Is there a new oracle in town? Warren Buffett still holds the title of Oracle of Omaha, but Charlie Munger, Buffet’s sidekick in Berkshire Hathaway and chairman and CEO of Wesco Financial Corp., is fast becoming the Oracle of Pasadena.
While shareholders and the press have long flocked to Berkshire’s annual meeting to hear Buffett’s words of wisdom, Munger is now garnering increasing attention for his views.
Hardly a shadow of Buffett, Munger has his own perspective on a range of issues—from the financial crisis to casinos. He’s so much an admirer of Benjamin Franklin that he titled his 2005 book Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, a homage to Franklin’s Poor Richard’s Almanack. In the book, Munger sets out his concepts of “Elementary Worldly Wisdom” as it relates to business and finance. His concepts work to solve critical business issues. One of Munger’s favorite terms is the “Lollapalooza Effect,” which represents a set of biases or tendencies that can conspire to cause extreme (perhaps delusional) and often disastrous decisions.
I thought it would be interesting to share some of Charlie’s pearls, as reported from Wesco’s May annual meeting. Here are some edited highlights:
Financial Meltdown: At the depths of the crisis, it was deadly serious. We were on the edge of something that could have taken the whole civilization into severe difficulty. Banks started falling like bowling pins—boom, boom, boom—and the process was feeding on itself. It was out of control. The government’s response was a credit to democracy and capitalism. We had wonderful leadership.
Wall Street Gambling: The more complex the game, the easier it is for the best players to beat the patsies. This is what happened on Wall Street. Casinos work so well because there aren’t any inventories and accounts receivable. It’s like God gave you the ability to print money. But real casinos have huge capital expenditures and asset requirements. On Wall Street, they can create a casino without those requirements. How many of us could resist those temptations?
The Blame Game: At the end, Lehman was pathological. The totally crooked and crazy operators originated mortgages and then packaged them into securities. It doesn’t work to sell things that are bad for customers. The disturbing thing is that most of these people think it is someone else’s fault. When Hitler was in the bunker at the end of war, he said it was too bad that the German people hadn’t appreciated him enough. This is much like what people on Wall Street think.
Government’s Job: In soccer, the referee has to limit the mayhem on the field. This is the role government should take with investment bankers. You can’t expect competitive people to rein themselves in. Competition leads to too much aggression, and ethical standards go down. There needs to be an adult in the room.
Fannie Mae and Freddie Mac—Twin Failures: They had 200 people in OFHEO (the Federal Housing Finance Agency) whose job it was to regulate Fannie and Freddie. Both had phony accounting. And both went insolvent right under OFHEO’s nose. Both had phony accounting, and both went insolvent right under OFHEO’s nose. You can’t solve the problem by allowing these entities to do whatever they want because a regulator is watching. The regulator is likely to be co-opted or subject to inertia. Letting the people who failed regulate more isn’t the answer.
SEC—Just Say No: That Enron was able to record profits upfront on uncertain derivative contracts was insane. The SEC needs more sense and has to learn to say no. People will always ask to be able to do the wrong things. If we don’t tell them no, we are going to continue to have trouble.
The Siamese Twins—Commercial and Investment Banks: Commercial and investment banks should be separated. We should have commodity markets, but not within the banks. They should not be able to gamble on derivatives or agriculture hedging. There is a lot of legitimate activity that they can do without getting into trouble. Why do they have to do everything else?
Nut-Case Accounting: We have Alice in Wonderland and nut-case accounting in the U.S. Accountants learn too much math but not enough common sense. Under new accounting standards, assets are good until you actually need them. We don’t need mark to myth accounting.
Greece: Greece is serious. It’s surprising it took so long to surface. Charlie doesn’t know how to solve it and is glad he doesn’t have to.
The Future: He doesn’t know what will happen in 20 years. He thinks China is promising but doesn’t think China has to do everything our way. China’s rise up the competency ladder is unprecedented, and the country has a great track record of dealing with difficult situations.
Charlie’s Rule: When a guy is offering you free money, don’t listen to the rest of the sentence.