Charlie Munger Interview - Meeting Buffett, Berkshire History & Investment Philosophy

Munger met Buffett in 1959 when returning to Omaha to wind up his deceased father's law practice. Mutual friends introduced them. Both came from Omaha, worked in Buffett's grandfather's grocery store, shared interest in successful investing, and had similar sense of humor. Munger immediately recognized Buffett's high intelligence. Early Buffett was classic Ben Graham follower buying thinly traded securities incredibly cheap statistically. With small amounts of money, could find enough obscure cheap stocks to earn high returns year after year. First major 'quality' purchase was American Express after salad oil swindle - did extensive research, concluded market wrong, made lot of money on 'A-rated security.'

Buffett always said it was less distracting to be in Omaha than among all the rumors and action on Manhattan. He made most money in solitary fashion just sifting data and thinking - could do that as well in Omaha, in fact better. At University of Omaha investment course, Buffett criticized common over-the-counter securities practice where firms met 'no lady in church' then sold her stock in a utility with hidden 5% markup. Buffett thought this was 'dirty and cheating and inelegant.' People doing it hated him - tried to keep him out of clubs. Munger notes 'I've never known anybody in a long life who liked criticism - zero.'

Berkshire origin was pure accident. Berkshire Hathaway CEO tried to cheat Buffett out of an eighth on the tender price. Buffett got angry and said 'well hell, I'll just buy more' - 'a pretty silly way to behave as Warren has recounted in retrospect.' If chairman hadn't tried to cheat him out of an eighth, 'there wouldn't have been any Buffett-Berkshire Hathaway history.' Buying Berkshire in narrow financial sense was 'misthinking' - if Buffett bought National Indemnity in his partnership instead, would have made lot more money. But Munger calls it 'fortunate misthinking because his life worked out better' - gave Buffett public platform to teach what he wants to teach. Buffett is 'brutal in appraising his own past' to identify misthinkings and avoid them in future.

Buffett made millions following Ben Graham buying lousy companies very cheaply - if cheap enough, didn't care about lousy company or lousy management, knew he'd make money from cheapness. Munger 'always knew that would be self-limiting, would only be available for a while then go away.' Easier to make money 'getting into great businesses that either had great manager or were businesses where a fool could run and still prosper.' Munger didn't change Warren, just caused him 'to go where he was going to go anyway a little faster.' More potential for long pole in good companies. See's Candies was pivotal - 'really good company... best in its part of California... wonderful product, wonderful reputation, powerful trademark, good culture.' Made so much money 'it was eye-opening how important these brands were.' Munger: 'I don't think Warren would have made all the money Berkshire made in Coca-Cola if he hadn't bought See's - he learned.'

Munger and Buffett 'never had an argument... never had a fight, we just kind of roll with it easily.' Suppose one doesn't want to do something the other would have done 'and that happens four times over 40 years or something - what the hell difference does it make to me, why should I fuss over that?' If one makes mistake the other wouldn't have made 'four or five times, why should anybody care? Net the record is working out fine.' Philosophy: 'You should go at life with a certain amount of equanimity and rationality.' On preferring quality companies: 'It's much more fun to watch somebody you like and admire succeeding than watching some jerk kind of half-mismanaged some company that's very cheap. It's a better life.' That's also why they don't short stocks - 'even if we could make a lot of money doing it neither one of us would bother, we'd find it unpleasant. You're crazy if you're rich to deliberately go out and do a lot of unpleasant things you don't have to.'

Munger identifies Ben Graham's most useful idea: 'Have the mindset of somebody that was buying into a business planning to hold for the long pole, and use that mindset when thinking of stocks.' Both Buffett and Munger 'have never departed from that one.' Contrasts this with Buffett's long history of 'buying stocks below working capital per share - hugely cheap securities - by definition they were all pretty lousy companies.' See's Candies example continues the theme - first real 'good company' purchase in the candy field.

Berkshire's approach: Started out with cash, ended up buying bunch of businesses including insurance companies, drove Berkshire 'without really issuing much stock to anybody from virtually nothing into hundreds of billions of dollars of market cap - nobody else has a record like that.' There are great conglomerates like General Electric, United Technologies, Honeywell, but 'nobody has a record like [Berkshire's].' Modern Berkshire is 'pretty much all a reflection of Warren. The businesses that he started with are gone - most of them died under him - and so he's created Berkshire with nothing but a small bit of starting money.'

Big bureaucracies 'just can't change, it's just too hard.' They may want to operate 'with no overhead and just a few people at headquarters and quick decisions that are good,' but they're locked into procedure 'like the army or navy with lots of meetings and people - they just can't get to where we are from where they are. And they know that and so they just shrug their shoulders.' Munger's attitude: 'Some people can do way better than I do by that method - God bless them, I don't envy them because I can't follow them.'

Berkshire annual meeting used to have 'just 30 people in the cafeteria, and now we have this huge public spectacle.' Munger thinks 'it's helped the company... the big spectacle meetings helped the teaching part of Warren's personality.' Buffett 'used to volunteer as a teacher at the University of Omaha - he likes a certain amount of this, he would hate doing it all the time.' Munger believes 'Warren has his life just the way he wants it, including the annual meeting celebration' which is 'part of making a group of people work well together - it's a celebration.'

