2016 Berkshire Hathaway Meeting

Notes: Q&A w/ Charlie Munger

Transcribed, abridged and edited for clarity by Jesse Koltes

On April 30, 2016, Warren Buffett and Charlie Munger hosted the 2016
annual meeting of Berkshire Hathaway in Omaha, Nebraska. Mr. Buffett
and Mr. Munger responded to a wide array of questions for over six hours
without the use of notes. Though Mr. Buffett generally answered the
questions himself before soliciting Mr. Mungers opinions, Mr. Mungers
answers were often both complete and incredibly concise.

The following transcript has been edited and abridged to focus exclusively
on the comments of Mr. Munger. A video recording of the entire
proceedings can be found here.

[00:42:24]

CAROL LOOMIS: Good morning. Ill make my very short little speech
about the fact that the journalists, and the analysts too, have given Charlie
and Warren no hint about what theyre going to ask. So they will be
learning for the first time what thats going to be also.

This question comes from Eli Moises. In your 1987 letter to shareholders,
you commented on the kind of companies Berkshire liked to buy: those that
required only small amounts of capital. You said quote; Because so little
capital is required to run these businesses, they can grow while
concurrently making almost all of their earnings available for deployment in
new opportunities.

Today the company has changed its strategy. It now invests in companies
that need tons of capital expenditures, are over regulated, and earn lower
returns on equity capital. Why did this happen?

[00:46:10]
CHARLIE MUNGER: Well, when circumstances changed, we changed our
minds.

Well, when circumstances changed, we changed our minds.

In the early days quite a few times, we bought a business that was soon
producing 100 percent per annum on what we paid for it and didnt require
much reinvestment. If wed been able to continue doing that, we would
have loved to do it. But when we couldnt do it we went to Plan B. Plan Bs
working very well and in many ways, Ive gotten to where I sort of prefer it.
[00:47:33]

JONATHAN BRANDT: Thanks for having me again. My first question is

about Precision Castparts. Besides your confidence in its talented CEO
Mark Donegan, what in particular do you like about their business that gave
you the confidence to pay a historically high multiple? Are their ways
Precision can be even more successful as an essentially private company?
For instance are their long term investments to support client programs or
acquisitions that Precision can make now that it couldnt realistically have
done as a publically traded entity?
[00:51:04]

CHARLIE MUNGER: Well, in the early days, we used to make wiseass

remarks. Warren would say, We buy a business that an idiot could
manage because sooner or later, an idiot will. We did buy some
businesses like that in the early days and they were widely available. Of
course, we preferred to do that but the world has gotten harder and we had
to learn new and more powerful ways of operating.
A business like Precision Castparts requires a very superior management
thats going to stay superior for a long time. And we gradually have done
more and more of that and its simply amazing how well it works. I think that
to some extent, weve gotten almost as good at picking the superior
managers as we were in the old days, at picking the no-brainer businesses.

[00:53:07]

STATION 1 QUESTION: Good morning, my name is Gaspar. I am Spanish

and I come from London. I admire you both in many ways. But I would like
to know When looking backwards, what would you have done differently in
life in your search for happiness?
[00:55:19]

CHARLIE MUNGER: Well, looking back, I dont regret that I didnt make
more money or become better known, or any of those things. I do regret
that I didnt wise up as fast as I could have but theres a blessing in that,
too. Now that Im 92, I still have a lot of ignorance left to work on.

I dont regret that I didnt make more money or become better known, or
any of those things. I do regret that I didnt wise up as fast as I could have
but theres a blessing in that, too. Now that Im 92, I still have a lot of
ignorance left to work on.

[00:56:00]

BECKY QUICK: This question comes from Salomon Ackerman whos in

Frankfurt, Germany. He wants to know why Berkshire has significantly sold
down their holdings in Munich Re, which is the world biggest reinsurance
company based in Germany while sticking with their reinsurance operations
within Berkshire, like Berkshire Hathaway Reinsurance, and General Re?
Would you reduce exposure to Berkshire Hathaway Reinsurance and
General Re if they were listed companies? And hes hoping that this can
bring out some of your insights as to whats happening in the reinsurance
business right now.

[01:00:45]

CHARLIE MUNGER: Theres a lot of new capacity in reinsurance and

theres a lot of very heavy competition. A lot of people from finance have
come over into reinsurance and all the old competitors remain, too. Thats
different from Precision Castparts where most of the customers would be
totally crazy to hire some other supplier because Precision Castparts is so
much more reliable and so much better.Of course, we like the place with
more competitive advantage. Were learning.

Of course, we like the place with more competitive advantage. Were

learning.
[01:02:46]

CLIFF GALLANT: Thank you. In terms of growth and profitability GEICO

really got whooped by Progressive Direct over the last year. In 2015,
Progressive Direct grew its policy count by 9.1%, GEICO only 5.4%, and in
terms of profitability the combined ratio at Progressive was a 95.1%, and
GEICOs was a 98.0%. Is this a evidence that Progressives investments in
technology like Snapshot, investments that GEICO has spurned, is making
it difficult at a time of difficult loss trends? Why is GEICO suddenly losing to
Progressive Direct?
[01:07:10]

CHARLIE MUNGER: Well, I dont think its a tragedy that some companies
had a little better ratio from one period. GEICO has quadrupled.alright
quintupled its market share since we bought all of it. I dont think we should
worry about the fact somebody else had a good quarter.

I dont think we should worry about the fact somebody else had a good
quarter.

[01:07:55]

NORMAN RENTROP: Greetings to all of you from the Midwest of Europe. I

am Norman Rentrop from Bonn, Germany, a shareholder since 1992. My
question is about the future of salesmanship in our companies. Warren,
you have always demonstrated a heart for direct selling. When we met you
in the midst of a tornado warning in a barbershop, you immediately offered
to write insurance for us.
We see with the rise of Amazon.com and others a shift from push
marketing to pull marketing, from millions of catalogues being sent out in
the past, to now consumers searching on what they are looking for. What is
your take on how this shift from push to pull marketing will affect our
companies?
[01:14:02]

CHARLIE MUNGER: Well, I would say that we failed so thoroughly in

retailing when we were young, that we pretty well avoided the worst
troubles when we were old. I think net Berkshire has been helped by the
Internet. The help at GEICO has been enormous and its contributed
greatly to the huge increase in market share. Our biggest retailers are so
strong that theyll be among the last people to have troubles from Amazon.
[01:14:52]

ANDREW ROSS SORKIN: Great to see you today. Got a lot of questions
on this particular topic and this question is particularly pointed one. Warren,
for the last several years at this meeting, you have been asked the
negative health effects of Coca Cola products and youve done a masterful
job of dodging the question by telling us how much Coke you drink
personally.

Statistically, you may be the exception. According to a peer reviewed study

by Tufts University, soda and sugar drinks may lead to 184,000 deaths
among adults every year. The study found that sugar sweetened
beverages contributed to 133,000 deaths from diabetes, 45,000 deaths
from cardiovascular disease, 6,450 deaths from cancer. Another
shareholder wrote in about Coke, noted that you declined to invest in the
cigarette business on ethical grounds despite one saying, It was a perfect
business because it costs a penny to make, sell it for a dollar, its addictive,
and theres fantastic brand loyalty. Again, removing your own beverage
consumption from the equation, please explain directly why we Berkshire
Hathaway shareholders should be proud to own Coke?

[01:21:50]

CHARLIE MUNGER: Well, I like the peanut butter brittle and I drink a lot of
Diet Coke.

And I think that people that ask questions like that one always commit the
one error thats really inexcusable. They measure the detriment without
considering the advantage. Well, thats really stupid. Its like saying we
should give up air travel through airlines because 100 people die a year in
air crashes or something.

And I think that people that ask questions like that one always commit the
one error thats really inexcusable. They measure the detriment without
considering the advantage. Well, thats really stupid. Its like saying, we
should give up air travel through airlines because 100 people die a year in
air crashes or something. Thatll be crazy. The benefit is worth the risk and
every person has to have about eight to ten glasses of water every day to
stay alive. And thats pretty cheap and sensible. And it improves life to add
a little flavor to your water, a little stimulation, you know, a little calories, if
you want to eat that way. There are huge benefits to humanity in that and
its worth having some disadvantage. We ought to have almost a law at
like, Donald Trump wherewhere these people shouldnt be allowed to cite
the defects without sighting the offsetting advantage. Its immature and
stupid.

[01:23:18]

GREG WARREN: With coal fired and natural gas plants continuing to
generate around two thirds of the nations electricity and renewables
accounting to less than 10 percent, there remains plenty of room for
growth. At this point, Berkshire Energy which has invested heavily in the
segment is one of the nations largest producers of both wind and solar
power. And yet, it still only generates around one third of its overall capacity
from renewables.

As you noted earlier, MidAmerican recently committed another $3.6 billion

to wind production which should lift the amount of electricity it generates
from wind to 85 percent by 2020. You also havethe company overall
pledging to have around $30 billion of renewable longer term. The recent
renewal of both wind and solar energy tax credit has made this kind of
investment more economically viable and should clear the path for future
investments.

Eliminating coal fired power plants looks to be the main priority but natural
gas fired plants are also fossil fuel driven and are also exposed to risk of
energy crisis. Is the end game here for Berkshire Energy to get 100 percent
of its generation capacity converted over to renewables? And one of the
risks and rewards associated with that effortafter all, the company
operates in a highly regulated industry where rates are driven by an effort
to keep customer costs low while still providing adequate returns for the
utilities.

