16 July 2017

Charlie Munger’s net worth is about 1.5 billion and as most people know, he’s Warren Buffett’s vice chairman at Berkshire Hathaway. As we’ve talked about on previous episodes, Munger is really a brilliant individual that’s considered a polymath. Few people know that Charlie is an investor with the Daily Journal Corporation in Los Angeles California. As a result, he does a question and answer period every year at the shareholder meeting. One of our good friends Hari Ramachandra was lucky enough to attend the Daily Journal meeting this year, and while he was there, he captured some of the best responses that Charlie gave.

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  • What would happen if we all bought index funds.
  • What the future holds for money managers.
  • Why it would be delusional to think you understand the future of payment systems.
  • Why you need to earn the right to become rich.
  • Whether you should invest through a partnership or a holding company.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh  0:02  

Hey, how’s everyone doing out there? Today, we’ve got an interesting show for you that covers one of our favorite billionaires, Mr. Charlie Munger. 

Munger’s net worth is about $1.5 billion, and as most people know, he’s Warren Buffett’s vice chairman at Berkshire Hathaway. As we’ve talked about in previous episodes, Munger is really a brilliant individual that’s considered a polymath. 

But something that few people know about Charlie Munger is that he’s an investor with a Daily Journal Corporation in Los Angeles, California. As a result, he does a question and answer period every year at their annual shareholder meeting. 

One of our good friends, Hari Ramachandra was one of the few people that were lucky enough to attend the Daily Journal’s meeting this year, and while he was there, he captured some of the best comments that Charlie gave. 

So, similar to the way that we cover the Berkshire Hathaway Shareholders’ Meeting each year, get ready for an interesting show that captures one of the smartest people’s thoughts on a variety of investing topics. So, here we go.

Intro  1:01  

You’re listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Preston Pysh  1:21  

All right, how’s everyone doing out there? And like we said in the introduction, we’re going to be talking about Charlie Munger today. We’re really excited to have Hari Ramachandra with us, as everyone knows, he’s part of our Mastermind Group. 

And Hari was the one who brought this one to us because Hari was privileged enough to actually attend the Daily Journal annual meeting with Charlie Munger, and it’s not a big group. I know from the video that I had access to that I watched. It was a pretty small room, Hari. It looked like there were about 100 to 200 people there at most, right?

Hari Ramachandra  1:54  

Yes, about 200 people, I would say.

Preston Pysh  1:56  

Before we start diving into some of the questions and doing our analysis of Charlie’s comments. I want to have Hari describe to us what the Daily Journal is, why Charlie Munger’s a part of it, and kind of a little bit about the meeting.

Hari Ramachandra  2:09  

Daily Journal Corporation is a publishing company. It is headquartered in Los Angeles, California. They have two divisions. One is a newspaper division, which is their traditional business. 

However, they also have a new venture, they call it Journal Technologies. And the Journal Technologies, essentially makes software, and these are case management software systems for courts and prosecutors and public defenders, and stuff like that. And this is a venture *inaudible* Munger calls it. 

And the reason Daily Journal got popular is because Munger is a longtime vice chairman of this company, since 1977. However, nobody paid attention until Munger invested $20 million of Daily Journal’s cash during the 2009 crash into few companies like Wells Fargo, US Bank and PASCO, and by end of 2016, that $20 million was worth $166 million in general portfolio. 

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Preston Pysh  3:19  


Hari Ramachandra  3:20  

And, from then on, I guess before that, there were only a few who attended the Daily Journal annual meeting. 

Preston Pysh  3:26  

First of all, how did you get asked there? How did you get access to this meeting?

Hari Ramachandra  3:30  

The fact that very few people know about this meeting makes the audience much less in number than the Berkshire, and I hope after this show, next year, when I go, I don’t have too much competition. 

Preston Pysh  3:43  

So what Hari was saying is, this is the last time they’re having a meeting. This meeting will probably never happen again. Right, Hari?

But anyway, so it’s a very small gathering, and it’s just Charlie. And Charlie’s answering questions for about two hours for anybody in the room. From what I understand after he’s done asking all the questions, he’s very accessible. 

