Charlie Munger Q&A Transcript // 2020 Redlands Forum (Paid Subscriber Bonus)

"This is just a bag of tricks that enables a non-prodigious man to get prodigious results."

On January 29, 2020, Charlie Munger spoke for over an hour at the Redlands Forum in Southern California. Over the past few weeks, I transcribed (and lightly annotated) his remarks for posterity and future study.

A few notes:

• My main focus is accuracy and readability.

• I summarized some of the questions to save space. All of Charlie’s answers are transcribed verbatim.

• I added footnotes with additional information at relevant points. Hopefully, these will prove useful to readers.

• The full transcript is available to all paid supporters. Free subscribers have access to the first two or three questions — which totals approximately 2,000 words. (That’s longer than the typical Kingswell article.)

  • I’ve tried to do my best to ensure that no one feels short-changed.

So, without further ado, here is the full transcript of Charlie Munger’s Q&A at the Redlands Forum…

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Q1: Why are you investing in Redlands? What is it that attracts you?

Charlie Munger: I have a natural prejudice for this area because when I was at Caltech in 1943, I used to hang around here. My first wife went to Scripps College and my sister went to Scripps College — so I’m very familiar with this area. And, of course, I’ve interfaced with a lot of people who love these universities out here.

I always liked the orange trees against the snow-capped mountains, so I started with a deep prejudice — but my investments here happened by accident. What happened was I live in a neighborhood which the Hasidic Jews came into a few decades ago — a very successful group of people — and one day at my house, a very young seventeen-year-old Hasidic Jew came by and gave me the Hebrew Bible in Hebrew. Munger sounds like it could be a German-Jewish name and it means “peddler” in both German and English, so it wasn’t totally crazy for a Hasidic Jew to think that a Munger could read the Hebrew Bible in Hebrew. But, of course, I couldn’t.

I got to talking with him and, one thing led to another, and I befriended Avi [Mayer] and watched him grow up. Avi never went to college. He has mild Attention Deficit Disorder, but a ferociously high I.Q. He was worried about it and I said, “Avi, don’t worry about it. You don’t need college. You’re going to succeed mightily.” Well, Avi is now 32 and has four children and a hugely-successful business¹. I was right, he didn’t need college.

Jack Dangermond: Avi is sitting right over there. Stand up, Avi.

CM: Yeah, wave to the crowd.

[Applause]

CM: Avi had a client, his main client in his apartment management business, and he was unhappy — and I think rightly so. I said to him one day, because I had gotten to like and trust Avi, I said, “Why don’t you just get rid of that client you’ve got [and] buy a bunch of apartments for me?” And the first ones we saw were the ones I bought out here. That’s how it happened.²

JD: By the way, they’re at the end of Alabama [Street]. You know, those beautiful apartments? They’re really amazing.

CM: Parkview Terrace. We’ve had a fair amount of fun — Avi and his partner Reuven [Gradon] and I. It’s kind of creative to buy old apartments and fix them up. Of course, we have a philosophy that there is no income unless the place is properly cared for. The apartment management field is full of people who just milk the properties and do the very minimum — and that’s a stupid mistake if you’re a long-term investor. Avi and I share a belief that all these things can be immediately improved. In the first year or something like that, we spent $600,000 on trees on just four projects.

JD: He’s got my heart right there.

Larry Burgess: Was that a planted question? (Laughs)

CM: No, it was not. (Laughs)

JD: Oh, Larry.

CM: But, Jack, you’re probably doing it out of love and I know how much better it’s going to work for me [financially], so I don’t deserve much credit. It’s very much in my interest financially to plant all of those trees. Now, I would probably plant them anyway, but I can’t prove that. (Laughs)

At any rate, that’s how we came out here. Of course, I like the mountains and I like the trees and I like the people and I like these good colleges. And, I will admit, I didn’t start out with the idea to pick Redlands. It’s just where this apartment project that caught my attention was. But once I was here…

I did not know there was an Esri company³. I have made my way in life with a pencil and a pen and a calculating machine and a compound interest table — I haven’t looked at a calculus question since I was nineteen years old — so I’m totally a creature of old-fashioned horse sense and a little arithmetic. So I don’t know about software companies like Esri. If I had known, I would have paid more for the project. (Laughs)

It’s a huge blessing to go into a community with a big employer that keeps hiring and so forth. And Avi is so smart, I didn’t suggest that he start giving… there are all kinds of rules for apartment house operators about guarantees and leases and down payments and what have you. Not every new employee of Esri qualifies and Avi took just one look at the situation and waived all those requirements for anybody who works at Esri.