[01:29:50]
CHARLIE MUNGER: Yea, I think were doing more than our share of
shifting to renewable energy and were charging way lower energy prices to
our utility customers and other renewableIf the wholerest of the world
were behaving the way we are, it would be much a better world. I will say
this about the subject though and that is that I think people who worry
about climate changes [being] the major trouble of earth dont have my
view. I think that weI like all this shifting to renewables but I have a
different reason. I want to conserve the hydrocarbons because eventually
were going to use every drop [of fossil fuel] feedstocks and so Im in their
camp but I got a different reason.

[01:32:53]

ADAM BERGMAN: Good morning Mr Munger. My name is Adam

Bergman. Im with Sterling Capital in Virginia Beach. In your 2008
shareholder letter, you said, derivatives are dangerous. They have made it
almost impossible for investors to understand and analyze our largest
commercial banks and investment banks. So, my question for you is, how
do you analyze and value companies, like, Bank of America, Merrill Lynch
and other commercial banks that Berkshire has investments in relative to
their significant derivative exposures? Thanks.

[01:40:04]

CHARLIE MUNGER: Well, were in the awkward position where I think

well probably make about $20 billion out of derivatives in just those few
contracts that you and I did years ago. All that said, were different from the
banks. We would really prefer if those derivatives had been illegal for us to
buy. It would even be better for our country.

We would really prefer if those derivatives had been illegal for us to buy. It
would even be better for our country.

[01:47:54]

DAN CHEN: Hi Charlie. Great to see you. This is Cora and Dan Chen from
Talguard Investments of Los Angeles. This annual meeting reminds me of
the magical world of Hogwarts of Harry Potter. This arena is our Hogwarts.
Warren, you are headmaster and professor, Dumbledore. Charlie is our
headmaster direct and full of integrity. The magic of long term concentrated
value investing is real. Yet, similar to Harry Potter, the rest of the world
doesnt believe we exist.

Your letter to me has changed my life. Your Secret Millionaires Club has
changed my childrens lives. They go to class chatting about investing. My
question is for my children watching at home today and the children in the
audience. How should they look at stocks when every day in the media,
they see companies that they have made a time of their life, go IPO, theyre
dilutive and they see they see a lot of very short term spanthe cycle is
getting shorter and shorter. How should they view stocks and whats your
message for them? Finally, I would love to thank you in person and shake
your hand personally today. I repeat what I said last year. Thank you for
puttingsetting the scenes for my generation, to want and for my childrens
generation too with the Secret Millionaires Club. I truly walk amongst
giants. Thank you.

[01:52:10]

CHARLIE MUNGER: No, I think that your children are right to look for
people they can trust in dealing with stocks and bonds. Unfortunately, more
than half the time, they will fail in a conventional answer. So, youthey
really have tothey have a hard problem. If you just listen to your elders,
theyll lie to you and makeand spread a lot of following.

[02:04:37]

KEN MARTIN: Hi Charlie. Im Ken Martin. Im an MBA student from Tuck

School of Dartmouth. My question is about college tuition and the problem
of rising student debt balances. In the past, prominent philanthropists have
founded institutions that are now prominent research universities in our
country. Why is this not a bigger part of todays philanthropic debate?the
founding of new colleges were not new supply in higher education part of
the solution of this problem?

[02:05:10]
CHARLIE MUNGER: Yea, I think that if you expect a lot of financial
efficiency in American higher education, youre howling at the windWell, I
do a lot more than Warren does in this field. And Im frequently
disappointed.

But monopoly and bureaucracy have pernicious affects everywhere and

universities arent exempted from it. But, of course, they are the glory of
civilization.

But monopoly and bureaucracy have pernicious affects everywhere and

universities arent exempted from it. But, of course, they are the glory of
civilization. And if people want to give more to it, Im all for it.

[02:08:45]

ANDREW ROSS SORKIN: Thank you, Warren. This is from a shareholder,

asked to remain anonymous. If Donald Trump becomes the President of
the United States and recognizing your public criticism of him and your
public support for Hillary Clinton, what specific risks, regulatory policy or
otherwise, do you foresee for Berkshire Hathaways portfolio of
businesses?

[02:09:47]

CHARLIE MUNGER: Im afraid to get into this area.

[02:17:46]

MICHAEL MOZIA: Hi, my name is Michael Mozia. Im from Brooklyn, New

York and Ill be starting at Wharton Business School in the fall. In an
interview with Bloomberg Markets recently, Jamie Dimon defended the role
banks play in financial markets, saying, banks arent markets, the market is
amoral. Youre trained to the market. A bank is a relationship but banks,
namely investment banks have struggled as regulators have favored
market based solutions. And many of those relationships investment banks
have worked so hard for have proven to be less lucrative especially
compared to the growing fixed costs of supporting themIn the marketable
securities portfolio, do you feel good about the going forward prospects of
the investment banking companies, especially as Wells Fargo moves into
that business?

[02:21:42]

CHARLIE MUNGER: Its not the investment banking that draws you to
Wells Fargo. Well, thats horrible. Its the general banking thatI think
generally we fear the genre more than we love it.

[02:23:23]

CAROL LOOMIS: In the conclusion of a book, Dear Chairman, which you

recommend in this years annual letter, a new book you recommend, the
author argues that the lifes work of great investors is inevitably
reabsorbed into the industrial complex with little acknowledgement of their
accomplishments. He then, argues that Berkshire Hathaway will be
eventually be targeted by activist investors if it trades too sharp a discount
to intrinsic value. Do you agree with this assessment and have you
considered installing corporate defences that might future generations of
activists from trying to break up Berkshire Hathaway?

[02:26:57]

CHARLIE MUNGER: Well, I think we have almost no worries at all on this

subject and that most other people have a lot of fairly justifiable worry. And
I think that helps us. So, I look forward on this subject with optimism.

[02:27:51]

JONATHAN BRANDT: Leasing has quietly become an important

contributor to Berkshires earnings with its several leasing units, logging
about $1 billion in combined annual pre-tax income. Can you talk about
Berkshires competitive advantage is in its various leasing businesses,
including containers, cranes, furniture, tank cars and rail cars. Are there
other leasing businesses youd be interested in entering, for instance
airplanes or commercial auto fleets? Plane leasing companies, in
particular, seemed to sell for reasonable prices and are often available?
[02:30:36]

CHARLIE MUNGER: I think youve said it pretty well. Were well located
now but weI dont believe weve got huge opportunities.

[02:31:03]

ZONE 7 QUESTION: Good morning Charlie. I am from the Philippines.

Warren, my wife and I sent original paintings to your office two days ago.
We hope you like them. Todaysorrytoday, Berkshires size ensures
that it faces competition from numerous businesses. If you had a silver
bullet, which competitor would you take out and why? And sorry, youand
cant say Donald Trump.

[02:33:05]

CHARLIE MUNGER: And were not targeting competitors for destruction.

Were just trying to do the best we can everywhere.

[02:33:36]

BECKY QUICK: This question comes from Sugar Land, Texas. He writes,
my wife and I have the vast majority of our net worth invested in Berkshire
and in shares of the Sequoia Fund. Mr Buffett, you have endorsed the
Sequoia Fund on more than a few occasions. Recently, the Sequoia has
been in the news because of its large position in Valeant Pharmaceuticals.
Mr Munger has termed Valeant business model highly immoral. Mr Buffett,
do you agree with Mr Mungers assessment. Have your views about
Sequoia changed?

[02:41:37]

CHARLIE MUNGER: Well, I totally agree with you that Sequoia, as

reconstituted, is a reputable investment fund and the manager, as
reconstituted, is a reputable investment advisor. And Ive got quite a few
friends and clients that use Ruane Cunniff and Ive advised them to stay
with the place, as reconstituted.
So, we think the whole is fixed. Valeant, of course, was a sewer and those
who created it deserved all the opprobrium they got.

Valeant, of course, was a sewer and those who created it deserved all the
opprobrium they got.

[04:00:28]

MATT CLAIBORNE: Hi, my name is Matt Claiborne from Columbus, Ohio.

And thank you for putting this on for all of us. My question is, youve said
before that your job will be divided into parts for your succession. One of
which will be, is the responsibility of maintaining culture by having Howard
as non-executive chairman. What is the plan for how Berkshire will
maintain its culture when Howard no longer fills the role and what should
shareholders watch for to make sure that the culture is being properly
maintained decades from now when Im your age?

[04:03:42]

CHARLIE MUNGER: Im even more optimistic than you are. Ive never
noticed it. I really think that the culture is going to surprise everybody by
how long it lasts and how well they do. They all wonder why they ever
made any fuss over us in the first place. Its going to work very well.

[04:05:05]

ANDREW ROSS SORKIN: Its a bit of a multi question. About two dozen
men and women work with you, Warren, at our corporate office. I see from
last year, the quality of the pictures have been improved in the annual
report. So, congratulations on that. However, looking at it, theres
something that comes to any ones attention and its the lack of diversity
among the staff. A 2015 analysis by Calvert Investments found that Coca
Cola is one of the best companies for work place diversity while Berkshire
Hathaway was one of the worst. Youve explicitly stated that youve not
considered diversity when hiring for leadership roles in board members.
Does that need to change? Are we missing any investment opportunities as
a result? And do you consider diversity, however defined, of company
leadership and staff when analysing the value of a company that you may
want to purchase?

