Wesco 2008 brief notes

I just returned from the Wesco Annual Meeting. I will post more detailed notes in the next few days.

I am always amazed at how witty and wise Charlie Munger is. My ambition is to be like him in my 80’s—wise and a billionaire! (CM is by his own admission pompous too, but I have that part down cold!)

His introductory talk and his answers turned on three general themes—old fashioned values, systemic problems and lower returns

--Old Fashion Values

He is old fashion and he believes that old fashioned values really are better than the “rot” we have now. The values that Bank of America, accountants or investment bankers used to have would not have allowed the types of awful behaviors that we have witnessed lately. The accountants blessed accounting that allowed both sides of a zero sum derivative trade to record profits. They blessed accounting that allowed a bank to issue a security and then record a profit on that issue, because the bank’s credit was so weak that upon issue, the value of the security was such that they could buy it back at a discount! At Salomon, he intervened over some similarly egregious accounting gambit. Said Munger, “You will do this over my dead body.” He did win that battle, but the war was lost.

There has been Gresham’s law in accounting with the bad driving out the good.

--Systemic Failures

Systemic failures need systemic solutions. He liked the old fashioned system: a Roman bridge builder had to stand under the bridge when it was first used or tested. Thus builder made sure that the bridge was well made. That made for strong bridges—soundly built to withstand stress. Similarly, Berkshire Hathaway has reserves to back the reserves. The engineering principle is that back-up systems have back-up systems. The financial system need models built to sound engineering standards. As far as Munger is concerned, Alan Greenspan overdosed on Ayn Rand. So, for Greenspan, the financial equivalent of ax murderer roaming about was acceptable part of the free market. CM strongly disagrees!

--Macro Predictions

Departing from the normal, CM made a macro prediction: that the returns from investments will probably be lower. We have lived in a really good time for investments over the last 20 years or so. This will probably not continue. Furthermore, the idea of buying an investment for less than it is worth is spreading, so that making great returns is becoming harder. So expect lower returns.

Random thoughts

Munger looked hale and hearty for his age.

On real estate, he had some advice that is particularly relevant to me or for those of you buying a house in California, the price deflation has not hit the good neighborhoods. I have seen this first hand. I was expecting the prices to drop and they have not!

The three best quotes of the day.

“Ideology will cabbage hook the head of a person.” (For example Greenspan and Ayn Rand)

“General Re needed a derivative book like I needed a case of syphilis”

He and Warren learned a lot from each other, but when asked about disagreeing about investments, well he and Warren are “like old married couple, a couple of grunts and raised eyebrow and what’s the point of talking.”

Best to all!

Learn and compound!