Charlie Munger Analyzes Current mess

[haha]

Charlie Munger is guy worth listening to. Even Warren Buffett thinks so.

washingtonpost.com

 

[W2R]

Interesting article, Ha. I like his discussion of and identification of the causes of the financial crisis. His discussion of WHY there will be opposition from academia to specific efforts to reform is very realistic, IMO.

His comparison with the Marshall Plan is mind-boggling. Do we really have that much time to consider and form these emergency measures for financial recovery? We are told no, but possibly we do.

I am not so sure that bipartisan support of the financial recovery bills would more quickly result by following along the lines of the deliberative rules of Constitutional Convention of 1787, though. I am not too familiar with them, but that sounds pretty cumbersome and might take longer than desired as well.

Thanks for pointing out the article. Munger's analysis is particularly astute, and his idea of modeling the recovery efforts along the lines of the Marshall Plan or the Constitutional Convention of 1787 are interesting, though they imply such a lengthy time frame that I almost wonder if he wrote this tongue-in-cheek.

 

[ziggy29]

I'm always entertained by listening to Charlie Munger. As he once famously remarked, "you can mix raisins with turds, but you still have turds."

 

[Hamlet]

The note at the end surprised me. Is Charlie Munger really a Republican? I've always assumed he was more or less in agreement with Buffett.

 

[unclemick]

Go get em Charlie - sic em!

Munger is Munger.

heh heh heh -

 

[clifp]

The note at the end surprised me. Is Charlie Munger really a Republican? I've always assumed he was more or less in agreement with Buffett.

He has written a lot of checks to Republicans over the years. AFAIK, he is a classic Wall St. Republican not a social conservative. Although he may have share social convervative views.

Buffett would be a Republican if it wasnt for his late wife, and the Washington Post's Katherine Graham

 

[Free To Canoe]

His comparison with the Marshall Plan is mind-boggling. Do we really have that much time to consider and form these emergency measures for financial recovery? We are told no, but possibly we do...

Perhaps the economic turnaround comes first, then the needed reforms / safeguards.

I have not read too much of him or Buffett. Both of those guys use little words but their conversation is deep in meaning.

Free

 

[harley]

His comparison with the Marshall Plan is mind-boggling. Do we really have that much time to consider and form these emergency measures for financial recovery? We are told no, but possibly we do.

No way, W2R! This bill is MUCH too important to think about or discuss. Not to mention reading the ~1420 pages of it. If they were to take time to actually read the thing there's a good possibility the daggone crisis would be over and they'd have lost the chance to pass every spending project they've ever thought of. I mean, the Republicrats got the Patriot Act, so the Dems deserve this one!

 

[deserat]

I, for one, am appalled at the speed in which duly elected representatives are willing to increase umpteen-fold the spending of my, my future and the future generations' money without even demonstrating some deliberation regarding the 'audacity' of this action. I read an analogy by an economist that likened the economy to a ship being controlled by a large lag 'rubber-band' - the control system is not tightly coupled to the response of the ship. This is like the difference between driving a Honda and Porsche - the response time to my pushing on the accelerator and receiving/demonstrating torque is much more quickly translated in the Porsche than in the Honda. That means I have to wait a bit to determine if my input is getting the output I desire when driving the Honda - now magnify that much more in time and that's the way government works - since they set the dials initially, they don't know exactly where they'll end up - the problem with that is a tendency to 'oversteer' due to not understanding a compensation for the time lag. This 'government input' is so large, that the future repercussions may be way beyond what was initially intended. Usually what one does in a large lag time system is slowly adjust the input while allowing for the lag time to elapse getting better output information to then more correctly direct any further input if needed.

As for more taxation - I don't necessarily agree with Mr Munger - however, his request, with analogies to Marshall Plan and Constitutional Convention, to slow down and deliberate what input truly should be put into the system, is one with which I agree.

 

[ERD50]

Good analogy deserat. Along that same line, I've also read that there really is no "feedback" mechanism in any of this. It's just "throw this out and see what happens". It would be possible to build feedback right into the bill, but they didn't. Granted, that feedback might be too slow, but some would be better than none.

It's like I mentioned before on a gas tax. If we really want to set a goal for oil consumption, have a gas tax based on a formula that self corrects. Americans using too much oil - raise the tax. Looks like we are ahead of goal - ease the tax down a bit. It could happen automatically, no voting from Congress required.

But since Congress often does not even put inflation adjustments in where they are critically needed (AMT), I don't think we can expect anything as "advanced" as applying centuries old control theories to economics.