I know I got a Christmas card from Hari this year that had a picture of him and Charlie Munger together, arms wrapped around each other like they were brothers. Is that true, Hari? I mean, what did you get to say to him after the meeting was over?

Hari Ramachandra  4:17  

One of the interesting things about this meeting is Charlie is much more relaxed and much more colorful than he is at Berkshire. He spoke for almost an hour or two after the two-hour long meeting with folks who had come from all over the place. Conversations are very candid and very interesting, so I would encourage everyone to listen to that.

Preston Pysh  4:42  

So we’re going to have links to Hari’s article in our show notes, and just so people know Hari blogs at a blog called bitsbusiness.com, but we’ll have the links to all that in our show notes and he has links to these videos so you can watch the full cut. 

What we’re going to do is we’re going to go through some of the audio of Charlie’s responses to what we’ve picked out as being some of the better questions and some of the better responses that he provided during the meeting. Some really, really interesting stuff. 

So, the first thing that we’re going to play here for you, is in the past, anyone who tracks cryptocurrencies and payment processing things that are really kind of emerging and evolving here, Charlie has been a real naysayer of a lot of this stuff. 

I forget what his exact quote was, whenever he was on CNBC when he was asked about Bitcoin, but it was something [along] the lines of this stuff is absolutely an abomination or just a disaster.I can’t remember what he said, but [he was in a] very, very negative position on it. When you hear this clip, I’m curious to hear what people will think after they hear what he has to say now.

Audience 1  5:44  

American Express by *inaudible* is more in terms of payment, or is more in terms of service and rewards. 

Charlie Munger  5:52  

I would say I’m confused too. I think if you think you understand exactly what’s going to happen to payment systems 10 years out, you’re probably under some state of illusion. It’s very hard to know. So if you’re confused, all I can say is welcome to the club. They’re doing the best they can. They’ve got some huge advantages. It’s a reasonable bet, but nobody knows. I don’t know if IBM is going to sell that much of Watson.

I always am agnostic on the subject. And you’re talking about tech payment system 10 years *inaudible*, I’m agnostic on that, too. I think if you keep trying, do the right thing and you play the game hard, your chances are better. But I don’t think those things are normal. Think of how fast they change.

Preston Pysh  6:37  

So this was a fascinating exchange. The person initially asked in case you didn’t hear that he was asking about American Express and where he thought that was going to go and he basically said, hey, if you think you understand where this is going, you have no idea. 

Something that I also found interesting at the tail end there was the jab at IBM. I mean, that was a real jab that he threw there at IBM like, I don’t even know that they can sell this Watson. Was this meeting before Berkshire? This was in February, right?

Hari Ramachandra  7:04  


Preston Pysh  7:05  

Yeah. So this was back in February. So this was before the Berkshire meeting, which basically showed his hand a little bit of what was to come with the IBM pullback as well.

Hari Ramachandra  7:14  

Yep. What is interesting, Preston is even in the meeting one year before the CSU has an annual meeting. So, even in 2016, somebody had asked Munger about Berkshire’s IBM bet. And Munger had even then said that he is not sure about IBM, and he said, “I’m agnostic.” And it is not a stinge. It is not something that Warren would really understand as much as he would when he invested in Coca-Cola, for example. 

Preston Pysh  7:47  

I remember that from the year before because we went to the meeting two years ago. And I think, Stig, we even talked about this on the show, right? He basically did this tap dance routine for like one minute and literally gave nothing away. Like, oh, yeah, we understand that. And then like that was it, and then they ran away from the question, and they didn’t talk any IBM stuff.

Stig Brodersen  8:05  

I think whenever you listen to Charlie Munger, he’s usually very honest, very candid, especially with the recordings that you’re going to listen to later in this episode. Whatever he says in public, especially when he is with Warren, that’s really because he doesn’t want to be disloyal in any way. I think, whenever you Google something about Charlie Munger and IBM, which we did prior to the show as research, he never really thought it would be a good idea. And it’s not really in hindsight today where he’s like, well, it didn’t pan out, like, immediate, whenever Warren Buffett made the purchase, he was really, really skeptical about it. So, I just think it’s really interesting to see him in that role as well.

