12 Pearls Of Genius From Warren Buffett's Right-Hand Man


Photo: AP Images

Last Friday, Charlie Munger held his final intimate meeting with investors in Wesco, his investment company that is getting absorbed by Berkshire Hathaway, where Munger is Buffett’s right-hand man.The Inoculated Investor was at the grand finale and took notes paraphrasing Munger’s last pearls of wisdom (he’ll still talk at Berkshire’s annual meeting, but the days of his intimate annual “Conversations” are now over).

We’ve plucked out our favourite notes from the conversation.

Munger: Keynesianism might not work when everyone is expecting it

Munger on how Keynesian policies might not work in the U.S.:

The Keynesians believed that recessions would be short and depressions less likely as a result of borrowing and printing money. People became so enamoured with this idea that they thought these economics laws were like those of physics... Of course Keynesian and monetary tricks do not work as well when everyone knows you are playing them.

For example, things that worked in the 1930s might not work now. Back then the US had better credit and people did not use the polls to make themselves rich.

Source: The Inoculated Investor

Munger: The US public can't handle two lost decades like Japan.

Munger: Japan has been hurt by the emergence of new competitors

Munger on why Japan's economy hasn't rebounded:

Japan is an export dependent economy. In the late 1980s and 1990s, Japan got huge and credible new competition from China and Korea. They got this because the traditional laws of economics were working well in China and Korea when they adopted something like free market capitalism. The main competitors got more competitive and this impacted Japan substantially...

Like Japan had in previous decades, the US has had huge new competition from places like China. This dynamic has reduced employment opportunities.

Source: The Inoculated Investor

Munger: Banks don't want to give up their best businesses, derivatives.

Munger: Accountants have been contemptible.

Munger on banks' shoddy accounting practices:

Then, the accounting profession allowed banks to show income and assets that weren't really income and assets. Accountants didn't think they had a responsibility to show the actual mess that could bring down the entire system. The medical system wants to prevent epidemics but the accounting profession does not want to deal with difficult and systemically risky issues--they want to charge more by making everything more complex. This is a contemptible approach. What accounting figures have expressed contrition? What major person in the US has been embarrassed by US accounting? Very few. But one such person is Jamie Dimon of JP Morgan who has written scathing criticisms of the accounting rules in his annual reports.

Source: The Inoculated Investor

Munger: Bankers are overwhelmed with ego and jealousy

Munger: People running public pensions are making things worse.

Munger on public pension plans:

The people with power in public pension plans are working in ways to escalate the size of the pensions. Soon-to-be retirees are manipulating pensions by working a lot of overtime during their last year to make the final year salary abnormally high. From there a police officer who has made $50,000 his entire career can retire with a $100,000 pension. This is evil and wrong.

Source: The Inoculated Investor

Munger: The economist is the best publication in the world.

Munger loves the Wall Street Journal, although he has never liked the editorial page. However, the publication he likes best is The Economist. He believes it is the adult intellectual publication of the world. The WSJ is not as good but is good in its field.

Source: The Inoculated Investor

Munger: You take the pain out of being foolish if you take pleasure in rubbing your nose in your own mistakes.

A life lesson from Munger:

Recently, his country club wanted to tearout a lot of trees at an exorbitant cost and he fought the plan. Now that the trees are gone, he sees that it was worth spending the money and that he was a horse's arse. You take the pain out of being foolish if you take pleasure in rubbing your nose in your own mistakes. It is a wonderful thing to do. You will never lack for opportunities.

Source: The Inoculated Investor

Munger: Employment will suffer because the Asians are so talented.

Munger on unemployment:

Part of the trouble is that the Asians are so talented. They were held down so long because they were stuck in a Malthusian trap--they didn't have enough to eat and now that problem has been alleviated to a large extent. These people now have been unleashed and they have great ambition and culture. We have benefited from Chinese goods being better and better and cheaper and cheaper. But, as a side consequence we have alot of competition in terms of manufacturing.

Charlie said he is very philosophical about stuff like this. He likes that the Chinese are coming up. He likes what was achieved by Japan's success. Look where car and TV production went--it went to Korea and Japan and away from the US. He can hardly believe the modern products that are developed. For example, his dentist has had at least 4 total equipment makeovers during the years he has been going there. The equipment is so good he thinks even he could use it. The dental assistant now has the modern equivalent of a miner's lamp that helps her see better. Now she is less likely to stick something into his gums rather than where she wants to.

Source: The Inoculated Investor

Munger: Every time Donald Trump says something and you get discouraged, just think about Costco.

Munger on Costco:

He would argue that Costco is one of the most admirable firms in the world and that CEO Jim Sinegal is one of the top executives in the world. Charlie can't say enough about his admiration of Costco. But the world has figured it out and the stock sells at 25x earnings. The world should work that way--finding great places to invest. If you are comfortable with 25x earnings, slow advances, and working with great people, Costco at 25x earnings is one of the most admirable capitalistic institutions in the world.

It is a total meritocracy. They pass on savings to their customers as if it were a moral duty. The company is losing money in the short term to make money in the long term. Everyone in the room should go through Costco's annual report. In fact, every time Donald Trump says something and you get discouraged, just think about Costco.

Source: The Inoculated Investor

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.