Wesco Financial Annual Meeting Notes
Here are my notes from the Wesco Financial annual meeting of shareholders on May 9, 2007. I am paraphrasing Wesco chairman (Berkshire Hathaway vice-chairman) Charlie Munger — there are few direct quotes here.
Why was Berkshire Hathaway a “lollapalooza”? (Charlie Munger’s word) It was multiple factors acting in concert, reinforcing one another:
- Warren Buffett is smart, though not the smartest.
- He was extremely interested in investing from age 10. Hard to excel in a subject if you’re not intrinsically fascinated.
- To start early in professional life is a tremendous advantage.
- Buffett is one of the best “learning machines.” Consistent, lifelong learning.
- In investing, accumulated wisdom doesn’t decay rapidly in value (contrast this with technical disciplines such as software).
- All the work of Berkshire was concentrated in one man’s mind. As with Singapore under Lee Kwan Yew, one excellent individual drove the entire enterprise to victory.
- Buffett has a habit of maximizing his objectivity.
- He received constant rewards for doing well. This has the effect that behavioral conditioning would predict: he continued to improve. Contrast this with normal corporate pay, which rewards a CEO no matter what he does.
- Buffett is not influenced by “nuttiness”: envy, greed, profligacy, revenge, self-pity, “world is unfair to me,” etc.
- He is more like Marcus Aurelius: a tough stretch is, for him, an opportunity to learn, teach, etc.
“You could argue I was forced into investing, because one is rendered a social outcast in most fields by calling revered luminaries “nuts.”
There is a great difference between intelligence and judgment. Having one implies nothing about whether one may have the other.
- For example, by basic good judgment, it’s obvious that trust is more important than compliance. Any contractual clause you may write in can be trumped by an untrustworthy counterparty. Yet many otherwise intelligent people don’t value trust highly enough in their business dealings. By contrast, we (Wesco Financial) didn’t even do audits until the outside world forced it upon us. Instead, we dealt only with people we trusted.
- For example, avoiding conflict of interest is more important than being current in your books. If you mark derivative instruments to market, for example, you leave valuation in the hands of internal people with a strong incentive to overestimate their value. Thus being current creates a conflict of interest, and thus obviously should not be done. Even senior accountants don’t understand this.
“Posco is not a commodity business.” — technology advantages were learned from Nippon Steel that give them an edge. But don’t write off commodities entirely — even they are attractive at some price.
“We don’t play gin rummy with our friends.” (meaning that Berkshire only buys businesses to keep, not to resell.)
- This reputation attracts better businesses — companies that would sell to no one but Berkshire.
- By contrast, because private equity buys to flip, they cannot get access to the quality of deals we do.
Envy is driving endowments to throw money into private equity. To see what will happen, observe what happened in to endowment investments in venture capital a few years ago.
USG made a mistake to do a rights offering in summer 2006 at well below intrinsic value.
Useful mental model: inversion. For examle, instead of “what do I want, and how do I get it,” also consider “What do I dislike, and how do I avoid it?”
Investor question: “what long-held belief have you changed recently?” Munger’s answer: We changed a lifelong belief about railroads recently. Why? Because of the recent comparative advantage of railroads over trucking. Rail improved with double-stacked trailers, computer scheduling, and rising real energy costs.
- “Martians of Science”
- “Deep Simplicity”
- Isaacson’s biography of Einstein
- Supermoney (decades old, but worthwhile)
Two kinds of market inefficiency these days:
- Too small for anyone to follow it.
- Craziness in bigger markets, e.g. panics.
Two markets in China:
- Gross excess in Shanghai
- A few interesting things elsewhere. Hong Kong is still pretty inefficient.
Treasury Secretary Nicholas Brady reversed his decision to cut off Salomon Brothers from government bond auctions based essentially on his trust of Buffett and his reputation.
Munger bought his first new car at age 60, long after he had become very wealthy.
Much trouble traces to “self-serving bias.” Plus envy.
Think of investing in terms of opportunity cost, not hurdle rate.
Lessons of the past 10 years — more of the same:
- Be more selective.
- No regret at passing up immoral investments, e.g. chewing tobacco.
- Don’t let envy drive investment decisions.