[04:11:11]

CHARLIE MUNGER: Years ago, I did some work for the Roman Catholic
Archbishop of Los Angeles. And my senior partner pompously said, you
know, you dont need to hire us to do this. Theres plenty of good Catholic
tax lawyers. And the Archbishop looked at him, like, hes an idiot and said,
Mr Peeler, he says, last year, I had some very serious surgery and I did not
look around for the leading Catholic surgeon. Thats the way I feel about
board members.

[04:12:01]

GREGG WARREN: When Berkshire authorized the share repurchase

program, originally ended up buying back shares at prices no higher than
10 percent premium to the firms most recent book value per share. A
figure that was subsequently increased repurchase share at prices no
higher than 20 percent premium to book value. Theres been relatively little
share repurchase activity during the last four and a half years. Even as the
shares dipped down below the 1.2 times book value threshold during both
January and February of this year, if you base it on a buyback price
calculated on Berkshires book value per share at the end of 2015. A
number that had not yet been published when the stock did dip that low.

Given your belief that Berkshires intrinsic value continues to exceed its
book value with the difference continuing to widen over time, are we at a
point where it makes sense to consider buying back stock at a higher break
point that Berkshire currently has in place and would you ever consider
stepping in buying back shares that did dip down below 1.2 times book
value per share even if that prior years figure had not yet been released?

[04:18:05]

CHARLIE MUNGER: Well, youll notice that elsewhere in corporate

America. These buyback plans got a life of their own. Its gotten quite
common to buy back stock at very high prices that really dont do the
shareholders any good at all. I dont know why people exactly are doing it
and I think it gets to be fashionable.

Were always behaving a lot like what some might call the Episcopal
Prayer. We prayerfully thank the Lord that were not like these other
religions who are inferior and Im afraid theres probably too much of that in
Berkshire but we cant help it.

Were always behaving a lot like what some might call the Episcopal
Prayer. We prayerfully thank the Lord that were not like these other
religions who are inferior and Im afraid theres probably too much of that in
Berkshire but we cant help it.

[04:23:47]
CAROL LOOMIS: This question comes from New York. Mr Buffett, you
have expressed concern about cyber, biological, nuclear, and chemical
attacks but preventing catastrophe is not getting enough attention. For
example, a bill passed the House unanimously to harden the electric grid
against the high altitude nuclear exposure. Not too many bills passed
unanimously these days but then, the bill got bottled up in the Senate.
Have you considered fundingwouldnt it be a good idea for you to
consider funding a lobbying and educational campaign and counteract
industry lobbyists who are often more interested in short-term profits?

[04:31:43]

CHARLIE MUNGER: We havent been very good at getting the

government to follow any of our advice?

[04:35:36]
STATION 10 QUESTION: Hello. Hello, Mr Buffett and Mr Munger. Thank
you so much for your insights, teaching and being great role models. I am a
violinist based in New York City. My question to both of you is really apt to
psychological biases. Through Berkshires operations, you get a very good
read on macroeconomic factors. Yet Berkshire does not make investment
decision based upon macroeconomic factors.
How do you control the effect of information, such as knowing
macroeconomic factors or the anchoring effect of knowing stock prices
because after a while, its hard not to once youve analyzed them before.
And how does that influence your rational decision-making, whether you
should ignore it or whether you should try to use it in a positive way?

[04:38:01]

CHARLIE MUNGER: Well, there hardly could be anything more important

that the microeconomics, that is business. Business and microeconomics
are sort of the same term. Microeconomics is what we do and
macroeconomics is what we put up with.

STATION 10 QUESTION: The anchoring effectI mean, how do you deal

with that as well?

CHARLIE MUNGER: Well, were not anchored to what were ignoring. We

try to avoid the worst anchoring effect, which is always your previous
conclusion. We really try and destroy our previous ideas.

We try to avoid the worst anchoring effect, which is always your previous
conclusion. We really try and destroy our previous ideas.

[04:40:40]

BECKY QUICK: Warren, just a quick request. Would you please stop using
CNBC as an acronym for mass destruction? This question comes from
Matt Bandy in Dallas, Texas. He is asking about Seritage Growth
Properties. He says, in December 2015, you filed a personal 13G
evidencely.evidencing a roughly eight percent ownership position in the
real estate investment trust, Seritage Growth Properties which to my
knowledge is not parallel as a Berkshire investment. Alternatively, in
September 2015, Warren filed a personal 13G evidencing ownership in
Phillips 66, which is parallel as a Berkshire investment.

My question is, how do you decide when making a personal investment for
your own account versus an investment for Berkshire. I understand market
cap in ownership sizing are the likely factors but does it still to invest for the
shareholders benefit in a company, like, Seritage that might have a
significant upside and where are you putting your personal to work?

[04:44:07]

CHARLIE MUNGER: Well, part of being in a position, like, that we argue

by, you really dont want conflict of interest or even appearance of it. And
its been 50 or 60 years. When have we embarrassed Berkshire by some
sort of side position?

Both of us have practically nothing of significance in the total picture

outside of Berkshire. Ive got some Costco stock. Im director of Costco.
Berkshire has got some of Costco stock. There are two or three little
overlaps, like that but basically, Berkshire shareholders have nothing to
worry about regarding some conflict that Warren and I are going to have.
Were not going to do it.

[04:45:35]

CLIFF GALLANT: One of the great financial characteristics of Berkshire

today is its awesome cash flow. While a simple earnings, less capex,
[04:45:39] yields and annual free cash flow calculation, I figure, of around
$10 to $12 billion, in reality it seems to be much higher, closer to $20
billion. I think part due to the changes in deferred asset year to year. What
is the outlook for free cash flow and can investors continue to expect
similar dynamics going forward?

[04:48:56]

CHARLIE MUNGER: Well, there are very few companies that have ever
been similarly advantaged. In the whole history of Berkshire Hathaway
weve lived in a torrent of money and we were constantly deploying it and
dispersed assets and we were wising up as we went along. Thats a pretty
good system. Were not going to change it. What youve got to do is be
aversive to the standard stupidities. If you just keep those out, you dont
have to be smart.
 What youve got to do is be aversive to the standard stupidities. If you just
keep those out, you dont have to be smart.

[04:49:59]

BRUCE WANG: Thank you so much for your generosity and sharing your
life accumulation of knowledge in financial capital to humanity. Thank
you for that. And Berkshire managers, thank you for building important
companies and securing our financial futures. Thank you guys. This is
Bruce Wang from [inaudible], traveling west from Orlando, Florida. Last
year, you kind shared with me the importance of getting the best reputation
you can and behaving well. This year, I like to ask in preface withBill
Gates wrote, Warrens gift is being able to think ahead of the crowd. It
requires more than taking his aphorisms to heart to accomplish that
although Warren is full of aphorisms well worth taking to heart.

And he also added that, Ive never met anyone who taught in business in
such a clear way. Warren, what elusive yet obvious to you truth has
allowed you to get ahead of the crowd and build a clear mental framework
to produce a historically significant institution powerhouse brand. And
Charlie, same to you, what obvious truth presents itself so clearly to you
but many would fervently disagree with you upon?

[04:53:26]

CHARLIE MUNGER: Well, its just a few simple tricks that work well and
probably youve got a temperament that has a combination of patience and
opportunism in it. I think thats largely inherited although I suppose it can be
learned to some extent. Then I think theres another factor that accounts for
the fact that Berkshire has done as well as it has is that were really trying
to behave well. I had a great-grandfather, when he died the preacher gave
a talk and he said, None envied this mans success so fairly won and
wisely used. Now thats a very simple idea but its exactly what Berkshires
trying to do.

There are a lot of people who make a lot of money and everybody hates
them and they dont admire they earned the money. Its not particularly
admirable making money running gambling casinos and we dont own any.
Weve turned down businesses including a big tobacco business. So, I
dont think Berkshire would work as well if were just terribly shrewd but
didnt have a little bit of what the preacher said about my grandfather. We
want to have people think of us as having won fairly and used wisely. It
works.

[04:55:20]Think of how lucky you were [Warren] to have your Uncle Fred.
Warren had an uncle who was one of the finest men I ever knew. I used to
work for him too, you know? A lot of people have terrible relatives.

Warrens a Democrat but he came from different antecedents. I worked for

his grandfather, Ernest and he was earnest and when they passed social
security which he disapproved of because he thought it reduced self-
reliance and he paid me $2 for ten hours work. There was no minimum
wage in those days on Saturday and it was a hard ten hours

At the end of the ten hours, I came in and he made me give him two
pennies which was my contribution to the social security and he gave me
two one Dollar bills and a long lecture about the evils of Democrats and the
welfare state and the lack of self-reliance and it went on and on and on, so
I had the right antecedents too. I had Ernest Buffett telling me what to do.

[04:58:09]

ANDREW ROSS SORKIN: Warren and Charlie, youre famous for making
a deal over a day or two with nothing more than a handshake. You pride
yourself on a small overhead of doing the due diligence mostly yourself.
Other successful acquisitive companies use teams of internal people,
outside bankers, consultants and lawyers to do due diligence, often over
many months to assess deals. Speed may be a competitive advantage.
Youve done some amazing deals but does your diligence process also put
us at greater risk? And if youre ever gone, how would you recommend
Berkshire change how we approach deal making?

[05:02:20]

CHARLIE MUNGER: Well, when you start to think about it, business
quality usually counts on something more than whether you crossed the T
in some old lease or something and the human quality of the management
who are going to stay are very important. And how are you going to check
that by due diligence, you know?