Preston Pysh  8:42  

So Hari, did you read into his response as kind of a nod towards blockchain technology there with the payment processing and all that kind of stuff changing in the next 10 years? Because that’s how I took it. 

Hari Ramachandra  8:53  

Yeah, I think what Munger is saying is that the rate of change is so rapid and in such an environment, it’s really hard for anybody to make predictions. He doesn’t want to take any sides because as Munger would say, unless he can argue well from both sides, he doesn’t allow himself to hold an opinion. I think he hasn’t completed his homework yet that’s how I see it, about payment systems and cryptocurrencies. 

Preston Pysh  9:20  

When we interviewed Ed Thorp, I saw the exact same approach to basically designing his idea of the probabilities on both sides. If he couldn’t really argue one side or the other, it was just an immediate 50% default. And you’re seeing kind of the same thing with Munger and the way that he kind of answers this question. 

When Munger is later asked about what book he would recommend that he’s currently reading or something that would be a good read, he actually recommends Ed Thorp’s new book that came out whenever we interviewed him on our show, so that was kind of interesting that Munger was recommending his book. 

Hari Ramachandra  9:55  

He also had a lot of good things to say about Ed Thorp. He actually spoke quite a bit about Ed Thorp, and then the book. That was interesting.

Preston Pysh  10:04  

All right. So let’s go ahead and go to the next question. Now, this is one that I’ve seen a lot on Twitter. This is something that I’ve seen in some of the forums. Because ETF [exchange-traded fund] investing has become so popular lately. 

You got a couple of people that you will read from time to time talking about how, because everyone’s piling into ETFs, that whenever we do see a contraction, and we do see the market pull back, that it’s going to be this really abrupt and seismic kind of event that occurs because so much of the money is being pushed into these ETFs and then spread across the breadth of the entire market. 

So, this next question hinted that and we’re going to hear what Munger says and thinks about that topic.

Audience 2  10:45  

Hello, Mr. Munger, William Andreessen, student at USC, wonderful stories. With regard to the proliferation of index funds, do you think that there may be issues of liquidity anytime we go through another large crisis, and then, do you think that that will create large discrepancies between the price of the index fund and the values of the securities underneath?

Charlie Munger  11:06  

Well, the index funds of the S&P 500 is like 75% of the market. So I don’t think the exact problem you’re talking about is going to be a big problem, like what the S&P 500 index. But is there a point where index funds theoretically can’t work? Of course. If everybody bought nothing but index funds the whole *inaudible* wouldn’t work as people expect. 

There’s also the problem, one of the reasons you buy a mega index like the S&P 500 is because when you buy a small index, and it gets popular, it’s a self-defeating situation. 

When a Nifty 50 were the rage, JP Morgan talked everybody into buying these 50 stocks. And they didn’t care what the price was, they just bought those 50 stocks. And of course, in due time, their own buying force those 50 stocks up to 60 times earnings were about to broke and everything went down by about two thirds, quite fast. 

In other words, if you get too much *inaudible* in one sector, or one narrow index, of course, you can get catastrophic changes like they had with the Nifty 50 in a former era. I don’t see that happening when the index is three quarters a whole market. The problem is the whole thing can’t work perfectly forever. But it will work for a long time. 95% of the people have almost no chance of beating it over time. 

Although people expect that they have some money, they can hire somebody who let them beat the indexes. And of course, the honest sensible people know they’re selling something they can’t quite deliver. That has to be agony. Most people handle it with denial. They think it’ll be better next year. But you don’t want to think about it, and I understand that. I don’t really think about my own death either. 

But it’s a terrible problem meeting those indexes. And it’s a problem that investment professionals didn’t have them in the past. And what’s happening, of course, is that the prices for managing really big sums of money are going down, down, down, 20 basis points and so on. 

