Sharing some of the best bits from Charlie Mungers Q&A session at Daily Journal’s annual meeting. If you want a full version, you can watch it here:
How do you think the Ukraine situation will be resolved in your opinion?
Charlie Munger: I have no insight that’s any better than anybody else on that one. Most of these things in the days when both parties have huge numbers of hydrogen bombs get resolved because the alternative is so awful that even an idiot can see that the question will be resolved. That’s the way it’s worked so far and I hope it keeps working that way.
We live in epoch nucleana. We’ve gotten an absence of world wars for a long time because we had these nuclear weapons. It’s been a blessing to humanity. But it does make you nervous every once in a while and it’s quite irresponsible when the leaders in the modern age get tensions over border incidents and so forth.
Crypto is a $2 trillion asset class. Are you willing to admit you missed something?
Charlie Munger: Well, I certainly didn’t invest in crypto. I’m proud of the fact I’ve avoided it. It’s like, you know, some venereal disease or something. I just regarded it as beneath contempt. Some people think it’s modernity, and they welcome a currency that’s so useful in extortions, kidnappings, tax evasion, and so on. And, of course, the envy… everybody has to create their own new currency. I think that’s crazy, too. I’m not having it. I wish it had been banned immediately. I admire the Chinese for banning it. I think they were right and we’ve been wrong to allow it.
Two years ago at this meeting, you said: “I think there are lots of troubles coming. There’s too much wretched excess.” Since that meeting, we have seen something like 860 SPACs, IPOs like Rivian and Robinhood, and the GameStop phenomenon. I can’t imagine you’ve changed your mind. I wonder what your favorite story of wretched excess is from the last year?
Charlie Munger: Certainly, the great short squeeze in GameStop was wretched excess. Certainly, the Bitcoin thing is wretched excess. I would argue that venture capitalists are throwing too much money too fast. There’s considerable wretched excess in venture capital and other forms of private equity.
We have a stock market that some people use as a gambling parlor. There are transactions of the people who love the gambling parlor aspect of the business and those who want to make long-term investments, take care their old age, and so forth. Model that in one market and it goes out of control because the stock market becomes an ideal gambling parlor activity. I don’t think that ought to have been allowed either. If I was the dictator of the world, I would have some kind of attacks on short-term gains that made the stock market very much less liquid and drove out this marriage of gambling parlor and legitimate capital development of the country. It’s not a good marriage and I think we need a divorce.
Charts, technicals, momentum, and AI seem to dominate the market these days. Are old-school Ben Graham valuation methods dead?
Charlie Munger: They’ll never die. The idea of getting more value than you pay for, that’s what investment is. If you want to be successful, you have to get more value than you pay for. So it’s never going to be obsolete.
Now, you can get a whole body of people that don’t really know what they’re buying. They’re just quotations on a ticker.
Think of the past crazy booms and how they worked out. The South Sea bubble, the bubble in the late 1920s, and so on. We’ve had this—crazy bubbles—since the dawn of capitalism.
Conventional economic theory argues that excessive monetary and fiscal stimulus over the last two years has triggered the highest inflation in 40 years. Do you broadly agree with this thesis? And more importantly, do you think there will be a high economic price to pay as the Fed attempts to bring inflation back under control?
Charlie Munger: Well, the first part I agree with. We’ve done something pretty extreme. And we don’t know how bad the troubles will be—whether it’ll gonna be like Japan or something a lot worse. What makes life interesting is that we don’t know how it’s gonna work out. I think we do know we’re flirting with serious trouble. I think we also know that some of our earlier fears were overblown. Japan is still existing as a civilized nation in spite of unbelievable excess by all former standards in terms of money printing.
Think of how seductive it is. You have a bunch of interest-bearing debts and you pay them off with checking accounts on which you’re no longer paying interest. Think of how seductive that is for a bunch of legislators. You get rid of the interest payments and the money supply goes up. Seems like heaven. Of course, when things get that seductive, they’re likely to be overused.
Do the great tech giant franchises of our day, specifically Microsoft, Apple, and Alphabet, have the same long-term durability that Coca-Cola had 30 to 40 years ago?
Charlie Munger: It’s a lot easier to predict who flourished in the past because we know what happened in the past. But now I want to compare what’s gonna happen in the future. Of course, that’s harder.
It’s very hard for me to imagine—that doesn’t mean it couldn’t happen—but I would expect Microsoft, Apple, and Alphabet to be strong 50 years from now—really strong, still strong. But if you’d asked me when I was young what was gonna happen to the department stores that went broke or the newspapers which were broke, and so on, I wouldn’t have predicted that either. I think it’s hard to predict how your world is going to change if you’re going to talk about 70, 80, 90 years.
Just imagine, they wiped out the shareholders of General Motors, they wiped out the shareholders at Kodak. Who in the hell would have predicted that? This technological change can destroy a lot of people. It’s hard to predict for sure in advance.
But the telephone company is still with us. It’s just a different way of doing it. Some things remain and some vanish.
What impact has passive investing had on stock valuations?