Buffett came out of private partnership where people he knew were trusting him when obscure. Had relatives in partnership who were not rich - 'so he always had a good stewardship idea and as it got bigger started treating everybody else the way he treated his relatives. That is a very good idea.' Munger has name for it: 'Extended Confucianism - very good idea to extend your Confucianism certainly to suppliers and customers and so on, it's so powerful.' Constantly talks about Berkshire as 'a seamless web of deserved trust - such a simple idea.' Bureaucracy has 'so much dysfunction and evil buried in it even when the people in the bureaucracy are not awful people' that 'running a system that has practically no bureaucracy at headquarters is hugely advantageous to Berkshire.' On managing complexity: Like juggler with 25 milk bottles - 'he started with one bottle and two then three and just kept doing it and pretty soon he was at 25. That's the way we did it.'

Both Munger and Buffett 'know that we've done better by having ethics.' Questions: 'Well do you deserve credit for doing something you know is going to work better for you? I don't want to take too much credit since I know clearly that it helps me instead of hurts me.' Believes 'people who are ethical when they know it's going to hurt them deserve [more] credit than people like me and Warren who know all along the ethics is going to help us in the end.' Also thinks 'partly we both like it intrinsically, so I don't think we're doing it just because it works better, but we know it works better - so what's our real motivation? I don't think people know their own motivations. I don't think I know mine. All I know is I end up there. I know I don't deserve as much credit for it as somebody who does it when it hurts him.'

On buying Burlington Northern: 'Good business run by good people - exactly what we like.' Also 'a little tinge of nostalgia - sort of a Midwestern company. The Burlington railroad was very important in Omaha always.' Union Pacific is headquartered in Omaha. 'Warren had always been an electric train fanatic when he was young and I had electric trains - I think there was a little bit of nostalgia in it too.' Buffett 'always looking for foreign investments but what he's found mostly is United States investments.' 'It has to be a pleasure for somebody raised in Omaha to buy the Burlington Northern railroad - it built the whole country, it changed the whole world.' Munger can remember time using trains instead of airplanes, remembers 'the trips on the old Pullman cars.' Both liked it 'but we wouldn't have bought it if the numbers hadn't been good.'

By and large 'it's all been pretty pleasant... we've had ups and downs. I have never heard Warren complain about a downdraft.' Never heard him indicate 'the world has been being unfair to him. Even when Susie died which really shook him up for quite a while, even then he never complained, never thought the world was being unfair when they took her away.' Some people naturally complain, others 'just naturally put their head down, sail through it, soldier through it. Warren and I believe in soldiering through without too much fuss.' Munger's theory: 'The dumbest thing you can do in life is to ever feel like a victim. And any politician that makes people feel like victims I automatically dislike. I never saw any good to come of feeling like a victim - even if you are a victim I think it's a mistake.' Uses Chinese example: 'Living in poverty, subsistence agriculture in caves... real poverty, hundreds of millions of them... they worked their way out of poverty and look at them now... They just soldiered through and worked their way out.'

Munger's philosophy: 'If you pretty much knew all the obvious things you should know in pretty much all the disciplines and use that knowledge routinely and didn't go crazy or irrational or go into anger or resentment, it would work very well.' Naturally operated that way all his life - 'it was my way of getting ahead. I didn't get ahead by specializing, I got ahead by knowing the big ideas in all the disciplines.' That works 'if you're a wide-ranging investor like me or Warren - it's not the way for most people to get ahead.' Both were 'very lucky to have the outcomes we did... in the right place with the right family values, the right temperaments... some favorable breaks.' Grandfather Munger 'really believed down to the souls of his feet that rationality was a moral duty.' On lollapalooza effects: 'Amazing how you can go through a modern textbook in psychology... you will not find people talking about the way that when you combine four or five psychological tendencies at once you get a lollapalooza effect. It's a hugely important idea.' Academics ignore it because 'it's hard to do their little experiments that prove it. Listen, Berkshire is a lollapalooza effect - there are several factors that intertwine all moving in the same direction.'

Munger and Buffett still opportunistic on cheap mispriced securities. 'If a marketable security was available in gobs on a horrible mispriced basis in some lousy business, I think we might still buy it. Things are cheap enough it sets the juices running.' On derivatives: Warren 'did those derivatives, we sold puts on the indexes - I think we'll make lots of billions of dollars out of that very easily.' Paradox: 'I think both of us believe the world would be better off without those derivative markets, but if they're there and it's mispriced, we act - they're for sale, it's a public market. There's no dishonor.' As voter, Munger 'would vote the derivative markets like that one out of existence tomorrow.' When options exchanges were allowed, 'Warren wrote a letter of objection - it was like the only letter. You really ought to dig that out and print it because he was so right and it was so early and nobody else was saying it... He said we don't need these. And even when 2007 came nobody dug it up and played it up big, but you can do it, you probably should.'