The people who *inaudible* as an investment management didn’t do it by getting paid 20 basis points. But that’s what we’re doing, I think in terms of people who manage big portfolios, so say, American equities in the equivalent of the S&P 500. So it’s a huge, huge problem. And that it makes your generation of money managers have way more difficulties. It causes a lot of worry and forgetfulness. And I think that people who are worried *inaudible* are absolutely right. I hate to manage a trillion dollars in the big stocks and trying to beat the indexes. I don’t think I can do it. 

In fact, if you look at Berkshire, take out 100 decisions, which is like two a year. Success at Berkshire came from 2 decisions a year for 50 years. Where are they *inaudible*. You may have beaten the indexes, but we didn’t do it by having big portfolios of securities, having subdivisions managing the drugs and subdivisions, and so on. The indexes are a hell of a road for you people. But you know, why should look *inaudible*. It’s what had to happen that’s happened.

Stig Brodersen  14:35  

So, Hari, I would like to kick this over to you here soon because early in one of our Mastermind discussions, you actually brought up the concept about Nifty 50, which is really an interesting point, especially given the stock market we have today. So perhaps if you can briefly explain what it is, the concept, and then also how it relates to today and then passive investing.

Hari Ramachandra  14:56  

Yeah, I remember that conversation, Stig, and it was in the context of the Nifty 50 era back in the ’70s, where companies like Xerox and a couple of favorites, McDonald’s were believed to be so good that the price didn’t matter. And people were encouraged to just buy it and forget it.

And I guess Munger is talking about those eras, and the index funds are funds focused on those Nifty 50s during that time, later on, basically, were self defeating in the sense that the stocks became so expensive that eventually it was a disaster for many investors. 

Munger is basically talking about how index funds can basically self-destruct if taken too far. However, as you noticed in the talk, he thinks it has not approached that level yet, as long as we are focusing on a broad index.

Stig Brodersen  15:52  

Yeah, because it’s really interesting what he talks about. He’s talking about how you can beat something up to 60 times earnings, that’s what he’s talking about. Whereas, which seems outrageous today, until you actually read the income statements for a lot of different companies. One company that might come to mind is something like Tesla. I mean, Tesla would be really happy if they had a P ratio of 60. They don’t. They have a market cap of around $60 billion as far as I remember. And I think last year, they lost something around $700 million or $800 million. 

So I mean, they would love a P ratio of 60. But that’s actually what’s happening right now. And that’s also what he’s discussing, even though he thinks that, right now, it might not be so much of a problem. But if you were buying an index fund that includes Tesla, then you are buying into a company that’s losing money. 

And if everyone does that, that’s basically what the question is all about/ What happens then? I would just be bidding up stocks that might not make any kind of profit at all? And what Charlie Munger talks about is what happened with the Nifty 50 is that they just lost two thirds of the market value just like that, because, in the end, if the valuations can’t be sustained, that’s just what happens. 

The narrative is really hard to understand, because whenever you’re reading the empirical evidence about fund managers, and that’s also what Charlie Munger talks about. He’s saying, well, 95% of people can’t beat the market, so why should we invest in index funds? So, if you have this idea that you should just always invest in index funds because you have no idea about the market, it can also be disastrous.

Hari Ramachandra  17:23  

*inaudible* you were having a conversation before the show, and it all boils down to your investment horizon. Many folks limit their investment opportunity just by their preferences. But, if you are a savvy investor, as you rightly mentioned, Stig, then index funds is just one of the options for you. 

But you are looking at individual companies, real estate, or commodities, or even cryptocurrencies. And you’re making a conscious decision based on what the right investment at that particular point of time is.

Stig Brodersen  18:00  

Yeah. And to respond to your question and also to hand it over to you again, Hari. I’m curious to hear your thoughts because you hear someone like Warren Buffett, he’s been saying multiple times that, call it, 98% of investors should invest in index funds, especially if you don’t have the time and skill to invest in the market. 

Whenever you hear Charlie Munger’s response to the question, do you think we should evaluate what Warren Buffett is saying, or do you think Charlie Munger has a different opinion? Is that how you interpret it?