And I think I dont know anybody whos had a generally better record than
Berkshire in judging business quality and the human quality, the people
who are going to lead the business after its acquired. And I dont even
would have been improved at all by using some different method. So, I
think the answer is that, for us at least, well go ahead the way we should.

[05:05:21]

GREGG WARREN: Warren, the announcement earlier this month that Ajit
Jain would be taking over responsibility for all Berkshires reinsurance
efforts once Tad Montross retires from General Re has raised some
questions about, not only in leadership structure but succession planning.
Given the state of the reinsurance market, it makes sense to have Ajit
overseeing both businesses especially if the pricing environment is
expected to be difficult for another 10 years.

And there are duplicative efforts that can be streamlined. Given this move
and the change of responsibilities in several of Berkshires subsidiaries in
the last few years, I was just wondering if you could give us some color on
how succession planning is handled at the subsidiary level and any insight
you could give us into what led you to finally decide to have Ajit oversee
both of Berkshires reinsurance arms and whether or not it would change
the amount of work youd be doing and especially inside of the business
would be greatly appreciated.

[05:09:28]

CHARLIE MUNGER: Well, theres an upper side to that. Not only can the
able people usually do a lot more, but the unable people by and large you
cant fix. SoI think youre forced to use our system if you have your wits
about youWarren and I once reached the decision, we wouldnt pay more
than X dollars for something and the man who was a subordinate to both of
us who was working on it just said, You guys are out of your minds. This is
really stupid. This is a quality operation. You ought to pay up for it. We just
looked at one another and did it his way. We dont pay any attention to
titles.

[05:11:26]

STATION ONE QUESTION: Hello Mr Buffett. Hello Mr Munger. Thank you

for taking my question. With Berkshire Hathaway being so well managed,
why doesnt it have the highest credit bond rating?

[05:11:45]

CHARLIE MUNGER: Im going to take that one, okay.

The rating agencies are wrong. And set in their ways.

The rating agencies are wrong. And set in their ways.

[05:12:34]

CAROL LOOMIS: Questions continue to come in about the financing and

working relationship that Berkshire formed with 3G a couple of years ago
and this is one of those questions.

While 3G has been very successful in cutting costs and increasing margins
at Kraft Heinz, the company has seen volumes and revenues decline. As a
long-term investor, how do you judge when a management is cutting
muscle as well as fat? Can a business increase revenues, while cutting
costs? And I forgot to say this came from Rick Smith in New York City.

[05:16:49]

CHARLIE MUNGER: Yeah and sometimes when you reduce volume it is

very intelligent because youre losing money on the volume youre
discarding. Its quite common for a business not only to have more
employees than it needs, but it sometimes has two or three customers that
could be better off without. And so, its hard to judge from outside, whether
things are good or bad just because volume is going up or down a little.
Generally, speaking I think the leanly staffed companies do better at
everything, than the ones that are overstaffed. I think overstaffing is like
getting to weigh 400lbs when youre a normal person. Its not a plus.

[05:22:17]

JOHN GORRY: Good afternoon Mr Buffett and Mr Munger. Im John Gory

from Iowa City, Iowa. When interest rates go from zero to negative in a
country, how does that change the way that you value a company or a
stock? Do you choose a high valuation because the discount rate is low or
on the other hand, do you choose a low valuation because the cash flow is
likely to be poor?

[05:25:11]

CHARLIE MUNGER: Yea but I dont think anybody really knows much
about negative interest rates. Weve never had them before and we never
had periods of stasis, like, 20except for the Great Depression. We didnt
have things like happened in Japana great, modern nation playing all
monetary tricks, Keynesian tricks, stimulus tricks, and mired in stasis for 25
years. And none of the great economists who studied this stuff and taught it
to our children understand it either, so we just do the best we can

No, and our advantage is that we know we dont understand it. If youre not
confused then you havent thought about it correctly.

No, and our advantage is that we know we dont understand it. If youre
not confused then you havent thought about it correctly.

[05:27:25]

CLIFF GALLANT: Youve long stressed the importance of taking a long

term view when investing and over the decades, your substantial returns in
American Express seems to support your point. Youve talked in the past
about the ability of American Express to reinvent itself overtime. But today,
it seems to be a company that doesnt have alternative businesses and its
brand doesnt seem to have the same cache as it once did. Shouldnt a
prudent investor like Berkshire periodically reassess its reasons for owning
an investment?

[05:29:09]
CHARLIE MUNGER: A lot of great businesses arent quite so great as they
used to be. The package goods business for the Procter & Gambles and so
forth- General Mills. They are all weaker than they used to be at their peak.

Auto companiesoh my God. When I think of the power of General

Motors, when I was young, and what happened. They wiped out all the
shareholders. I would no more have predicted that when I was young,
General Motors loomed over the economy like a colossus. It looked totally
invincible. Torrents of cash, torrents of everything

I think anybody in payments probably whos an established long time

player, with an old method, has more danger than used to exist. Its just
theres more fluidity in it.

[05:31:29]

MIKE KELLY: Hi Mr Buffett. Hi Mr Munger. Im from Arizona. My name is

Mike Kelly. My family run some cattle ranches down in Arizona and thats
kinda what my question pertains to. Im curious on your thoughts as it
relates to the expanding global population and investing in cattle, and if you
think its wise? Thank you.

[05:31:47]

CHARLIE MUNGER: I think its one of the worst businesses I can imagine,
for somebody like us.

Yea. Not only is it a bad business but we have no aptitude for it.

Oh, yea, yeathey have one good year every 20 years or something.

MIKE KELLY: I know you guys like steak.

CHARLIE MUNGER: But not all in cattle.

CHARLIE MUNGER: Somebody has to occupy the tough niches in the

economy. We need you.

[05:33:08]

ANDREW ROSS ROSKIN: Warren and Charlie. The first part is for Charlie,
second part is for Warren. Charlie, you clearly understand the power of
incentives. How do you apply this at Berkshire when designing
compensation formula? Without naming names or dollar amounts, please
illustrate for us with examplesof a couple of examples of Berkshires
operating managers get paid for performance in different industries? The
second part is for Warren, which is, you once said, youd write about how
we should compensate the next Berkshire CEO. Can you describe exactly
how we should do it now?

[05:33:35]

CHARLIE MUNGER: I wouldnt worry about the next CEO but theWhen
it comes to assessing incentives, the systems are different and what theyre
trying to adapt to is the reality of each situation. And the basic rule on
incentives is you get what you were awarded for, so if you have a dumb
incentive system, you get dumb outcomes. Andand one of our really
interesting incentive systems is at GEICO, and Ill let Warren explain it to
you because we dont have a normal profits type incentive for the people at
GEICO.

Its simple but other people might reward something like just profits. And
so, the people dont take on new business that they should take it on
because it hurts profit. Youve got to think these things through and, of
course, Warren is good at that, and so is Tony Nicely.

[05:37:39]

CHARLIE MUNGER: And maybe an undertaking power. God knows where

they get the plan.
[05:40:10]

CHARLIE MUNGER: And hehe wanted more bad examples. A lot of the
bad examples of incentives come from banking and investment banking.
And if you reward somebody with some share of the profits and the profits
are being reported using accounting practices that cause profits to exist on
paper that arent really happening, in terms of underlying economics, then
people are doing the wrong thing and its endangering the bank and hurting
the country and everything else.

That was a major part of the cause of the Great Financial Crisis, is that the
banks were reporting a lot of income they werent making, and the
investment banks were too. The accounting allowed for a long time a
lender to use as his bad debt provision his previous historical loss rate. So,
an idiot could make a lot of money by just making loans at high interest and
accruing a lot of interest, and saying Im not going to lose any more money
on these because I didnt lose money on different loans in the past. That
was insane for the accountants to allow that andliterally insane. Its not
too strong a word. Yet, nobody is ashamed of it. Ive never heard of an
accountant thats ashamed of it.

We want it simple and right and we dont want to reward what we dont
want. If you got to havethose of you with children, just imagine how your
household would work if you constantly rewarded every child for bad
behaviour. The house would be ungovernable in short order.

[05:49:03]

MARCUS DOUGLAS: Good afternoon Mr Buffett and Munger. My name is

Marcus Douglas. Im an investment adviser from Houston, Texas. Where
Im from, there a lot of people losing their jobs mostly due to the sharp
decline of crude oil prices. My question pertains to the overall state of the
union, more so [05:49:24]. Keeping in mind that crude oil is primarily
bought and sold in American dollars, do either of you believe the major
fluctuations in the supply of crude oil influence the USs future monetary
policy decisions?

[05:49:46]
CHARLIE MUNGER: Well, my answer would be not much.

[05:52:34]

CAROL LOOMIS: The question is from Larry Lapowitz of Boston. The year
in the balance sheet for manufacturing service and retailing operation
shows total current assets of $28.6 billion, of which cash and equivalents
are $6.8 billion. Meanwhile, total current liabilities are $12.7 billion, implying
net working capital of $15.9 billion. It has become increasingly common for
companies, like, Apple and Dell to finance their businesses via their
suppliersin some cases with negative working capital. Why is it
necessary for these Berkshire businesses to have so much working capital,
particularly so much cash? More generally, how do you think about
efficiently managing the working capital of a business segment so large
sprawling and decentralized as this one?

[05:57:08]

CHARLIE MUNGER: Yea, I think its hard to do that brutally, when youre
rich and your supplier isnt, and think that your supplier dont love you. And
so, I think there is something to be said for leaning over backward to have
a win-win relationship with both suppliers and customersalways. Yea and
we dont need it. Let somebody else set the record on that one.

