The Warren Buffett and Charlie Munger Show

On the question “How do you make friends, and how do you get people to like you?” Buffett responded: “You should get smarter about human behavior as you move along. Try to list the attributes you see in people you like, and try to change your behavior accordingly.”

Buffett was asked about which stocks or other assets do well in times of high inflation. He answered, “Companies that buy assets only once.” In other words, companies that have significant fixed assets and small incremental capital expenditures would fit the bill.

A few years ago when Buffett was asked the same question, he offered a different answer: “Companies that have royalties on someone else’s revenues.” Visa and MasterCard are perfect examples: As prices go up, the fee they collect from each transaction goes up too. (A franchisor like McDonald’s would be another example.)

Buffett on the stock market: “If we get normal interest rates, stocks will look expensive.”

Both Buffett and Munger were puzzled about today’s global economy. Buffett said, “We’ve done a lot of things that weren’t in my Economics 101 class, and nothing bad has happened except that people who’ve kept their money in savings have gotten killed. But it’s hard for me to see that if you toss money from helicopters, there isn’t inflation. But I’ve been surprised by what has happened. We’re operating in a world that Charlie and I don’t understand.”

I find these comments to be very refreshing. For most investment professionals the most difficult words are “ I don’t know.” You’ll never hear those words from the commentators on any business channel, who exude the confidence of investment gods. The perception is that investment professionals are paid to know, so they’ll simply make stuff up as necessary. It takes a lot of self-confidence and intellectual honesty to say those three words in front of an arena full of people who’ve trekked thousands of miles to download your wisdom.

Most first-time attendees are shocked at how smart, pithy and politically incorrect Munger is. Over the years Buffett has become a TV personality; but Munger is fairly private, and thus most people don’t know much about him. Buffett is usually quite politician-like and very diplomatic. Munger is too rich and too old to care what other people think of him; he tells it like it is.

Here are some of my favorite quotes from Munger:

On why value investing will not go out of style: “Who in hell doesn’t want value when they buy something?”

Warning on unintended consequences of hyperinflation: “Without the Weimar hyperinflation, we’d have had no Hitler.”

On macro forecasting: “Macro predictors get a lot of air time but not much more. The trouble with making economic pronouncements is people grow to think they know something; it is much easier to just say you’re ignorant.” On this question Buffett had a pithier response: “Every company that employs an economist has one employee too many.”

On multitasking: “I am so stupid that I have to think about one thing for a long time – I can’t multitask my way to glory.”

I would encourage everyone to listen to this speech Munger gave in 1995: “The Psychology of Human Misjudgment.” I have listened to this speech probably five times.

Buffett could not miss an opportunity to throw a jab at Modern Portfolio Theory (MPT) when he was asked whether it’s worth going to business school: “You pay $30,000 a year to learn that you should not value assets, as the market values them for you.” Munger said that “if people were not often so wrong, we would not be so rich.”

Personally, I have a theory that the reason schools still teach MPT is that it’s teachable. Let’s say you’re a dean and you have an investment class that needs to be taught. You can try to bring in a practitioner to teach this class, but not all good practitioners are good teachers. But with MPT you can take a physics or statistics professor – anyone who is good with formulas and numbers – give them a book, and in a few days they’ll be MPT and investment experts.

MPT is taught despite all its flaws because it is elegantly laid out in simple formulas that are all wonderfully interconnected. Also, it employs lots of Greek symbols and thus glows with an air of scientific sophistication. On the other hand, the real-world investing that is practiced by Buffett and Munger is full of common sense but very difficult to express in precise formulas. It is fuzzy and ambiguous. Try to teach that in the classroom!

Buffett’s and Munger’s agility and stamina are quite amazing. Buffett is 85, and Munger is 91. Both sit onstage in the huge arena and answer questions from 9:00 a.m. to 3:30 p.m., taking only a lunch break. I am half their age. During the Berkshire weekend, I had the privilege of being on a value investing panel at Creighton University, answering questions from students. I was mentally exhausted at the end. There were maybe 500 attendees, and the Q&A lasted for only an hour or so.

This odd couple must be drawing their secret power from Coke and See’s candy. In fact, both were gulping Coke and probably consumed several boxes of See’s candy during the annual meeting. Buffett said, “In the last 30 years, 25 percent of my consumption has been Coca-Cola.” I think there’s something to be said for being happy. He added that if he had to eat healthy, “every meal I approached would be like going to jail.” To which Munger added: “Sugar prevents premature softening of the arteries; and if I die a little early, so be it, because at least I won’t be drooling in a nursing home.”

This was the most insightful comment my 14-year-old son heard at the event. My wife and I don’t allow our kids to consume soda on a daily basis (only on special occasions). I can envision Jonah quoting both Munger and Buffett the next time he asks me to buy him a gallon of soda at the movie theater. Thank you, Charlie and Warren!

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of Active Value Investing (Wiley) and The Little Book of Sideways Markets(Wiley). To receive Vitaliy’s future articles by email or read his articles click here.

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