Hermitage
[
hur-mi-tij or, for 3, er-mi-tahzh]

Sunday, March 29, 2015

Charlie Munger's Thoughts – Past and Future of Berkshire Hathaway

Munger gave a talk this week at the Daily Journal, where he’s chairman. Investor Alex Rubalcava took notes. Here are some great things Munger said.

“I did not succeed in life by intelligence. I succeeded because I have a long attention span.”

Time is the individual investor’s last remaining edge on professionals. If you can think about the next five years while most are focused on the next five months, you have an advantage over everyone who tries to outperform based on sheer intellect.

“The finance industry is 5% rational people and 95% shamans and faith healers.”

There are few other industries in which people are paid so much to be so consistently wrong while clients come back for more without demanding any change.

“I think that someone my age has lived through the best and easiest period in the history of the world.”

People ignore the really important news because it happens slowly, but obsess over trivial news because it happens all day long. News headlines will forever be dominated by pessimism, but by almost any metric we are living through the greatest period in world history.

“When things are damn near impossible, maybe you should stop trying.”

Related: Everyone should know the difference between patience and stubbornness. Patience is the willingness to wait a long time while remaining open to changing your mind when the facts change. Stubbornness is the willingness to wait a long time while ignoring and dismissing evidence that you’re wrong.

“Other people are trying to act smarter. I’m just trying to be non-idiotic.”

Napoleon’s definition of a military genius was “The man who can do the average thing when all those around him are going crazy.” It’s the same with investing: You don’t have to be brilliant, you just have to consistently be not stupid.

“If the incentives are wrong, the behavior will be wrong. I guarantee it.”

Anyone criticizing the behavior of “greedy Wall Street bankers” underestimates their tendency to do the same thing if offered an eight-figure salary.

“I don’t spend too much time thinking about what is almost certain never to happen.”

This likely includes: accurate economic forecasts, stable markets, consistent outperformance, reasonable politicians, and hyperinflation.

“I don’t think anything that any average person can do easily is likely to be worthwhile.”

Good investing hurts. It’s not any fun. It requires the ability to endure things most people aren’t, such as bear markets that last for years and times when you perform worse than average.

“The way to get rich is to keep $10 million in your checking account in case a good deal comes along.”

You don’t need $10 million, but cash in the bank will be the best friend you’ve ever had when stocks fall. If you’re upset that your cash is earning a dismal interest rate right now, you’re doing it wrong. Cash’s value isn’t its ability to earn interest. Providing flexibility and options is how it earns its keep.

“Nobody survives open heart surgery better than the guy who didn’t need the procedure in the first place.”

Avoid debt. Spend less than you earn. Advocate humility. Learn from your mistakes. If you can manage to not screw up too many times in investing you’ll probably do just fine over time.