[05:57:52]

JONATHAN BRANDT: Most American corporations separate out

supposedly, one time restructuring costs, whereas Berkshire doesnt.
Berkshires reported operating earnings are therefore, in my opinion, of
higher quality. Have you ever calculated how much higher operating
earnings on average would be if Berkshire separated out plant closing
costs, product line exits, severance pay, and similar items? Is it a material
number or does Berkshire not incur much in the way of these types of
costs, typically, because most of your acquisitions are standalone?

[05:58:16]
CHARLIE MUNGER: Let me take that one. Thats a question like asking,
Why dont you kill your mother to get the insurance money?

Thats a question like asking, Why dont you kill your mother to get the
insurance money?

We dont do it. Were not interested in manipulating those numbers. We

havent had a restructuring charge ever, and I dont think were about to
start.

[05:59:11]

CHARLIE MUNGER: And youre talking about We like to advertise our

defects.

[06:00:07]

STATION FIVE QUESTION: This is Martin from Germany. Im a fixed

income manager. We launched thewith Henry Lieber Fund
andYeayeathe volume is about $600-$650 million. We are 4.1
percent hedged this year. [06:00:28] my question is about fixed income If I
look in your annual report, its about the volume of $25 billion. If I add, lets
say, the CDS, you are selling the CDS and its about the volume of about
seven to eight billion. So, my complete question is, the premium on your
CDS is about 31 basis points at the end of the year, so marked-to-market,
its probably at the high teens or twenties. So, would you consider
unwinding this position? Are you allowed to do it? In the annual report you
say no, but probably you can make exactly the contrary trade on it. That
means you are buying protection. Is that a philosophy, which you stand
behind, could you do that from the ethic point of view, when the premium
are extremely low, which is at the casethat the spreads are, as I said,
between 15 and 20 basis points?

[06:03:52]

CHARLIE MUNGER: Well, the truth of the matter is we dont pay much
attention to trying to get an extra two basis points by being gamey on our
short-term things and that credit default position is a weird, historical
accident. We dont pay much attention to it either. It will go away in due
course.

[06:05:12]

BECKY QUICK: This question comes from Tom Hinsley, a long time
shareholder from Houston, Texas who says, over the years, you have been
effusive in your praise of Ajit Jain and his contributions to Berkshire. In the
2009 Chairmans letter you write, if Charlie, Ajit and I are sinking in a boat
and you can only save one of us, swim to Ajit. My question is, what if we
dont get to Ajit in time? Please comment on the impact on National
Indemnity in Berkshire and whether or not there is another Ait in the
house?

[06:08:10]

CHARLIE MUNGER: Yes, Ajit has a longer shelf life than we do. Hed be
particularly missed.

[06:08:33]

CLIFF GALLANT: Thank you. Low to negative interest rates are something
thats been discussed a few times today, and youve mentioned its
implications for a return on float. I was wondering how should shareholders
value the 25 percent of the float thats been created by retrocession
reinsurance where the business is booked at an underwriting loss and, at
times, has adversely developed.

[06:10:28]

CHARLIE MUNGER: Yeah, were willing to pay a little money now to have
just the certainty of having a lot of money available, in case something
really attractive comes up, in a bit difficult timeIts an option cost, right.

[06:13:27]

ANDREW ROSS SORKIN: Warren, Todd and Ted now had been at
Berkshire for several years. What have been their biggest hits and failures,
specifically? And what have they learned from Charlie and Warren? And
what are the biggest differences between you and them?

CHARLIE MUNGER: Again, Ive got nothing to add.

[06:15:02]

ANDREW ROSS SORKIN: The biggest hits and failures, I think they
specifically wanted to know in terms of investments and try to understand
the way you think perhaps. I think the question was moreI think mythe
implication was, the way they think and the way you think. Are there
differences?

[06:16:16]

CHARLIE MUNGER: And we dont want to talk about specific hits and
failures.

[06:18:47]

STATION SEVEN QUESTION: Good afternoon Mr Buffett and Mr Munger.

My name is Jeffrey [06:18:52] from Cranford, New Jersey. I just have a
simple question. How would you explain IBMs move?

[06:19:05]

CHARLIE MUNGER: No, I dont either.

[06:19:35]

CHARLIE MUNGER: Yea, its obviously coping with the considerable

change in the computing world andand its big and interesting, and God
knows whether its gonna work flawlessly or very well. I dont think Warren
knows either.

[06:19:55]
CHARLIE MUNGER: Yea, yea, yeap. But its a field where a lot of
intelligent people are trying to get big in.

[06:20:19]

CHRISTIAN CAMPOS: Hello everybody. Good afternoon. My name is

Christian Campos. Im from New York City. Im a senior accounting major
at Baruch College, part of the City University of New York. And Mr Buffett,
in your annual shareholder letters and during interviews, and even today,
your sense of humour always shines through. Where does your sense of
humour come from? Please tell us Thank you.

[06:21:16]

CHARLIE MUNGER: I think if you see the world accurately, its bound to
be humorous because its ridiculous.

I think if you see the world accurately, its bound to be humorous because
its ridiculous.

[07:05:22]

RICHARD MILLER: Good afternoon Mr Buffett. Im Richard Miller in the

Creighton Theology Department here in Omaha and I study climate change
and its social effects. I just wanted to make you aware that Berkshire is
operating within a larger economy and that the most important climate
analysis, economics analysis, from Nicholas Stern indicates that on our
current path, by the end of this century, 30 percent loss in global GDP is
possible.

The other issue is when we talk about doing something about climate
change, doing something means to avoid major sea level rise, we need to
reduce emissions globally starting todayseven percent per year.

The only time weve ever reduced emissions overover a 10 year period in
a growing economy was in the 1990s in England and we reduced at one
percent per year. So, were talking about a completely different thing than
President Obamas gradual move and we need to do something. We need
to do massive transformation immediately. And with your large global
holdings, you are a world significant figure on this, not just about this
particular shareholder resolution. Thank you for your time.

[07:07:23]

CHARLIE MUNGER: Well, yes. Were in Omaha, which is considerably

above sea level. And we have no big economic interest in this subject and
our insurance companies, we dont write much of that catastrophic
insurance that we used to write many years ago. So, were asked as a
corporation to take public stance on very complicated issues.

We got crime in the cities. We got a hundredwe got a thousand

complicated issues that are very material to our civilization. And if we
spend our time on the meeting public stance on all of them, I think it would
be quite counterproductive. And I dont like the fact that the people that
constantly present this issue never discuss any solution except reducing
consumption of fossil fuels.

So, there are geoengineering possibilities that nobody is willing to talk

about. And I think thats asinine. So put me down as not welcoming.

The 2016 Daily Journal Meetings

Notes: February 10, 2016
Los AngelesCharlie Munger hosted the Daily Journal Corporations
(NASDAQ:DJCO) 2016 annual meeting at the companys headquarters in
Los Angeles, California on February 11, 2016. Detailed notes of the
proceedings appear below. These notes fall short of a verbatim
transcription. Rather, they represent my best attempt at capturing Mr.
Mungers wisdom as faithfully as allowed by the circumstances. Errors of
transcription are mine.

Charlie Munger: (Inaudibly addressing the formal business of The Daily

Journal for approximately five minutes)
Unidentified Audience Member: Can you please turn the mic up?

Charlie Munger: Is this better? (Audience cheers) Some of you may

remember that this same thing happened at a Wesco meeting once. Back
to the Daily Journal. Like many newspapers it was once a fine business. Of
course the world changed a lot, as it has for other newspapers.

But some things have gone well, like our stock holdings. We made a lot of
money in the foreclosure boom. We had more than 80% of the foreclosure
notice business. It was huge prosperity for us and that gave us a lot of
money, and we then used that money to buy securities at low prices during
the panic. We were aided by that peculiar circumstances, and it offset the
deterioration of our newspaper business. Of course, weve also entered the
software business.

And whats happened now is that we have more software properties than
print properties and those businesses are doing much better. And the
business is doing better because our product is way better than that of our
main competitor. And there is an endless market for this stuff. District
attorneys, courts; its hard to imagine anything more certain to flourish.

Its agony to do business with public bodies and their bureaucracies and
agencies, but its the agony that keeps many other software companies
from coming into the market. If youre Microsoft youre into easy money.
They did buy one of these businesses once, and it was not a success. The
really big boys find it hard, and they tend to stay out. I think our prospects
are thus better than our main opposition.

What you have here is a sort of venture capital approach to the software
business. Weve tacked on a software business to a newspaper. Our stock
may be reasonable if you like VC investments, but its not right for Ben
Graham groupies. Im not saying it wont work, but if it does, you dont
deserve it.

Our stock may be reasonable if you like VC investments, but its not right
for Ben Graham groupies. Im not saying it wont work, but if it does, you
dont deserve it.
(Audience laughs) With that Ill take questions.

Questioner One: Tell us about one or two opportunities in technology and

also give us one or two risks.

Charlie Munger: The one I was most excited about was getting
into(inaudible, but could have been Journal Technologies). Crucial
milestone. We bought this little nothing software company and now it has
80 or 99 employees. The new business is interesting because its in a big
market. I think whoever gets entrenched in it will be in a very sticky
business.

At least we will have entered a business where well be hard to dislodge.

The hurdle is that we want to be most important player in this new niche,
which is a big niche. I dont regard that as going poorly. Its going well.
(Authors note: Journal Technologies is a subsidiary of DJCO and supplies
case management software to courts and justice agencies).

