Charlie Munger: A masterclass in how to get rich – and stay that way

Before my first visit to the Berkshire Hathaway AGM a decade back, I'd never heard of Charlie Munger. Like most others who had not experienced the Omaha Pilgrimage, he was simply the vice chairman of the US's fifth biggest group by market cap. But once you've listened to Munger's contribution during those five and a half hours of shareholder questions, opinions change. Now 90 and with a mind sharpened through obsessive reading, Munger is rated by some Berkshire followers as even smarter than Buffett himself. Among our Biznews.com classics is Munger's 1986 speech to his alma mater, the Harvard School. If you haven't read it, go have a look. This interview with the BBC, conducted in mid 2012 and shared on Youtube.com, is another useful addition from the man RECM's founder Piet Viljoen calls "the brains" of the Berkshire partnership. – AH.INTERVIEWER: How worried are you by the declines in the share price at Berkshire Hathaway – the difficulty the company's in?.CHARLIE MUNGER: Zero. This is the third time that Warren and I have seen our holdings in Berkshire go down, from top tick to bottom tick, by 50 percent. I think it's in the nature of long-term shareholding with the normal vicissitudes, worldly outcomes, and markets that the long-term holder has his quoted value of stock go down by say, 50 percent. You can argue that if you're not willing to react with equanimity to a market price decline of 50 percent – two or three times per century – you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get, compared to the people who do have the temperament and who can be more philosophical about these market fluctuations..How political ideology caused the markets to crash..You can never take all the boom and bust out of a capitalist economy, but they can be enormously dampened is there were wise legislative restraints on human conduct that eliminated more of the sin and folly that will inevitably come without the wiser wise restraints. What happened in America, is that the people who were making money out of a lack of wise restraints, just got more and more power by doing more and more lobbying and making larger and larger political contributions, and being aided by a certain ideological nuttiness, which assumed that because free markets worked so well compared to say, communism. It automatically followed that if there were no laws at all restraining financial conduct, the economy would work better and that's not so. The economy works worse if you allow unrestrained sin, folly, and finance. That goes back to the South Sea Bubble..Without a system of wise restraints, gross immorality and extreme craziness will happen..In markets, they need to be dampened. Sin and folly needs to be stepped on..The idiot boom – and the fringes of the U.S. Democrat and Republican Parties..Both parties have wings that are full of idiots. That is the nature of the game. The reason why it's worked as well as it has is that the people in the middle have sort of, over time, tuned out the idiots on both sides. However, every once in a while the idiots gain control and of course, that has terrible consequences. That's the nature of the system..INTERVIEWER: You're thinking of the last 10/15 years..CHARLIE MUNGER: We went way too far in financial deregulation. People were making so much money and the economy was doing so well because it was being puffed up by this idiot boom and idiot expansion of consumer credit, that everybody thought 'oh, isn't this wonderful'. Of course, your life (for the next three weeks) would be more pleasant if you went on heroin, but it would totally destroy you over the long haul and that's what an economy does when it allows itself to be seduced by the potential for any idiot boom, into allowing all this gross immorality and this craziness to take over..On Alan Greenspan, Chairman of the U.S. Federal Reserve between 1987 and 2006..To his credit, of all the major figures, he's the only one who promptly said 'I was a horse's ass. I'm ashamed of my lack of foresight. I missed this'. Who else but Alan Greenspan, was talking that way? In my book, he's sort of a hero in that it is hard, at his age to look back at a career as distinguished as his with us much success and adulation and basically, say 'I was a horse's patoot', and that's what he's done. To me, he's a hero. We need more of that sort of thing..The trouble with Wall Street culture.Wall Street attracts and rewards what I call a 'locker room culture'. They are the people who just have to win at football, soccer, or something like that. In their nature, they're just so competitive that whatever A is doing, they have to be as good (or better) than A. Of course, Warren and I don't have those compulsions. I would rather live my way than theirs. They do enormous damage to the rest of us with their damned 'locker room culture' – that 'have to win' and is not very squeamish about what they have to do to win..Munger and Buffett's checklist for picking a company to invest in.We have to deal in things that we're capable of understanding. Once we're over that filter, we have to have a business with some intrinsic characteristics that give it a durable, competitive advantage. Then, of course, we would vastly prefer a management in place with a lot of integrity and talent. Finally, no matter how wonderful it is, it's not worth an infinite price, so we have to have a price that makes sense and gives a margin of safety considering the natural vicissitudes of life. It's a very simple set of ideas. The reason why our ideas have not spread faster is that they're too simple. The professional classes can't justify their existence if that's all they have to say. It's all so obvious and so simple. What would they have to do with the rest of the semester?.On one of Munger and Buffett's most successful investments – Coca Cola.Well, at the time when we bought it, it was succeeding mightily on multiple fronts and it was cheap in relation to what was plainly, going to happen. That was a valuable insight. There are times when even a company as big as Coca Cola is too cheaply priced by the market, considering what it's going to do for the shareholder. There are times when we can figure that out and there are times when we can't. The times when we can figure it out, we tend to go in heavily. For many, many months, we were buying as much Coca Cola as we could buy – roughly one-third of the volume – trading, every day for months. We were very aggressive in buying into Coca Cola..Munger's way of thinking about buying shares.We have the mindset of the person who's buying the whole business at the price you would realise, by multiplying the share by the number of outstanding shares, and we want the price for the whole business (so calculated) to look very attractive. We like buying individual share at a price that's lower, which we think a rational person would pay if he could buy the whole business..Munger and Buffett – and the future of Berkshire Hathaway.Warren would have been a huge success if Charlie Munger had never lived..INTERVIEWER: How often do you speak to him?.CHARLIE MUNGER: Well, in the early days, it was almost every day and now it's maybe once a week..INTERVIEWER: Only once a week…that's not very much..CHARLIE MUNGER: But sometimes, it's a long conversation..INTERVIEWER: You and Warren are very much, a double act as the Chairman and Vice-Chairman of the company. At some point, you want to retire, don't you – step down, rest a bit….CHARLIE MUNGER: Well, I don't think either of us wants to quit, except that the laws of physiology force us. That, no doubt, will be soon on us you have to remember that Berkshire is probably the most decentralised big corporation in the world. I think that the very decentralisation of Berkshire and the extreme pockets of talent in all our subsidiaries will give Berkshire a very respectable future long after we're gone. You also need to remember that we started with a little nothing and our successors are starting with something, which is not a 'little nothing'. You ought to be able to achieve a lot more when you're given a might hand, than you would be if you started with a little nothing. They wouldn't be able to multiply money as fast, per share, because that can't happen, when you're working with such large sums. In terms of a creditable institution that serves the wider world, I think Berkshire's contribution after Warren is dead will utterly dwarf the contribution made while he was alive.

Charlie Munger: A masterclass in how to get rich – and stay that way

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