From:www.berkshirehathaway.com
I closely watched the 50-year history of Berkshire’s uncommon success under Warren Buffett. And it now seems  appropriate that I independently supplement whatever celebratory comment comes from him. 
I will try to do five things.
(1) Describe the management system and policies that caused a small and unfixably-doomed commodity
textile business to morph into the mighty Berkshire that now exists,
(2) Explain how the management system and policies came into being,
(3) Explain, to some extent, why Berkshire did so well,
(4) Predict whether abnormally good results would continue if Buffett were soon to depart, and
(5) Consider whether Berkshire’s great results over the last 50 years have implications that may prove useful elsewhere.
The management system and policies of Berkshire under Buffett (herein together called “the Berkshire system”) were fixed early and are described below:
(1) Berkshire would be a diffuse conglomerate, averse only to activities about which it could not make useful predictions.
(2) Its top company would do almost all business through separately incorporated subsidiaries whose CEOs would operate with very extreme autonomy.
(3) There would be almost nothing at conglomerate headquarters except a tiny office suite containing a Chairman, a CFO, and a few assistants who mostly helped the CFO with auditing, internal control, etc.
(4) Berkshire subsidiaries would always prominently include casualty insurers. Those insurers as a group would be expected to produce, in due course, dependable underwriting gains while also producing substantial “float” (from unpaid insurance liabilities) for investment.
(5) There would be no significant system-wide personnel system, stock option system, other incentive system, retirement system, or the like, because the subsidiaries would have their own systems, often different.
(6) Berkshire’s Chairman would reserve only a few activities for himself.
(i) He would manage almost all security investments, with these normally residing in Berkshire’s
casualty insurers.
(ii) He would choose all CEOs of important subsidiaries, and he would fix their compensation and
obtain from each a private recommendation for a successor in case one was suddenly needed.
(iii) He would deploy most cash not needed in subsidiaries after they had increased their competitive
advantage, with the ideal deployment being the use of that cash to acquire new subsidiaries.
(iv) He would make himself promptly available for almost any contact wanted by any subsidiary’s
CEO, and he would require almost no additional contact.
(v) He would write a long, logical, and useful letter for inclusion in his annual report, designed as he
would wish it to be if he were only a passive shareholder, and he would be available for hours of
answering questions at annual shareholders’ meetings.
(vi) He would try to be an exemplar in a culture that would work well for customers, shareholders,
and other incumbents for a long time, both before and after his departure.
(vii) His first priority would be reservation of much time for quiet reading and thinking, particularly
that which might advance his determined learning, no matter how old he became; and
(viii) He would also spend much time in enthusiastically admiring what others were accomplishing.
(7) New subsidiaries would usually be bought with cash, not newly issued stock.
(8) Berkshire would not pay dividends so long as more than one dollar of market value for shareholders was being created by each dollar of retained earnings.
(9) In buying a new subsidiary, Berkshire would seek to pay a fair price for a good business that the Chairman could pretty well understand. Berkshire would also want a good CEO in place, one expected to remain for along time and to manage well without need for help from headquarters.
(10) In choosing CEOs of subsidiaries, Berkshire would try to secure trustworthiness, skill, energy, and love for he business and circumstances the CEO was in.
(11) As an important matter of preferred conduct, Berkshire would almost never sell a subsidiary.
(12) Berkshire would almost never transfer a subsidiary’s CEO to another unrelated subsidiary.
(13) Berkshire would never force the CEO of a subsidiary to retire on account of mere age.
(14) Berkshire would have little debt outstanding as it tried to maintain (i) virtually perfect creditworthiness under all conditions and (ii) easy availability of cash and credit for deployment in times presenting unusual opportunities.
(15) Berkshire would always be user-friendly to a prospective seller of a large business. An offer of such a business would get prompt attention. No one but the Chairman and one or two others at Berkshire would ever know about the offer if it did not lead to a transaction. And they would never tell outsiders about it.
How did Berkshire happen to get a corporate personality so different from the norm?
Well, Buffett, even when only 34 years old, controlled about 45% of Berkshire’s shares and was completely trusted by all the other big shareholders. He could install whatever system he wanted. And he did so, creating the Berkshire system.
Almost every element was chosen because Buffett believed that, under him, it would help maximize Berkshire’s achievement. He was not trying to create a one-type-fits-all system for other corporations. Indeed, Berkshire’s subsidiaries were not required to use the Berkshire system in their own operations. And some flourished while using different systems.
What was Buffett aiming at as he designed the Berkshire system?
Well, over the years I diagnosed several important themes:
(1) He particularly wanted continuous maximization of the rationality, skills, and devotion of the most important people in the system, starting with himself.
(2) He wanted win/win results everywhere--in gaining loyalty by giving it, for instance.
(3) He wanted decisions that maximized long-term results, seeking these from decision makers who usually stayed long enough in place to bear the consequences of decisions.
(4) He wanted to minimize the bad effects that would almost inevitably come from a large bureaucracy at headquarters.
(5) He wanted to personally contribute, like Professor Ben Graham, to the spread of wisdom attained.