Hari Ramachandra  18:27  

To be fair to Buffett, I think he is clear in his advice. He says, no, nothing investors. The safest option is index funds. He doesn’t necessarily say it’s the best option for everyone. But for diligent enterprising investors like him, he wouldn’t recommend index funds. I don’t see Berkshire buying index funds yet. And probably there is a reason for that. And another thing that I always keep in mind is whenever I am thinking about returns, the first thing I ask myself is: Do I deserve it? 

I might want 15% returns annually, but do I deserve it? Do I have the intellect and the time to do the homework? And if I don’t, then I should be satisfied with whatever returns I would get from an index however flawed they might be. But based on the historical record and data we have, index funds have a track record of delivering 6% to 7% return, at least in the US, which I think most investors will be happy to take.

Preston Pysh  19:39  

Okay, so the next part here that we’re going to play. I found this exchange really quite interesting because one of the things that I think Charlie is really, really good at is just psychology in general, and kind of mixing psychology with investing. And this next exchange covers that topic and it’s an idea of discarding your best ideas. 

Audience 3  19:59  

You said that any year in which you don’t destroy one of your best loved ideas is a wasted year. It’s well known that you have coaxed Warren towards quality which was a difficult transition for him. I was wondering if you could speak to the hardest idea that you’ve ever destroyed.

Charlie Munger  20:14  

Well, I’ve done so many dumb things. I’m very busy destroying bad ideas because I keep having them. So it’s hard for me to just single out one from such a multitude, but I actually like it when I destroy a bad idea. I think it’s my duty to destroy *inaudible*. 

I know so many people, whose main problem in life is that the old ideas displace the entry of new ideas that are better. That is their absolute standard outcome in life. As an old German folk describes it [and] says, “We’re too soon old, too late smart.” That’s everybody’s problem. And the reason why I’m too late smart is we still have ideas, we always have, we already have, we can’t get rid of. 

Now it’s a good thing that we have that problem. In marriage that may be good for the stability of marriage, that we stick with our own ideas. But in most fields, you want to get rid of your old ideas. It’s a good habit, and it gives you a big advantage in the competitive game of life since other people are so very bad at it. 

What happens is that you spout ideas out. What you’re doing is you’re pounding them in. The person you’re really convincing is, you already have the ideas, you’re just pounding them in harder and harder. 

One of the reasons I don’t spend much time telling the world what I think about how the Federal Reserve System should behave, and so forth is because I know that I’m just pounding the ideas into my own head when I think I’m talking to other people how to run things.

Preston Pysh  21:51  

Alright, so I personally love this exchange. It reminded me of a quote that I had seen and I apologize that I don’t know the source of this book, and I’m doing a variation of the quote, but it’s basically like most people are dead at the age of 40 even though they’re still living. 

And what the quote’s getting at is, “How many people out there do you know that are 40 years old and in their life when they’re 40 until the day they die, they’re doing the exact same thing?” They’re thinking the same exact way. They’re not learning anything new. It’s almost like they have a programmed response. 

[It’s] like they’re almost like a computer, going through an algorithm, and going through the same routine every single day. They’re not challenging in destroying preconceived notions and ideas that they had had from those first 30 or 40 years of their life. 

And so, in a way, you’re almost dead at that point. You’re not doing anything new, you’re not living anymore. And I really find a lot of value between the correlation of that quote and what Charlie’s talking about here, where he’s saying, you’ve got to destroy bad ideas. 

You’ve got to continue to challenge your thinking and watching the video and hearing him say this, Hari, it seemed like this was a very, very important point for him and something that he really wanted to emphasize to the crowd. Did you get that feeling when you were there in person?

Hari Ramachandra  23:10  

Yes, I did. And in fact, he brought the same topic up a couple of times, even though he was not asked about bad ideas, but he kept referring back to this idea of discarding bad ideas multiple times in different contexts. I think he values this very much. 

In fact, he has said many times that Berkshire is what it is today because of how Buffett has been a learning machine and has been constantly learning and growing as the business environments changed. And as part of that, he believes discarding old ideas is very important.