Questioner Two: Im from Stanford. Thanks for donating the Munger

building. Youve said you want to know where youre going to die, so you
never go there. A few years ago Warren Buffet bought IBM, and some
people say he walked out of the circle of competence. Can you comment in
relation to the first comment?

Charlie Munger: IBM is a lot like us. They have a traditional business that
is very sticky, but then the world changed. And of course, in the new world
they are not the leader. Up came Oracle and Microsoft. IBM didnt do too
well with the rise of the PC.

But IBM is in a position where they have an old business and a new
business. (Inaudible). The automated checklist is a great idea. It was
particularly useful for Edison.

But now IBM is a kind of super market and I dont really have an opinion
about it. Im neither a believer nor disbeliever in the new business. It could
happen or it could not happen. I do think the old business is very sticky and
will die slowly. On the Berkshire side, we have to play a long game. It may
work in a mediocre way, it may work big.
Questioner Three: I want to thank you for sharing your wisdom with all of
us. Two questions: What advice do you give to your grandchildren? Second
question: do you have a favorite investment story you can share with us?

Charlie Munger: Well, regarding grandchildren I was not able to change

my children very much. My situation reminds me of what Clarence Darrow
said about the great poem: I am the master of my fate master of soul.
Master of my fate? I cant even pull an oar! Thats the way I feel about
grandchildren.

(Authors note: Clarence Darrow, a prominent 19th century lawyer was

quoting and challengingthe spirit of the poem Invictus by William Ernest
Henley. Darrow said Instead of being the captain of his soul, as I have
sometimes expressed it, man isnt even a deck-hand on a rudderless ship!
He is just floating around and trying to hang on, and hanging on as long as
he can. Source: http://darrow.law.umn.edu)

Charlie Munger: What was the second question?

Questioner Three: Do you have a favorite investing story?

Charlie Munger: Well, I have many investment stories from my younger

days, but not many that I havent told before. Al Marshall and I did
something in 1962, where we were bidding for some oil rights. I soon
realized that under the rules of the rights the only people who would bid for
these oil royalties were oil brokers and they were a bunch of bastards. I
realized the oil royalties business was populated by shady characters, who
could be outmaneuvered easily. The Mungers were getting a $100k a pop
for a while. (Authors note: Munger gave much more details regarding this
trade / arbitrage but they were not audible)

The trouble with that business, is it didnt work for very long, and thats true
of most investment stories. The trick is to get one or two or three.

Questioner Four: How does the current investment energy environment

compare to the 1980s?
Charlie Munger: We owned Wesco for a long time. They did a lot of
transactions. But it was only five or six outcomes that carried most of the
freight. Now that is really interesting. To try and do a zillion little things is
hard. Try to do a few things well, and it will work out. A few good decisions
over a long period of time can lead to great success. You make your
money by the waiting. A fair amount of patience is required. Like when we
had all this money flowing in from the foreclosure boom, and we deployed it
in a day. It wasnt luck we had the money on hand.

You make your money by the waiting. A fair amount of patience is

required. Like when we had all this money flowing in from the foreclosure
boom, and we deployed it in a day. It wasnt luck we had the money on
hand.

Questioner Five: Historically Berkshire was built around its insurance

model. What other models did you try and pursue?

Charlie Munger: In the early days we thought we had a special advantage

in any float business. Now we have enormous float but its not that useful.
Its not a tragedy but the float business in Berkshire is large and its not
getting a great return.

Questioner Six: The Daily Journal is in software. What do you think of the
attractiveness of the average software business?

Charlie Munger: Software based businesses are like any other business.
Some of them are the dumps, some of them are the best on earth. Good
spots and bad spots.

Questioner Six: It seems like Journal Technologies is growing slower than

its competitors, but people are paying high multiples for it. Would you ever
consider selling Journal Technologies?

Charlie Munger: Well, never say never. Weve had problems and
opportunities. Its a peculiar part of the software business. We cant judge it
like a normal business or even like a normal growth company. Its venture
capital. You have a venture capital like business thats not venture capital.
Those little businesses are not acquisitions of the very best businesses that
are going to be foolproof like we do at Berkshire. We are going to make a
venture capital like assault on the software business. Dont judge those
things by normal standards.

Questioner Seven: If you were to design CEO compensation for an

insurance company or a bank, what would you do?

Charlie Munger: Well both Berkshire and the Daily Journal have our own
ways of doing things, and we just try and do whatever makes sense. Thats
our system here.

Questioner Eight: What are your expectations for BYD?

Charlie Munger: That too is a venture capital like company. The founder
started by borrowing $300K from the Bank of China, and was going into the
small batteries business. He succeeded in grabbing a small part of that
market. Hes a very remarkable man, doing an insanely ambitious thing.
Last month he sold 10,000 electric cars in China, which is more than Tesla
sold. Most people have never heard of BYD.

Berkshire doesnt do this venture capital stuff, and I hope that the Daily
Journal works out half as well. BYD is in a position to benefit from this
electrification trend. Its very helpful when people are dying in the streets of
Beijing because they cant breathe the air.

BYD is in a position to benefit from this electrification trend. Its very

helpful when people are dying in the streets of Beijing because they cant
breathe the air.

We have electric forklifts in this country. Do you really want carbon dioxide
in the warehouse? Its a very interesting venture capital investment. It was
an accident that the Daily Journal is doing a venture. I only wish we came
across more BYDs.

Questioner Nine: How do you use the discount rate to calculate intrinsic
value?
Charlie Munger: We dont use numeric formulas that way. We take into
account quality factors. Its like a bridge hand, you have to think about a lot
of things. There is never going to be a formula. If that worked, every
mathematical person would be rich, but thats not the way it works.

There is never going to be a formula. If that worked, every mathematical

person would be rich, but thats not the way it works.

Questioner Nine: But you value a company

Charlie Munger: Opportunity cost is crucial, and the risk free rate is one
factor.

Questioner Nine: Do you use the same rate for different businesses?

Charlie Munger: The answer is no, of course not, different businesses

need different rates. They all are viewed in terms of value, and theyre
weighed one against another. But a person will pay more for a good
business than for a lousy one. We really dont want any lousy businesses
anymore. We used to make money betting on reinventing lousy
businesses and kind of wringing money out of them, but that is a really
painful, difficult way to make money, especially if youre already rich. We
dont do much of it anymore.

We used to make money betting on reinventing lousy businesses and

kind of wringing money out of them, but that is a really painful, difficult way
to make money, especially if youre already rich. We dont do much of it
anymore.

Sometimes we do it by accident, cause one of our businesses turns lousy,

and in that case its like dealing with your relatives you cant get rid of. We
deal with those as best we can, but were out looking for new ones.

Questioner Ten: Mental models question.what are your favorites?

Charlie Munger: Well, were always talking about multiple models, and
that means I have many. Thats the nature of reality. Theres no way that it
can be easy. You are all in the investment business do you find it easy?
Anybody who finds it easy is wrong. You are looking at an illusion.
Occasionally youll get an easy one, but not very many. Mostly its hard.
How many people find it hard? (Most of audience raises hands) Intelligent
group of people here. We collect them.(Audience laughs)

Questioner 11: You said you try to reduce errors by avoiding auctions.
What do you do in your daily life to reduce errors?

Charlie Munger: There are two things Warren and I have done. One is that
we spend a lot of time thinking. Our schedules are not that crowded, and
we sit around and think constantly. In a way, we look more like academics
than businessman. My system has always been to sit quietly for a few
hours. I dont mind if there are long period where nothing happens.
Warrens the same way. Hes sitting on top of an empire now. Sometimes
he clears his schedule for a haircut. His calendar will say Tuesday: Haircut
day.

I dont mind if there are long period where nothing happens. Warrens the
same way. Hes sitting on top of an empire now. Sometimes he clears his
schedule for a haircut. His calendar will say Tuesday: Haircut day.

All you people are very good at multitasking, and thats fine if you are the
chief nurse at a hospital. Otherwise, multitasking is bad. Juggling three
balls at once is not ideal. Luckily, a lot of you are so obscure youre not that
busy (audience laughs).That advice worked for me, and it should work for
you. If it didnt work for me, I didnt have a backup plan. I was not going to
dance lead in the Bolshoi Ballet.

But I do think that the constant search for wisdom and the right reactions
can help. Being angry will never serve you. You can apply that to your life.
But its hard to do. The nature of ordinary results is that theyre ordinary.

Questioner 12: You bought Wells Fargo. Why was that a good
investment?

Charlie Munger: Well Ill take you back to when Berkshire bought Wells.
The world was coming apart. Real estate was the source of the chaos.
Wells Fargo had a huge exposure. But we knew that the lending officers at
Wells Fargo were not normal bank lending officers. They were grownups,
and they had a somewhat cynical view, and they were appropriately careful
and it was the right way to run a bank.

And we knew they were better, and we knew they wouldnt lose at much
because they chose better and managed better. So we had an
informational advantage. We were aware they had that special capacity, so
we bought heavily.

Secondly when the Daily Journal bought Wells we again knew that bankers
at Wells were more rational than normal. Its a different kind of superiority
and rationality. I dont think anyone should buy a bank if they dont have a
feel for the bankers. Banking is a business that is a very dangerous place
for an investor. Without deep insight, stay away.

Questioner 13: Two powerful mental models are the concept of

specialization and taking an interdisciplinary approach. How do you
reconcile the two?

