Another Munger Masterclass: The 1991 Wesco Financial AGM

"We happen to do a few things right. We also fail to do a lot of other things which would have been right. But so what?"

The late, great Charlie Munger willingly ceded the spotlight to Warren Buffett at Berkshire Hathaway annual shareholders meetings — with “I have nothing to add” becoming something of a catchphrase for the laconic billionaire.

Except that was never exactly true.

Charlie, of course, had plenty to say.

Usually, though, we had to wait until he took center stage at the Daily Journal AGMs — and Wesco Financial ones before that — to get his full and unfiltered thoughts on just about any subject under the sun.

These meetings might have lacked the rock concert atmosphere of their Omaha counterparts, but nevertheless stood toe-to-toe in terms of wisdom and insight.

Sadly, many of the early Wesco meetings have little or no information left about them. 1991, though, is a rare exception. Outstanding Investor Digest published lengthy excerpts and quotes from that meeting — and Adam Mead has kindly archived a copy of that report over at his Oracle’s Classroom website.

(In 1991, Berkshire owned 80.1% of Wesco — with the subsidiary remaining on public markets to honor the request of the founding Caspers family. The other 19.9% was finally purchased twenty years later with the full blessing of Betty Caspers Peters.)

OID recommended that everyone read Charlie’s remarks for both “their humor and their uncommon common sense”. The Wesco chairman, as always, minced no words on matters like leverage, consumer credit (likening it, in some cases, to alcoholism), Benjamin Graham, humility, and more.

The end result — another Munger masterclass.

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(1) “The problem around here at the moment is that we have more money than we have brilliant ideas. But there are worse problems to have.”

Some things never change.

Berkshire Hathaway often has more cash than it knows what to do with. At last count, the conglomerate is sitting on $305.5 billion — and maybe even more if sales of Apple and Bank of America stock have continued into the fourth quarter.

But, like Charlie says here, there are much worse fates that can befall a company.

Echoing one of his partner’s favorite points, he told the Wesco shareholders that the secret of the money game is the ability (and willingness) to stand up at the plate and wait for the perfect pitch. Excess cash would never burn a hole in Warren or Charlie’s pockets — and they would be quite happy to wait weeks, months, or even years until they got a pitch to their liking.

There are no called strikes. No heckles from the crowd. No self-imposed pressure to swing. Just a relentless focus on allocating capital as best they could.

(2) “The idea of rubbing one’s nose [in your own mistakes] on purpose is very good for civilization. Many people go to great lengths to avoid it … It’s a marvelous thing to remember and learn from your dumb mistakes.”

• Charlie shared something he had recently learned: Johnson & Johnson routinely conducts postmortem meetings to examine how well acquisitions did — or did not — work out. “The officers who proposed that the acquisition be made are present and have their noses rubbed in it or take their bows,” he said. “That is a marvelous system.”

(3) “It’s really crazy if you’re very comfortable and secure to [use] leverage. The incremental value of getting a little extra return is not that great.”

(4) “If our ambition had been to create the best financial record that’s ever been created, then we would have used a lot more leverage. But, personally, we don’t do that.”

• In his final interview with Becky Quick late last year, Charlie elaborated on his cautious nature. “We did take way smaller of a helping than we could have easily handled,” he said. “Berkshire could easily be worth twice what it is now and the extra risk we would have taken would have been practically nothing.” What stopped them, though, was “the idea of disappointing a lot of people who had trusted us when we were young. If we lost three-quarters of our money, we were still very rich. That wasn’t true of every shareholder.”

(5) “We have to assume in any financial institution with a lot of leverage that you’ll occasionally get a surprise — even if you’re right on top of things. The trick is whether you act on them when the surprise starts. All over America, you’ve got people hiding their problems and papering over them with accounting tricks when they start to arise. That is not our style around here. We like to address them.”

• I think it’s safe to say that the top execs at Salomon Bros. were not listening.

(6) “Parts of [Ben] Graham’s ‘Security Analysis’ can’t be outdated. The basic concept of value to a private owner and being motivated when you’re buying and selling securities by reference to intrinsic value instead of price momentum — I don’t think that will ever be outdated.”

