Charlie Munger Q&A // 2023 Daily Journal Annual Meeting (Full Transcript)

It is indeed a Berkshire fest this edition of the 3L&3S. In Buffett’s annual letter (featured above), he also says this about his long-standing partner and vice-chairman of Berkshire, Charlie Munger: “Charlie and I think pretty much alike. But what it takes me a page to explain, he sums up in a sentence. His version, moreover, is always more clearly reasoned and also more artfully – some might add bluntly – stated…I never have a phone call with Charlie without learning something. And, while he makes me think, he also makes me laugh.”

He then adds his own rule: “Find a very smart high-grade partner – preferably slightly older than you – and then listen very carefully to what he says.”

The two nonagenarians at Berkshire enlighten us with life rules that go beyond investing and hence this second feature. This is a transcript of a 2.5hr long interview (you can catch the whole thing on youtube) of Charlie Munger who served as the Chairman of Daily Journal corporation for decades before he stepped down last year. In his usual blunt style, Munger speaks his mind about various issues ranging from economic moats to cryptos to ChatGPT to the importance of rationality in life. The clarity of thought at the age of 99 is incredible indeed.

On active management to a question on mental biases:
“If I had to name one factor that dominates human bad decisions, it would be what I call denial. If the truth is unpleasant enough, their mind plays tricks on them and they think it isn’t really happening. Of course, that causes enormous destruction of business where people go on throwing money into the way they used to do things, even though it isn’t going to work at all well in the way the world is now, having changed.

If you want an example of how denial is affecting things, take the world of investment management. How many managers are going to beat the indexes, all costs considered? I would say maybe 5% can consistently beat the averages. Everybody else is living in a state of extreme denial. They’re used to charging big fees for stuff that isn’t doing their clients any good. It’s a deep moral depravity if some widow comes to you with $500,000 and you charge her one point a year when you could put her in the indexes — but you need the one point. So people just charge some widow a considerable fee for worthless advice. The whole profession is full of that kind of denial. It’s everywhere.”

On geopolitics and investing in the context of his stake in Jack Ma’s Alibaba and why China is still a good investment destination :
“It was a very interesting thing. Jack Ma was a dominant capitalist in Alibaba and, one day, he got up and made a public speech where he basically said the Communist Party is full of malarkey. They don’t know their ass from their elbow and they’re no damn good and I’m smart. And, of course, the Communist Party didn’t particularly like his speech and pretty soon he just sort of disappeared from view for months on end and now he’s out of [Alibaba]. He was pretty stupid. It’s like poking a bear in the nose with a sharp stick. It’s not smart and Jack Ma got way out of line by popping off the way he did to the Chinese government. Of course, it hurt Alibaba.

…I would argue that the chances of a big confrontation from China have gone down, not up, because of what happened in Ukraine. I think that the Chinese leader is a very smart, practical person. Russia went into Ukraine because it looked like a cakewalk. I don’t think Taiwan looks like such a cakewalk anymore. I think it’s off the table in China for a long, long time — and I think that helps the prospects of investors who invest in China.

The other thing that helps, in terms of the China prospects, is you can buy better, stronger companies at a cheaper valuation in China than you can in the United States. The extra risk can be worth running given the extra value you get. That’s why we’re in China. It’s not like we prefer being in some foreign country. Of course, I’d rather be in Los Angeles right next to my house. It would be more convenient. But I can’t find that many investments right next to my house.

…I have more optimism about the leader of the Chinese party than most people do. He’s done a lot right, too. He led a big anti-corruption drive. He’s done a lot of things right. I don’t know where this man (who submitted the question) lives. Where is there a place where the government is perfect in a world of sin and sorrow?

The democracies aren’t that brilliantly run, either. It’s natural to have some decisions made by government that don’t work well. It’s natural to have decisions in each individual life that don’t work very well. We live in a world of sin, sorrow, and misdecision. That’s what human beings get to cope with in their days of life. I don’t expect the world to be free of folly and mistakes and so forth — I just hope that I’m invested with people who have more good judgment than bad judgment. I don’t know anybody who’s right all the time.”

On the arguments against his position against cryptos:
“I don’t think there are good arguments against my position. I think the people who oppose my position are idiots. I don’t think there is a rational argument against my position. This is an incredible thing. Naturally, people like to run gambling casinos where other people lose. The people who invented this crypto crappo, which is my name for it, sometimes I call it crypto crappo and sometimes I call it crypto shit.

It’s just ridiculous that anybody would buy this stuff. You can think of hardly nothing on Earth that has done more good to the human race than currency, national currencies. They were absolutely required to turn man from a goddamn successful ape into a modern successful humans and human civilization, because it enabled all these convenient exchanges. So if somebody says I’m going to create something that sort of replaces the national currency, it’s like saying I’m going to replace the national air. It’s asinine. It isn’t even slightly stupid, it’s massively stupid.

It’s very dangerous and the governments were totally wrong to permit it. I’m not proud of my country for allowing this crap — what I call the crypto shit. It’s worthless, it’s no good, it’s crazy, it will do nothing but harm, and it’s anti-social to allow it. The guy who made the correct decision on this is the Chinese leader. The Chinese leader took one look at crypto shit and said not in my China. And, boom, there isn’t any crypto shit in China. He’s right and we’re wrong. There is no good argument on the other side. I can’t supply it.”

On why democracy isn’t devoid of flaws and cause its own share of harm to the world:
“If you take the history of democracy in the world and go back far enough, it fails a lot and gets succeeded by dictatorships and all kinds of awful things. As a matter of fact, the worst thing that happened to the human race in my lifetime was when an advanced civilization like Germany was taken over by a dictator as awful as Adolf Hitler. That happened as a consequence of a big worldwide depression. It would never have happened if we hadn’t had a big depression.

Once Hitler got in, that meant World War II was inevitable — and that could have worked out a lot worse than it did for people like the United States. So these things are quite important and they’re not going to be done perfectly in the future, no more than they were done perfectly in the past. You’ve got to expect a certain amount of future trouble in the world and your government is going to do some things that aren’t exactly right.”

On Elon Musk and Tesla:
“My policy on Elon Musk is that he’s a very talented man, but also quite peculiar. I don’t buy him and I don’t sell him short. I just say, well, he’s a very unusual person. Who else has that talent, except BYD? It just shows how tough capitalism is. Even if you’re a genius like Musk is in some ways, there’s always some little BYD that comes out and does better. Capitalism is not easy.”