Charlie Munger: You cant say live without synthesis. Synthesis is reality.
Of course we need synthesis to understand anything. The question doesnt
make sense. However, the reward system of the world does not favor
focusing on synthesis. Extreme specialization is the way to succeed. Most
people are way better off specializing than trying to understand the world.

Being good at synthesis is good only for some people, but its not great
career advice for most people. Most people should get very good at one
thing. Even then, synthesis should be your second attack on the world, and
its also a really good defense. Without synthesis wed be blind.

Questioner 14: Youve said that rationality was the most important thing to
you. How would you advise us to become more rational?

Charlie Munger: If you start working at it young, its a good idea. And its a
lot of fun. I can hardly think of anything thats more fun. Id say youre on
the right track. Not everyone gets to be the Emperor of Japan.
Being rational means you avoid certain things. Try the alternatives. Try
jealously, try anger. They dont work. Yet some people wallow in those
feelings, and of course its a total disaster. Self-pity is not going to improve
anything. Get self-pity out of your repertoire.

Self-pity is not going to improve anything. Get self-pity out of your

repertoire.

Questioner 15: Increasingly, men and some women dont find ROI in a
long-term relationship worth it. What is your evaluation of this?

A: Well I think different folks can live in different ways, but I think all the
evidence is that marriage is the best practical alternative for most people,
and the statistics show it. They live longer. They measure happiness
physiologically, smiling and all that. It isnt that a lot of marriages dont fail
and a lot arent made in Hell and all that, but considering how difficult the
world is, its your best chance for most people. And of course it should be
valued. Thats one of the things I like about the Asian cultures. The
Confucian idea that the family is really important . . . too, for that matter, is
a very sound idea. If we ever lost family values we would have a hell of a
lot of [trouble]

Questioner 16: The Daily Journal bought property recently. Can you
explain the choice to purchase real estate versus deploying that capital
elsewhere?

Charlie Munger: We think were going to be in Provo, Utah for a long time.
We have a lot of employees there, they like their work, and their location.
Its part of the business operations. We have customers that come there. I
never see us leaving. We bought it cheaply, we built it cheaply, and its a
nice piece of property. Our way of getting ahead has nothing to do with real
estate investments.

Questioner 17: Do you think a person who cant make money running a
New Jersey casino is qualified to be President of the United States?

Charlie Munger: Well he did make money for quite a while. My attitude is
that anybody who makes his money running a casino is
not morally qualified to be President. I regard it as a very dirty way to make
money.

Questioner 18: What has given you the greatest sense of

accomplishment? If you could give advice to your younger self, what would
it be?

Charlie Munger: Well, my family life has been great. Cicero used to say
that one way to be happy in old age was to remember your achievements.
Some people say thats too damn self-centered. I agree with Cicero. Its OK
to look back. What was the other question?

Questioner 18: What advice would you give to a younger version of

yourself?

Charlie Munger: My advice is always so trite: good behavior makes your

life easier, makes it work better, and is less complicated than lying. And so
Im very old fashioned. Discipline works, old fashioned good behavior
works, generosity works. We all know people who go to a funeral just to
make sure someones dead. We dont want to be in that crowd.

Im very old fashioned. Discipline works, old fashioned good behavior

works, generosity works. We all know people who go to a funeral just to
make sure someones dead. We dont want to be in that crowd.

Kiplingers If is a great poem. Kiplingers If is great advice: Keep your

head, be a man my son. Why dont you want to be a man? Some people
are so angry, theres much to be gained by never being an angry twit.

This political situation were in is such a despicable mess. This political

situation we all face now. Of course, its a disgrace, a lot of these people. I
mean, its bad the leading civilization has these candidates for high office . .
. were talking about. And theyre not all in one party. But you dont want to
get angry. After all, politicians have been politicians for a long, long time.
You want to operate constructively, vote constructively. But anger. Theres
just so much anger in politics now, so much automatic hatred.
How can any of us really know will the United States be better fifty years
from now because we vote Republican or we vote Democratic in the next
election? Who can tell what the exact mix is between compassion and
something else?

How can any of us really know will the United States be better fifty years
from now because we vote Republican or we vote Democratic in the next
election? Who can tell what the exact mix is between compassion and
something else?

And so. And by the way the Moslem behavior rules were created a lot like
the Old Testament. Of course they copied. They claim they came directly
from God, but really they stole them from the Jews.

Questioner 19: How do you understand a new industry or new business

youre trying to get into where the dynamics are different? How do you get
insights into the specific domains? What is the relationship between oil
prices and economic growth?

Charlie Munger: I dont really know the correlation between oil prices and
economic growth. I think its obvious that if oil had been a little cheaper and
easier, the growth would have been greater than it had, and in that sense if
oil gets to be expensive, and we still need it desperately, . . . and
there is that correlation between oil prices and economic growth.

Whats happened to Exxon and so on, the damn price of oil went up faster
than their production went down. Name me another business whos
earnings goes up when production units go down down down?

People who really have a lot of free energy, like the people in the Middle
East, have very dysfunctional economies. Theyre like a bunch of rich
people spending their capital and not knowing how to do anything anybody
else wants to buy. So, maybe in that sense I think a tougher hand has been
good for us. My answer to that question reminds me of my old Harvard law
professor who used to say, Charlie, let me know what your problem is and
Ill try to make it harder for you. Im afraid thats what Ive done to you.
As for how do I understand a new industry: the answer is barely. I just
barely have enough cognitive ability to do what I do. And thats because the
world promoted me to the place where Im stressed. And youre lucky if it
happens to you, because thats what you want to end up: stressed. You
want to have your full powers called for. Believe you me, Ive had that
happen all my life. Ive just barely been able to think through to the right
answer, time after time. And sometimes Ive failed.

Questioner 20: How do you deal with stress?

Charlie Munger: The answer is that I barely stress. I guess I grew out of it
over the years.

Questioner 21: Last year you had some very pointed comments about
Valeant. Do you have any updated thoughts or any thoughts on other
companies? (Audience laughs)

Charlie Munger: I have no dog in that hunt, I have no interest in pharma,

or Valeant. Its just when you people have come so far.(audience
laughs). Valeant is such an extreme example of extreme behavior that I
wanted to call attention to it. One of the Valeant shareholders said Warren
is a sinner because he owned Coca-Cola. My comments drew heat on
Warren. He can handle it though. Hes a very philosophical man. (audience
laughs)

It is true that crazy false values and crazy excess is bad morals, and bad
for the nation, bad bad bad. A lot of that is in American finance. And there
is no question that American finance has its sins. Elizabeth Warren and I
dont agree on many subjects, but she is basically right about American
finance when she says its out of control.

Elizabeth Warren and I dont agree on many subjects, but she is basically
right about American finance when she says its out of control.
Bernie Sanders and Elizabeth Warren are not two of my favorite people,
but they are absolutely right on that subject. You all see what goes on. The
craziness, the stock promotions, the accounting, the culture. Its very bad
for all us that we have this huge overdevelopment of finance. And yet its
very hard to do anything about it.

It reminds of me of the English land barons. They had all the land, and
what did they do? They sat around and played cards, and they gambled for
high stakes and thats what human nature does. That continued day in and
day out. Multiply the capital of the world by 30, and now we have people
like the lords of England who had all that time to play cards. We have a
vast gambling culture, and people have made it respectable. Instead of
betting on horse, they bet on securities and derivatives.

We have a huge amount of legalized gambling of and of course a public

market is an ideal casino and there are whole bunch of people who want to
be in a casino. Just to sit there and see it every night go higher and
higher. Other very respectable people see others getting rich and theres
way too much of that. Too much of the new wealth either owns a casino or
they play in one. And I dont think the exultation has been good for life in
general, and I am, to some extent, a member of that group.

Im always afraid that Ill be a terrible example to the youth that want to
make money. Even if you do it honestly, I dont consider it much of a life.

Im always afraid that Ill be a terrible example to the youth that want to
make money. Even if you do it honestly, I dont consider it much of a life.

Its not a great example for other people, and it is the reason that Warren
and I take care to run businesses. Were not just buying pieces of paper.
So I think we have something going in our nation that is really very serious
and very bad, I hate to agree with Elizabeth Warren but I dont see a way of
stopping it.

As this cycle of gaming in securities continues what happens is the big

busts hurt us more than the big booms help us, like in the Great Recession.
A lot of people think that Hitler rose because of the inflation in the Weimar
Republic, but Germany recovered well from the Weimar. They destroyed
the old currency and issued a new one, and that worked pretty well. It
worked pretty well in Argentina too.

What really enabled Hitler to rise was the Great Depression. Weimar plus
the Depression was so demoralizing that the German people were
snookered by a Hitler. I think this is deadly serious. These crazy booms
should be watched. Alan Greenspan didnt think so. Hes a capable man
but hes an idiot. You should not make him the father of all banking. His
hero is Ayn Rand. Its an unlikely place to look for wisdom .A lot of people
think that if an ax murderer goes around killing people in a free market its
alright because free markets are alright.

These crazy booms should be watched. Alan Greenspan didnt think so.
Hes a capable man but hes an idiot. You should not make him the father
of all banking. His hero is Ayn Rand. Its an unlikely place to look for
wisdom. A lot of people think that if an ax murderer goes around killing
people in a free market its alright because free markets are alright.

A lot of those people are in my party by the way.

Question 22: Berkshire owns some auto companies. What about

automobiles are uniquely different today that makes you own them?

