing the benefits that the internet and technology are providing to society versus the evils of stock speculation in these sectors.

Ben Franklin was a very good man, and whatever was wrong with him from John Adams' point of view I am sure helped him with the French.

Simpson on Munger

When I first met Charlie Munger, I knew he was a unique individual, but I didn't realize just how unique until I knew him better.

I have now known Charlie for twenty-five years and have had the opportunity to observe him under a wide range of circumstances, including the aftermath of the Salomon bond crisis of the early nineties where we were both serving on the board of directors. I can attest that Charlie has a combination of characteristics that I have never seen in any other single individual. He has an extraordinary and deep intelligence across a broad range of interests, and he never seems to forget anything, no matter how arcane or trivial. On top of these attributes is his absolute commitment to honesty, ethics, and integrity-Charlie never "grabs" for himself and can be trusted without reservation. If that's not enough, he has a temperament toward investing that can only be described as ideal: unyielding patience, discipline, and self-control-Charlie just doesn't crack or compromise on his principles, no matter how stressful the situation.

How fortunate we have all been to have this duo of Charlie Munger and Warren Buffett as our partners, teachers, and role models for all these years. These are truly exceptional men.

Munger on Simpson

Lou Simpson is a highly intelligent and honorable man. I was pleased that in the annual letter to shareholders this year (2005), Warren printed Lou's twenty-five year investment track record. It's not unheard of to beat the market averages for a couple of years, maybe even five or ten years. But, imagine beating the S&P 500 by an average annual gain of 6.8 percent over twenty-five years! This extraordinary track record speaks for itself-Lou has one of the greatest investment minds of our time. He is, as Warren says, "a shoo-in for the investment Hall of Fame."

I remember well the dot-com boom of the late nineties and how Lou handled it. You can't believe the pressure that he was under, year after year, as the world seemed to be reaping enormous gains while he, correctly, avoided the bubble altogether, staying true to fundamentals. Lou was a wonderful example in that period-intelligent, honorable, and true to his fundamentals.

Sinegal on Munger

I had the pleasure of meeting Charlie eight years ago when he agreed to have lunch with me in Los Angeles at the California Club. My purpose was to convince him to consider joining the Costco board of directors. I liked him from the moment we met when he told me how much he enjoyed shopping at Costco; and despite our being interrupted continuously by the other 500-plus people dining there that day, who all felt compelled to say hello to Charlie and whom Charlie identified by name in almost every instance, we managed to have a great conversation. First off, Charlie was astute enough to recognize what a great value Costco membership represented. Later, of course, I learned of Charlie's reputation for thriftiness, which clarified Costco's appeal, but, more importantly his straightforwardness and common sense business acumen came through loud and clear.

Later when he called to accept the position on the board, he referred to himself as a septuagenarian. Pretty fancy description to share with someone from the warehouse industry: I was flattered he thought I understood him. Since then he has provided everything that can be expected from a director. His insight, questioning, and support have made Costco a better-governed and better-operated company. As an extra bonus, we are treated to regular doses of the Munger wit-we are lucky people!

Munger on Sinegal

You just wouldn't believe how efficient and sophisticated Costco's warehouse operation is. Jim Sinegal is a fabulous business operator-like a Carnegie, Rockefeller, or James J. Hill. I consider him to be one of the top five retailers of the past century. He's that good. He works eighty hours a week and sets a terrific example for his entire organization in terms of work ethic, integrity, loyalty, and selflessness. He's a moral leader as well as a practical leader. These are not minor virtues. We have our own living, breathing Sam Walton at Costco.