Stig Brodersen  23:55  

Yeah, it’s a great point, Hari, and I remember whenever we did the episodes about the Berkshire Hathaway’s recent meeting, and Warren Buffett and Charlie Munger talk about the Apple acquisition. Charlie Munger says he took that as a good sign that Warren Buffett was still learning. 

I would just remember smiling whenever I was listening to that, because one of the themes that we see again and again with these two are that they talk about how the ideas is really developed like how they started out with these really basic ideas of only looking at the hard assets, and the lowest possible valuations; how they went on to other acquisitions like See’s Candies with more economic moat and whether it didn’t need to put in so much capital, then transitioning into utilities where you actually need to put in a lot of capital. 

They simply needed that because they had a portfolio that was just too large, but they still found a niche that was somewhat protected and had somewhat monopoly power. And now, they’re talking about going into what some people might call technology, or in any case, a different type of consumer good. 

They kind of need to reinvent themselves all the time because the times are changing, the size of the assets on the management are changing as well. In this situation, having money is a really nice indicator of growing, if you like, but I think it’s applicable for everything, and not just investing. 

And I think probably Charlie Munger, more than anyone is really a learning machine instrument in a number of different fields. We’ll talk more about that later in the show, but just something to leave out there for everyone. I mean, he’s really modest in a way he’s saying I know a little about everything, but he’s really a specialist, and almost everything you can think of out there.

Hari Ramachandra  25:37  

That’s a very good point, Stig. In fact, Buffett has been quoted saying that Munger is one of the few people who can get to the bottom of a topic within 30 seconds and deliver key insights. He [Buffett] has valued Munger’s insights and feedback many times in his investing career. 

Preston Pysh  25:58  

Alright, so the next question, we’re going to play is a question where a member of the audience asked Munger how he can get superior returns, kind of like the way that Buffett and Munger had achieved. And this was Charlie’s response. 

Charlie Munger  26:12  

Well, he really wants to get rich at a rapid rate. That was not what we’re trying to do here. I’ll leave some mystery so that you can use yourself finding your own way.

But ideas that I’ve heard a quite few. The lesson I can give you is, a few is all you need, and don’t be disappointed. And when you find the few, of course, you’ve got to act aggressively. That’s the Munger *inaudible*. 

I learned that indirectly from a man I never met, which was my mother’s maternal grandfather. He was a pioneer and came out to Ohio and fought in the Black Hawk wars and so on, and eventually, after enormous hardship, when he was the richest man in town, when he opened the bank and so on, he sat there in his old age, grown-up. 

My mother knew him because she’d go to Algona, Iowa where he lived, at the big house in the middle of town. What Grandpa *inaudible* used to tell her is, “It’s just a few opportunity to get no whole life, escaped go where Iowa and the land was black top *inaudible*. 

Iowa’s cheap, but it didn’t get that many opportunities. Just a few of it, and they will *inaudible* prosperous. He bought a few farms. *inaudible* was a panic. Please let me go through a few Germans. Money policing a farm to the German in Iowa. But he only did a few things. I’m afraid that you’re not going to find a million wonderful ideas.

Well, the computer algorithms do it but they have a computer sifting in the whole world. It’s like placer mining. Of course, every night you sit around and somebody else comes in the niche starts leeching away. I don’t think it’s that optimal way to make a living, by the way. I would rather make my money in some other way than outsmarting the trading system, so I have a little computer algorithm that just leeches a little off everybody’s trade. 

I always say that those people have almost also utility, a bunch of rats and a granary. It’s not that great way to make money. I would say that if you make your money that way, you should be very charitable with it. You got a lot to atone for. 

So, I don’t think it’s an ambition we should encourage. And the rest of us who aren’t just leeching a little off the top, because we’re great at computer science. And that’s what this room was *inaudible*. And if you’re not planning it harder now, you don’t understand it. That’s my lesson. 

Hari Ramachandra  28:52  

So, this was an interesting interaction, because the person who asked the question was asking for specific advice and specific picks or tips. And you know how Munger reacts to such questions because he feels that you’re not entitled to receive specific tips and you have to do your own homework. 

