By Jason Zweig
Berkshire Hathaway Inc. Vice Chairman Charlie Munger, 95, spoke to Wall Street Journal reporters Nicole Friedman and Jason Zweig for six hours over dinner in his Los Angeles home on April 23. He covered a wide array of subjects. Here is an edited transcript from that conversation and a follow-up telephone discussion.
Q: What do you make of the world-wide fan club that you and Warren Buffett have attracted?
A: Well, the world is very peculiar. And these people that like me are mostly nerds in China or India. It's a very deep attachment. They're so passionately interested in improving themselves. Some of them just want to get rich in some easy way, but mostly they're trying to improve themselves.
An awful lot of graduates of great engineering schools are investors. I wouldn't call a man who uses computer science to sift vast amounts of data for correlation, and then starts trading the correlation and if it works, keeps going, and if it doesn't, stops, I wouldn't call him an investor. It's really, what he is is a trader. And those correlations are very peculiar.... Of course, the more people that try and trade that one correlation, once they find it, the less well it works.
Q: If you were just starting out as an investor, what approach would you take?
A: Well, the original [Benjamin] Graham approach of looking for cases where you're getting more than you're paying for is correct. All good investing involves getting a better investment than you're paying for. And you're just looking for it in different places, just as a fisherman can fish in one place or another. But he's always looking for more value than [he's] paying for. That will never go out of style. I mean, that is just basic and fundamental.
Some people look at it in stocks where the earnings are going up all the time, some look at consumer goods, some look at bankruptcies, some look at distressed debt. There are different ways to hunt, just like different places to fish. And that's investing.
And knowing that, of course, one of the tricks is knowing where to fish. Li Lu [of Himalaya Capital Management LLC in Seattle] has made an absolute fortune as an investor using Graham's training to look for deeper values. But if he had done it any place other than China and Korea, his record wouldn't be as good. He fished where the fish were. There were a lot of wonderful, strong companies at very cheap prices over there.
Let me give you an example. One guy in Korea, he cornered the sauce market. And when I say cornered, he had like 95% of all the sauce in Korea. And he couldn't stand anybody else ever selling any sauce. So he could have made two or three times as much if he wanted to by raising the prices.
Li Lu figured that out. It's called Ottogi. And of course we've made 20 for 1. There was nothing like that in the United States.
Q: How should brokers and bankers be paid?
A: I'm afraid that salesmen do have a wonderful incentive. On the other hand, what a salesman will do is just awful, if you give a man a family to support, in the commission system. And the reason that the brokerage houses need such big compliance departments is that, without them, the salesman who needs the commission to live, maintain status, to pay the bills and so forth, if it gets to the end of the month, he would sell a blind man any goddamn thing to get the gross.
It's disgusting. My dead wife had a relative, her mother's cousin, who was a blind doctor. And he had two adopted children. And after he was blind, and he was living on the savings that he'd made from very hard working, he came late to medicine from pharmacy, and he worked hard and he'd saved some money, and that's what he lived on -- and this goddamn broker who was married to the adopted daughter, he just churned the old guy until he was broke. He was blind! He was his own father-in-law!
They just think if you need it enough, it's OK to do. And it happens everywhere. And what happened at Wells Fargo was just another instance of that. You get the incentives too tough and too many people will yield.
The mistake [at Wells Fargo] was, when it blew up, they just started firing the people that did it and they fired thousands without changing the incentive system. It was insane but again a dumb bureaucracy, a pompous CEO.
Q: Who would you want to see as the new Wells Fargo CEO?
A: Well, I would have liked to have [outgoing CEO] Tim Sloan stay. The way that place is run, he had no power at all over those divisions of the bank.
And in no sense did he make any of the decisions. And none of those decisions were evil, they were just stupid. They just didn't realize that the incentives were so strong that the people were misbehaving. And, see, the brokers do the same thing Wells Fargo did, they just have a compliance department. So [Wells Fargo] regarded themselves as having a compliance problem. It never occurred to them that something like their own incentive system could be a mistake.