JD: Thank you, Avi. I really appreciate that.

CM: But there, again, he doesn’t deserve any credit. It’s a smart business strategy. He doesn’t know whether he’s being nice or being greedy. (Laughs) I like these things where a confluence of two factors is working in the right direction.

I share Jack’s interest in design and architecture, which is an absolute accident. My uncle was a graduate of the Harvard School of Architecture and I am a graduate of the Harvard Law School. I have done a fair amount of house-building for myself and building projects of various kinds in my long life, and so it’s kind of a hobby with me to do what Jack does professionally. So, of course, the minute I see this beautiful campus⁴ and this very successful company…

I’m also a total nut on the subject that the best way to get what you want in life is to deserve what you want. If you apply that to business, that means you really take care of the customers. It’s perfectly obvious that what’s happened to Esri would not have happened if it weren’t terribly good at taking care of the customers. Again, I don’t deserve any credit for doing it. I know that I make more money taking care of the customers than I would if I were more short-term operating. I don’t want to masquerade as a better fellow than I am because it works so well.

It would be nice if I were Mother Teresa and did something I didn’t like doing because I am a noble soul, but my life is organized so that, time after time, what works for my pocketbook works for every moral teaching that I’ve been taught. Anybody in such a position is very lucky — and you people, who work for a company like Esri, are hugely lucky, too, because there are a lot of employers that are defective. (Laughs)

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Q2: You have acquired many companies, you and Warren [Buffett] together, in your career. What’s the philosophy that you have for determining what’s a good company and what’s not a good company? What is your philosophical rule base for when you’re looking at organizations to invest in or acquire?

CM: We have a very peculiar way of looking at things. We want to buy something that is intrinsically a very good business, meaning that an idiot could run it and it would do alright. And then we want that business, which an idiot could run successfully, to have a wonderful person in it running it. If we have a wonderful business with a wonderful person running it, that really turns us on — and it works very well.

We do make exceptions, but not many. It’s a pretty simple philosophy. Warren sometimes says that if you have to choose [between] a good person and a good business… You know what he says? This is not politically correct. He says good business. He wants something that has such tremendous strength.

I had a friend when I practiced law and he said, “If it won’t stand a little mismanagement, then it’s not much of a business.” We like businesses that stand a lot of mismanagement, but don’t get it. That’s our formula. We can’t make it work perfectly, but it has certainly worked better than most people’s methods. We reject some wonderful businesses and some wonderful people where it is just too tough.

I’ve been so lucky in life that I took on, once, the job of being chairman of a nonprofit hospital⁵ because it was a losing hand. Too many competitors, too weak of a position — it had a lot of terrible defects. I said, “This is good for me. I’ll expose myself to the disappointments of the real world.” And, I want to tell you, it was forty years of mixed agony and pleasure — and the agony never went away.

If the business is tough enough, it has a way of staying tough. Warren says that when a business with a reputation for being tough and a manager with a [reputation] for being brilliant get together, it’s the reputation of the business that remains. If they start tough, they stay tough. It’s really hard to change a whole damn business — or a person. Lots of luck if you’re somewhat disappointed in one of your children. (Laughs)

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Q3: When making a deal, do you try to win at all costs?

CM: No, no, no. What really works in life is win-win [deals] and that requires some sensitivity to the other fellow’s way of thinking and his needs, too. But win-win is the only formula that really will work on and on and on. When it really starts working is when two people trust each other.

Take the operating theater at the Mayo Clinic. The whole damn group trusts one another. There’s not a lot of lawyers. They just know what to do and when to do it and who to call on for what help. Everybody does what they are supposed to do and so on.

So we’re trying to get these win-win relations. Of course, I see it all the time. I’m a director of Costco and Costco has this reputation for being a fairly tough buyer. I don’t regard them as that tough. There are a lot of people who are rich as small suppliers of Costco. But Costco is into win-win and that’s what really works.

JD: It’s win-win with their customers, but it’s also win-win with their suppliers and win-win with their employees.

CM: Absolutely. Everybody has to win-win. Peter Kaufman⁶, who you know well, is the ultimate win-win operator. The last person I want to compete with in life is Peter. He takes such good care of the customers. I’ve never heard any complaint from Peter’s customers except that his price is high. Everything else about the business is perfect.