Charlie Munger. The second one is easy. Berkshire is in GM because one

of our young men likes it. Warren, when he was a young man, got to do
whatever he wanted to do, and thats the way it is. It is true GM may be
protected by the federal government in the end, and it may be a good
investment in the end, but the industry is as competitive as Ive ever seen.
Everyone can make good cars, they have the same suppliers, and cars last
forever. It just has all these commoditized features. So I dont think the auto
industry is the place to be.

The culture of everyone having three or four cars is also shrinking so I think
the auto industry is not great. If I were investing Id want some way to be
better than the others, and thats hard to find.

Question 23: Can you give us more thoughts on oil?

Charlie Munger: I would not have predicted that oil would reach its present
price. Its forced me to look at things. I think its generally true that with
commodities, there will be periods of extreme prices. I think commodities
can do strange things, and of course that has huge consequences. If youre
Australia, this is a disaster. I think its the nature of the human condition
that youre are going to have weird periods. Weird periods of high and low
prices. Ive never been able to predict accurately. I dont make money
predicating accurately. We just tend to get into good businesses and stay
there.

Question 24: Would you please recommend some books that youve
enjoyed lately.

Charlie Munger: You people send me books. Thirty a week! I have to skim
them so rapidly that I no longer have the joy of reading. You are ruining my
love of reading! Im no longer a good book source.

Question 25: Would you mind sharing with us some highlights of your
philanthropic work and what inspires you about it, and what sort of results
youd like your work to produce in the future.

Charlie Munger:Well, Ive never wanted to tackle problems like world

peace. You know, Ive read enough biographies. Carnegie thought he was
so smart, so he thought hed use his money and bring on world peace. And
he created the court of the Hague and all kinds of very expensive things.

And the ink was barely dry on his creations when the crazy monarchs of
Europe stumbled into World War I with the carnage and the poison gas and
the agony and stupidity. And so that was quite demoralizing at the time. So
Im not trying to bring on world peace. I watched Carnegie try it, and I
decided if he couldnt do it Im gonna leave it alone.

I dont take on those big subjects. I like to create dormitories and science
teaching facilities and stuff like that. Its a pretty modest activity, but its
interesting to me, and its easy to do them better than most people do
them. I have no feeling I have any advantage in bringing on world peace,
but I am pretty good at dormitories. So I do what Im good at, and I suggest
that all of you do the same thing.
Question 26: Please give us your views on politics. Why are people
starting to feel the Bern?

Charlie Munger: A very good question. Because politics are corrupt

perhaps. People like Bernie Sanders attitude. But people who are really
passionate about government action gave us the Soviet Union, and all the
death and poverty there. They also gave us Communist China and North
Korea. Im suspicious about all this passion for equality.

If you want to look at what inequality gives us, look at China. Of course
when they adopted private property what they got was growth more quickly
than anyone had gotten before, but many Chinese fell behind. I think its a
good bargain. I dont think Bernie wants to understand this. Hes said it for
thirty years. Hes a Johnny one note. As an intellectual, hes a disgrace.

I think its a good bargain. I dont think Bernie wants to understand this.
Hes said it for thirty years. Hes a Johnny one note. As an intellectual, hes
a disgrace.

Id think Id be awfully glad to have him marry into the family just based on
his personal characteristics, but as a thinker hes pretty bad. Now, I dont
think hes any worse than some of our Republicans, but at least theyre
crazy in a different way.

But egality (sic) has one effect in a democracy that Aristotle commented
on. People will cheerfully tolerate considerable differences of outcome if
they seem deserved. Nobody minds the fact that Tiger Woods has a big
income . . . and somebody who invents some new wonder of the world
etcetera etcetera. But differences in outcome that are seen as undeserved
tend to disrupt democracy. Thats why Aristotle commented on it in one of
his most well-known observations.

But differences in outcomes are seen as undeserving. Who is getting all

the underserved money in American now? A lot of the underserved wealth
from the financial class is counterproductive. I think it would be nice to fix
the obviously underserved wealth. If you take the ordinary investment
manager, they take capital gains, and they dont pay any income tax at all.
Its not very complicated to understand.
I think by and large inequality is a natural outcome of a natural civilization
thats good for everyone. And all of this stuff about the wealth of the 1%,
what the hell does he do with it? He has to eat the same food, watch the
same television, leave the money to something . . . Is he the main problem
we have? Hes not really using the wealth very much. And most of these
guys are not that interested in politics. People who like to talk about the
terrible influence . . . on politics.

If you are rich, you realize how little influence the rich really have. Lots of
rich people get practically nowhere. I think these people that are raging
about it are wrong, but I think the undeserved wealth does deserve some
attention. On that, I think theyre right, and a huge amount of the
undeserved wealth is in finance.

Question 27: Im pretty excited about self-driving cars, but as a Berkshire

shareholder Im worried about the prospect for the auto insurance
business.

Charlie Munger: It will be bad for GEICO if cars dont have drivers. But I
think it will be quite slow. I think the auto industry, even if we dont get self-
driving cars, that the driving culture may be waning. Not so much in the
third world, but in places like America.

Questioner 28: Thanks for being a great teacher. Someone asked you
about books, and I sent you two, and a letter. If maybe you could publish a
book list, we could keep learning?

Charlie Munger: I dont want to be a book recommender. It would be quite

time consuming.

Questioner 29: What is your view on unicorn companies on Uber, Palantir,

AirBnB, Can they ever go public?

Charlie Munger: I have a circle of competence, and it doesnt include

which companies in Silicon Valley are going to succeed, so I tend to avoid
the subject entirely. And its the same way with others.
But I will comment on one thing. The venture capital industry is a more
honorable than some other areas of finance. VC is a useful member of
society. But they dont escape sin. They sneak a clause in contracts where
anyone thats new to a company is preferred. Its a disgusting, dishonest
thing to do, and worse because its obscured. So even in our most
reputable parts of finance, there are dirty sleazy activities sneaking in.
Large amounts of money make people behave badly. Thats Mungers rule.

Questioner 30: Do you think fundamental value is losing relevance?

Charlie Munger: I dont think fundamental value will ever lose relevance.
You have to be buy things for less than theyre worth. Its like arithmetic, it
will always be with us.

High frequency trading is a complicated subject. Many such traders are

admirable personally, but they are rats in the granary. They suck the
resources out of civilization and contribute nothing.

High frequency trading is a complicated subject. Many such traders are

admirable personally, but they are rats in the granary. They suck the
resources out of civilization and contribute nothing.

Questioner 31: You mentioned that you havent changed your children
much. Do you have an approach for quality time with family?

Charlie Munger: I dont think I want to make myself a wonderful example

of a family. We all have to live with our imperfections.

Questioner 32: Do you think that Coach Bryant at Alabama is . . .

Charlie Munger: I dont know anything about coaches. Im better about

ballet.

Questioner 32: Can you name a few people you admire?

Charlie Munger: There are lots of historical people I admire. Thats the
advantage of being a reader. You can consort with the best people of all
time and thats what I do. I admire a lot of people. The best surgeons,
actors who are the best actors there are a lot of people who are
instructive and generous and they build the world for the rest of us. There
are lots of good examples on the Costco board.

Dan Evans, the former Senator, was an admirable politician. There are all
these crazy people on the right and left, but when you find a Dan Evans,
wow. There will always be admirable people. My god, thats what we all
want to be. We all want to be admirable. You want to be the kind of person
that other people name in their wills to raise their children. If people are
doing that, youre doing something right.

We all want to be admirable. You want to be the kind of person that other
people name in their wills to raise their children. If people are doing that,
youre doing something right.

Questioner 33: How should we go about seeking wisdom?

Charlie Munger: If you do enough reading and thinking you dont have to
do much else.

Questioner 34: I was once given the advice that its really important to
conquer fear. Im wondering if you would speak to your relationship to fear
and whether youve conquered it.

Charlie Munger: Generally Ive avoided circumstances that cause fear. I

mean if you want to go hang gliding, by all means.

My son Phillip is in the audience. He used to say, if at first you dont

succeed, well so much for hang gliding (audience laughs). I dont seek out
fear for thrills. Generally Im not a lover of danger. Thats not my thing. I
dont think Ive felt much fear for a long time. Ive just lived a long time. I
had fears when I was younger, but they gradually melted away.

Alright, one more question. One last question.

Questioner 35: My question is about Coke. But first I want to tell you quick
story. My 17 years old son had his friends over, and we bought all the right
refreshments including two bottles of Coke. At the end of the party, there
was hardly any Coke consumed by these young men, and it gave me
pause. Sweet beverages are on the decline. Does Berkshires investment
gives Cokes management cover to not address the future of the beverage
business?

Charlie Munger: Easy one: Coke for many decades has been a basic
product full of sugar, and it grew every year. Full sugar coke is now
declining. Fortunately, the Coca-Cola Company has a vast infrastructure.
Coca-Cola is declining some, but the rest of the businesses are rising. So I
think Coke is a pretty strong company and will be a respectable investment,
but its not like it used to be when it was like shooting fish in a barrel.

(Audience Applauds)

Authors Note: Following Mr. Mungers formal remarks and Q&A session, he
lingered on stage to take pictures with attendees. This author was able to
ask him a final question while having my photo taken with him.

Jesse Koltes: If you were starting a hedge fund right now with a much
smaller amount of money would you still care as much about quality?

Charlie Munger: Id always care about quality. But if I was running a

smaller fund, I wouldnt have to choose been Exxon and IBM. There would
be a lot more interesting places to look.