Q: But Wells Fargo had other scandals -- before and since.
A: When you have tough incentives that are driving everybody with quotas, of course you'll have scandals. They're now throwing out all those incentive plans, which they should have done in the first place.
Q: Were you and Warren Buffett too close to Wells Fargo to see the problems? Do you feel blame should stick to you?
A: Well, I don't want to be running away from blame. [But] it is completely counterproductive, if you've got a pompous, stupid CEO, to be criticizing him from our position. It's not going to do any good, not going to change, and we have a huge gain now that we'd have had to pay a huge tax if we sold it. So we do not tend -- Kovacevich was there first. He never stops talking. And he's full of himself. He would not learn anything from anybody. [Editor's note:Former Wells Fargo CEO Richard Kovacevich declined to comment.]
And the new guy, the next guy, was almost as bad but not so loud and persistent. [Editor's note:A lawyer for John Stumpf, Mr. Kovacevich's successor as Wells Fargo's CEO, declined to comment on his behalf.] And nobody had done any good. So we don't, I can't think of a time -- we do try to talk people out of things if we think we've got a chance.
Q: So Wells Fargo wouldn't listen to advice?
A: Kovacevich never listened to anybody. He talked. And the next guy didn't talk all the time, but it just didn't get through to him that the incentives were too tough. He just had -- it was a cognitive glitch, not a malevolence.
And that is an interesting question. My own personal opinion is that more damage to the world comes from the cognitive glitches than does from malevolence.
Q: Tim Sloan had been CEO for more than two years. Some critics say he didn't do enough to fix the culture or respond to new scandals.
A: Well, I know more about it than they do. Sloan is a very honorable, good guy. And he's a very good bank lender. And all these banks are using the government's credit to get the money, and all of them will tend to make stupid loans. And so when you get a good lender, that's the last person you want to throw out. So I would have kept Sloan, myself, but nobody asked me.
Q: Who will get the job now?
A: That's a very interesting question. I will hope that it's a banker.
Q: Didn't Warren Buffett say he hopes it isn't somebody from Wall Street?
A: That's Wall Street. I would agree with [not wanting someone from] Wall Street. No, I would like a banker. We'd both like somebody who's already proved he's a good banker. Not from Wall Street. We don't like the Wall Street crowd that is making the damn decisions. They want to do the easy stuff and make a lot of money. They're financial engineers and sales types.
Q: Do you see anybody else who could succeed Warren and you and Jack Bogle [the late founder of the Vanguard Group and pioneer of index funds] in encouraging higher standards of business conduct?
A: You've got to remember, Bogle happened to be right about something important. But that [was] his only advantage. He was a monomaniac. And so that's an odd characteristic. I would not pick Bogle to have the run of the place. He just was very right on one very important subject [the importance of minimizing investment costs], and therefore he's been very useful.
You're asking a lot. You take a big [corporate] bureaucracy and let the wheels of industry grind, the kind of people that come to the top, we know what they look like. They're tall men and they're the kind of men with reasonably high IQs, but not super-brilliant, who would have been elected head of a fraternity house. So that's what rises, you know -- what, 80% of the time? And of course that's not perfect. And you want some kind of a philosopher king that can also do the work. You're asking for a lot. It doesn't happen very often.
What most people don't understand, and this is from a lifetime of experience, and Warren and I have reached exactly the same conclusion: At the top, you need a certain kind of a mind that automatically makes sense about investments and money. Warren calls it the money sense. "The money mind," he calls it. And what I have discovered in a long lifetime is that people have it or they don't, and if they don't have it, you can't create it. It can't be just taught to somebody. You just have it. You either have it or you don't. And one of our secrets [at Berkshire Hathaway] has been that we try and throw the power to people who have it. It's almost an inherited knack. It's like a gift. You just automatically generate it.
But, you know, once you realize that some people have the knack and other people don't and that people with very high IQs, many of them lack the knack -- so you can't solve your problem if you want correct thinking by just hiring the bright people, because they do many dumb things.
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