And so, obviously, there was that aspect to his answer. He also said something else in terms of achieving superior returns. And that was about temperament, temperament in terms of being patient, as well as the concept of having a concentrated portfolio and that’s where he was giving his grandfather’s example. 

He also went on to talk about his own experience later in the event where he said that he read Barron’s for 50 years. And he found just one investment opportunity that turned his $1 million or $2 million into $80 million. And then, he gave it $80 million to Leloo, who turned it into $400 million or $500 million. He also said, by the way, I’ve been reading Fortune for more than 60 years, and I haven’t found an investment opportunity yet. Nothing against Fortune, but it might later. 

Preston Pysh  30:19  

I like that. That is good. 

Hari Ramachandra  30:21  

So I think what he’s trying to tell the audience is, if you want to achieve superior returns, you’ve got to wait. He’s also talking about how hard it is to achieve superior returns. It’s not easy.

Preston Pysh  30:34  

Yeah, I like it. 

Okay, so the last question that we’re going to play here is a really interesting exchange around the corporate structure of Berkshire Hathaway itself as a holding company. And the person gets into an exchange with Charlie about whether it’s smarter to have a partnership, or to do a holding company like the way Berkshire Hathaway was set up. So, you’re going to be surprised by his answer here.

Audience 4  30:58  

Once you imagine you have the opportunity to invest with a couple money managers that you really like, and they offer you a couple different ways to invest in their strategy. So one way is [a] partnership that would flow through the taxes. And the other way is through a corporation that would pay tax on the gains and the dividends. The corporation would serve no other function, other than paying taxes. So I think you’d be crazy to say that those two ways of investing are equally desirable.

Charlie Munger  31:25  

You’re certainly right about that. It’s plumb crazy. That’s exactly the way people buy Berkshire investing. It’s plumb crazy. They have a big common stock portfolio in a corporation and pay taxes compared to investing in a partnership that doesn’t. And that’s just the way the Berkshire shareholders have invested. And they have made whatever it is, 25% a year since we were there. But you’re right. It’s not the logical way to do it.

Audience 4  31:50  

So my question is, if you had to decide to invest in Pool A or Pool B, how would you decide on that? What method would you use to figure out what discount would make you indifferent to whether you invest in the corporate tax paying structure?

Charlie Munger  32:04  

I think it is totally asinine to invest in a portfolio [of] common stock through it. Corporation tax *inaudible* Subchapter C, or something. Totally asinine. And Berkshire Public Securities keep going down and down *inaudible* is the total value. So, it doesn’t matter. 

We’re getting to be sort of a normal corporation, but I don’t think anybody in his right mind should invest in a corporation in a bubble of securities. The tax disadvantage is so horrible. So, I wouldn’t even consider it. 

In other words, and I regard it as a minor miracle that we were able to get what we did. So of course, you’d invest in the partnership. 

Audience 4  32:36  

So with anyone who invest in Berkshire has to decide what discount to put on a pool of securities that has a future tax *inaudible* on the gains. So do you have to invent a model?

Charlie Munger  32:47  

Yeah, my model was to avoid it. I don’t want to invest in a pool of securities in somebody else’s corporation. You’re totally right. But you already knew, by the way.

Preston Pysh  33:15  

So that exchange for me, if people could see our Skype call, Stig, Hari and myself are just grinning ear to ear because it’s just crazy to listen to him say that, because that’s what Berkshire Hathaway is. 

I love his little snide comment there at the very end, and you already knew the answer to this. But what a great question, and he obviously can’t defend it through logic, but they’ve proven that it’s the right way. 

This is what my personal opinion is the value that he’s not discussing through this is this idea of the disadvantages of a partnership versus a holding company. The disadvantages with a partnership is that you get the money all at the wrong time. 

So, when the market has a massive downturn and everyone’s running for the hills, because they’re scared. They’re pulling their money out of your fund right when you need the money to invest and buy the cheap assets. And whenever the market’s booming, call it now, and everything’s doing really good, everyone’s throwing money at you, and all the things that you can buy in the market are overpriced. And so, that’s a total handicap for a partnership. And whenever you have a holding company, you can actually do the exact opposite. 