Charlie Munger: That’s another thing that’s coming. We have a new bunch of emperors. They’re the people who vote the shares in the index funds. Maybe we can make Larry Fink and the people at Vanguard Pope.
All of a sudden, we’ve had this enormous transfer of voting power to these passive index funds. That is going to change the world. I don’t know what the consequences are gonna be, but I predict it will not be good. I think the world of Larry Fink, but I’m not sure I want him to be my emperor.
Given the valuation and market correction in early 2020, why is Berkshire not picking up or adding any new companies to its profile? Is the management getting too conservative with M&A?
Charlie Munger: The reason we’re not buying is that we can’t buy anything at prices we’re willing to pay. It’s just that simple. Other people are bidding the price up.
A lot of the buying is not done by people who really plan to own them. A lot of it is fee-driven buying. Private equity buys things so they can have more fees by having more things under management. Of course, it’s a lot easier buying something when you use somebody else’s money. We’re using our own money, or at least that’s the way we think of it.
By the way, it’s not a tragedy that Berkshire has some surplus money they’re not investing. And you can argue the little Daily Journal, what a good thing it was we had 30 million extra coming in from a foreclosure boom and that we invested it shrewdly. It gives us a lot of flexibility. And by the way, that piled-up money helps us in wooing these governmental bodies we’re selling the software to. We look more responsible with the extra wealth, and we are more responsible with the extra wealth.
The shareholders who are worried about the future because it looks complicated and difficult, I want to say to them what my old torts professor said to me. He’d say, “Charlie, tell me what your problem is and I’ll try and make it more difficult for you.” He did me a favor by treating me that way. I’m just repeating his favor to you.
When you’re thinking the thoughts you’re doing, at least you’re thinking in the right direction. You’re worried about the right things—all you people that are worried about inflation, the future of the Republic, and so forth.
What worries you most about our economy and the stock market? And on the other hand, what makes you optimistic?
Charlie Munger: You have to be optimistic about the competency of our technical civilization. But there again, it’s an interesting thing. If you take the last 100 years, 1922 to 2022, most of modernity came in in that 100 years. And then the previous 100 years, that got another big chunk of modernity. Before that, things were pretty much the same for the previous thousands of years. Life was pretty brutal, short, limited, and what have you. No printing press, no air conditioning, no modern medicine.
I don’t think we’re going to get things that are in what I call the ‘real human needs’. Think of what it meant to get the steam engine, the steamship, the railroad, a little bit of improvement in farming, and a little bit of improvement in plumbing. That’s what you got in the 100 years that ended in 1922. The next 100 years gave us widely distributed electricity, modern medicine, the automobile, the airplane, the records, the movies, the air conditioning in the south. Think what a blessing it was.
If you wanted three children, you had to have six, because three died in infancy. That was our ancestors. Think of the agony of having to watch half your children die. It’s amazing how much achievement there has been in civilization in these last 200 years and most of it in the last 100 years.
Now, the trouble with that is that the basic needs are pretty well filled. In the United States, the principal problem of the poor people is that they’re too fat. That is a very different place from what happened in the past. In the past, they were on the edge of starving.
It’s really interesting. With all this enormous increase in living standards, freedom, diminishment of racial inequities, and all the huge progress that has come, people are less happy about the state of affairs than they were when things were way tougher.
That has a very simple explanation. The world is not driven by greed; it’s driven by envy. So the fact that everybody’s five times better off than they used to be, they take that for granted. All they think about is somebody else having more now and it’s not fair that he should have it and they don’t. That’s the reason that God came down and told Moses that he couldn’t envy his neighbor’s wife or even his donkey. I mean, even the old Jews were having trouble with envy.
So it’s built into the nature of things. It’s weird for somebody at my age because I was in the middle of the Great Depression and the hardship was unbelievable. I was safer walking around Omaha in the evening than I am in my own neighborhood in Los Angeles after all this great wealth and so forth. So and I have no way of doing anything about it. I can’t change the fact that a lot of people are very unhappy and feel very abused after everything’s improved by about 600% because there’s still somebody else who has more. I have conquered envy in my own life. I don’t envy anybody. I don’t give a damn what somebody else has. But other people are going crazy by it. And other people play to the envy in order to advance their own political careers.
We have whole networks now that want to pour gasoline on the flames of envy. I like the religion of the old Jews. I like the people who were against envy, not the people who were trying to profit from it.
Think of the pretentious expenditures of the rich. Who in the hell needs a Rolex watch so you can get mugged for it? Yet, everybody wants to have a pretentious expenditure. That helps drive demand in our modern capitalist society. My advice to the young people is: don’t go there. To hell with the pretentious expenditure. I don’t think there’s much happiness in it. But it does drive the civilization we actually have. And it drives the dissatisfaction.
Steven Pinker of Harvard is a smart academic. He constantly points out that everything’s gotten way, way better, but the general feeling about how fair it is has gotten way more hostile. As it gets better and better, people are less and less satisfied. That is weird but that’s what’s happened.
Excerpts are from this transcript of Q&A session made by Junto Investments.