-ERD50

 

[Kwirk]

Buffett would be a Republican if it wasnt for his late wife, and the Washington Post's Katherine Graham

Or, maybe, he doesn't want to be a raisin...

Honestly, I don't see him as so easily influenced as that.

 

[FinanceDude]

Or, maybe, he doesn't want to be a raisin...

Honestly, I don't see him as so easily influenced as that.

Munger's a Republican, and Buffet's a Democrat, sounds like balance to me........

Actually, Buffet's son, Peter, has a house here in Milwaukee. I met him at a function at the Art Museum. Nice guy, and quite a musician from what I understand. No real interest in taking over Dad's business.....

 

[clifp]

Or, maybe, he doesn't want to be a raisin...

Honestly, I don't see him as so easily influenced as that.

Buffett's dad was super conservative congressman, and stockbroker, so he started out life out as a Republican and Ayn Rand fan into his 20s. After reading the 900 pages of Snowball, I think marrying a [-]bleeding heart liberal [/-] carrying and compassionate Susie and his long discussion with equally liberal Katherine Graham had big influence.

What would be your explanation for the conversion?

 

[Nords]

Or, maybe, he doesn't want to be a raisin...
Honestly, I don't see him as so easily influenced as that.

Honestly, you need to read "The Snowball" to learn the effects those two women had on Buffett.

There's speculation that Warren Buffett was also rebelling against his father. Dad was so autocratically and righteously Republican that it got him voted right out of Congress, with the full endorsement of his fellow Republicans.

 

[clifp]

One thing is for sure is that if Warren Buffett dad was alive today. He would be screaming at the top of his lungs about how bad the stimulus package. Of course none of today's reporters would ask such a question.

 

[RonBoyd]

none of today's reporters would ask such a question.

None of them? Wow! What an indicment. We should sue someone.

 

[haha]

I'm always entertained by listening to Charlie Munger. As he once famously remarked, "you can mix raisins with turds, but you still have turds."

Did you know that in this quote he was referring to indexing and to extreme diversification in general? While Buffett has recently recommended indexing to investors, he also has said that indexing is a wonderful thing for an investor who likes to think, as it creates a lot of money that will be invested in stocks regardless of their intrinsic attraction. In other words, a bottomless well of dumb money.

Ha

 

[Ed_The_Gypsy]

Interesting, his reference to George C. Marshall, one of America's quiet giants. I credit Marshall with creating the (more or less) united Europe of today.

 

[Maurice]

Hmmm...

First they came for the Credit Default Swaps,
But I wasn't a Credit Default Swap, so I said nothing...

 

[ERD50]

"you can mix raisins with turds, but you still have turds."

Did you know that in this quote he was referring to indexing and to extreme diversification in general?

Ha

That also reminds me of a quote :

I know half the money I spend on advertising is wasted, but I can never find out which half. John Wanamaker

-ERD50

 

[ziggy29]

Did you know that in this quote he was referring to indexing and to extreme diversification in general?

I believe he said this right as the tech bubble was starting to pop at the BH annual meeting in 2000, as he and Buffett were discussing the irrational exuberance in the tech market.

In other words, even if a rising tide lifts all boats, Munger still believes that some boats still need to be avoided because they may sink like a rock when the tide goes back out (and you can see who was swimming naked). And my reading is that because Buffett and Munger were not authorities in "evaluating" tech stocks (they could review the financials but they have trouble identifying "staying power" or a "moat" in their industry), they avoided the sector entirely because they'd probably end up with some of the turds with the raisins. If they bought tech without understanding long-term competitive advantages (moats), they'd end up with some turds.

The reason we use the phrase, "wretched excess," is because it produces wretched consequences. It's irrational. If you mix raisins with turds, they're still turds.

 

[haha]

I believe he said this right as the tech bubble was starting to pop at the BH annual meeting in 2000, as he and Buffett were discussing the irrational exuberance in the tech market.

In other words, even if a rising tide lifts all boats, Munger still believes that some boats still need to be avoided because they may sink like a rock when the tide goes back out (and you can see who was swimming naked). And my reading is that because Buffett and Munger were not authorities in "evaluating" tech stocks (they could review the financials but they have trouble identifying "staying power" or a "moat" in their industry), they avoided the sector entirely because they'd probably end up with some of the turds with the raisins. If they bought tech without understanding long-term competitive advantages (moats), they'd end up with some turds.

