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No. of Recommendations: 21
Wesco Annual Meeting, May 8, 2002
University Club, Pasadena, CA
3:30 to 5:30
Charles T. Munger

This may not add anything to what has already been posted, but these were my jottings . . .

Regarding the size of Berkshire and its growth potential. All great aggregation eventually reaches hell on earth. Eventually is an interesting word; could mean next week or 15 years. Munger believes Berkshire will be a lot bigger in the future.

Berkshire and share buybacks. Warren O.K. with them at the right price.

Why doesn't an intrinsic value estimate for Wesco appear in the annual report anymore? Answer: For a while the stock was too high. Charlie doesn't like it when the stock gets undeservedly high. [He was trying to steer the stock lower.]

Bond holdings. Mostly mortgage-backed bonds the last couple of years. Some governments, some junk bonds.

Charlie thinks BRK is more conservative than most insurers. Most insurers will get pretty punk results. BRK will try to succeed [No kidding, and I'm sure they will do fine.]

Charlie defined “Pretty well” as top 10%.

Always tried to do it right at GeneralRe.

Ethics on Wall Street have been “imperfect” throughout his lifetime. 5% markups to ladies at church, etc. Charlie considered this “inelegant”. Paying different rates depending what is sold doesn't promote good behavior. The work Wall Street has done for Berkshire has been great, but “you don't get a lot of credit in life for not committing adultry with the Virgin Mary.”

People will flow with the incentives. There are a lot of wonderful, intelligent people on Wall Street. Many have to fight their own firm.

Wesco's insurance component: decent, but small.

Board of Directors. CEO makes the decisions; boards say yes.

Regarding FRE. Financial institution with vasts amounts of leverage make them nervous. Also mentioned again the comment that financial institutions that try too hard make them nervous. Story: When the rich owner of a company was asked why he fired his top producer, he answered, “He made me nervous.” Charlie and Warren are in a position where they don't have to be nervous. Munger later admitted they may not be right on FRE.

Wealth Effect: obviously there is a wealth effect. Munger thinks it is larger than most economists believe.

Multi-factor complex systems. You just can't pick one factor. If you want to lose weight, but you like sausages and apple pie, you can't just eliminate one of them.

Accounting for derivatives. Venal. If I'm right, there will be hell to pay.

Buffett/Munger try to buy securities that are virtually risk-free over the long term. [For example: KO at a P/E of 14 in 1988.]

Munger had a relative that did only 8 things his entire life. He died rich.

Level Three. [Note: There are LVLT shareholders at these meetings hoping to get reassuring positive remarks; as usual, Munger doesn't deliver.] No predictions on the future of the business. At the right price, maybe. [Implied very low price.]

What's more important, nominal or real interest rates. Munger: No formal systems.

Math – one of the languages of life. Munger recognized that early.

Physics – all the best private schools teach it. Everyone should take it. Develop habits of the mind.

In science, you can pick up big ideas easily. For example: Thermodynamics. Story: Someone tried to turn salt water into energy, legal contracts for company were all in place, etc. None of it would have happened if someone would have stayed awake in a freshman course.

Ben Graham bought mediocre, cheap companies. In his era with a limited amount of money, it worked well. Real money, though, is made in the great businesses. Warren would have become a great investor without Graham, Munger, etc.

The US government has increased spending 10% a year for each of the last two years. We've quickly gone from a surplus to a deficit. Munger hates bureaucracies; this came up many times.

No matter what happens, we don't want go back to GO (monopoly).

Care a lot about risks; no guarantees though.

Buffett/Munger are aware that many BRK shareholders have more than 50% of their money in BRK stock.

Ben Franklin had enormous range. He was the country's best writer, scientist, investor, philanthropist, legislator. The example of his whole life has been useful, no one thing. All this from a guy who started poor, etc.

Education in big-city school systems is a disaster.

3/4s of university educators should be removed. Disfunctional, don't see the world the way it is. Don't feel guilty, though, about what comes out.

In colleges, hard sciences and engineering are good. Business, law, and sociology are taught pathetically. [Note: made me feel a lot better about having engineering degrees!]

Satisfied with AXP overall. Yes, they made mistakes with some investments, but who doesn't?

Thomas Hunt Morgan. Great Geneticist.

Get the big points right, use ordinary commonsense. Pick up the big gold nuggets in the stream; much easier than placer mining.

Very basic knowledge is enormously powerful.

Organized commonsense.

Huge dangers in getting caught up in the minutia.

People calculate too much, think too little.

Consumer credit. Talking to the wrong person. Munger never believed in it. Liked the German model of savers and hard work.

Doesn't like the thought of dreaming up advertisements to entice people to put more on their credit cards.

A core value of the hard sciences is the idea of trying hard not to fool yourself.

Great model. Ethos. Try hard not to fool yourself.

List of models. Checklist. Just run down them. Perfectly obvious.

People that can handle science education should be forced to take it.

USG. We make mistakes. Story: A man with a wife and 3 children got a lady pregnant in a five-minute affair in the back of a train. When asked why he did it, he said, “It seemed like a good idea at the time.”

Leading accountants and law firms should turn down rascals as clients.

Tax shelter accounting, terrible. Then, why should audit be taken seriously?

Lawlers have gotten by with murder. Accountants have taken a lot more punishment. People have generally not sued lawyers. That is changing. Not a welcome change for the legal profession.

Lloyds has improved since a couple of years ago.

Mental checklist. Different for each company. Keep trying to get a little better. Eventually you get to be virtually sure. Can't just go to the master and get the solution. Like golf, you have to work at it. [Charlie always gets questions about his models, etc. He always refuses to give a direct answer. Thinks a person needs to learn it on his own for it to be beneficial to the person.]

Calculated balance of probabilities.

Moody's. Strong moat. Warren Buffett does not use Moody's ratings, but not everyone is a Warren Buffett. Ratings are useful for many people.

Way to stay away from things. Have three baskets. IN, OUT, TOO TOUGH.

Legal system. Client first, justice second. Charlie never had an interest in helping miscreants.

Ice Age book. Suggested getting it and reading it. If you don't like it, you have limitations; but then, you could also always give it to someone else in your family.

Scottish/Irish people. Noted their genetic stock. Poor people that had a large influence. Recognized Adam Smith as an example.

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