Buffett and Munger, if they wanted to, they could issue more common stock. They could raise more cash. Put it into the cash account, and then whenever the market has a downturn, they could take that liquidity in that cash and invest it, when everyone’s selling their stock at a very cheap price. Heck, they could buy back their own shares off the market at a cheaper price and take advantage of the situation. 

So, I really think that that’s a very, very valuable part of this equation that we’re talking about. That was never brought up. Munger didn’t defend it in that way at all, but I’m trying to do that now, and I’m curious what the audience might think. Hit us up on Twitter if you agree or disagree with my opinion. And I’m curious to hear what Hari and Stig think about this.

Hari Ramachandra  35:13  

So Preston, that’s right. I wasn’t sure whether Munger was using the questioner. 

Preston Pysh  35:20  


Hari Ramachandra  35:21  

And you know, Munger is moody, and sometimes he doesn’t have the patience to really explain everything and give him the context. So, sometimes he just throws curveballs back at people. And if you see at the end, he says, “I guess you knew the answer,” and I think what you just described, Preston, is like the second-level thinking; what Howard Marks calls the second-level thinking. 

On the surface, if you just look at all the superficial data, yes, partnership in this situation is better. But, if you look at the second level of things that Berkshire has what Munger calls the lollapalooza effects including a perfect permanent capital that you described, the holding structure definitely made sense. 

We have to be cognizant of the fact that it was Munger and Buffett who found this structure, and they would have put a lot of thought into it. Buffett was actually operating as a partnership before. And there is a reason why he got out of that partnership model into this holding company.

Preston Pysh  36:26  

Stig, I’m curious to hear what you think. Do you think he was antagonizing the person asking the question because he was so smart that he was dumb, in a way?

Stig Brodersen  36:34  

Yeah, I think what really ticked him off was that he knew it was not really a question. It was actually because the person asking the question wants to hear himself talk and really come with an insightful question, but it was something a lot of people have really haven’t thought about.

Preston Pysh  36:47  

He didn’t give him a morsel. He didn’t give him anything he just

Stig Brodersen  36:49  


Yeah, I think that was actually why. 

Preston Pysh  36:52  

Hari, you were there. What do you think? 

Hari Ramachandra  36:54  

No, I think that’s what a lot of us came off thinking is that, it was definitely a curveball back at him. 

Preston Pysh  37:01  

Wow, very interesting exchange. So that’s all we have for this episode. It was pretty fun to pick through some of this Hari. Any concluding remarks that you had from going to the meeting that we didn’t have an opportunity to play, that really kind of leaves a mark in your mind that was really important?

Hari Ramachandra  37:20  

One of the things that really struck me was Munger’s reflection on his life. And also, his thoughts about mortality. And many times, he brought up the fact whether he will be there for the next annual meeting, or even brought up the topic of mortality once, when he said, “We are glad we are still getting to do what we love to do, when we should all be dead.” 

I think he’s very aware of his mortality. And that was also kind of sobering to see him talk about it multiple times. So very personal. So, that was definitely something that I took away from that meeting, and I hope to see him next year.

Preston Pysh  38:03  

Well, I thought there wasn’t going to be a meeting or something. 

Well, I’ll tell you, Hari, it was just such a pleasure having you here this week. We really appreciate you doing a lot of the research and giving us hand off to the various parts of the interview that we could talk about. It was just always such a pleasure to have you on. 

If the audience wants to learn more about you, Hari, where can they find you?

Hari Ramachandra  38:26  

I’m always there on my blog. It’s bitsbusiness.com. And also at Twitter, my handle is at @harirama.

Preston Pysh  38:33  

Alright, we’ll have links to that in our show notes. So Hari, thank you so much for joining us this week. It was such a pleasure to have you on the show.

Hari Ramachandra  38:40  

Thank you guys. It’s always a pleasure.

Stig Brodersen  38:42  

All right, guys, that was all that Preston and I have for this week’s episode of The Investor’s Podcast. We see each other again next week.

Outro  38:49  

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