Well, we were both wrong as to the meaning of the quote, but you had the scene correctly. As you said, it was at the 2000 annual meeting. As far as I know, there are no official transcripts, only ones provided by attendees. Here is what I found:

Question: With speculation in the high tech area, what are your views on a crash?
WEB: Any time there have been real bursts of speculation in the market it does get
corrected eventually. (He gave the Ben Graham voting machine quote). No wealth
created just an enormous transfer of wealth. Money has been destroyed by the frictional
cost of trading.
We had a mania in farmland in Nebraska, land prices spiked and when farm
prices went down a lot of people and banks were devastated. A huge number of
participants creates it’s own truth for a long period of time.
CM: Wretched excess, retched consequences. Mixing ponzi schemes with good
possibilities of internet. When you mix raisins with turds, they are still turds.

So it appears that Charlie was calling “good possibilities of the internet” raisins, and Ponzi like speculation turds.
Ha

 

[Free To Canoe]

It's like I mentioned before on a gas tax. If we really want to set a goal for oil consumption, have a gas tax based on a formula that self corrects. Americans using too much oil - raise the tax. Looks like we are ahead of goal - ease the tax down a bit. It could happen automatically, no voting from Congress required.
-ERD50

Good idea!
I bet the oil industry would not like that.

Free

 

[Nords]

And my reading is that because Buffett and Munger were not authorities in "evaluating" tech stocks (they could review the financials but they have trouble identifying "staying power" or a "moat" in their industry), they avoided the sector entirely because they'd probably end up with some of the turds with the raisins. If they bought tech without understanding long-term competitive advantages (moats), they'd end up with some turds.

Schroeder's biography opens with Buffett's speech to a group of wealthy investors in 1999, a crowd that had become swelled with nouveau riche digerati. In that speech, knowing full well what kind of audience he was addressing, Buffett compared the Internet's "new economy" to the same tech boost given by the aviation, automobile, and rail industries of the last 150 years. He showed a 70-page document listing just the names of all the automobile companies of the 1920s, and mentioned that all the airline's profits since Orville & Wilbur still don't equal the money sunk into airline capital investments. He talked about the fortunes made & lost by railroad investors, let alone the fraud & waste.

Then he went on to show what would have to happen for that year's "new economy" profits to continue to grow at even a conservative estimate of the rate expected by that year's investors. By the end of the hour it was pretty clear that (1) the trend was not sustainable and (2) things really weren't different this time after all.

Schroeder also has a long account of the fateful day when an overworked & grumpy Bill Gates was required to muster for a family dinner whose guests included an equally unwilling & reclusive Warren Buffett. (It should've been titled "When Warren met Billy".) By the end of the evening, William Gates Sr. actually had to pry the two apart and suggest that they stop monopolizing each other and socialize with the other guests in a manner intelligible to most human beings, not just those showing symptoms of Asperger's.

So it's not as if Buffett was being misled by Steve Case, Blodgett, & Meeker. I think he could analyze Bill Gates' strengths & weaknesses.

I think Buffett & Munger were evaluating tech stocks just fine and understood exactly what was going to happen. I think they'd decided there weren't even any ponies in that pile, let alone raisins...

 

[ziggy29]

I think Buffett & Munger were evaluating tech stocks just fine and understood exactly what was going to happen. I think they'd decided there weren't even any ponies in that pile, let alone raisins...

I'm not sure. Buffett has more or less said he doesn't really understand technology companies.

In every year's annual report, Buffett identifies Berkshire's acquisition criteria. In it every year, he states he and Charlie are looking for (among other things):

Simple businesses (if there’s lots of technology, we won’t understand it)

I've heard Buffett talk in the past how the problem he has with calculating the intrinsic value of tech companies relates to not being able to see which companies will have a very long-term enduring "moat". I don't think Buffett is a total dummy about using technology, but my interpretation has always been that he doesn't "understand" how to measure the intrinsic value of tech companies. IV is roughly the value of the discounted cash flows that can be taken from the business over its lifetime. Some companies are so enduring, in industries he knows how to analyze, that he does a good job of figuring will be dominant and prominent in their industry for so many years a decent IV calculation can be made.

But with tech, sometimes a radical new shift takes place every 10 years or so, and when that happens, the former industry giants become also-rans -- assuming they can stay in business. Granted, a few companies have stayed at or near the top for years, but so many of them that look like the next big thing -- or even some then-current industry giants -- have flamed out when new technologies take hold that they weren't ready to exploit.

So I go back to the raisins and turds. I still believe that the point being made was that Berkshire wasn't confident with their ability to pick the long-term winners and losers in tech and thus had a hard time putting a fix on their current intrinsic value. Add to that insanely high valuations at the time for even the "turds," and you have a recipe for staying away from that sector.