• While cigar butts and net-nets might not be as relevant today, Graham’s principles of intelligent investing will never go out of style. Namely, that a share of stock is a piece of an actual business; that investors should not allow market fluctuations to sway their decision-making process; and that every investment should have a margin of safety in case of error or misfortune.

(7) “But Ben Graham had blind spots. He had too low of an appreciation of the fact that some businesses were worth paying big premiums for. In a creditable footnote to one edition of ‘The Intelligent Investor’, he sheepishly said that he’d practiced this one value system for a long time and achieved a very respectable record doing it, but he got rich in a hurry by buying one growth stock investment (GEICO). It amused him that half or more of his fortune came to him from one investment.”

(8) “Graham was insufficiently aware of the possibility that a company could prove a great holding for a long time — even when it sold at a large multiple of book value. Look at Coca-Cola stock. It has a very minor book value compared to its current price. You will notice that we’re not following classic Graham & Dodd to the last detail as it was in Ben Graham’s mind.”

(9) “It will be a long time before Coca-Cola’s franchise grows cold. In some respects, our franchises are better than [Henry] Singleton’s. But we didn’t get the returns that he did. He was earning 50% on capital — or more — per annum year after year. That was a miracle. But, again, miracles have a way of ending.”

• Charlie had been asked about Teledyne’s struggles late in founder Henry Singleton’s life — and an unspoken question about whether Berkshire would suffer a similar fate as Buffett and Munger advanced in age. Charlie called Singleton a “genius” — but suggested that not all conglomerates are created equal. And that Teledyne’s (many) franchises did not have the staying power of Berkshire’s stable of blue chip stocks and subsidiaries.

  • “The trouble was not that Henry Singleton grew old,” said Charlie. “It’s that some of those businesses’ franchises grew cold.”

(10) “I am personally skeptical of goosing the economy with increasing amounts of consumer credit under terms where significant fractions of the populace are behaving just like so many alcoholics — they’re right up to their credit card limit every month. That does not strike me as a wonderful way to have a civilization function.”

(11) “The business of turning so many corporations into piles of super-leveraged junk … is socially irresponsible. I don’t think the nation should permit it. And the people who created it ought to be ashamed of themselves.”

(12) “You obviously need a system that allows personal bankruptcy. When you have a system of shrewd credit solicitation at 20% interest rates by very skillful and manipulative people, it’s like introducing a lot of people to drink. About 10% will become alcoholics. If you introduce people to credit on the American scale, maybe 15% or 20% will mishandle the credit to their disadvantage. It seems entirely appropriate that the people who are doing that and getting very high interest rates should not be able to hound people to death forever — and that people should have a right to go bankrupt and start over … The people extending consumer credit are big boys — and they can handle it.”

• Charlie was not quite so kind about corporate bankruptcy, calling the system “horribly defective” and “perfectly disgraceful”. They are “expensive and miserable and pays the wrong people large sums of money”.

(13) “We don’t claim to be omniscient. Occasionally, some wonderful thing comes along that we understand and do. What matters is what you do do, not what you don’t do. We happen to do a few things right. We also fail to do a lot of other things which would have been right. But so what? We find it very hard to be right with a lot of confidence on more than a few things.”

(14) “A lot of institutions get into terrible trouble trying to be omniscient. They think if they create 27 departments and require each to be omniscient in its field, that it makes the whole collective enterprise omniscient across all 27 fields. We regard that as madness. We hope to have important pieces of foresight relatively infrequently.”

• To Charlie, omniscience is a foolish delusion. “We never had the idea that just by hiring smart people, we could be good at understanding 5,000 different securities or even 100 different securities,” he once said. “I just had the idea that maybe we could find a few — enough so it would serve our lifetime needs — and we were patient and we waited and we occasionally made a few investment decisions.”

(15) “Both Warren and I sometimes wonder what would have happened if we’d started in better businesses instead of trading stamps, aluminum, and textile companies — we even had a windmill company at one time. It took us a long time to wise up.”